Study Circle notes on Unexplained Cash Credits June 2014

• Study Circle Notes: June 30th, 2014
• Issues & Developments relating to Sections 68 & 69
of the Income Tax Act, 1961
• By CA. Gaurav Sharma
Section 68 of the Act Features
• Any Sum
• Found credited in the Books of an Assessee
maintained for any Previous Year
• Assessee offers no explanation
• Or the explanation offered by him is not in the
opinion of the Assessing Officer, satisfactory,
• May be charged to Income Tax
• As the income of the Assessee of that Previous
Year
S ection 68 - Year of Cha rge
Year
of
applicability of
Section 68
Year of credit of any
sum in the Books of
Accounts
of
the
Assessee
Held in:
CIT vs. Prameshwar Bohra (2008) 301 ITR 404 (Raj)
CIT vs. Usha Stud Agricultural Farms Limited
(2008) 301 ITR 384 (Del)
3
Confrontation and Cross E xamination
during Assessment P roceedings
• Whether information gathered by the AO during the
course of Assessment Proceedings needs to be
confronted to the Assessee or not before passing the
Order?
• Yes, It is mandatory as is held in:
• Jindal Vegetable Products (ITA 428 of 2007) (Del)
• CIT vs. Geetanjali Education Society [2008] 174 Taxmann
440 (Raj.),
• Kishinchand Chellaram vs. CIT (1980) 125 ITR 713 (SC)
• Laxman S Patel [2008] 174 Taxman 206 (Guj)
• ACIT vs. Geetanjali Education Society (2008) 114 TTJ 697
(ITAT Jodhpur)
Confrontation and Cross Examination
during Assessment Proceedings
• If AO does not provide the material gathered by him
on the request of the Assessee, whether the addition
will be tenable in law?
• No, the addition will not be tenable in law as is held in:
• Dhakeshwari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775
(SC)
• R. B. Shreeram Durga Prasad & Fatechand Nursing Das vs.
Sett. Comm. (1989) 176 ITR 169 (SC)
• Dhirajlal Girdharilal v/s C.I.T. (1954) 26 ITR 736 (S.C.)
Confrontation and Cross Examination
during Assessment Proceedings
• In case assessee borrower gives complete identity &
address details of lender to AO and requests to AO
to issue summons u/s 131 – it is duty of AO to issue
said summons (if not issued, matter can be remanded
back). This has been held in the following cases:
• CIT vs. N. P. Garodia (2009) 310 ITR 62 (P&H)
• Brij Pal Sharma (17.02.2009) ITA no. 685 of 2008 (P&H)
• Food Corporation Of India vs Provident Fund
Commissioner (1 SCC 68) (SC) (1989)
S ection 68 : S hare Application Money
• Supreme Court Ruling in Lovely Exports Pvt. Ltd.
(2008) 216 CTR 195
• The question raised was that whether share
application money can be treated as undisclosed
income of the assessee?
• Supreme Court replied that, “If the Share Application
Money is received from alleged bogus shareholders,
whose names are given to AO, then department is
free to proceed to reopen their individual assessment
in accordance with law, but it cannot be regarded as
undisclosed income of the assessee.”
S ection 68 : S hare Application Money
• The judgment of Supreme Court in the case of
Lovely Exports has been applied in:
• Bhav Shakti Steel Mines Pvt. Ltd. vs. CIT (2010) 320 ITR
619 (Del)
• CIT vs. Gangour Investments (2009) 18 DTR 242 (Del)
• Samir Bio-tech (P) Ltd., [2009] 17 DTR (Del) 224
• Value Capital Service Pvt. Ltd. (2009) 221 CTR 511 (Del)
• CIT vs. Creative World Telefilm Ltd. (2011) (333 ITR
116) (Bom)
• CIT vs. GP International Ltd. (2010) 229 CTR (P&H) 86
• Siddharth Marketing Services Pvt. Ltd. (2011) IT(SS)A
Nos. 57 to 59/Ind/2009 (ITAT Indore)
• Rank Shipping Agency Pvt. Ltd. (2014) ITA
No.5946/Mum/2008 (ITAT Mumbai)
S ection 68 : S hare Application Money
• Supreme Court Judgment in Lovely Exports:
Issue
Possible View
Whether SC ruling in
Lovely Exports can be
applied in context of
UNSECURED LOANS
taken by a corporate
assessee?
