Cash Credits, Unexplained

Investments, Unexplained Money,

Investment not fully disclosed,
Unexplained expenditure, Amounts
borrowed on Hundi

By
Reepal Tralshawala, FCA
tralshawalareepal@gmail.com
 Deeming provisions - objective

Search operations – unearthing unaccounted money,
bogus loans, unaccounted / unexplained investments /
expenditure, etc.

Nature & Source of these transactions entirely within
the knowledge of assessee, hence, assessee to explain
the same – Parker J.S. v. Palekar V.B. (1974) 94 ITR
616 (Bom); Yadu Hari Dalmia v. CIT (1980) 126 ITR
48 (Del)

To avoid litigation & put onus on assessee, deeming
provisions inserted
 CASH CREDITS

Section 68 – Analysis:

Any sum found credited in the books maintained
for any previous year;

Offers no explanation about the nature & source
thereof or the explanation is not satisfactory;

Amount credited in books may be charged to
income tax as income of that previous year
 Analysis – sec. 68

Any sum found credited in books of an assessee
maintained by him

Credits in cash or credits generally-
generally-

VISP (P) Ltd. v. CIT (2004) 265 ITR 202 (MP) – section not
confined merely to credits in actual ‘cash’ & any credits / liabilities
would get covered in sec.68

Books of account-
account-

Books of assessee himself and not any other assessee – Anand Ram
RAitani v. CIT (1997) 223 ITR 544 (Gau)

Bank pass book – whether books of assessee – CIT v. Bhaichand
H. Gandhi (1983) 141 ITR 67 (Bom)-
(Bom)- not books of assessee as not
maintained by him but by the bank & pass book is copy of assessee
account in books maintained by bank
 Analysis – sec. 68

Books of account-
account-

Rough Books – treated as books maintained by
assessee for sec.68 – Haji Nazir Hussain v. ITO
(2004) 271 ITR (AT) 14 (Del)

Loose Sheets – Not books

Mohd. Yusuf & Anr. v. D. & Anr. AIR 1968 Bom 112 –
referred to s.32 of Indian Evidence Act and General
Clauses Act and also Black’s Law Dictionary – held not
books

CBI v. V.C. Shukla (1998) 3 SCC 410 – piece of paper
without support of corroborative evidence & not proved
to be written by assessee – not books

Followed in Goyal (S.P.) v. DCIT (2004) 269 ITR (AT) 59
(Bom)
 Analysis – sec. 68

Offers no explanation about the source of credit or
the explanation is not satisfactory

CIT v. P. Mohanakala [2007] 291 ITR 278 (SC) – assessee
offers no explanation means no proper, reasonable or
acceptable explanation in respect of credits in books
maintained by him – AO to form opinion objectively with
reference to material available & due application of mind

Sreelekha Banerjee v. CIT (1963) 49 ITR 112 (SC) –
explanation given show receipt not of income nature –
cannot convert good proof into no proof – explanation to be
considered objectively.
 Analysis – sec. 68

Explanation cannot be rejected arbitrarily or
capriciously, without sufficient grounds, on suspicion
or on imaginary or irrelevant grounds – Roshan Di
Hatti v. CIT (1977) 107 ITR 938 (SC)

Explanation not to be rejected merely because
department unable to verify its correctness – Hastimal
(S) v. CIT (1963) 49 ITR 273 (Mad)

Explanation not to be rejected on presumption that
witness has come forward to give false evidence to
oblige the assessee – Sheo Narain Duli Chand v. CIT
(1969) 72 ITR 766 (All)
 Analysis – sec. 68

Onus to prove and onus when shifts

Onus on assessee to prove the source of money
received by him – when liability to pay tax is
disputed, responsibility is of assessee to prove that
receipt is not income or income exempt from tax –
Kale Khan Mohammed Hanif v. CIT (1963) 50
ITR 1 (SC)
 Analysis – sec. 68

Assessee to prove 3 vital conditions-
conditions-

Identity of creditor

Capacity of creditor to advance money

Genuineness of transaction

All the 3 conditions to be satisfied
cumulatively & not independent of each other

Assessee has legal obligation to explain the
nature and source of entries in his books –
Sreelekha Banerjee v. CIT (1963) 49 ITR 112
(SC)
 Analysis – sec. 68

Onus when discharged:

Once the 3 conditions are established by the assessee, it is
for the department to disprove the same – CIT v. Baishnab
Charan Mohanty (1995) 212 ITR 199 (Ori)

Names and addresses and PAN nos. of creditors furnished
(with confirmation letter of creditors), initial burden
discharged – CIT v. Orissa Corporation P. Ltd. (1986) 159
ITR 78 (SC); DCIT v. Rohini Builders (2002) 256 ITR 360
(Guj) [SLP rejected (2002) 254 ITR 276 (ST.)]

