The cash credits provisions under section 68 of the Income Tax Act, 1961, will remain as one of the most contentious, debated and ever-evolving ‘Rules’ under the law. Key objects are to curb the generation and circulation of unaccounted money, concealment of unaccounted cash by showing them as lent or deposited with them by third parties, showing of unaccounted cash as their ‘own capital’ contribution or the alleged loan as repaid and other illegal practices.
The clarificatory provision has statutorily authorised an Income Tax Assessing Officer to ‘assess’ the ‘Unexplained Cash Credits’ as ‘Income’ and add back to the ‘Total Income’ of that individual assessee and levy applicable taxes.
Similar provisions to prevent the circulation of unaccounted money under the guise of ‘Investments’ in closely held companies, due amendments were brought in vide the Finance Act 2012, wherein ‘any such’ sum credited as share capital or share premium in the books of closely held companies shall be treated as ‘explained satisfactorily’, only if the ‘source of funds’ have been genuinely explained and proved beyond a reasonable doubt.
Ingredients
There are three key ingredients in Section 68- the existence of books of account, credit entry and absence of satisfactory explanation by the assessee.
What may be termed as books of accounts? It signifies a collection of sheets of paper bound together with the intention that such binding shall be permanent and the papers used collectively in one volume. As per Income Tax provisions, books or books of account includes ledgers, day-books, cash books and other books, whether kept in the written form or as print-outs of data.
Can the bank passbook be regarded as books of account? No, the Bombay High Court in CIT v Bhaichand H Gandhi, 141 ITR 67 held that the passbook supplied by the bank to the assessee cannot be regarded as the books of account.
Can rough books be regarded as books of account? Yes, the Delhi High Court in Hazi Nazir Hussain v ITO 271 ITR (AT) 14, held that where assessee failed to give a satisfactory explanation for cash credits recorded in rough books can be assessed as assessee’s ‘income’.
Can a piece of paper found during Search be regarded as books of account? No, majority of the Judges in the Supreme Court in Shukla (V.C.) JT and L.K Advani on Crl. Revision Petition No. 265 of 1996 held that a piece of paper found in ‘search’ does not fall within the meaning of ‘Books of account’. The second ingredient is a ‘Credit Entry’, which is in general and inclusive in nature, hence, it shall apply to all types of ‘credit entries’.
The third ingredient is ‘absence of satisfactory explanation’, if an assessee offers no reasonable explanation, as regards the sums found credited in Books of accounts, credits will be construed as ‘Income’ from undisclosed sources. From the language of the provision, it is the assessee, the assessee alone who is to offer the explanation, whether initially or subsequently.
Assessing officer & his discretion
Since ‘May’ word used in Section 68, it can be interpreted as ‘the provision’ has provided discretionary power to an assessing officer to apply on a particular credited sum as income or not. Nevertheless, even in the absence of a ‘satisfactory explanation’, it is not open or necessary to treat all cash credits as income in the hands of the assessee. Hon’ble Calcutta High Court in Hindustan Tea Trading Co. Limited v. CIT 263 ITR 289 held that an assessing officer cannot act unreasonably and his opinion must be based on relevant facts.
Burden of proof – On whom?
The golden rule of evidence puts the onus on the assessee to explain any sum found credited in his books of account. However, it does not absolve the responsibility on the assessing officer to prove that cash credit forms part of the assessee’s total income and his contention should be justified. If the prima facie inference on the fact is that assessee’s explanation is satisfactory, then the onus shifts to the Revenue.
Finance Bill, 2022
Whether Section 68 cover masquerade loans or borrowings? To curb the pernicious practice of conversion of unaccounted money by crediting through a masquerade of loan or borrowing, it has been proposed to bring in ‘Clarificatory Amendment’ to the law, so as to provide that the nature and source of any sum, whether in form of loans or borrowings credited in the books of an assessee shall be treated as ‘explained’ only if the ‘source of funds’ is also explained in the hands of the creditor or entry provider. The proposed amendment will take effect from April 1, 2023, and will accordingly apply from the assessment year 2023-24 onwards.
Concluding remarks
Recently, a top official has assured that the proposed amendments are just anti-avoidance measures targeting at tax evaders and won’t harass genuine taxpayers. Section 68 is playing a very crucial role as far as ‘revenue’ is concerned. In the days to come, it will be extremely difficult for individual assessees and companies to involve in any malafide practices like tax evasion. Before parting, it is appropriate to recall Nani Palkhivala, the greatest jurist’s words ‘If there is widespread tax evasion, it may be more meaningful to search for the cause in the tax system than in the taxpayer’.
(The writer is the Founder and CEO of Shree Tax Chambers)
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