Whether SLP dismissal
by speaking order in
Lovely Exports attract
binding force of Article
141?
Seems to be Yes (more
in case of corporate
lenders)
Yes Refer SC in 245
ITR 360
S ection 68 : S hare Application Money
Proviso to Section 68 introduced with effect from 1.4.2013
Resident
Person
Share Application
Money,
Share
Capital,
Share
Premium or any
such amount by
whatever
name
called
Company (not being a
company in which the public
are substantially interested)
Except
Venture Capital Fund or a
Venture Capital Company
as referred to in Section
10(23FB)
Then SOURCE of such Resident Person is also required to be proved by
the Assessee Company, otherwise addition will be made in the hands
of the Assessee Company
S ection 68 : S hare Application Money
After the introduction of the Proviso to Section 69
Share Application Money,
Share
Capital,
Share
Premium, etc. received by
Pvt. Ltd. Company
Share
Application
Money,
Share
Capital,
Share
Premium, etc. received by
other than Pvt. Ltd. Company
Proviso
to
applicable
69
Judgment of SC of Lovely
Exports applicable
Source of Source to be
proved
by
Pvt.
Ltd.
Company
Source of Source not to be
proved by the Assessee
Tax implication on the
Investor can be initiated u/s
115BBE
Tax implication on the
Investor can be initiated u/s
115BBE
Section
S ection 68 : Uns ecured L oa ns
•
Assessee to prove IDENTITY & CREDITWORTHINESS of
Lender as well as GENUINENESS of Transaction and
source of source is not required to be established.
•
Case Laws:
CIT vs. Orissa Corporation (P) Ltd. (159 ITR 78)
CIT vs. Rohini Builders (256 ITR 360) (SC)
CIT v. Metachem Industries (2000) 245 ITR 160 (MP)
Nemi Chand Kothari v. CIT 264 ITR 254(Gau)
Rajokri Farms Pvt. Ltd. (ITA1410/2008) Delhi HC
CIT vs. Real Time Marketing Pvt. Ltd. 221 CTR 716
CIT vs. Diamond Products (2009) 177 Taxman 331 (Del)
Sh. Brij Mohan Sharma Vs ITO 220 CTR 622 (Raj)
Labh Chand Bohra Vs ITO 219 CTR 571 (Raj)
Kanhaialal Jangid Vs. ACIT 217 CTR 354 (Raj)
CIT Vs Laul Transport Corporation 214 Taxation 329
(P&H) and many more case laws
S ection 68 : Uns ecured L oa ns
Further Mere Non production of Lender or Shareholder
cannot by itself be a ground for making addition u/s 68.
Held in following:
a) Anil Kumar Midha vs. ITO (2006) 100 TTJ 644 (Jodh)
b) Divine Leasing & Finance Ltd. (2008) 299 ITR 268 (Del)
c) CIT v. Steller Investment Ltd. vs. CIT (1987) 168 ITR
493 (Cal)
d) Guj HC in Rohini Builders (supra)
e) SC in Orissa Corporation (supra)
f) Anis Ahmed (2008) 297 ITR 441 (SC)
g) CIT vs. U.M. Shah [1973] 90 ITR 396 (Bom.)
h) Hanuman Agarwal (1985) 151 ITR 150 (Pat)
S ection 68 : Uns ecured L oa ns
How to prove Identity & Creditworthiness of
Lender and Genuineness of Transaction?