Once aforesaid done, correct position in law is that burden
shifts to department – Onus actually gets discharged when
AO accepts explanation of assessee.
 Analysis – sec. 68

Assessee not to prove source of source:

No requirement of law for assessee to establish the source
from which the third party obtained money – Sarogi Credit
Corpn. v. CIT (1976) 103 ITR 344 (Pat.); DCIT v. Rohini
Builders (2002) 256 ITR 360 (Guj)

Once existence of creditor proved and such creditor owns
the credits – not to further establish source in hands of
creditors – Aravali Trading Co. v. ITO (2008) 8 DTR 199
(Raj) [followed decision in Orient Trading Co. Ltd. v. CIT
(1963) 49 ITR 723 (Bom)]

Similar view taken in CIT v. Daulat Ram Rawatmall
(1973) 87 ITR 349 (SC) – onus to prove that the apparent is
not real is on the party which claims it to be so.
 Analysis – sec. 68

Duty of AO to enforce attendance:

It is duty of AO to enforce attendance of witness if his
evidence is material – if AO does not exercise his power to
call witness and examine him, he cannot treat deposits as
suppressed income of assessee – Nathu Ram Premchand v.
CIT (1963) 49 ITR 561 (All)

Cf. Food Corp. of India v. Provident Fund Commissioner
(1990) 1 SCC 68, 71 (SC) – if party requests for issuing
summons to creditor, it is legal duty of AO to exercise
powers.

However for issuing summons, assessee must furnish
complete address of such person in absence of which, AO
not duty bound to issue summons – Sri Jagdish Saran
Shukla v. CIT (1988) 171 ITR 694, 697-
697-98 (All); Ram
Kumar Jalan v. CIT (1976) 105 ITR 331 (Bom)
 Analysis – sec. 68

Significance of word ‘May’:

Bill introduced with word ‘shall’ at both places in the
section

Word replaced by ‘may’ at instance of Select Committee
Report

Reason – AO should be able to assess any third person, if
found that sum credited belongs to such third person.
Further, even if explanation offered not satisfactory,
provision should not invariably force AO to treat it as
income of assessee.

Thus, discretion given to AO – CIT v. Noorjehan (Smt.
P.K.) (1999) 237 ITR 570 (SC)
 Analysis – sec. 68

Year of taxability:

As per provision of sec.68, unexplained credits
deemed to be income of the previous year in which
sum credited in the books maintained by assessee

CIT v. Prameshwar Bohra (2008) 301 ITR 404
(Raj) – credits did not relate to the year in which
addition made – additions deleted on this ground
valid.
 Analysis – sec. 68

Peak Credit Theory:

Last resort of defense for unexplained cash credit

If credits not explainable and entries recur both
debit and credit side, plea can be taken for addition
of only peak credit and not the entire credits

ACIT v. Tritan Happy Home (P.) Ltd. (2005) 94
TTJ 628 (Ctk) – Addition confirmed on peak
credit instead of addition of each and every entry.

Not a legal proposition of law but normal
probabilities that can be displaced by material to
the contrary
 Analysis – sec. 68

Telescoping Benefit:

Intangible additions made could be contended to take care
of unexplained cash credit, if facts of the case so warrant

Additions made to trading results as also amounts
representing unexplained cash credit and if trading result
additions sufficient to cover cash credits, justified in
deleted cash credit addition – CIT v. Tyaryamal Balchand
(1987) 165 ITR 453 (Raj); CIT v. Jawanmal Gemaji
Gandhi 151 ITR 353 (Bom); CIT (Addl.) v. Ghai Lime
Stone Co. (1983) 144 ITR 140 (MP);

However, not a proposition of law – onus on assessee to
show some link between intangible additions and cash
credits – Nothing in law preventing the AO from making
both the additions separately and independently – Kale
Khan Mohammed Hanif v. CIT (1963) 50 ITR 1 (SC)
 Analysis – sec. 68

Partner & Firm:

Funds brought in by partner/s in the firm and proved
beyond doubt – addition not in the hands of firm, but
assessable in hands of partner if partner not able to prove
the source in his hands – CIT v. Jaiswal Motor Finance
(1983) 141 ITR 706 (All); CIT v. Taj Borewells (2007) 291
ITR 232 (Mad); CIT v. Metal & Metals of India (2007) 208
CTR 457 (P&H)

