This article deals with the theory of telescoping as applied in the Income-tax Law, the manner of its application and as to how and under what circumstances the benefit of telescoping could be claimed / availed by an assessee. Though the said theory has general applicability across the taxability of a wide range of items, usually the items of income on which the said theory is applied are those covered by sections 68 to 69D of the Income-tax Act, 1961 (Act).
What is theory of Telescoping
Telescoping is one type of technique which delinks all subsequent transactions of the original transaction or amount which have merely rotation, recycling and conversion of one into another. By this technique a real income is to be determined. The real income is subject to tax in the Income-tax Act, for example if in a search, assets of Rs 50 lakhs were found and assessee disclosed Rs 50 lakhs in his return against notice under section 153A, then it is telescoping that assets found were the application of this disclosed income as on other assets etc. were found in search. Therefore assuming or accepting that the application of this income into assets is called telescoping. the theory of Telescoping is applicable in case of income tax assessment.
The principle of telescoping has being accepted in many case. However, the acceptance of plea of telescoping depends upon the facts of each case and the burden of proof lies on the assessee to explain the application of such plea in the facts of the case. When there are two separate addition one being suppression of profits and other being on account of cash credit, then the assessee can take a plea that one should be telescoped into other.
As in case of large number of non-genuine credit and debit entries, peak theory may be applied, similarly, additions for low gross profits can be given credit against unapproved cash credits or unexplained expenditure or investment with similar set offs between additions and such practice is known as telescoping.
For example there may be a case where there is an unexplained income of an assessee in the first part of a year and also a corresponding unexplained investment of some what similar amount in the later part of the year, in such case unless there is evidence to the contrary, it may be treated that the unexplained investment has been made out of the unexplained income. Thus in such case instead of adding both unexplained income as well as unexplained investment to the income of the assessee, it would be wise to add one of them, as both represent only one income. This is called telescoping.
Telescoping theory may also extend to number of years income, where the unexplained income of previous year is being used in an unexplained investment in the subsequent year. Telescoping is available only in such cases, where an earlier addition could be available for a later investment. If there is some intervening unrecorded expenditure in between such period then the theory of telescoping may not be available.
It is pertinent to note here that both the peak credit and telescoping theories have to be applied after appreciating the facts of each case and neither of the theory is readily available in every case as these are not the propositions of the law. The basic principle behind the theories is that there should not be overlapping additions and only the actual and real income of the assessee is taxed.
Brief background of Telescoping
‘Telescoping’, is a word extensively used but scarcely defined under the Income-tax Law. No specific definition has been accorded to the term ‘telescoping’ either under the Act or even the Judicial Law. So, what is ‘telescoping’ or what is the Theory of Telescoping as used in the Income-tax Law? In simple words and as applied in the tax law, telescoping means identifying an income and its application, so that ultimately tax is levied either only on the income or only on its application. In other words, in case where an assessee has certain undisclosed income and also certain undisclosed investments, then it could be reasonably presumed that the undisclosed investments have been sourced out of the undisclosed income, so that only the income may be taxed or only the investment may be taxed and not both, in the hands of the assessee under the provisions of the Act.
The said theory which is judicially accepted in the case of Anantharam Veerasinghaiah & Co. v. CIT (1980) 123 ITR 457 (SC), is in effect, a theory of probability or inference (CIT v. S. Nelliappan (1967) 66 ITR 722 (SC) which is applied in order to avoid taxing the same income twice – once on earning and then on utilizing / expending it. The theory of telescoping is applied keeping in view the well-established canon of taxation that the same income cannot be taxed twice.