The following are required to be furnished:
a) Confirmation of fact of transaction of giving the
amount by the creditor
b) Mode of Payment i.e through DD/Cash/cheque
c) In case of banking channel adopted, particulars of
cheque etc
d) In interest bearing: state this vital fact
e) PAN and place of assessment of creditor
f) If possible, source of lending the money, like, if the
money has been received through Bank Account then
explain the immediate Credit entry of the Lender
before lending the amount to the Assessee
Section 68: Capital Introduction
Addition cannot be made in the hands of the Firm or
Capital u/s 68 if Partners or Shareholders claim that
the money invested are their own. Action if lie, will lie
against the Partners or Shareholders u/s 69:
a) CIT vs. Metal & Metals of India 208 CTR 459 (2007)
(P&H)
b) CIT vs. Rameshwar Das (2007) 208 CTR 457 (P&H)
c) CIT vs. R. N. Goel (1997) 224 ITR 180 (P&H)
d) Metachem Industries – 245 ITR 160 (Madhya Pradesh)
e) Mad HC in Taj Browellers 291 ITR 232
f) SC in Lovely Exports (supra)
g) Jaiswal Motor Finance – 141 ITR 706 (Allahabad)
h) All HC in 141 ITR 706
S ection 68: Capital Introduction
If Credit is introduced in the first previous year in the
books of the Assessee Firm/Company or before
commencement of the business, then no addition u/s
68 is made in the hands of the Firm/Company:
a)
b)
c)
d)
e)
f)
g)
h)
i)
Luthra Jewellers (ITA 280/2009) (Del)
Mad HC in Taj Browllers (supra)
Engg. & Construction Co. [1972] 83 ITR 187 (SC)
CIT vs. Kewal Krishan Partners (2009) 18 DTR 121 (Raj)
ACIT vs. Pennar Aqua Exports Pvt. Ltd. (2013) (ITA No.
1846/Hyd/2011)
Surender Prasad Mishra (Luck ITAT) (7 SOT 457)
Sai Baba Rupadas (ITA 1543/98) (Delhi ITAT)
Ghaziabad Footwear (142 Taxman 8) (Delhi ITAT)
Smt Meera Devi (All ITAT) (14 SOT 190)
S ection 68 : Capital Introduction
Introduction of Section 56(2)(viib)
Resident
Person
Consideration for
issue of Shares
+
Consideration is
more than Face
Value of Shares
Company (not being a
company in which the public
are substantially interested)
Except
Venture Capital Fund or a
Venture Capital Company
as referred to in Section
10(23FB)
Then if the Consideration is more than the Fair Market Value of the
Shares of the Assessee Company, then the excess amount of
Consideration will be assessed in the hands of Assessee Company as
income u/s 56(2)(viib) of the Act
Section 68: “May” not “Shall”
• If explanation offered by the Assessee is found
unacceptable, whether addition u/s 68 of the Act is
Automatic?
• No, held by Supreme Court in P.K.Noorjahan 237 ITR
570
• Depends upon the facts of the Case, example:
• where an assessee cannot be supposed to have earned
undisclosed income, given the fact a lady aged 17 years
– never engaged in business),
• first year cash credit where assessee operated for few
months in a year)
Section 68: “Books”
• Maintenance of Books is a condition precedent for
application of Section 68 (DCIT vs. Finlay Corporation
Ltd. 86 ITD 626 (Del ITAT)
• Amount not credited in Books cannot be brought to tax
u/s 68 (Baladin Ram vs. CIT (71 ITR 427) (SC))
• Books means Books of Original Entry wherein
Accounts are updated, entries are made in routine
basis (CIT vs. C. Shukla (1998) 3 SCC 410)
• Pass Book/Bank Statement are not “Books” (Bhai
Chand Gandhi (141 ITR 67) (Bom), Ms Mayawati vs.
DCIT (2008) 113 TTJ 178 (Del), Jawaharlal Oswal 71
ITD 324 (ITAT Chd)
Section 68: Trade Creditors
Whether section 68 is applicable to Creditors arising out
of purchases made in normal course of business, which
have not been doubted u/s 37 of the Act?
