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November 2, 2020

Fantastic or unacceptable explanations are not acceptable for allowance under Section 68 – Goa HC

by CA Shivam Jaiswal in Income Tax

Fantastic or unacceptable explanations are not acceptable for allowance under Section 68 – Goa HC

Bogus basically means something which is counterfeit or fake, something which is not genuine.Section 68 of the Income Tax Act pertained to Cash Credits. According to Section 68, where any sum was found credited in the books of an assessee maintained for any previous year, and the assessee offered no explanation about the nature and source thereof or the explanation offered by him was not, in the opinion of the AO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

Let us refer to the case of The Commissioner of Income Tax Karnataka (Central), Bangalore Versus Sadiq Sheikh and Sadia Sheikh, where the issue under consideration was that whether the Assessing Officer (AO) can make addition u/s 68 where assessee had provided an explanation which was considered as primarily unsatisfactory.

Facts of the Case:

  • The assessee’s in these appeals are individuals and are spouses of one another.
  • The assessee’s filed their return of income and thereafter, a search was conducted under Section 132 in the residential premises of the assessee’s.
  • The Assessing Officer (AO) finalized the assessment by adding an amount of Rs 19,76,00,000 on account of the unaccounted cash receipts and Rs 30,00,000 on account of unexplained investments by the assessee’s.

Appeal to Commissioner of Income Tax (Appeals) [CIT(A)]

  • The assessee’s, aggrieved by the aforesaid additions to the declared income, appealed the assessment order to the CIT(A), who partly allowed the assessee’s appeal.
  • From out of the addition of Rs 19.76 crores, addition to the extent of Rs 8,49,49,888 was sustained.
  • However, the addition to the extent of Rs 11.76 crores was deleted.
  • The CIT(A), sustained the addition of Rs 30 lakhs on account of unexplained investments by the assessee’s.

Appeal to Income Tax Appellate Tribunal (ITAT)

Both the assessee’s as well as the Revenue appealed to the ITAT against the order of the CIT(A). The ITAT, by its impugned order, allowed the assessee’s appeal and dismissed the appeal instituted by the Revenue. Therefore, the Revenue appealed before the High Court.

Appeals were admitted before the High Court (HC) on the following substantial questions of law:

  • Whether on the facts and circumstances of the case, the ITAT was correct in law and not perverse in its findings in deleting the amount of Rs.11,26,50,112 made by the AO towards unaccounted cash receipts?
  • Whether on the facts and circumstances of the case, the ITAT was correct in law and not perverse in its findings deleting the amount of Rs8,49,49,888 made by the AO towards unaccounted cash receipts?

Observations of the High Court (HC) on deletion of Rs 11,26,50,112 towards unaccounted cash receipts

  • HC answered this against the Revenue and in favour of the assessee’s by accepting the reasoning of the CIT(A).
  • The CIT(A) had held that no inferences needed to be drawn about this amount simply because there was material on record that this amount was paid to M/s. Good Earth Developers and M/s. Raj Hospitality Pvt Ltd.
  • Therefore, the nature of such amounts could be very well assessed in the hands of said recipients and need not be assessed in the hands of the assessee’s.
  • Since, there was material on record, that the amount of Rs 11.26 crores was paid by the assessee’s to the 2 entities and since there was evidence on record that the two entities had admitted to the receipt of the said amount, the CIT(A), was right in taking the view that such amounts were best assessed in the hands of the two entities and not in the hands of the assessee’s.
  • Accordingly, the first substantial question of law needs was answered against the Revenue and in favour of the assessee’s.

What led to the appeal on the second question of law? (deletion of Rs 8,49,49,888 towards unaccounted cash receipts)