When an “intangible” addition is made to the book profits during an assessment proceeding, it is on the basis that the amount represented by that addition constitutes the undisclosed income of the assessee. That income, although commonly described as “intangible” is as much a part of his real income as that disclosed by his account books. It has the same concrete existence. It could be available to the assessee as the book profits could be. – [Refer : Anantharam, Veerasinghaiah & Co. v. CIT (1980) 123 ITR 457 ; 16 CTR 189 (SC)]
In the case of CIT v. Sharraf Trading, it was held that even peak credit taxed in the earlier year is available for telescoping against peak credit worked out in the subsequent year and therefore not taxable. – [CIT v. Sharraf Trading (2015) 376 ITR 534 (All)]
In the context of telescoping following observations of Kantilal & Bros v. ACIT (1995) 52 ITD 412 (Pune) are also relevant-
“It would be contrary to the canons of law to tax the same amount twice, i.e., as borrowings and as cost of assets. The borrowings were utilised to acquire the assets. Once the contention of the assessee, that the amount as reflected in the ‘seized paper’ represented borrowings of the assessee, was accepted, it would be proper to presume that such amount was utilised for the acquisition of assets found at the time of search.”
Onus of proving the source of a sum of money found to have been credited by the assessse
It is now well settled that the onus of proving the source of a sum of money found to have been credited by the assessse either in his name or in the names of third parties is on the assessee who must be held to have the special knowledge about the circumstances under which the credit was made by him or by his agent or clerks in the books of account maintained by him and if he fails to establish the source of such a cash credit satisfactorily, such amount can be treated by the taxing authorities as taxable income. It is for the assessee and not for the department, either to establish satisfactorily by independent evidence that the receipt was not income or that even if it was income, the same was not taxable as it was exempt or already taxed under a different head under the provisions of the Act. [See Govindarajulu Mudaliar v. CIT (1958) 34 ITR 807 (SC), Kale Khan Mohammad Hanif v. CIT (1963) 50 ITR 1 (SC) and CIT v. Devi Prasad Vishwanath Prasad (1969) 72 ITR 194 (SC)]
Assessee to prove that it is income from the source which has already been taxed
In the case of CIT v. Devi Prasad Viswanath Prasad, the learned judge, Shah J. (as he then was), speaking for the court, ruled thus :
“There is nothing in law which prevents the Income-tax Officer in an appropriate case in taxing both the cash credit, the source and nature of which is not satisfactorily explained and the business income estimated by him under Section 13 of the Income-tax Act, after rejecting the books of account of the assessee as unreliable………Whether in a given case the Income-tax Officer may tax the cash credit entered in the books of account of the business, and at the same time estimate the profit must, however, depend upon the facts of each case…… Where there is an unexplained cash credit, it is open to the Income-tax Officer to hold that it is income of the assessee and no further burden lies on the Income-tax Officer to show that that income is from any particular source. It is for the assessee to prove that even if the cash credit represents income it is income from a source which has already been taxed.” – [CIT v. Devi Prasad Viswanath Prasad (1969) 72 ITR 194 (SC)]
In A. Govindarajulu Mudaliar v. CIT, it was explained by the apex court that whether the receipt is to be treated as income or not must depend very largely on the facts and circumstances of the case. Further, where an assessee fails to prove satisfactorily the source and nature of an amount credited in its accounts, the A.O. was entitled to draw an inference that the receipt is of an assessable nature. – [A. Govindarajulu Mudaliar v. CIT (1958) 34 ITR 807 (SC)]
Manner of application of the theory of telescoping
The theory of telescoping has been applied in the Tax Law ever since the Income-tax Act, 1922 was in operation. There are various judgments of the Hon’ble Supreme Court and the various Hon’ble High Courts who have applied the theory of telescoping in dealing with income tax issues before them. The entire theory of telescoping rests on certain well accepted, fundamental principles of taxation that the same income cannot be taxed twice in the hands of the same person, or the income taxed in one year be not taxed in another year.