Held No, as per the following case laws:
• CIT vs. Pancham Dass Jain (2006) 205 CTR All 444 (All)
• Goyal Synthetics Pvt. Ltd. (2012) ITA No.989/Ahd/2006
(Ahd ITAT)
• Dhiraj R. Rungta vs. ITO in ITA No. 1687/2010 (Ahd
ITAT)
• Balaji Textile Industries (1994) (49 ITD 177) (Bom)
• CIT vs. M. K. Brothers (163 ITR 249) (Guj)
• JCIT vs. Mathura Dass Ashok Kumar' 101 TTJ (All) 81
• M. B. Traders (132 TTJ 490) (Nagpur)
• Sheo Narain Jaiswal (176 ITR 352) (Patna)
• Chhugamal Rajpal (79 ITR 603) (SC)
Sale
of
Jewellery
Section 68:
declared under VDIS
In case of sale of jewellery declared under VDIS, capital
gains thereon albeit can be examined u/s 68 of the Act,
however no addition for the same can be made in case
assessee has furnished:
• Conformation from jewellery purchaser
• Bank a/c copy for transaction proof
• Sale/Purchase Voucher of Jewellery etc.
(Refer BHC in CIT vs. Inder V. Nankani, ITA No. 128 of
2009), CIT vs. Uttamchand Jain (2009) 26 DTR (Bom)
23, Vinay C. Shah vs. DIT (2011) (ITA No.
1372/PN/2009) (ITAT, Pune)
Section 68: Security Deposits
Sufficient for Landlord to prove IDENTITY of tenant
and GENUINENESS of transaction (No need to prove
CREDITWORTHINESS)
• CIT v. Nevendram Ahuja [2007] 290 ITR 453 (MP)
• REWA Group (Jab ITAT) 109 TTJ 657
• Tulip Finance (15 DTR 185) (Del)
In case deposits subsequently adjusted against
Rentals - duly accounted for - No question of taxation
u/s 68
Section 68: Advance Bookings
ADVANCE BOOKING AMOUNT
RECEIVED BY REAL ESTATE
DELVELOPER
If subsequent sales made
or refunded, then no
addition under Section 68
Otherwise, SC Judgment
of Lovely Exports will
apply and Identities of
the Persons are to be
proved
Section 68: Amount received through
Will or Gift
• Amount recd through Will cannot be taxed by rejecting
the will on conjectures and surmises (that is will is not
on stamp paper, there are no witnesses, it merely bears
thumb impression etc) - Delhi ITAT in Budh Kishore 87
TTJ 140, Jodhpur ITAT in 102 TTJ 161
• Since assessee has disclosed the source of funds, so
he cannot be asked source of source and any addition if
required can be made in hands of deceased under
section 69 – SC J u d g m e n t i n Lovely Exports
• Burden to prove that money received from Will actually
emerged from assessee is not discharged by Revenue
Section
68:
Entities
claiming
Deductions u/s 80-I Series
Deduction u/s 80-I on income declared during the survey is not
available if the Assessee fails to prove that the same is
generated from or derived from Industrial Undertaking:
1. Home Tex vs. CIT [2012] 20 Taxmann.com 729 (Punj. & Har.)
2. Maa Vaishno Devi Ginning Pressing Udhyog Dhamnod Vs.
DCIT (2011) ITA NO. 538/IND/2010 (ITAT Indore)
3. Suresh Kumar Tayal vs. CIT(A) (2013) (ITA No. 3273/Del/
2008) (ITAT Delhi)
4. M/s National Legguard Works vs. CIT(A) (2006) I.T.A. No.302
of 2005 (P&H)
5. Commissioner of Income-tax v Harshwardhan Chemicals
[2003] 131 Taxman 813 (RAJ.) High Court of Rajasthan, Jaipur
S ection 68 vers us S ection 145
AO, after rejecting the Books of Accounts, can both
enhance the G.P. or N.P. Rate on estimate basis and can
make addition on account of unexplained cash credits in
the books of the Assessee (K.M.N. Naidu 221 ITR 451,
APHC in 120 ITR 294, Kale Khan (SC) 50 ITR 1)
If
unexplained
Cash
Credits proved to be
earned out of business,
then
benefit
of
telescoping available (Mad
HC in 149 ITR 127, BHC in
151 ITR 353, Raj HC in
165 ITR 453
Otherwise, no benefit of
telescoping
50
S ection 69 ; S ection 69 B; S ection
69 C vers us S ection 68 Contrast
Provision
Jurisdictional Fact
Section 68
Where any sum is found
credited..