  • Section 68 provided that where any sum was found credited in the books of assessee maintained for any previous year and the assessee offered no explanation about nature and source thereof or explanation offered by him was not found to be satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year.
  • The record, in this case, indicated that hardly any explanation was offered by the assessee’s when called upon to explain the transactions leading to the transfer of the huge amount of Rs 8.49 crores into their bank accounts.
  • Even the source was not indicated by the assessee’s but the same was unearthed by the Revenue by probing the bank accounts and the money trail.
  • The assessee’s neither cooperated nor were they candid. It was only as the probe deepened, the assessee’s and their alleged sources began to offer some explanations, which, as found by the AO and the CIT(A) were far from satisfactory.
  • The ITAT, in its impugned order, however accepted the assessee’s explanation relying almost entirely upon the following three circumstances:
  • That the amount of Rs 8.49 crores was transferred into the assessee’s bank account at Development Credit Bank. The ITAT regarded this as a transfer through a “normal banking channel”.
  • That this amount of Rs 8.49 crores was transferred from out of the bank accounts of Siraj Sheikh (assessee’s brother/brother in law) and Vijay Kumar Rao (assessee’s close friend) held in the same bank. The ITAT had held that the identity of the source was thus established.
  • That the identified sources had confirmed having made these payments to the assessee’s.
  • Based almost entirely upon the aforesaid three circumstances and virtually ignoring all other circumstances emanating from the record, the ITAT, had concluded that the requirement u/s 68 was proved beyond any doubt by the Assessee and that no addition was required.
  • According to the HC, the ITAT, had erred both on facts as well as in law, in interfering with the well-reasoned analysis reflected in the orders of the AO and CIT(A).

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Reference by HC on older cases

In Oceanic Products Exporting Co. v. CIT (Ker) it was held that after the enactment of Section 68, the burden was placed on the assessee to prove a credit appearing in its books of accounts. That burden had to be discharged with positive material. When it was contended that a person had advanced money or had given a loan, it had to be established that the person was not a man of straw and had the capacity to give the money.

In CIT v. Bikram Singh, it was held that each of the three conditions i.e. identity of the creditor, capacity of the creditor, and genuineness of the transaction had to be fulfilled cumulatively. Merely because the transactions were through banking channels, it cannot be said that such transactions were genuine. When the assessee’s were not in a position to show the credit-worthiness of the creditors, there was no question of accepting the explanation of the assessee’s.

In CIT v. P Mohanakala (SC), it was held that the mere furnishing of particulars or the mere fact of payment by an account payee cheque or mere submissions of a confirmatory letter by the creditor, is, by itself was not enough to shift the onus on the Revenue.

Even in Tania Investments P. Ltd. (supra) upon which reliance was placed by the ITAT, HC had tacitly accepted the legal position that in case of cash credit entries in the books of account, the assessee had to establish identity of the party, capacity and the genuineness of the transaction.

In the said case, the assessee had established the identity and perhaps the genuineness of the transaction. On the aspect of ‘capacity’, HC agreed with the finding of the ITAT in the said case, that books of account of the said party were very much available with the AO. Such books of account itself would indicate the capacity of the party to advance loans. Therefore, without examining such books of account the AO could not have rejected the assessee’s explanation.

In the present matters, the assessee’s quite reluctantly, indicated but not established the identity of the source. In any case, the assessee’s failed to establish the capacity of the source and the genuineness of the transaction. Therefore, it was clear that Tania Investments P. Limited (supra) was quite mechanically relied by the ITAT to accept the assessee’s so-called explanation in these matters. It was possible that the ITAT merely went by the headnotes which, at times, would not accurately represent the ratio of the decision.

Similarly, even Nemi Chand Kothari (supra) rendered by the Guwahati High Court laid down the following propositions, which, supported the case of the Revenue:

  • Inquiry under Section 68 need not necessarily be confined by the AO to the transactions, which took place between the assessee and his creditor, but that same may be extended to the transactions, which may have taken place between the creditor and his sub-creditor
  • There could be no doubt that to establish the receipt of cash credit as required under Section 68, the assessee must satisfy 3 important conditions – identity of the creditor, the genuineness of the transaction, and financial capacity of the person giving the cash credit to the assessee, i.e., the creditworthiness of the creditor
  • Once, the assessee fulfilled the aforesaid two conditions, thereafter there is no further burden upon the assessee to establish the creditworthiness of the sub creditor or the creditor’s creditor. The onus then shifted upon the Revenue

In the present matters, the assessee’s failed to discharge the burden of establishing the creditworthiness of the creditors. The assessee’s miserably failed to establish the genuineness of the transaction between said creditors on one hand and the assessee’s on the other. In fact, there was no reference to any transaction between these apparent sources/creditors and the assessee’s. These apparent sources at one stage chose to call themselves as ‘conduits’ on behalf of M/s. Prasad Properties to the transaction projected in the agreement. If the apparent sources were mere conduits as claimed by them, then the creditor or the source was M/s. Prasad Properties. The burden, therefore, laid upon the assessee’s to establish the capacity of such source i.e. M/s. Prasad Properties and the genuineness of the transactions with M/s. Prasad Properties. The assessee’s had failed miserably on both these aspects.