Section 5 : Scope of total income – Interpretation of taxing statues – Rule against double taxation – Income chargeable to tax – Double taxation – Where the assessee has paid the income – tax at source in the State of Sikkim as per the law applicable at the relevant time in Sikkim, the same income was not taxable under the Income Tax Act, 1961 – In a case of reasonable doubt, the construction most beneficial to the taxpayer is to be adopted
The Apex Court allowed the assessee’s appeal and held that once the assessee had paid income tax at source on winning from lotteries in State of Sikkim as per Sikkim State Income Tax Rules, 1948 applicable at relevant time in Sikkim, same income could not be taxable under the Act as two types of income-tax could not be applied on the same income. It also referred to the decision in the case of Laxmipat Singhania v. CIT (1969) 72 ITR 291 (SC) and Jain Brothers v. UOI (1970) 77 ITR 107 (SC) where it was held that there is no prohibition as such on double taxation provided that the legislature contains a special provision in this regard. However, noting that there was no specific provision in the Act for including the income earned from the Sikkim lottery ticket prior to 01.04.1990 and after 1975, the Apex Court held that the assessee could not be subjected to double taxation. (Related Assessment year : 1986-87) – [Mahaveer Kumar Jain v. CIT (2018) 404 ITR 738 : 302 CTR 1 : 255 Taxman 161 : 165 DTR 113 (SC)]
Same income cannot be taxed under two different heads
We are also not impressed by the submission of learned counsel for the revenue that there is no bar in the Income-tax Act, on double taxation of the very same receipt under two different heads, viz., “Dividend” and “Capital gain”. This arguments does not require any elaborate discussion whatsoever because it is well-settled that the very same income or the very same receipt cannot be assessed twice under two different heads of income. It should not be forgotten that what is chargeable to tax under the Income tax Act is the total income of the assessee. “Dividend” which is income from other sources and “capital gains” are only two different heads under which the income falls to be charged. That being so, once a particular receipt has been treated as dividend, it cannot be treated as income under any other head. The duty of the Income-tax Officer is only to find out the appropriate head under which the receipt in question can be assessed. Once the assessee a particular receipt under a particular head of income, that amount is no more available to him for assessment under another head. – [CIT v. Surat Cotton and Spinning (1993) 202 ITR 932 (Bom.)]
Unless expressly provided an Income which is assessable in one assessment year cannot be assessed in another assessment year. – [Laxmipat Singhania v. CIT (1969) 72 ITR 291 (SC)]
Same income could not be assessed again in the hands of the Hindu undivided family by taking proceedings under section 34 of the Act
Assessee moved the High Court at Allahabad under article 226 of the Constitution for quashing the said notice on two grounds, namely, (i) the income in respect of which the return had been called for had already been assessed in the hands of the individual members of the family and, therefore, the said income could not be assessed again as that of the Hindu undivided family; and (ii) the Hindu undivided family had ceased to exist, that the partition of the family was recognised by the Income-tax Officer under section 25A of the Act, and, therefore, no valid notice could be issued to the respondent in his capacity as the karta of the Hindu undivided family. On an admission made by the learned counsel for the revenue, the notice, so far as it related to the reassessment of the income on the ground of under-assessment, was ignored as it was inconsistent with the alternative ground of escaped assessment. The High Court held that the said notice was invalid as it offended the principle against double taxation. As the assessment of the same income in the hands of the members of the family for the same year was not set aside, the High Court held that the same income could not be assessed again in the hands of the Hindu undivided family by taking proceedings under section 34 of the Act. In that view, it thought that it was not necessary to go into the second ground, namely, whether the proceedings under section 34 of the Act could have been validly taken in view of the orders passed under section 25A of the Act. Pursuant to the view expressed on the first question, the said notice was quashed. Hence the appeal.