Where assessee has made
investments not recorded in
books…
Where assessee is found to be
the owner of any money…
Where assessee’s investments
are undervalued in his books
Where assessee incurs any
expense…
.
Section 69
Section 69A
Section 69B
Section 69C
27
S ection 69 ; S ection 69 B; S ection
69 C vers us S ection 68 Contrast
For Section 68, the onus is
wholly on the Assessee to
explain the source of the
entry
For Section 69, 69A etc.,
the phraseology shows that
before
any
of
these
sections are invoked, the
condition as to existence of
investment,
expenditure,
etc. must be established by
material on record or
evidence
a) 10 SOT 319
b) 116 Taxman 271
c) 19 SOT 201
d) 8 SOT 6
28
Section 69/69A/69B/69C
Year of Charge
ADDITION U/S 69 CAN BE MADE IN THE YEAR IN
WHICH UNEXPLAINED INVESTMENT IS MADE
• Shankar R. Mhatre vs. ACIT (2009) (117 ITD 241)
(ITAT Mumbai)
29
Section 69: Inflated Stock to Bank
• In case of inflated stock to avail higher credit
facility, whether addition of difference in stock
value can be made as undisclosed investment?
• Following can be the factors in favour of the
Assessee:
1. Bank never vouched the quantity declared,
2. Mere value inflated (no quantity declared),
3. Physical control always with assessee,
4. Books audited,
5. No trading outside the books detected
•
1.
2.
3.
4.
Cases favouring Assessee having aforesaid facts:
Mad HC in 241 ITR 363,
158 Taxman 363,
236 ITR 340,
J&K HC in 201 CTR 178
Section 69: No Adverse Decisions under
Other Acts – Effect on Income Tax Act
In case income tax proceedings proposing to add certain
income are initiated on Excise proceedings, wherein
Excise Tribunal/CESTAT has decided the issue in favour
of the Assessee, then the same is also binding on the
Income Tax Department
• CIT vs. Mascot (India) Tools & Forgings (P) Ltd. (2010)
320 ITR 116 (Allahabad)
• Shiva Exports vs. ITO (2009) 28 SOT 512 (ITAT Chd)
• Shanker Rice Co. vs. ITO (2000) 72 ITD 139 (ASR)(SB)
• Kumar Aerosoles (P) Ltd. vs. ACIT (1996) 55 TTJ
(ITAT Del) 385
31
Section 69: Unexplained Production
Electricity Cases
GENERAL POINTS
• Sizes and quality of Finished Products
• Sizes and quality of Raw Materials
• Temperatures at different stages
• Fuel in the Reheating Furnace
• Delays/Breakdowns
• Technology and speed of Mill
• Mill condition
• Motors condition
• Electrical Transmission System
• Types of Mill Equipment installed
• Operating parameters
• Skill of Manpower
32
Section 69: Unexplained Production
Electricity Cases
OTHER POINTS
• That no excess stock of any raw material or finished
goods has been found.
• Even the Assessing Officer has not found any fault in
the Audited Books of Accounts and no statement of
the Assessee has been recorded.
• No documentary evidence has been disclosed by the
Department as to from whom the Assessee has
acquired/purchased the raw materials for the alleged
manufacture of Rounds/Angles allegedly cleared
clandestinely, to whom they had sold the
Rounds/Angles.