In Aravali Trading Co. (supra), the firm of creditors who had advanced the amounts to the assessee’s had not only admitted to the making of such advances but further, there was material on record to establish the creditworthiness of such creditors. Such creditors were themselves taxpayers who had been assessed for income tax for the relevant years. In these factual circumstances, the court held that the capacity of creditors had been established and therefore the burden was discharged.

In contrast, in the present matters, neither was the capacity of the said creditors nor M/s. Prasad Properties was established. Also, the genuineness of the transaction, if any, was also far from established.

Observations of the High Court (HC) on deletion of Rs 8,49,49,888 towards unaccounted cash receipts

  • According to the HC, merely pointing out to a source and the source admitting that it had made the payments was not sufficient to discharge the burden placed on the assessee’s by Section 68.
  • If this were so, then, it would be sufficient for assessee’s, to simply persuade some credit- less person or entity to own up having made such huge payments and thereby evade payment of property tax on the plea that the Revenue, could always recover the tax from such credit- less source, if possible.
  • To discharge the burden which Section 68 casted upon assessee’s, at least some plausible explanation was required to be furnished, which had to be backed by some reliable evidence.
  • Therefore, the assessee’s in the present case, has not discharged the burden which was cast upon it by Section 68.
  • In this case the assessee’s wanted the authorities to believe that the amount of Rs 8.49 crores credited into their accounts was indeed sourced from the said creditors and M/s. Prasad Properties.
  • This explanation was purported to be backed by some 4 documents of absolutely dubious origins executed in the year 2006- 07 but on stamp papers of the year 2000-02 for which there is no explanation whatsoever.
  • M/s. Prasad Properties was allegedly founded on 03.04.2006 and stood dissolved on 29.03.2007 i.e. within a single financial year.
  • This firm had neither any bank account nor any PAN card. This firm never filed any ITR nor paid any income tax. Even then this firm and its partners including the said creditors claimed to have transacted the business of ‘crores of rupees’.
  • Above all, explanation furnished on behalf of the assessee involved transportation of cash of Rs 8.50 crores by road from Chennai to Goa (a distance of over 1046 km.).
  • This wasan unacceptable explanation. Yet, the ITAT, by virtually ignoring all these circumstances and further by applying incorrect legal principles, had accepted such unacceptable explanation put forth, not by the assessee’s themselves but on behalf of the assessee’s.
  • In these matters, even if HC were to accept that the assessee’s, by pointing out to the creditors and M/s. Prasad Properties had discharged the initial burden cast upon them by Section 68, HC found that the onus which had shifted upon the Revenue, was appreciably discharged by the Revenue.
  • This was not a case where the Revenue, halted its probe soon after the so-called sources were indicated by the assessee’s.
  • The Revenue, in these matters, probed further and unearthed quality material to establish that the so-called sources completely lacked the capacity or credit-worthiness to advance such a huge amount of Rs 8.49 crores to the assessee’s.
  • Further,the Revenue, in these matters, established that there was no genuineness in the transactions sought to be projected on behalf of the assessee’s. Therefore, the Revenue, in these matters, has discharged the onus, assuming that such onus had indeed shifted upon the revenue. Again, this is an aspect, which was ignored by the ITAT.
  • The finding recorded by the ITAT in these matters was based upon the wholly erroneous view of law and perversity on account of ignoring completely, vital and relevant circumstances emanating from the record.
  • Therefore, for all the aforesaid reasons, HC answered the second substantial question of law in favour of the Revenue and against theassessee’s. HC reversed the order of ITAT and restored the order made by the CIT(A) in this matter.

In conclusion, Revenue has to examine the source of the credit. Merely pointing out to a source and the source admitting that it has made the payments was not sufficient to discharge the burden placed on the assessee’s under Section 68. The explanation has to be plausible and backed by reliable evidence. If proper explanation is not provided then the unexplained credit shall be added back to the income of the assessee.

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