Capital introduced in firm on first day of firm coming into
existence or before starting of the business by firm – such
credits cannot be assessed in the hands of the firm – India
Rice Mills v. CIT (1996) 218 ITR 508 (All); Surendra
Mohan Sheth v. CIT (1996) 221 ITR 239 (All)
 Analysis – sec. 68

Share Application Money:

Extent of responsibility of Company in discharging onus

Identity of shareholders to be proved – such as Name & address,
PAN, Application forms, Payment through proper banking channel,
etc. – Once all this is established and even if the AO alleges as
received from bogus shareholders, then Department can proceed
against the individual assessment of such shareholders but cannot
assess the same as undisclosed income of the company – CIT v.
Divine Leasing & Finance Ltd. [2008] 299 ITR 268 (Del) – SLP
rejected by SC; CIT v. Lovely Exports (P) Ltd. (2009) 319 ITR 5
(SC); CIT v. Value Capital Service P. Ltd. (Del); CIT v. Samir Bio-
Bio-
tech (P.) Ltd. (2010) 325 ITR 294 (Del)

Taxation in hands of company only if department able to prove that
share application money actually emanated from coffers of
company
 Analysis – sec. 68

Gifts: After insertion in s.56(2) of clause (v) / (vi),
gift recd. by individual / HUF from non-
non-relatives
more than specified sum – taxable. However, in
respect of relatives also and in case of gifts to other
than individual/HUF, s.68 still applicable

Explanation if not satisfactory in respect of receipt of NRI
gift, can be assessed as unexplained cash credit – CIT v. P.
Mohanakala (2007) 291 ITR 278 (SC).

Relationship with donor & human probabilities important
since difficult to accept a stranger giving gift of huge sum
of money – Rajeev Tandon v. ACIT (2007) 294 ITR 488
(Del); Sandeep Kumar (HUF) v. CIT (2007) 293 ITR 294
(Del); Sumati Dayal v. CIT (1995) 214 ITR 801 (SC) – test
of human probabilities
 Analysis – sec. 68

Creditors for purchases – applicability of s.68

Once purchases accepted as genuine – outstanding credit
liability of such purchase cannot be a treated as
unexplained cash credit – CIT v. Pancham Dass Jain (2006)
156 Taxman 507 (All); Annamaria Travels & Tours (P.)
Ltd. v. DCIT (2005) 95 TTJ 71 (Del); Manoj Agarwal v.
DCIT (2008) 113 ITD 377 (Del) (SB)

Even otherwise, if purchase is considered as non-
non-genuine,
it would be disallowed u/s.69C or trading results would be
rejected and profits estimated or unexplained capital
investment for making such purchases added u/s.69, hence,
in any eventuality, sec.68 may not be applicable
 Unexplained Investments – s.69

Investments made in financial year

Such investments not recorded in books of
account, if any, maintained

No explanation offered about nature & source
of investments – or –

Explanation offered is not satisfactory in
opinion of AO

Such investments deemed to be income in the
year of investment

Stock disclosed to bank:

For availing credit facility

If no difference in quantity and only valuation difference –
addition could not be made

If quantity estimated as well as value estimated, again no
addition merely due to difference vis-
vis-à-vis books stock –
no rejection of books of account - 281 ITR 482 (P&H) CIT
v. Siddharth; 241 ITR 363 (Mad) CIT v. N. Swamy; 303
ITR 199 (All) CIT v. Das Ind.

Onus on assessee to establish correct position else would be
deemed to be unexplained investment – Dhansiram
Agarwalla v. CIT (1993) 201 ITR 192 (Gau) [SLP
dismissed (1993) 204 ITR (St.) 45-
45-46 (SC)]

Year of taxability:

Financial year in which the investment is made

In search / survey, if unexplained investment
detected, deemed to be made in the year of search /
survey unless assessee proves beyond doubt that
year of investment other than the year of search/
survey. Such investment addition to be made only
in that year and if time limit for invoking
provisions for that year expired, than no addition
can be made

Provision of s.50C invoked in case of seller

In case of purchaser, s.50C not applicable

Automatically s.69 could not be applied for taxing
unexplained investment

For applying s.69, AO has to prove consideration
paid over and above disclosed in books and could
not make addition merely relying upon the case of
seller wherein s.50C is applied

Seizure of assets:

If investments is seized and impounded by any
authority – whether deduction of business loss
u/s.28 available to assessee if assets used in course
of business of assessee

Dr. T.A. Qureishi v. CIT 287 ITR 547 (SC) – allowed
as business loss - heroin seized from doctor – raw
material in preparing medicines – public morality has no
place in taxation laws

