Introduction
Confused after reading the title of the article? I am not giving this statement, it is interpreted by one of the judgement of ITAT. In the ruling, the Income Tax Appellate Tribunal (ITAT), Chennai Bench, in the case involving these two companies named Sakthi Finance Holdings Ltd. and other one Sakthi Realty Holdings Ltd., held that customer deposits, even if unaccounted in the regular books, do not automatically become taxable income under Section 68 of the Income Tax Act, 1961.
Case Citation: M/s. Sakthi Realty Holdings Ltd. Vs. DCIT (ITAT Chennai); ITA No.1161/Chny/2024 Dated: 10 December, 2024
Now, what is section 68 of Income tax act?
This section of the Income tax act demands that taxpayer or assessee is required provide an explanation to any sum credited in his bank account and the said explanation should satisfy the Assessing Officer or else he have right to collect tax on it by using section 69, which acts as the weapon of the assessing officer by which he could detect the tax evasion in respect of investments made by the assessee or income received by assessee and are not recorded in the books of accounts, if any, maintained by him.
In this ruling which I have emphasised in this article, says that the true nature of a transaction must be assessed based on “substance over form”, and that liabilities cannot be reclassified as income solely due to absence of accounting entries.
Note: “Substance over form” is a legal as well as accounting principle which prioritises the true nature or true reality of the transaction over its mere legal form or presentation. In other words, it means focusing on the underlying substance of a transaction rather than its superficial legal appearance. This concept is important and used by courts to ensure fairness, accuracy, and transparency in legal and financial transactions.
Now, Let’s discuss the background of case
On 24th November 2016, the income tax department had conducted a search and seizure operation empowered by Section 132 of the Income Tax Act, 1961 at the premises of Sakthi Finance Holdings Ltd, it is specifically stated in this section that the department can search premises and seize undisclosed assets, books of account, or documents if there is reason to believe that income has been concealed.
Following the search, the department issued notices under Section 153A, which requires the assessee to file returns for six assessment years preceding the year of search, irrespective of whether assessments were already completed.
In this case, the notices pertained to Assessment Years 2014–15 and 2015–16, indicating that the department intended to reassess the income for those years in light of the evidence gathered during the search.
During the course of the search conducted under Section 132 at the premises of Sakthi Finance Holdings Ltd., the income tax authorities recovered a classmate notebook from the residential premises of one of the company’s executives.
The said notebook allegedly contained handwritten entries documenting cash transactions, which were not recorded in the regular books of account maintained by the assessee. These entries were interpreted by the department as indicative of receipt of unaccounted cash from various customers
To cross check the contents of the notebook, the authorities recorded statements from key employees and executives under oath, who, in their depositions, confirmed the existence and nature of such cash dealings.
Based on the cumulative evidence, which included the contents of the seized documents and the employee statements, the assessing officer concluded that the assessee had received undisclosed cash aggregating to ₹210.10 lakh, which was subsequently utilized for the acquisition of land i.e. immovable property.
Accordingly, the AO treated this amount as unexplained investment or income, proposing to tax the same under the relevant provisions of the Income Tax Act, possibly invoking Sections 69, 69B, or 69C, depending on the facts established during assessment proceedings under Section 153A.
Hence, the AO, in absence of formal accounting, treated these deposits as undisclosed income under Section 68 and apportioned them between two group companies ₹66 lakh and ₹39.05 lakh were added to Sakthi Realty Holdings Ltd. for AY 2014–15 and 2015–16 respectively and an additional ₹66 lakh was added to Sakthi Finance Holdings Ltd. for AY 2014–15.
Even, later these additions were confirmed by the Commissioner of Income Tax (Appeals), then the assessee here decided to challenge this decision by filing an appeal with the Income Tax Appellate Tribunal.
Legal provisions that were involved in this case
First one is section 68 unexplained cash credits, this provision allows the Assessing Officer to treat any unexplained credits in the books of account as income, if the identity of the creditor is not established, the genuineness of the transaction is in doubt, or the creditworthiness of the creditor is not proved. However, it applies only if such credits are found in the ‘books of the assessee’.
Second one is section 132 which defines search and seizure, this section empowers the income tax authorities to conduct searches and seize documents where undisclosed income or property is suspected.
Third one is section 153A dealing with assessment in case of search which enables reassessment of six previous assessment years when a search is initiated.
What were the main findings and observations of ITAT in this case?
First, existence of a genuine commercial transaction, here the Tribunal observed that the alleged cash deposits were customer deposits bearing interest, and were later refunded. Thus, they represented liabilities, not income.
Second was there were no entries in regular books, as we discussed before, here, since the deposits were not recorded in the official books, Section 68 was inapplicable, which applies only to credits found in the books of the assessee.
Third, the depositors identity and funds were traceable, and were supported by internal records and employee statements.
Forth, use of non-convertible debentures that means the deposits were acknowledged through issuance of non-convertible debentures, although the NCD documents were later destroyed upon refund. This still pointed to a structured financial arrangement.
Last one is, as we discussed in detail above, Principle of substance over form, here the tribunal reaffirmed that the substance of the transaction must override mere procedural deficiencies like non-accounting or document destruction.
Final conclusion drawn by ITAT in this case
The Chennai Bench, comprising Vice President Mahavir Singh and Accountant Member Manoj Kumar Aggarwal, held that the deposits were liabilities, not income, additions made under Section 68 were not sustainable, the absence of accounting records alone does not render a liability as income. Accordingly, the entire addition of ₹1.05 crore was deleted, and all three appeals were allowed in favor of the assessee.
What were the implications of the ruling?
This judgment of ITAT provides a clear outline of the scope of Section 68 of the Income Tax Act, 1961, strongly supporting that the provision is applicable only to unexplained credits appearing in the assessee’s regularly maintained books of account.
Where liabilities or transactions are not recorded in the books, and yet are duly substantiated through credible evidence, such items do not fall within the purview of Section 68. The ruling further stresses the importance of documentary support and the inherent commercial substance of transactions while determining their taxability.
It reiterates that merely relying on loose papers or uncorroborated documents, in the absence of substantive evidence, is insufficient for making additions. This decision thereby sets a protective precedent for assessees in comparable circumstances, especially where unaccounted liabilities are backed by adequate explanation and evidentiary support, shielding them from arbitrary tax additions.
Conclusion
This ITAT ruling highlights an important point, tax assessments should not focus only on procedural issues. Instead, they must consider the real intention behind transactions, supporting evidence, and the actual substance of the deal. It makes it clear that any liability, whether shown in the books or not cannot be treated as income under Section 68 unless all legal conditions are properly fulfilled.
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Author can be contacted at aman.rajput@mail.ca.in
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