TAX ON CASH CREDIT & UNEXPLAINED INVESTMENTS, etc.

1. TAX ON CASH CREDIT & UNEXPLAINED INVESTMENTS, etc. BY CA ANIL SATHE

2. Section 68 Cash Credits - Overview • Introduced for the first time in Income Tax Act 1961 – there was no corresponding provision in Income Tax Act 1922 • Purpose to tax unexplained credit entries – including moneys outstanding in capital accounts • Receipt of share application money – initial onus on assessee to prove genuineness, creditworthiness and identity • No satisfactory explanation – No automatic deeming fiction – addition depends upon discretion of AO & facts and circumstances of the case • CIT vs. Smt. P. K. Noorjahan 237 ITR 570 (SC) CA ANIL SATHE

3. Section 68 – Existing Provision • Sum found credited • in the books of the assessee • assessee offers no explanation about the nature and source OR • explanation offered by him is not satisfactory - in the opinion of the AO • the sum so credited may be charged as the income of the assessee • of that previous year • Section 68 to 69D – known as “Rules of Evidence” CA ANIL SATHE

4. Section 68 – Existing Provision • Established position of law • Sum credited in the books • Books – maintained by assessee • Assessee to offer prime facie proof/evidence of source • Prima facie proof – qua assessee and qua quantum • Degree of burden of proof to vary depending onthe nature of credit and person from whom received • Depends upon relation of assessee with creditor • assessee not bound to establish “source of source” – onus restricted only to the extent of first source • once assessee discharges initial burden the same to shift to the AO • Also applicable to non-commercial loans and share application money CA ANIL SATHE

5. Extent of onus on assessee • Assessee should prove identity, capacity of lenders as well as genuineness of transaction • Where lender is assessed to tax, assessee can avoid addition by filing confirmation with particulars of PAN • Precautions to be taken while furnishing confirmation of unsecured loans: • Mode of payment – Cash/DD/ Cheque • Particulars of Bank, if available • Whether interest-bearing loan • Immediate source – If possible CA ANIL SATHE

6. When primary onus is discharged by assessee – onus shifts to revenue • Independent evidence adduced by revenue calling for information u/s 133(6) or issuing summons u/s 131 • Mandatory that the assessee is confronted with the said evidence and an opportunity of cross – examination afforded • However cross-examination to be conducted within a reasonable time by assessee • Failure to avail of opportunity may prove counter productive CA ANIL SATHE

7. Role of affidavit from lender • Affidavit is only an assertion by the lender and needs to be corroborated by independent additional evidence • Such evidence may be documentary or oral by way of examination of the deponent CA ANIL SATHE

8. Issues in regard to invoking of Section 68 • Credit in the account of partner of firm admitted by the partner • Credit in the books on the first day of the previous year where the assessee is a firm or company and business has not commenced • Sale of jewellery declared under VDIS • Amounts received through gifts from residents or non residents • Amounts received through wills CA ANIL SATHE

9. Basic Principles u/s 68 • Suspicion however great cannot take the place of evidence • Burden to prove apparent is not real lies on the revenue • Addition cannot be made merely on the basis of conjectures and surmises • Theory of human probabilities and surrounding circumstances is to be applied where there is no evidence or the evidence is insufficient CA ANIL SATHE

10. Unexplained Share Application Money – Treated as Cash Credit u/s 68 • Initial burden on assessee to explain “nature & source” of credit • Prove identity of shareholder – by way of physical presence, registered address, PAN, etc. • Prove Genuineness – Confirmation letter, bank statements, shareholder register, share application form, share transfer register, etc. • Prove Creditworthiness – Creditor’s IT return, Balance Sheet – Profit & loss A/c CA ANIL SATHE

11. Contd… • Initial burden being discharged, onus on the Department to enquire and investigate about the creditworthiness & veracity of transaction – before making addition u/s 68 • AO duty bound to prove that such addition on account of share application money or share capital – indeed income of the assessee • No addition u/s 68 – merely because creditor fails to respond to Department notices • Assessee’s AO cannot question creditor’s IT return or himself examine the Profit & Loss A/c – unless the return has been rejected by creditor’s AO CA ANIL SATHE

12. Judicial Decisions which led to insertion of proviso in Sec 68 • CIT vs. Lovely Exports (P) Ltd. 216 CTR 195 (SC) • CIT vs. Oasis Hospitalities Pvt.Ltd.333 ITR 119 (Del) • CIT vs. Divine Leasing & Finance Ltd. 158 Taxman 440 (Del) • CIT vs. Value Capital Services P. Ltd. 307 ITR 334 (Del) • CIT Vs. Dataware Pvt. Ltd. (Cal HC) • 15 Taxmann.com 225 (Del) • 15 Taxmann.com 183 (Bom) • 15 Taxmann.com 226 (Kar) CA ANIL SATHE

