The complex nature of taxation laws, coupled with their progressive & high rates of taxes and long drawn litigations have negatively impacted India's popularity in terms of  "ease of doing business". The Government in recent times has taken several measures to make tax legislation and administration simple and hassle-free, including introducing concessional tax regimes, Taxpayers Charter etc. Despite these endeavours, certain provisions under the Income-tax Act are still considered to be draconian given the ambiguity surrounding them, and the Revenue's discretion involved in their application.

Mr Siddesh Nagaraj Gaddi and Mr Ravi Garg (Chartered Accountants) in this article have analysed  the provisions of Sec. 68 to 69D of the Income-tax Act and brought about several issues with regards to their applicability to the forefront. They have lucidly skirted around the controversy surrounding the taxability of undisclosed income under relevant head of income or under the aforesaid provisions, more so in the context of section 115BBE which has significantly higher rates of tax for such income. Referring to several judicial precedents they have balanced out both the views and shared their insights on it.

“Undisclosed and Disclosed Income Taxation”

India is often viewed as a tax rigour nation with high tax rates. The complex tax laws and long-drawn litigations have been one of the key factors for India’s low ranking in “Ease of doing business”. The Government in the recent past has taken several measures to improve this perception and reduced the tax rates for both individuals and corporates. Our Hon’ble Prime Minister in the recent past has introduced “Taxpayers Charter” which promises fairness and fearlessness. While the Government has taken several steps in this direction, there seem to be certain provisions in the Act whichhave caused immense trouble to the taxpayers. The provisions of section 68 to 69D of the Income-tax Act, 1961 (“the Act”) are  amongst them and in this article, we have attempted to analyse the same.

Background: Section 68 Act was introduced in the Act with the intent to plug loopholes used by assessees to convert their unaccounted money to the legitimate ones. Over the years this provision has also been handy to the Revenue Authorities to achieve internal tax collection targets. Invoking the deeming provision of section 68 of the Act has often resulted in high-pitched assessments whereby the assessees have been subject to rigorous tax rates of approx 78% u/s 115BBE of the Act.

Controversy regarding heads of income: The question, whether an income must be offered under respective heads of income, as referred under section 14 of the Act or whether provisions of sections 68 to 69D (specified sections) are to be invoked has always been a matter of debate. With the amendment to section 115BBE of the Act whereby the tax rate for income offered / taxed under specified sections has been significantly increased, the above question stands revived. Further, the bar on a claim of the benefit of set-off of losses, allowances, and deductions has added life to the old debate.

Revisiting the provisions of the Act would require reference to section 2(45) which deals with the definition of the term ‘total income’ to mean ‘…the total amount of income referred to in section 5, computed in the manner laid down in this Act’. Like the definition of the term ‘total income’, section 5 as well as section 14 of the Act are yielding to other provisions of the Act and thereby lead to the conclusion that the heads of income as referred to in section 14 of the Act are not all-pervading.

The bare extracts of the provisions of section 68 of the Act have been provided below for reference:

Cash credits.

68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year :

Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so 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—

(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.

Basic understanding of section 68

Section 68 of the Act casts onus on the assessee to explain the nature and source of credit in the books.  Failure to give a reasonable and satisfactorary explanation can fasten the assessee with the treatment of the same as income and liability to tax.  The Apex Court in the case of CIT v. P. Mohanakala [TS-5013-SC-2007-O]  held that the " Section 68 itself provides that where any sum is found credited in the books of the assessees for any previous year, the same may be charged to income tax as the income of the assessees of the previous year, if the explanation offered by the assessees, about the nature and source of such sums found credited in the books of the assessees, is in the opinion of the Assessing Officer not satisfactory. Such opinion found itself constitutes a prima facie evidence against the assessees, viz., the receipt of money, and if the assessees fail to rebut the said evidence, the same can be used against the assessees by holding that it was a receipt of an income nature”

Since the onus of the assessee is discharged upon the satisfaction of the Assessing Officer (“AO”), can this lead to a contention that every disagreement of the AO will result in rigorous taxability? The explanation given by the assessee should be considered objectively before the officer takes a decision to accept or reject it. As explained by the Supreme Court in Sreelekha Banerjee vs. CIT [TS-5008-SC-1963-O]  “..Before the department rejects such evidence, it must either show an inherent weakness in the explanation or rebut it by putting to the assessee some information or evidence which it has in its possession. The department cannot by merely rejecting unreasonably a good explanation, convert good proof into no proof. It is within the range of these principles that such cases have to be decided..”

