A very common reason for litigation involving unexplained cash credits is that the AOs often reject books of accounts and apply Gross Profit (GP) rate based addition to business income, and also an addition on account of unexplained cash credits. The assessee invariably strenuously objects, saying this will amount to taxing the same (presumed) income twice. SC has held as early as in 1963, that there is no bar against both, unexplained cash and GP Rate-based addition to business income being taxed. SC in another case has held that the burden of proving that the unexplained cash credits were either not income or not taxable is on the assessee.
Taxsutra Database Insight powered by Taxsutra Library showcases other important cases where this controversy about whether addition of unexplained cash credits was valid or not, took centre stage. These might be useful in Operation Clean Money (OCM) cases where additions have been made of demonetized cash deposited, among other situations.
Cash deposited in business bank account was treated as income from other sources, in addition to rejecting books and estimating income at a flat 12.5% of turnover. SC cited its own earlier judgment in Kale Khan Mohammad Hanif vs. CIT, which enunciated the principle that there is no bar to tax both, the unexplained credit and the estimated business income. It was for the assessee to prove that income represented by the unexplained cash credit was not from a source that was already taxed.
Addition made after applying higher GP rate was explained by assessee as being attributable to cash credits from genuine loans taken. ITO rejected this explanation and made a further addition for unexplained cash credits. Assessee wanted the two additions to be telescoped into one, citing in its support SC decisions in CIT vs. Devi Prasad Vishwanath Prasad and CIT vs. S Nelliappan. The revenue contested this view and the view that the revenue had to establish that the assessee had another separate source of income; SC upholds ITAT view that, additions towards the suppressed book profit should have been telescoped with the additions towards the cash credits, was legally tenable.
HC : Onus of proving the source of a sum of money found to have been credited by the assessee either in his name or in the names of third parties is on the assessee, and if he fails to establish the source of such a cash credit satisfactorily, such amount can be treated by the taxing authorities are taxable income. As the assessee consistently took the view that cash credit were genuine without further evidence, and failed to establish that the additions were referable to the same source of income that the ITO estimated profits from, the ITO was justified in holding that the cash credit came from an undisclosed source, while also estimating business income on GP basis. The AAC and the Tribunal were not justified in holding that separate addition on basis of unexplained cash credits was not permissible in view of the addition made on GP basis.
AO disbelieved assessee’s explanations that cash credits deposits from various persons were squared off before the close of accounting year. AO made a GP-based addition and added them as income from undisclosed sources. Assessee on appeal before HC, argued that since, for the last preceding three years, substantial additions had been made, the unexplained cash credits could be taken as having come out of such intangible additions in past assessments. This was argued before the AAC but not before the ITAT. HC held that, ITO was justified in taxing both, while in respect of the assessee’s contention, HC relied on the principle laid down in Anantharam Veerasinghaiah & Co vs. ClT [TS-9-SC-1980-O] where the SC held that additions made to book profits in earlier years are real income and can be treated as available for use in subsequent years or even in the same year.
ITAT : No reason for the lower authorities to rely upon the same books of account for the purpose of making addition u/s 40A(3) of the IT Act as well as to make addition of peak under section 68 of the IT Act. For considering the issue of peak credit, there should be a foundation that it was unaccounted money of the assessee having both debit and credit which assessee did not agree, the authorities cannot rely upon the same entries in the books of account for the purpose of making the addition of the nature of peak against the assessee, when the books of accounts itself are rejected.
SC relied on coordinate bench ruling in the case of Govindarajulu Mudaliar vs. CIT wherein it was held that, the onus of proving the source of a sum of money found to have been received by the assessee is on him. If assessee disputes liability for tax, it is for him to show either that the receipt was not income or that if it was exempt from tax. Further, questions pertaining to s. 66 not raised before HC cannot be raised before SC.
AO initially rejected books of account during assessment, however applied book gross profit margins for unexplained cash credits. ITAT rejected the rates used and applied flat rate for computing gross profits on cash credits but errs in calculation. HC reprimanded IT authorities; they cannot have it both ways, rejects use of books margins for cash credits and recalculates taxable income.
HC: It`s is not open to the ITAT to add up both the cash credit and the estimated excess of the profits over the amount shown in the books of account and to hold the amount so added up is taxable in the hands of the assessee. Such a course is open to the Income-tax authorities only when there is material to show that the assessee carries on an independent business apart from the business for which assessment is made. HC notes that, the facts found by the ITAT it is clear that the amount of Rs. 15644 is not unconnected with the amount of Rs. 85,000 being the cash credits shown in the books of account but treated by the Income-tax authorities as secreted profits from the business for the accounting year. It is, therefore, manifest that the amount of Rs. 85,000 which was added by the Income-tax authorities as secreted profits would include the amount of Rs. 15,644 which was the estimate made by the Income-tax Officer on examination of the books of account produced by the assessee. It follows that in the facts and circumstances of this case the amount of Rs. 15,644 ought not to have been added to the amount of Rs. 85,000 as income of the assessee for the year of account and that the amount of Rs. 15,644 was not taxable in the hands of the assessee.
Assessing Officer found no correlation between entries in the books of accounts with vouchers/ supporting documents hence rejected books of account and applied s. 69. Subsequently, AO made additions based on differences in creditors account balances, and credits in bank accounts. HC stated since assessment is based on ‘best judgement’ differences in account balances is an application of the income, therefore does not warrant another addition. Deposit in bank balances also tantamount to application of income, and hence no separate addition is called for. Further, once AO has rejected the books of account, he cannot take recourse to them so as to find out the income therefrom and make addition/ disallowance.
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