BY CA ANIL SATHE
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Introduced for the first time in Income Tax Act
1961 – there was no corresponding provision in
Income Tax Act 1922
Purpose to tax unexplained credit entries –
including moneys outstanding in capital accounts
Receipt of share application money – initial onus on
assessee to prove genuineness, creditworthiness
and identity
No satisfactory explanation – No automatic
deeming fiction – addition depends upon discretion
of AO & facts and circumstances of the case
CIT vs. Smt. P. K. Noorjahan 237 ITR 570 (SC)
CA ANIL SATHE
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Sum found credited
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in the books of the assessee
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assessee offers no explanation about the
nature and source OR
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explanation offered by him is not
satisfactory - in the opinion of the AO
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the sum so credited may be charged as
the income of the assessee
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of that previous year
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Section 68 to 69D – known as “Rules of
Evidence”
CA ANIL SATHE
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Established position of law
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Sum credited in the books
Books – maintained by assessee
Assessee to offer prime facie proof/evidence of source
Prima facie proof – qua assessee and qua quantum
Degree of burden of proof to vary depending on the
nature of credit and person from whom received
Depends upon relation of assessee with creditor
assessee not bound to establish “source of source” –
onus restricted only to the extent of first source
once assessee discharges initial burden the same to
shift to the AO
Also applicable to non-commercial loans and share
application money
CA ANIL SATHE
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Assessee should prove identity, capacity of lenders as
well as genuineness of transaction
Where lender is assessed to tax, assessee can avoid
addition by filing confirmation with particulars of PAN
Precautions to be taken while furnishing confirmation
of unsecured loans:
◦ Mode of payment – Cash/DD/ Cheque
◦ Particulars of Bank, if available
◦ Whether interest-bearing loan
◦ Immediate source – If possible
CA ANIL SATHE
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Independent evidence adduced by revenue
calling for information u/s 133(6) or issuing
summons u/s 131
Mandatory that the assessee is confronted
with the said evidence and an opportunity of
cross – examination afforded
However cross-examination to be conducted
within a reasonable time by assessee
Failure to avail of opportunity may prove
counter productive
CA ANIL SATHE
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Affidavit is only an assertion by the lender
and needs to be corroborated by independent
additional evidence
Such evidence may be documentary or oral by
way of examination of the deponent
CA ANIL SATHE
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Credit in the account of partner of firm admitted by
the partner
Credit in the books on the first day of the previous
year where the assessee is a firm or company and
business has not commenced
Sale of jewellery declared under VDIS
Amounts received through gifts from residents or
non residents
Amounts received through wills
CA ANIL SATHE
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Suspicion however great cannot take the
place of evidence
Burden to prove apparent is not real lies on
the revenue
Addition cannot be made merely on the basis
of conjectures and surmises
Theory of human probabilities and
surrounding circumstances is to be applied
where there is no evidence or the evidence is
insufficient
CA ANIL SATHE
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Initial burden on assessee to explain “nature &
source” of credit
Prove identity of shareholder – by way of physical
presence, registered address, PAN, etc.
Prove Genuineness – Confirmation letter, bank
statements, shareholder register, share application
form, share transfer register, etc.