It was held that the assessing authority had proceeded against the Hindu undivided family which according to the assessee-firm had broken earlier and observed as under:
“That apart, under section 3 of the Act, in the matter of assessment, there is no question of any election between a Hindu undivided family and a member thereof in respect of the income of the family. If a Hindu undivided family exists, under section 3 of the Act the Income-tax Officer has to assess it in respect of its income. Indeed, under section 14(1) of the Act, any part of income received by its members cannot be assessed over again. While section 3 confers an option on the Income-tax Officer to assess either the association of persons or the members of the association individually, no such option is conferred on him thereunder in the case of a Hindu undivided family, as its existence excludes the liability of its members in respect of the income of the former received by the latter.” – [ITO, Lucknow v. Bachu Lal Kapoor (1966) 60 ITR 74 : TaxPub(DT) 291 (SC)]
Income taxed in earlier year telescoped to subsequent year
Another aspect of the theory of telescoping is whereby an income is taxed / addition is made to taxable income in an earlier year. In such cases, the assessee may claim that the income arising in subsequent year / subsequent period is sourced out of the income taxed earlier.
In the case of CIT v. Jawanmal Gemaji Gandhi, the assessee was a dealer in gold ornaments. The excise authorities seized and confiscated certain quantity of gold from the assessee. The value of the gold was added as income from undisclosed sources and other intangible additions were also made in the same assessment year on the basis of estimated rate of gross profit and turnover. It was held that secret profits or undisclosed income of an assessee earned in an earlier assessment year can constitute a fund, though concealed, from which the assessee may draw subsequently. In the instant case, the assessee acquired the gold during the latter half of the assessment year and it could be that the undisclosed income earned in that very year constituted a fund from which the asset was acquired. It was further held that though the assessee did not contend before the Income-tax Officer that the source for the acquisition of the gold was the addition made by the Income-tax Officer to the turnover, yet it was the assessee’s case before the Income-tax Officer that the gold had been legitimately acquired. The assessee could not then have known that the Income-tax Officer would make an addition to the income on the basis of an addition to the turnover. Even before the Tribunal, the assessee had adopted this stand but the assessee had contended in the alternative that the source of the gold could be assumed to have come out of the intangible additions on account of increased turnover. Therefore, it was held that the Tribunal was justified in deleting the addition of the amount as income from undisclosed sources. – [CIT v. Jawanmal Gemaji Gandhi (1985) 151 ITR 353 (Bom)]
Assessee is entitled to raise an alternative plea of non taxability of certain income on the ground of telescoping for the first time even before the First Appellate Authority
In the case of Addl. CIT v. Dharamdas Agarwal, it was held that when cash credits were treated as income from undisclosed sources, the assessee can take an alternative contention before the Appellate Assistant Commissioner that the cash credits were out of undisclosed income taxed in earlier years and the assessee is entitled to raise such alternative plea before the Appellate Assistant Commissioner for the first time. – [Addl. CIT v. Dharamdas Agarwal– (1983) 144 ITR 143 (MP)]
In the case of Kuppuswami Mudaliar v. CIT, it was held by the Madras High Court that where the Income-tax Authorities make an addition to the income of the assessee over and above the income as disclosed by the assessee, on an estimate basis, the amount so added must be treated as the real income of the assessee. It is not open to the authorities to take the view that the addition was only for purposes of taxation and that it should not be regarded as the true income of the assessee. – [Kuppuswami Mudaliar v. CIT (1964) 51 ITR 757 (Mad)]
Where the assessee was taxed on substantial undisclosed income in the past years, the same could be treated as income available with the assessee and an addition as undisclosed income in the subsequent year could be telescoped in the undisclosed income taxed earlier
In the case of CIT v. Tyaryamal Balchand, additions were made to the trading results as also amounts representing cash credits were added as income from undisclosed sources. It was held that the AAC and the Tribunal had committed no error of law in holding that the unproved cash credit of Rs. 16,950 should be taken to have come out of intangible additions as substantial additions had been made even in the earlier years. It had also been rightly held by the Tribunal that even during the present assessment, an addition of Rs. 18,117 had been made, which would sufficiently cover any unexplained income to the extent of Rs. 16,950. The amount of Rs. 16,950 could not, therefore, be added as income from undisclosed sources. Additions were made to the trading results as also amounts representing cash credits were added as income from undisclosed sources. The Tribunal found that the additions in trading results would cover the amount of cash credits as also substantial additions had been made in earlier years, it was held that the Tribunal was justified in deleting the addition on account of cash credits. – [CIT v. Tyaryamal Balchand (1987) 165 ITR 453 (Raj)]
However, this is not a proposition of law and therefore the onus on assessee to show some link between intangible additions and cash credits i.e. the credits represents / is covered from the intangible additions so made.
