Dr. CA Abhishek Murali analyses the implications of Section 68 and visits the loaded question of who bears the onerous burden of proving its contention – the assessee, or the revenue. He also discusses whether Section 68 can apply when books are rejected, or a best judgment assessment u/s 144 is made.
As assessments for cash deposited during the demonetization period (OCM Cases) have begun, questions are being raised as to under which head/section should such additions be made. In a significant number of cases, the additions have been made u/s 69A, i.e. where Assessee is found to be owner of any money, jewellery etc. and this is not recorded in the books of account. However, in many other cases, additions have been made u/s 68.
Let’s understand Section 68 of the Income Tax, it’s applicability to OCM cases and how, in certain circumstances, the entire order is void, when such an addition is made.
UNDERSTANDING SECTION 68 AND THE IMPLICATIONS
Section 68, of the Act, deals with Unexplained Credits. It states that where any sum is found credited in the books of an assessee and he offers no explanation about the nature and source satisfactorily, the sum may be charged as unexplained income.
Hence, there are 2 clear pre-requisites for an addition to be made u/s 68
The Books of an Assessee is defined u/s 2(12A), of the Act, and includes ledgers, day books, cash books in whatever format it is stored. In CBI vs VC Shukla - [TS-5026-SC-1998-O], the Supreme Court held that loose sheets cannot be termed as books. In CIT vs Bhaichand Gandhi – [TS-5090-HC-1982(Bombay)-O], it was held that a Bank Passbook or Bank Statement is not adequate, by itself, to be termed as books.
ONUS OF DISCHARGE -IS IT ON ASSESSEE OR DEPARTMENT?
Another important observation from the above is that there is an onus that is placed on the Assessee to satisfactorily explain the source or provide a valid confirmation of the source of such income.
A valid confirmation has no specified format but it is expected to contain the name of the giver/lender, complete address of the lender and, preferably, PAN number. The confirmation should give details of the transaction and the nature of the transaction. The concerned Assessing Officer may additionally seek to establish the credit-worthiness of the lender/source and, hence, additionally details like the income tax returns & bank statement of the lender/source may also be required to be furnished. In Nemi Chand Kothari v. CIT [TS-5663-HC-2003(Gauhati)-O], it was held as follows:
“It cannot be said that a transaction, which takes place by way of cheque, is invariably sacrosanct. Once the assessee has proved the identity of his creditors the genuineness of the transactions, and the creditworthiness of his creditors vis-à-vis the transactions which he had with the creditors, his burden stands discharged and the burden then shifts to the revenue”. The same was also held in Kamal Motors v. CIT [TS-5485-HC-2002(Rajasthan)-O] & CIT vs. Precision Finance Pvt. Ltd. [TS-5381-HC-1993(Calcutta)-O].
The Supreme Court in CIT vs. Bedi & Co. Pvt. Ltd. [TS-5022-SC-1998-O] held that what needs to be examined is if the prima-facie evidence given by the Assessee, that is adequate for discharge of his onus. In Mehta Parikh & Co. vs. CIT [TS-5011-SC-1956-O], it was held that the affidavits filed by the Assessee cannot be rejected without cross examination. In Jalan Timbers v. CIT [TS-5856-HC-1996(Gauhati)-O], it was held that where, in respect of certain cash credits, the assessee had not only disclosed them in his return of income but also produced confirmatory letters from the creditors & established their genuineness, addition made as cash credits by ignoring the aforesaid facts would not be justified.
In DCIT vs. Rohini Builders [TS-5242-HC-2001(Gujarat)-O], the Hon’ble Gujarat High Court observed that mere identification of the source of the creditors even without evidence as to the nature of the income could justify acceptance. The High Court further stated that it is not necessary that there should be an explanation as to the source of the money on the part of the creditors in every case.
The 2 landmark cases in this matter is Pr. CIT v. NRA Iron & Steel (P.) Ltd. [TS-5030-SC-2019-O] and CIT vs Lovely Exports (P) Ltd. [TS-85-SC-2008-O]. In NRA Iron & Steel, the Hon’ble Supreme Court, vide an ex-parte order, decreed that merely proving the identity of investor does not discharge the onus of the taxpayer, if credit worthiness is not established. The SC held that even if such transaction was through banking channels or account payee, that would still be the case.
However, in CIT vs Lovely Exports (P) Ltd. [TS-85-SC-2008-O], the Hon’ble SC had held that where the Assessee furnished names, address, PAN number, ID proof of the creditors/source, it was adequate and his onus was discharged. The Income Tax Officer, after making adequate enquires, is free to reopen their individual cases and make additions in their hands.
Therefore, despite multiple decisions, Section 68 remains a highly contentious and deliberated section of the Act. Every decision would come down to the facts and circumstances of each case. If the Assessee has discharged his onus and responsibility then the Assessing Officer is duty bound to not make additions, unless his investigations prove otherwise.
Hence, the Learned Assessing Officer has to, in his assessment order, detail the examination of the above particulars and his conclusion as to why an addition is being made u/s 68, if any, only after recording why the submissions made by the Assessee are not adequate to explain the source of the income. It is mandatory for the AO to make proper and detailed enquiry. In the absence of proper enquiries, addition cannot be sustained.
IS SEC 68 APPLICABLE WHEN BOOKS REJECTED OR ORDER PASSED U/S 144
As discussed earlier, one of the fundamental requirements of Section 68 are the books of accounts. A question was raised if any addition can be made u/s 68 when the assessment itself rejected the books of accounts or was based on estimates or where an order was passed u/s 144.
In the grand old case of Maddi Sudarsanam Oil Mills Co vs CIT [TS-5019-HC-1959(ANDHRA PRADESH)-O]. The Learned Andhra Pradesh High Court held as follows:
“If once the IT authorities have rejected the books, they cannot have it both ways, namely, adopting a flat rate to compute gross profits as well as rely on the books for the purposes of adding unexplained cash credits which were part of the scheme of balancing the accounts”.
In Indwell Constructions vs CIT [TS-5260-HC-1998(Andhra pradesh)-O], it was held that when the AO proposes to add back an exact item in the P&L a/c, he was relying on the rejected books which he cannot do, as the books have already been rejected. The same has been held in Devi Prasad Vishwanath Prasad Vs CIT [TS-5199-HC-1962(Allahabad)-O] & CIT vs Banwarilal Banshidhar [TS-5385-HC-1997(Allahabad)-O].
Hence, it is a well settled principle, vide several judicial precedents, that when the books have been rejected by the Assessing Officer, or when figures are estimated, that no additions can be made based on the rejected books.
However, despite the above, it appears that in some cases, especially OCM matters, it has come to light that orders have been passed where additions for specified notes have been made u/s 68. Here, it would be advisable to evaluate the applicability of the addition u/s 68 where books have been rejected or the order has been passed based on estimates.
Hence, from the above, it is evident that Section 68 is a section loaded with intricacies. Where the Act itself is not clear, several judicial precedents have laid down the principles that ought to be followed for additions under the section. Especially when it comes to OCM cases, where these principles have not been followed, it is highly probable that the entire order could be held as void.