CIT v. Anil M. Beli 284 ITR 344 (Bom) – a smuggler –
foreign currency seized by customs – allowed as
business loss
 Unexplained Money – s.69A

Assessee found to be owner of any money, bullion,
jewellery or other valuable article;

Such assets not disclosed in books of account, if any,
maintained by him;

Offers no explanation about and nature and source of
acquisition of such assets, or;

Explanation offered not found satisfactory by AO;

Deemed to be income of the financial year in which
the assessee became the owner of such asset

Mere possession of such assets:

If assessee found to be in possession of such assets
then presumption is that he is the owner of such
assets;

Such presumption is rebuttable and opportunity to
be given to prove with evidence that owner is third
person;

Else explanation to be given for establishing
ownership of asset from disclosed sources
Amount of investment, etc. not fully
disclosed in books of account – s.69B

Investment made or owner of assets i.e. money,
bullion, jewellery or other valuable article;

Amount recorded in books of account less than actual
value of investment or purchase value of such assets;

No explanation offered or explanation offered not
satisfactory in opinion of AO;

Excess deemed to be income of the financial year in
which investment made or such assets owned

Burden on revenue to prove:

Since the investment or assets are recorded in
books of account, it is the revenue alleging that the
same is not disclosed fully

Hence, onus is on the department to prove the real
value of investment or of assets;

Merely on fair value / market value, provision of
s.69B not to be invoked. However if sufficient
material on record to draw inference of investing
more amount than disclosed – 69B can be invoked
– Smt. Amar Kumari Surana v. CIT (1997) 226
ITR 344, 349 (Raj)

Non--maintenance of books of accounts
Non

S.69B could be invoked only in cases where the
assessee is maintaining books of account and the
value of investment or other assets disclosed in
books of account is less than its real value

Hence, if books of accounts are not maintained,
provision of s.69B could not be invoked and
addition of unexplained investment could not be
sustained – Dr. Prakash Tiwari v. CIT (1984) 148
ITR 474 (MP)

Cost of Construction:

Amiya Balal Paul v. CIT (2003) 262 ITR 407 (SC) – AO
has no jurisdiction to refer matter of cost of construction to
DVO

Finance (No.2) Act, 2004, inserted s.142A with
retrospective effect from 15/11/1972 – reference to DVO
validated – however, conclusive assessment as on
30/9/2004 not to be reopened except in cases of
reassessment made u/s.153A – DCIT v. Shubham
Industries [2007] 104 ITD 126 (Luck.)(TM)

Regular books of account maintained – cost of construction
disclosed – no defects in books – reference to DVO /
addition u/s.69 / 69B not valid – Rajhans Builders v. DCIT
[2010] 41 SOT 331 (Ahd); CIT v. Pratapsingh A.R.S. 200
ITR 788 (Raj); K.J. Arora v. DCIT [2009] 180 Taxman 131
(Del)(Mag)
Unexplained expenditure – s.69C

Assessee incurs expenses

Offers no explanation about source of such expenses
or

Explanation offered not satisfactory in opinion of AO

Amount of such expenses or part thereof deemed to
be income of that financial year in which such
expenses incurred

Proviso inserted w.e.f. 1-
1-4-1999 – unexplained
expenditure deemed to be income not to be allowed
as deduction under any head of income

Common examples of additions in this category are
that of household expenses; marriage expenses; etc.

In search action, loose papers, documents, etc. are
found depicting expenses incurred outside books of
account – may be for business purposes or otherwise

Earlier to inserting of proviso w.e.f. 1-
1-4-1999, even if
unexplained expenses proved by department, the
same were claimed to be allowed as expenses
incurred for business thereby neutralising the effect
of provision of sec.69C - Sharma Associates vs.
ACIT 55 ITD 171 (Pune) (T M); Hynoop Food & Oil
Industries (P.) Ltd. vs. ACIT 48 ITD 202 (Ahd)

Proviso – whether retrospective

It has been held that the proviso inserted by
Finance (No.2) Act, 1998 w.e.f. 1-1-4-1999 is not
clarificatory but substantive and hence, would
operate only prospectively - 84 ITD 641 (Mum)
DGP Windsor (India) Ltd. v. Dy. CIT
 Amount borrowed or repaid on
hundi – s.69D

Amount borrowed on hundi or

Any amount due thereon is repaid otherwise than
through account payee cheque

Amount borrowed or repaid deemed to be income of
the person borrowing or repaying

Income for the year in which such borrowing /
repayment carried out

Proviso clarifies avoidance of double taxation i.e. if
amount borrowed on hundi is deemed to be income
and taxed, such person not liable to be taxed once
again on repayment of same amount
Thank You