In the case of Kale Khan Mohammad Hanif v. CIT, it wasw held that there is nothing in law which prevents the Assessing Officer in an appropriate case in taxing both the cash credit, the source and nature of which is not satisfactorily explained, and the business income estimated by him after rejecting the books of account of the assessee as unreliable. In this case their Lordships of the Supreme Court have held that the onus of proving the source of a sum of money found to have been received by the assessee is on him and has further held that the amount of cash credit could be assessed to tax as income from undisclosed sources in addition to the business income computed by estimate. The taxing authorities were not precluded from treating the amount of credit entries as income from undisclosed sources simply because the entries appeared in the books of a business whose income they had previously computed on a percentage basis. – [Kale Khan Mohammed Hanif v. CIT (1963) 50 ITR 1 (SC)]
In the case CIT v. K. N. Satyapalan, the Kerala High Court rejected the theory of telescoping on the ground that there was no link between the intangible addition in the past assessment year and the cash credit in the current year. – [CIT v. K. N. Satyapalan (2001) 247 ITR 105 Ker)]
One type of income already taxed could be telescoped into another
In the case of CIT v. K.S.M. Guruswamy Nadar and Sons, it was held by the Madras High Court that when there are two separate additions, one on account of suppression of profit and another on account of cash credit, it is open to the assessee to explain that the suppressed profits had been brought in as cash credits and one has to be telescoped into the other resulting only in one addition. It was, therefore, held that the Tribunal was right in its view in telescoping the additions made towards the cash credits. – [CIT v. K.S.M. Guruswamy Nadar and Sons (1984) 149 ITR 127 (Mad)]
In the case CIT v. S. Nelliappan, the Hon’ble Supreme Court held that even in the absence of direct evidence of any connection between the cash credit entries and the income withheld from the books of account by the assessees if the Tribunal inferred that there was a connection between the profits withheld from the books and the cash credit entries, then the said conclusion must be upheld and it cannot be said that the conclusion is based upon speculation. – [CIT v. S. Nelliappan (1967) 66 ITR 722 (SC)]
In the cases Lagadapati Subba Ramaiah v. CIT, it was held that when the Revenue Authority levied a huge tax on the company on the basis that the books of the assessee company were unreliable and that the bulk of the company’s profits had been kept outside its books as secret profits, then, those secret profits less the income-tax paid would be available with the company for distribution as dividends. Once the secret profits had been assessed to tax, it would have been open to the company to bring those profits into the books and distribute them, or what remained after payment of tax, as dividends. – [Lagadapati Subba Ramaiah v. CIT (1956) 30 ITR 593 (AP)]
Telescoping – Income to investment and income to expenditure
The theory of telescoping could also be applied in cases where additions in respect of unexplained money / unexplained investment are sought to be made in the hands of the assessee. For example, if there is an addition in respect of undisclosed income or unexplained cash credits and also certain addition in respect of unexplained investments, then it can be pleaded by the assessee that the unexplained investment is sourced out of the income already taxed as unexplained cash credits as held in the case of CIT v. Jawanmal Gemaji Gandhi (1985) 151 ITR 353 : (1984) 39 CTR 127 (1983) 15 Taxman 487 (Bom.).