Prove Creditworthiness – Creditor’s IT return,
Balance Sheet – Profit & loss A/c
CA ANIL SATHE
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Initial burden being discharged, onus on the
Department to enquire and investigate about the
creditworthiness & veracity of transaction – before
making addition u/s 68
AO duty bound to prove that such addition on
account of share application money or share capital
– indeed income of the assessee
No addition u/s 68 – merely because creditor fails
to respond to Department notices
Assessee’s AO cannot question creditor’s IT return
or himself examine the Profit & Loss A/c – unless
the return has been rejected by creditor’s AO
CA ANIL SATHE
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CIT vs. Lovely Exports (P) Ltd. 216 CTR 195 (SC)
CIT vs. Oasis Hospitalities Pvt.Ltd.333 ITR 119 (Del)
CIT vs. Divine Leasing & Finance Ltd. 158 Taxman
440 (Del)
CIT vs. Value Capital Services P. Ltd. 307 ITR 334
(Del)
CIT Vs. Dataware Pvt. Ltd. (Cal HC)
15 Taxmann.com 225 (Del)
15 Taxmann.com 183 (Bom)
15 Taxmann.com 226 (Kar)
CA ANIL SATHE
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Where the assessee is company (in which public are not
substantially interested)
◦ Sum 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◦ the person, being resident in whose name such credit is
recorded
◦ also offers an explanation about the nature and source of
the sum credited and
◦ such explanation in the opinion of the assessing officer is
found to be satisfactory
Exclusion
◦ in regard to sum received from person who is a VCF or a
VCC
CA ANIL SATHE
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Total change from established position of law
Complete deeming fiction to treat initial explanation
by assessee company to be unsatisfactory
The further explanation can be offered only by a
resident person
Non-resident not entitled to offer any explanation
No mechanism to require AO to enforce co-operation
from creditor
CA ANIL SATHE
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Explanation to be offered by resident person –
distinct views
o Whether proviso is applicable only to residents and no
explanation required to be offered by non-resident OR
o That any explanation offered by non-resident deemed
to be not satisfactory OR
o Confirmation and Identity proof required – as per
existing provision – would satisfy the AO
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The person offers an explanation – whether physical
appearance or through written communication
directly addressed to assessee’s AO required
CA ANIL SATHE
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Where in the financial year immediately preceding
the assessment year
the assessee has made investments which are not
recorded in the books of account
and the assessee offers no explanation about the
nature and source of the investments
or the explanation offered by him is not
satisfactory in the opinion of the assessing officer
the value of investments may be deemed to be
income of the assessee
for the financial year
CA ANIL SATHE
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where in any financial year
the assessee is found to be the owner of
any money, bullion, jewellery or other valuable article
and such money bullion jewellery or valuable article or thing
is not recorded in the books of account, if any
maintained by the assessee
and the assessee offers no explanation about the nature and
source of acquisition
or the explanation offered by him is in the opinion of the
assessing officer not satisfactory
then the money and the value of bullion jewellery or other
valuable article
may be deemed to be the income of the assessee for such
financial year
CA ANIL SATHE
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Where in any financial year
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Assessee has incurred any expenditure
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and he offers no explanation about the source of
such expenditure or part thereof
Or the explanation offered by him is not satisfactory
in the opinion of AO
the amount covered by such expenditure or part
thereof
may be deemed to be income of the assessee for
such financial year
CA ANIL SATHE
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Section 68 requires the assessee to explain credit in books
of accounts
Section 69 to 69 B require establishing of sources of
investments, money, bullion jewellery or other valuable
article , not recorded in books of account.
In section 68 onus is only on assessee to explain the source
of the entry
In section 69 to 69B the revenue is to establish that the
investment has been made by the assessee
Or the assessee is found to be the owner of money bullion
jewellery or any other valuable article
In section 69 C it is essential to establish that the assessee
has incurred the expenditure - before the provisions can be
invoked
CA ANIL SATHE
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Inflated stock to bank
Investment by one person in the name of
another person
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Understatement of purchase consideration
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Unexplained household expenditure
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Unaccounted marriage expenses
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Unverifiable purchases
CA ANIL SATHE
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Where total income of an assessee includes income
referred to in sections 68 to 69D
◦ amount of income taxable shall be aggregate of
◦ amount of income tax calculated on income referred
to in 68 to 69D
◦ at the rate of 30% and
◦ the amount of income tax with which assessee would
have been chargeable
◦ had his total income been reduced by the
aforementioned sums
◦ No deduction in respect of any expenditure to be
allowed
◦ in computing income referred to in 68 to 69D
CA ANIL SATHE
Issues
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Earlier section 68 – only a Rule of Evidence –
general principle to charge as Income from
Business or Income from Other Sources
Now section 115BBE – Charging Section – tax
income referred to in section 68
What is the character of income u/s 68 – whether
Income from Business or Income from Other
Sources – provision de horse of both heads of
income
Sec 115BBE – whether reference to character of
income or quantum of income
CA ANIL SATHE
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Whether provision applicable irrespective of slab
rates or basic exemptions
No deduction of expenses – but whether set-off of
losses allowed
Total income “includes” Income referred to in sec
68 – “Income” different concept than “sum to be
treated as income”
Whether Chapter VI-A deduction allowed – or
income taxable under similar lines as winning from
lottery, puzzles u/s 115BB
CA ANIL SATHE