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November 25, 2020

Assessee must prove the source of receipt of his/her cash credits or else AO may treat it as taxable income

by CA Shivam Jaiswal in Income Tax

Assessee must prove the source of receipt of his/her cash credits or else AO may treat it as taxable income

Black money is basically, that quantum of income which was not disclosed to government and hence no tax was paid, although the source is legal. Black money becomes white and legal if tax and penalty at the prevalent rate is paid. Corrupt money is the money obtained by bribes. The source is also illegal and it can’t become legitimate by paying tax.

Any sum found credited in the books of the taxpayer, for which he offers no explanation about the nature and source thereof or the tax authorities are not satisfied by the explanation offered by the taxpayer, is termed as cash credit. The provisions relating to tax treatment of cash credit are given in section 68 of the Income Tax Act.

Section 68 pertains to cash credits. According to Section 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 (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 Kale Khan Mohammad Hanif vs Commissioner Of Income-Tax where the issue under consideration was whether proving the source of receipt of his/her cash credits is on the assessee or not.

Facts of the Case:

  • The assessee was a trader carrying on two businesses, general merchandise and bidis.
  • For each of the assessment years concerned, the assessee had submitted a return but as his accounts were not found complete and reliable, the Income-tax officer had assessed the gross profits of the businesses on the basis of certain percentages of the total sales which had also to be fixed by estimates.
  • No question arose in the appeals pertaining to the correctness of those assessments
  • Subsequently, the Income-tax Officer (ITO) noticed various credit entries in the assessee’s books of account which had all escaped his attention at the time of the assessment for the earlier years.
  • The ITO thereupon, with the sanction of the Commissioner of Income-tax, re-opened the assessments in respect of these years and after giving the assessee full opportunity to explain the nature of these entries made fresh assessments under section 34.
  • In the fresh assessments he added to the previously estimated incomes, Rs. 95,300 in respect of the year 1945-46 and Rs. 39,575 in respect of the year 1947-48, as he was unable to accept the explanation offered by the assessee in support of his contention that the credit entries did not represent income.

Proceedings of Appellate Court

  • The assessee appealed against the fresh assessments to the Appellate Assistant Commissioner but the appeals were unsuccessful.
  • He then appealed to the Income-tax Tribunal.
  • The Tribunal found the assessee’s explanation with regard to the said entries for the amounts of Rs. 33,000 and Rs. 10,000 under the heads “Ghar Khata” and “Muhammad Islam Khata” respectively, acceptable and ordered their deletion from the assessment, but otherwise maintained the orders of the Income-tax Officer.

Proceedings of the High Court (HC)

  • Thereafter, under the orders of the High Court made at the instance of the assessee, the Tribunal framed questions in each of the assessment cases and referred them to the High Court for its decision.
  • These questions were answered by the high Court against the assessee.
  • Aggrieved with the order of the HC, assessee appealed before the SC.

Observations of the Supreme Court (SC) on onus of proving the source of the cash credits

  • The question which arose for discussion was whether the burden of proving the source of the cash credits was on the assessee or not.
  • According to the SC, the answer to this question must be in the affirmative and that was how it was answered by the HC.
  • It is well established that the onus of proving the source of a sum of money found to have been received by the assessee was on him.
  • If he disputed liability for tax, it was for him to show either that the receipt was not income or that if it was, it was exempt from taxation under the provisions of the Act.
  • In the absence of such proof, the Income-tax Officer was entitled to treat it as taxable income.

Observations of the SC on whether in the absence of satisfactory proof as to the source of credits the inference of the Tribunal that these credits are the assessee’s income from some undisclosed sources is an inference of factor or an inference of law