It was held that the Tribunal was justified in deleting the addition of Rs. 9,375 as income from undisclosed source on the ground that there were other intangible additions made in the assessment for the preceding years as in the year under appeal. The Supreme Court has clearly stated that the secret profits or undisclosed income of an assessee earned in an earlier assessment year can constitute a fund, though concealed, from which the assessee may draw subsequently. That observation is clearly contrary to the finding of the Kerala High Court. The assessee acquired the gold during the latter half of the assessment year; it could then very well be that the undisclosed income of Rs. 10,702 earned in that very year constituted the fund from which this asset was acquired, accordingly having regard to all the circumstances that were before the Tribunal, that the source for the acquisition of the gold could well be assumed to be the addition of Rs. 10,702 to the assessee’s income. – [CIT v. Jawanmal Gemaji Gandhi (1985) 151 ITR 353 : (1984) 39 CTR 127 (1983) 15 Taxman 487 (Bom.)]
Section 68 : Cash credits – Fund manger for other people – Benefit of telescoping – Peak credit – May be allowed Assessee was held to be a fund manager for other people for which purpose moneys were frequently withdrawn or deposited. Therefore, assessee was entitled to work out a peak credit and avail the benefits of telescoping. (Related Assessment years : 2001-02 to 2003-04) – [Chetan Gupta v. ACIT (2014) 98 DTR 209 (ITAT Delhi)]
Addition under section 68 – Whether cash credits be deemed to have origin in the added income
The assessee, a partnership firm was deriving income from the business of manufacture/assembly of diesel engine sets and diesel generating sets. For the year under consideration, the assessing authority made two additions one for Rs. 1,50,980 towards undisclosed profit on the sale of fuel injector equipment and a sum of Rs. 89,500 towards unexplained cash credit under the head ‘Dealership Security Account’. The Commissioner (Appeals) reduced the addition of Rs. 1,50,000 to Rs. 89,000 and has deleted the addition towards unexplained cash credit for Rs. 89,500. Commissioner (Appeals) found that the sale out of the books has been ploughed back in the form of deposits. A separate addition for the same would accordingly be deleted. In the net result the additions for deposits as well as extra consumption would be restricted to Rs. 89,500. The Tribunal upheld the order of the Commissioner (Appeals).
Held: The view of the Commissioner (Appeals) that sale out of the books had been ploughed back in the form of deposits and the separate addition for the same could be deleted, has not been challenged by the revenue before the Tribunal. The effect of the finding of the Commissioner (Appeals) is that it has been accepted that the sale out of the books of account has been deposited in the form of cash credit. The addition in respect thereof at Rs. 89,500 has been sustained, therefore, the Commissioner (Appeal) and the Tribunal have not deleted the addition made by the assessing authority as an unexplained cash credit under section 68 of the Act as it was explained, but it has been deleted on the ground that the deposits were out of sale made out of the books of account and the addition to that extent has been sustained. There was no error in the view of the Tribunal inasmuch as the revenue before the Tribunal has not challenged the view of the Commissioner (Appeal). (Related Assessment year : 1982-83) – [CIT v. Singhal Industrial Corporation (2008) 303 ITR 225 : (2005) 199 CTR 690 (All)]
Benefit of Telescoping while making addition under Section 69C
Addition under section 69C can be made only when an expenditure is not satisfactorily explained by the assessee. Whenever any addition is made by the assessing officer during the assessment proceedings and assessee claims that expenditure is made out of such income, then no further addition can be made by invoking provision of section 69C. The benefit of telescoping is to be given in such cases.