Therefore, the explanation furnished by the assessee needs to be considered objectively and the explanation given cannot be rejected arbitrarily or capriciously, without sufficient grounds, on suspicion or on imaginary or irrelevant grounds. It is for the assessee to prove what is best known to him about the source of income-based on the information available in his records. Once such an onus is discharged and the assessee has submitted the available details, the onus shifts upon the AO to disprove the same with the material available in his records. The satisfaction of the AO is the basis for the invocation of powers under section 68 of the Act and the satisfaction must be derived from the relevant factors on the basis of proper enquiry. Based on the above, it can be said that once the assessee discharges his prima facie responsibility of proving the source, unless proved contrary to available material, revenue authorities cannot invoke provisions of section 68 of the Act. 

Business Income u/s 28 of the Act vs Deemed Income u/s 68 of the Act

In cases where the explanation offered by the assessees has not been accepted and the AO invokes section 68 of the Act, the question arises whether additions have to be made under heads referred u/s 14 of the Act, or under specified sections?

By way of dismissal of SLP, the Supreme Court (“SC”) in CIT vs. P.D. Abraham [2015] [TS-5036-SC-2014-O], refused to interfere with the order of the High Court wherein this controversy has been acknowledged. On the failure of the assessee to explain the source of the unaccounted amount, the AO had taxed it under the head Profits & Gains from Business or Profession (“PGBP”) and CIT sought to tax it under Income from Other Sources (“IFOS”) by invoking the provisions of section 263 of the Act. The High Court quashed revision proceedings by stating that the AO has taken possible view considering that the assessee has no source other than business income.  [CIT vs. P.D. Abraham [2015] [TS-5325-HC-2014(KERALA)-O]- though the ruling is on the validity of proceedings under section 263 of the Act, it is relevant to note that the main premise of the AO in taxing the income under the head PGBP is considering the fact that the assessee had no source other than business. Further, the SC in the case of Lakhmichand Baijnath v. CIT [TS-5022-SC-1958-O] has appreciated the above by holding that "When an amount is credited in business books, it is not an unreasonable inference to draw that it is a receipt from business.". The same has been followed in many other rulings including Annamalai Reddiar vs. CIT [TS-5119-HC-1963(KERALA)-O]

In our view, merely because an assessee has offered income under the head PGBP, the same will not lead to the automatic presumption that all the credits, as referred under section 68 of the Act, are from business. Section 68 being deeming fiction; the onus thereunder has to be independently discharged by the assessee to the best of his knowledge and available records. Not just the credits, even the income offered under the head PGBP can be classified and brought to tax under section 68 if the source is not explained. Therefore, unless the prima facie onus is discharged, the above rulings cited cannot serve their purpose.

Income from other sources vs Income from no-source

 With respect to the contention that additions under the specified sections when taxable under the head ‘IFOS, there are two views possible. While few authorities have held that for an income liable to be taxed, the same has to fall under any of the heads referred in section 14 of the Act. We place reliance on the ruling of Fakir Mohmed Haji Hasan vs. CIT [TS-5358-HC-2000(GUJARAT)-O]  to state that there has to be a source even to tax income under the head ‘IFOS. Additionally, it is relevant to refer the preamble of section 14 of the Act which states ‘save as otherwise provided, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads’. If there is nothing that is otherwise provided in other sections, income shall be classified among the heads of income. However, the specified sections being section 68 to 69D, have provided otherwise. Therefore it can be concluded that the five heads of income as referred to in section 14 of the Act are not complete codes in and of itself, there can be income liable to tax which is not covered in any of the sections ranging from 14 to 59 of the Act. In any case, considering the conflicting conclusions, we have discussed the same under both the options.