• No enquiry has been made from the Truck Drivers as
to whether they had delivered the raw materials to
the Assessee
33
Section 69: Unexplained Production
Electricity Cases
OTHER POINTS
• The addition is based on assumptions, conjectures
and surmises.
• At first, the assumption is that the Assessee
Company
must
have
purchased
the
raw
materials/consumables/stores & spares outside the
Books of Accounts
• Another assumption of extra wages outside the books
of accounts, extra freight paid on such purchase is
also outside the books of accounts and has also
incurred other costs of production outside the books
of accounts.
• Again assumption of the sales of whole of
unaccounted production outside the books of
accounts.
• Lastly, Concept of Rotation
34
Section 69: Effect of Third Party Statements
& Third Party Books of Accounts
Merely on basis of affidavit filed by seller (purchaser for
assessee) during sale tax proceedings, purchases made
by assessee from seller cannot be held to be bogus so as
to justify addition in that respect
•
•
•
•
Jodhpur ITAT in Jagdamba Trading (107 TTJ 398)
Permanand (107 TTJ 395) : alleged bogus
Nahar Spinning Mills Ltd. (8 SOT 6) (Chd ITAT)
Jodhpur ITAT in R.K.Synthetics 81 TTJ 909
80
Characterization of Deemed Income
Surrender in a
Search/Survey
Otherwise caught by
AO
Taken in Heads of
Income
Taken u/s 68/69 of the
Act
Set off of losses
available + Taxable at
Normal Rates
Can be taken back in
Heads of Income
Before 1.4.2013
Some Cases - Yes
and therefore Set
off of losses
available
Some Cases – No
and therefore No
Set off of losses
available
After 1.4.2013
No, and therefore No
Set off of losses
available + Taxable @
30%
(Section 115BBE)
36
Characterization of Deemed Income
Question 1: Surrender to be taken in Heads
of Income or u/s 68/69?
Heads of Income
a) Mad HC in 212 CTR 539
b) SC in Lakhmichand Baijnath
(1959) 35 ITR 416
c) Cal HC in 48 ITR 254; 64
ITR 593; 201 ITR 747
Recents
• Chensing Ventures 291 ITR
258 (Mad.)
• Radhey Developers India
Ltd. (2010) 329 ITR 001
(Guj)
• CIT Vs. Shilpa Dyeing &
Printing Mills P. Ltd., (2013)
39 taxmann.com 3 (Gujarat)
Section 68/69
a) Guj HC in Fakir Mohamed Haji
Hasan (1983) 247 ITR 290
b) P&H HC in 288 ITR 18
c) Mum ITAT in 7 SOT 208
Recents
• Dulari Digital Photo Services
(2012) (In ITA No.984/Chd/
2010) (ITAT Chd) BASED ON
FAKIR
MOHAMED
HAJI
HASAN
37
Characterization of Deemed Income
Question 1: From point of view of KIM
PHARMA (P&H HC)
A/Y 2005-06
A/Y 2004-05
Surrender as
other sources
income
from
Decision in Kim Pharma (P&H) –
Not Relatable to Business
Therefore considered as
Income under Section 68/69
Surrender on account of sundry
credits, repairs to building and
advances to staff,
Decision in Kim Pharma (P&H) Relatable to Business
Therefore considered as Income
from Business
38
Characterization of Deemed Income
Question 2: Whether Additions u/s 68/69 are
taxable under the Heads of Income?
• Chensing Ventures 291 ITR
258 (Mad.)
• Radhey Developers India Ltd.
(2010) 329 ITR 001 (Guj)
• CIT Vs. Shilpa Dyeing &
Printing Mills P. Ltd., (2013)
39 taxmann.com 3 (Gujarat)
• Dulari Digital Photo Services
(2012) (In ITA No.984/Chd/
2010) (ITAT Chd) BASED ON
FAKIR
MOHAMED
HAJI
HASAN
39
Thank You
CA. GAURAV SHARMA
(M) - 9988242443
info@ipxedu.com
www.ipxedu.com (Coming Soon)