Section 69C “On Money”: If the unaccounted expenditure incurred is from the ‘on money’ received by the assessee, then, the question of making any addition under section 69C does not arise because the source of the expenditure is duly explained. It is only the ‘on money’ which can be considered for the purpose of taxation. Once the ‘on money’ is considered as a revenue receipt, then any expenditure out of such money cannot be treated as unexplained expenditure, for that would amount to double addition in respect of the same amount. – [CIT v. Golani Brothers (2018) 300 CTR 245 (Bom)]
Accounting method – Rejection of books of account – Addition made on the basis of book entries
When income is estimated and while assessing the same and rejecting the books of account, it would not be appropriate to rely on the books of account for any separate addition under section 69C, other than estimate made by the Assessing Officer. Assessing Officer rejected books of account of the assessee and assessed on the basis of estimation and while estimating the other income addition was made under section 69C. Assessee contended that this would tantamount to double addition. Held: When income is estimated and while assessing the same and rejecting the books of account, it would not be appropriate to rely on the books of account for any addition other than estimate made by the Assessing Officer. – [Malpani House of Stones v. CIT (2017) 395 ITR 385 (Raj)]
Addition on account of bogus purchases
In Grand Bazzar v. ACIT, assessee had not explained as to the source of purchases and the additions under section 69C were therefore, sustainable. Commissioner (Appeals) was not justified in reducing/ deleting additions. As the funds introduced by assessee as cash credits in books of account had gone into assessees business account and so, the same could not have been utilised for making unaccounted purchases and assessee could not be given credit of any amount already introduced as credits in account books as available to meet any unaccounted expenditure including the unaccounted purchases, therefore, Tribunal was justified in restoring the additions under section 69C for both assessment years. – [Grand Bazzar v. ACIT (2007) 292 ITR 269 : TaxPub(DT) 928 (Mad)]
Income of one person can be telescoped in the hands of another
Another important facet of the theory of telescoping is whether when income is disclosed or taxed in the hands of one person, could another person claim a set-off of the said income against his / its undisclosed income. In this regard, there are a few judicial precedents wherein it has been held that when the search operation was carried out on a group as a whole, income taxed in the hands of one person of the group could be telescoped and set-off against income from another person in the same group.
It was held by the ITAT in the case of J. B. Education Society v. ACIT, that where the manager of the assessee, an educational society, was in a position to collect money from students who were admitted in assessee’s college and he used his position to collect amount in excess of prescribed fee from students and while passing assessment order same was treated as undisclosed income in his hands, the said unaccounted receipts could not again be taxed in hands of the assessee as well.
Assessee – society was running medical and engineering colleges and collected certain amount from students over and above the prescribed fees. Manager of the assessee-society stated that amounts were collected and received by him without knowledge of Management Committee. Assessing Officer taxed amount in hands of assessee-society. Held: Not justified. Amount collected could not be considered exclusively relating to assessee as manager agreeing to withdraw appeals against assessment and pay tax if amount added as income of assessee-society were to be deleted
Sri R accepted the receipt of money without the knowledge of the assessee by using his position in the assessee’s office. Sri R. Kondal Rao has accepted that all the money which has been received would be accepted as his income and he owns the entire responsibility and accordingly disclosed the same to the department and he would pay the tax. It is also an admitted fact that the Assessing Officer has assessed all the income from those receipts in his hands and assessment order was duly passed by the Assessing Officer after considering these receipts in his hands and the appeals are pending before the CIT(A). Sri R. taken full responsibility of the impugned receipts. Therefore, these impugned receipts cannot be considered to be exclusively relating to the assessee, especially when Sri R. who has admitted that he has collected money and also admitted to pay the tax on it. The Assessing Officer having treated the income from unaccounted receipts in the hands of Sri R. the assessee could not be saddled with all these unaccounted receipts as it is at its hands. It is an admitted fact that Sri R. was in a position to collect the money from the students who were seeking admission in the assessee’s college and he used his position to collect these impugned receipts from the students and while passing the assessment order the same was treated in his hands as undisclosed income and he accepted himself for being