  • SC confessed that they found it difficult to see the point of this question.
  • Questions could be referred under section 66 when they were questions of law which arose out of the facts found by the Tribunal and which the Tribunal was said to have answered erroneously thereby unlawfully imposing a burden of tax on an assessee.
  • On questions of fact, the Tribunal was the final authority and such questions could not be referred to a High Court for its decision.
  • Now the present question assumed that the Tribunal had made an inference.
  • Either that inference was one of fact or was one of law.
  • If it was of fact, no question with regard to it can be referred to the High Court.
  • If it was one of law, then a question whether the inference could in law be drawn might be referred to the High Court.
  • But the question whether the inference drawn by the Tribunal was of law or fact, which was the question here framed, was not a question which arose out of the decision of the Tribunal nor one which the Tribunal had at all answered.
  • It did not seem to SC that a question in this form could be referred under section 66.
  • The High Court, however, answered the question by saying that the inference was one of fact.
  • If this was the correct view, then the matter ended there, as on questions of fact the Tribunal was the final authority.
  • If, on the other hand, the inference was one of law, then a question could be referred to the High Court as to whether the inference was justified in law. That was not done.
  • SC, however, added that if the inference was treated as one of law, then the Tribunal had drawn it lawfully.

Observations of the SC on whether having regard to the fact that the Income-tax Officer has assessed the income on a percentage basis, he was justified in treating the said sums as profits from an undisclosed source or not

  • The High Court answered the question in the affirmative.
  • This was correct according to the SC and they did not think that any other answer was possible.
  • SC had difficulty in appreciating the point of this question also.
  • The question suggested that because the income from a disclosed source was computed on the basis of an estimate and not on the basis of the return filed in respect of it, an income represented by a credit entry in the books of account of that source could not be held to be income from another and undisclosed source.
  • SC did not see why it could not be so held.
  • It appears from the judgment of the High Court that the reason given in support of the suggestion was that if that income was held to be income of an undisclosed source, the result would be double taxation of the same income which the Income-tax Act did not contemplate.
  • Apparently, it was said that there would be double taxation because it was assumed that the same income had once been earlier taxed on the basis of an estimate.
  • This reason was obviously false, for if the income was treated as one from an undisclosed source which the question postulates, it was not treated as income of the disclosed source which had previously been assessed to tax and, therefore, there was in such a case no double taxation.
  • It was not a case where the income sought to be taxed was held to be undisclosed income of a disclosed source, the income of which source had previously been taxed on the basis of an estimate.
  • If it were so, the question of double taxation might have been legitimately raised. That, however, was clearly not the case here as the question as framed itself stated.
  • SC conceded that the question as to the source from which a particular income was derived was to be decided on all the facts of the case.
  • Hence the question whether income represented by an entry in the books of a business was income of that business or of another business would have to be decided on the facts which showed the business to which it belonged.
  • But the answer to that question would not depend on whether the income from the first mentioned business was computed on the basis of a return filed or of an estimate of the income made by the taxing authorities.
  • This, however, was what the question as framed suggested, and that suggestion was wholly without foundation.
  • Therefore, it could not be said that the taxing authorities were precluded from treating the amounts of the credit entries as income from undisclosed sources simply because the entries appeared in the books of a business whose income, they had previously computed on a percentage basis.
  • In the present case, the Income-tax Officer held the income represented by the credit entries to be income from undisclosed sources, that was neither from the general merchandise nor from the bidi business of the assessee which he had disclosed.
  • This view was upheld by the Appellate Commissioner and by the Tribunal excepting as to two of the amounts earlier mentioned.
  • It was open to the assessee to raise the question that the finding that those amounts were income received from undisclosed sources was not based on any evidence or was, for other reasons, perverse.
  • He did raise some questions of this type before the Tribunal for reference to the High Court but the Tribunal did not think that those questions legitimately arose and did not refer them to the High Court.
  • The assessee accepted the decision of the Tribunal and did not move the High Court to direct a reference in regard to those questions under section 66(2).
  • Those questions, therefore, could not be raised in the SC.

It is well established that the onus of proving the source of a sum of money found to have been received by the assessee is on him. If he disputes liability for tax, it is for him to show either that the receipt was not income or that if it was, it was exempt from taxation under the provisions of the Act. In the absence of such proof, the Income-tax Officer is entitled to treat it as taxable income.

Further, taxing authorities were not precluded from treating the amounts of the credit entries as income from undisclosed sources simply because the entries appear in the books of a business whose income, they had previously computed on a percentage basis

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