13. Amendment to section 68 vide Finance Act 2012 – Proviso inserted w.e.f. 1.4.2013 • Where the assessee is company (in which public are not substantially interested) • Sum credited consists of share application money, share capital, share premium • or any such amount by whatever name called • any explanation offered by such assessee company shall be deemed to be not satisfactory • Unless- • the person, being resident in whose name such credit is recorded • also offers an explanation about the nature and source of the sum credited and • such explanation in the opinion of the assessing officer is found to be satisfactory • Exclusion • in regard to sum received from person who is a VCF or a VCC CA ANIL SATHE

14. Issues / Interpretations of the proviso to section 68 • Total change from established position of law • Complete deeming fiction to treat initial explanation by assessee company to be unsatisfactory • The further explanation can be offered only by a resident person • Non-resident not entitled to offer any explanation • No mechanism to require AO to enforce co-operation from creditor CA ANIL SATHE

15. Issues / Interpretations of the proviso to section 68 • Explanation to be offered by resident person – distinct views • Whether proviso is applicable only to residents and no explanation required to be offered by non-resident OR • That any explanation offered by non-resident deemed to be not satisfactory OR • Confirmation and Identity proof required – as per existing provision – would satisfy the AO • The personoffers an explanation – whether physical appearance or through written communication directly addressed to assessee’s AO required CA ANIL SATHE

16. Unexplained Investments – Section 69 • Where in the financial year immediately preceding the assessment year • the assessee has made investments which are not recorded in the books of account • and the assessee offers no explanation about the nature and source of the investments • or the explanation offered by him is not satisfactory in the opinion of the assessing officer • the value of investments may be deemed to be income of the assessee • for the financial year CA ANIL SATHE

17. Unexplained Money, etc. – Section 69A • where in any financial year • the assessee is found to be the owner of • any money, bullion, jewellery or other valuable article • and such money bullion jewellery or valuable article or thing • is not recorded in the books of account, if any • maintained by the assessee • and the assessee offers no explanation about the nature and source of acquisition • or the explanation offered by him is in the opinion of the assessing officer not satisfactory • then the money and the value of bullion jewellery or other valuable article • may be deemed to be the income of the assessee for such financial year CA ANIL SATHE

18. Unexplained expenditure, etc.–Sec 69C • Where in any financial year • Assessee has incurred any expenditure • and he offers no explanation about the source of such expenditure or part thereof • Or the explanation offered by him is not satisfactory in the opinion of AO • the amount covered by such expenditure or part thereof • may be deemed to be income of the assessee for such financial year CA ANIL SATHE

19. Distinction between 68 and 69 to 69C • Section 68 requires the assessee to explain credit in books of accounts • Section 69 to 69 B require establishing of sources of investments, money, bullion jewellery or other valuable article , not recorded in books of account. • In section 68 onus is only on assessee to explain the source of the entry • In section 69 to 69B the revenue is to establish that the investment has been made by the assessee • Or the assessee is found to be the owner of money bullion jewellery or any other valuable article • In section 69 C it is essential to establish that the assessee has incurred the expenditure - before the provisions can be invoked CA ANIL SATHE

20. Issues w.r.t Section 69 to 69C • Inflated stock to bank • Investment by one person in the name of another person • Understatement of purchase consideration • Unexplained household expenditure • Unaccounted marriage expenses • Unverifiable purchases CA ANIL SATHE

21. Insertion of New Charging Section 115BBE -Special rate of taxes in regard to income referred to in Sec 68 to 69D • Where total income of an assessee includes income referred to insections 68 to 69D • amount of income taxable shall be aggregate of • amount of income tax calculated on income referred to in 68 to 69D • at the rate of 30% and • the amount of income tax with which assessee would have been chargeable • had his total income been reduced by the aforementioned sums • No deduction in respect of any expenditure to be allowed • in computing income referred to in 68 to 69D CA ANIL SATHE

22. Issues • Earlier section 68 – only a Rule of Evidence – general principle to charge as Income from Business or Income from Other Sources • Now section 115BBE – Charging Section – tax income referred to in section 68 • What is the character of income u/s 68 – whether Income from Business or Income from Other Sources – provision de horse of both heads of income • Sec 115BBE – whether reference to character of income or quantum of income CA ANIL SATHE

23. Issues w.r.t. section 115BBE • Whether provision applicable irrespective of slab rates or basic exemptions • No deduction of expenses – but whether set-off of losses allowed • Total income “includes” Income referred to in sec 68 – “Income” different concept than “sum to be treated as income” • Whether Chapter VI-A deduction allowed – or income taxable under similar lines as winning from lottery, puzzles u/s 115BB CA ANIL SATHE