assessed by the department vide affidavit filed before Tribunal. Therefore, in this context, these unaccounted receipts which have been assessed by the department in his hands cannot be once again considered in the hands of the present assessee, once Sri R. acted in accordance with the affidavit filed before Tribunal. The explanation offered by both assessees can be believed to be true unless there is contrary evidence brought on record that the assessee itself has collected the money from the students. Being so, in the event of Sri R. paying the tax on the unaccounted income from the receipts in his hands then the same unaccounted receipts cannot be brought to tax in the hands of the assessee. Accordingly, to the extent of unaccounted receipts which were considered in the hands of Sri R. K, the same cannot be treated as unaccounted income in the hands of the assessee once again. In other words, the receipts as per seized documents accepted to have been collected by Sri R. during the course of search action as well as before Tribunal and offered for taxation by Sri R., cannot be considered in the hands of the assessee once again in the event he complied with the payment of tax. Accordingly, the Assessing Officer shall pass fresh order on this issue after giving an opportunity of hearing to the assessee. – [J. B. Educational Society v. ACIT (2014) 159 TTJ 236 : 98 DTR 0347 : 28 ITR (Trib) 284 (ITAT Hyderabad)]
While granting the benefit of telescoping in the hands of the partner in respect of amounts offered and taxed in the hands of the firm, it was held that once an estimated addition on account of household expenses, investment in land, investment on foreign travel are being made and the source of such expenditure is stated to be flowing from the firm which has suffered tax as undisclosed income, then, telescopic benefit should be given to the total amount flowing from the firm as a share of profit coming to the assessee from the firm. In effect, it was held by the Tribunal that the quantum of the amounts available for the benefit of telescoping should not be restricted only to the specific amounts disclosed by the assessee as unexplained expenditure, etc., but the entire share of profits which would have been available to the assessee as a partner of the firm which has already suffered tax on its undisclosed profits. In view of the above precedents, it is quite clear that it is possible to claim the benefit of telescoping in respect of undisclosed income offered by one person in the hands of another person. – [Rajni M. Patel v. DCIT (2015) 43 ITR (Trib) 628 (ITAT Ahemedabad)]
Settlement Commission gives a unique opportunity to take advantage of telescoping of income
The Settlement Commission is a platform to avoid never ending litigation. There are several instances wherein the assessee may be liable to tax even in respect of income which he has not earned or there may be duplicacy of tax on same income. Thus, Settlement Commission gives a unique opportunity to take advantage of telescoping of income and get taxed on real income without having burden of penalty and prosecution. However, as mentioned earlier it is once in a lifetime opportunity and the intention of the assessee should be to come out clear by making true and full disclosure of additional income.
One may approach Settlement Commission only when assessment proceedings are pending. Further, the Settlement Commission has got wide powers to determine real income and while doing so, they may ignore additional ‘deemed income’ and consider ‘Peak Credit’ and ‘Telescoping’.
FOR EXAMPLE 1:
A business group inflate expenses of say Rs. 10 crore in Company A in Year 1, and ploughs back the money in books in Company B in Year 2 through bogus share capital. Now, if the group receives 148 notice for both the company, there can be situation that Rs. 10 crore is added in both the company. If the additions are sustained in appeal, there can be penalty and prosecution provisions. Now, there can be an alternative. The assessee moves ITSC involving both the company and makes offer of additional income of Rs. 10 crore in Company A in year 1, and takes advantage of telescoping theory and shows that Rs. 10 crore was utilized for mobilizing share capital in Company B in year 2. In that case, the assessee is not required to make offer additional income of Rs. 10 Crore in Company B. Further, there may not be any penal implications on the same.
FOR EXAMPLE 2:
C company was in control of an entry operator. It raised share capital/premium of Rs. 30 Crores in FY 2012-13 and entire money was utilized in bogus investments. In FY 2014-15, a business house named D Group took over the company through some complex structure, and the bogus investments were thus purchased by some bogus entities in that year and the funds realised on sale of such bogus investments was utilised by D Group. On the basis of some FIU informations, 148 notice was received for both the years. In Year 1, on the basis of some bogus share capital and in the Year 2 on the basis of some bogus credit entries on account ofsale ofshares. Now, the Assessing Officer wants to make additions of Rs. 30 Crores each in both the years. The assessee may approach Settlement Commission and take advantage of Telescoping Theory.