If the view is taken that the same is liable to tax under section 56 r.w.s 68/69/A/B/C of the Act, the following case laws will come to the rescue of the assessees. It was held that the heads of income provided for in the sections of the Act are mutually exclusive and where any item of income fall specifically under one head, it has to be charged under that head and no other [CIT vs. D.P. Sandu Bros. Chembur (P.) Ltd [TS-5-SC-2005-O] and United Commercial Bank Ltd. v. CIT [TS-5013-SC-1957-O]. It has been further held by this Court in East India Housing & Land Development Trust Ltd. v. CIT [TS-5048-SC-1960-O] that if the income from a source falls within a specific head, the fact that it may indirectly be covered by another head will not make the income taxable under the latter head. [See also CIT v. Chugandas & Co. [TS-5037-SC-1964-O]. S.G. Mercantile Corporation (P.) Ltd. v. CIT [TS-5001-SC-1972-O]. Thus, when the source is adequately explained, the respective head of income has to be invoked before pushing it to the residuary provisions.

If it is so held that additions under the specified sections will be taxed under the respective sections without assigning the income thereunder to any head of income, the above legal precedents on the warring head of income will be of less use. However, in the absence of overriding powers given to any of the provisions, be it specified provisions or respective charging sections under various heads of income, no provision will prevail over another. On the question, where the income will be offered in such cases, should not be dictated by consequential provisions (Section 115BBE). No matter how tempting it is to the Revenue Authorities, the rate of tax should not decide the colour of the income.

We believe that the determining factor would be the source of income/investments/money,bullion, etc. If there is one thing that is common in all the sections, it is the explanation with respect to the source. It is only in the event of un-satisfactoriness or absence of source, an amount can be brought to tax under the specified sections. When the source is established, for example source being business, there is no reason why provisions of section 28 of the Act cannot be invoked. Consequently, the computation mechanism provided u/s 29 of the Act will have to be followed. The choice of application of section 28 vs 68 of the Act should not be decided on the basis of tax rates/ computation mechanism.

As a tie-breaker, the same may be proceeded chronologically. Provisions of section 28 of the Act would be applicable and not 56/68 of the Act. Seeking to tax the income u/s 68 when the same is offered to tax u/s 28 of the Act or any other provision, will lead to double taxation which is frowned upon. After all the objective of the specified provisions is to tax income that has gone untaxed. When income has been taxed under other provisions, there is no question of bringing it to tax again under section 68 or any of the specified sections. As another tie-breaker principle, when two views are possible the one beneficial to the assessee may be followed.

In any case, instead of applying arbitrary methods to check the applicability, the assessee should seek to establish the source. Existence of which should not lead to additions under the specified sections as they are applicable only if the same is source-less.

We place reliance on the landmark ruling of the Gujarat High Court in the case of Fakir Mohmed Haji Hasan vs. CIT [TS-5358-HC-2000(GUJARAT)-O] (supra) wherein it has been held as under:

6.1 The scheme of sections 69, 69A, 69B and 69C of the Act would show that in cases where the nature and source of investments made by the assessee or the nature and source of acquisition of money, bullion, etc., owned by the assessee or the source of expenditure incurred by the assessee are not explained at all, or not satisfactorily explained, then the value of such investments and money, or value of articles not recorded in the books of account or the unexplained expenditure may be deemed to be the income of such assessee. It follows that the moment a satisfactory explanation is given about such nature and source by the assessee, then the source would stand disclosed and will, therefore, be known and the income would be treated under the appropriate head of income for assessment as per the provisions of the Act. However, when these provisions apply because no source is disclosed at all on the basis of which the income can be classified under one of the heads of income under section 14 of the Act, it would not be possible to classify such deemed income under any of these heads including "Income from other sources" which have to be sources known or explained. When the income cannot be so classified under any one of the heads of income under section 14, it follows that the question of giving any deductions under the provisions which correspond to such heads of income will not arise. If it is possible to peg the income under any one of those heads by virtue of a satisfactory explanation being given, then these provisions of sections 69, 69A, 69B and 69C will not apply, in which event the provisions regarding deductions, etc., applicable to the relevant head of income under which such income falls will automatically be attracted.