The Hindu Business Line : Loan, cash credit: No source, will tax

Where adequate explanation is not provided for loans, cash credits and unsubstantiated investments, they are taxable and the court would also uphold such an assessment. This provision in the Income-Tax Act is an excellent tool against evasion, says H. P. Ranina.

THE TAX Department has at last woken up to the possibility of raising a large quantum of revenue by invoking certain provisions which have been on the statute book for many years. The law empowers the Assessing Officer to bring to tax as undisclosed income cash credits, loans and investments where the source cannot be explained or the quantum of investment is disproportionately large vis-à-vis the income disclosed in the past.

It is trite knowledge that thousands of crores worth of property, including tenancy and occupancy rights, change hands every year where a substantial part of the consideration remains undisclosed. By concentrating on just these transactions, the Revenue can garner substantial funds if focussed investigation is made. Courts have generally upheld assessments where the provisions of Sections 68, 69, 69-A, 69-B and 69-C of the Income-Tax Act, 1961 are invoked. It is now for the Tax Department to take courage in both hands and concentrate on making assessments, provided adequate evidence is gathered to confirm that the loans and cash credits are unexplained, or that investments are not supported by declared income.

Courts have taken a broad view in defining the scope of such assessments. This can best be illustrated by three recent decisions where the provisions of law were invoked by the Tax Department.

The cardinal principle of law which has been emphasised by courts is that if an entry of cash credit is found in the books of account of a firm, it is for the assessee to give an explanation on the identity and source of such deposits; if the explanation is disbelieved, the deposits are to be added as income under Section 68 of the I-T Act, 1961.

Similarly, if an assessee, who is a partner in the firm, has made an investment which is not recorded in the books of account maintained by him and the explanation given by the partner or individual regarding the source of deposits is disbelieved, such deposits which are investments, can be brought to tax as income from undisclosed sources under Section 69 of the Act.

Full effect of the deeming provisions and the presumptions provided under Sections 68 and 69 has to be given. Where a sum is found in the books of an assessee and the explanation offered about the nature and source thereof is not found to be satisfactory or no explanation is offered, the sum so credited can be charged to income-tax as the income of that assessee for the relevant previous years.

In India Rice Mills v. C.I.T. (218 I.T.R. 508), the Allahabad High Court held that if the deposits came to be made during the accounting year in the books of the assessee-firm before it started its business and the deposits represented the capital contribution of the partners, it was for the partners to explain the source of deposits and if they failed to do this, then such deposits could be added in the hands of the partners only. These deposits could in no case be the income of the assessee-firm because the firm started its business after the credits had been made in its books.

In Surendra Mahan Seth v. C.I.T. (221 I.T.R. 239), the Allahabad High Court held that the deposits made by the partners on the very first day when the partnership firm came into existence could not be added in the hands of the assessee-firm if the explanation regarding source of the deposits was disbelieved; at best it could be added in the hands of the partners individually. This view was reiterated by the Allahabad High Court in Jagmohan Ram, Ram Chandra and Girish Narain v. C.I.T. (274 I.T.R. 405).

In an interesting case, C.I.T. v. Vir Bhan and Sons (273 I.T.R. 206), the Assessing Officer made additions of Rs 22,01,500 to the income of the assessee on account of unexplained cash credits and Rs 94,602 on account of interest claimed thereon.

The Commissioner (Appeals) found that the amounts of credits were received by the assessee by means of crossed, account-payee cheques, the creditors were existing income-tax assessees and the Assessing Officer had access to their records for verification and, accordingly, deleted the additions. The Tribunal upheld the order of the Commissioner (Appeals). On appeal, the Punjab and Haryana High Court held that the approach of the two appellate authorities was totally erroneous.

The Assessment Order showed that the assessee did not care to respond to the show-cause notice issued by the Assessing Officer requiring it to explain why, in the absence of production of the creditors, the amount standing to their credit should not be treated as unexplained cash credits under section 68 of the Act.

It was not the case of the assessee that the creditors were not responding to its letters or refusing to attend the office. The assessee did not even make a request to the Assessing Officer for the necessary verification.

The assessee had furnished certain materials before the Commissioner (Appeals) who straightaway accepted the same. The order did not show that he afforded any opportunity to the Assessing Officer to verify the correctness of the material produced before him and also no finding was recorded that he had himself made any verification from the records of the creditors.

According to the Court, the appellate authorities had not dealt with the matter properly. Though the assessee might have discharged the initial onus by furnishing the permanent account numbers and copies of accounts of the creditors showing receipts and payments by way of account payee cheques, these could not conclusively prove the genuineness of the creditors.

In Exoimp Resources (India) Ltd. v. C.I.T. ([2005] 144 Taxman 795), the Calcutta High Court held that when Section 68 is invoked and a notice is issued if the assessee furnishes an explanation, it is incumbent upon the Assessing Officer to examine the explanation and arrive at a conclusion as to whether the explanation is satisfactory. The conclusion arrived at by the Assessing Officer is to be communicated to the assessee if the explanation is not satisfactory.

If thereupon the assessee submits any comments or furnishes further information, the Assessing Officer has to examine the same and arrive at his own conclusion. The in-built safeguard provided in Section 68 cannot be ignored by the Assessing Officer. The Assessing Officer can add the share capital as undisclosed income if no explanation is offered by the assessee.

The facts in this case were that in view of the explanation in terms of Section 68 furnished by the assessee disclosing list of subscribers along with particulars of permanent income-tax account numbers wherever available, number of shares allotted and face value of the shares, the Assessing Officer added the share capital as undisclosed income of the assessee without arriving at any conclusion as to the question whether the explanation was satisfactory or not. On appeal, the Commissioner (Appeals) affirmed the order of the Assessing Officer. On further appeal, the Tribunal upheld the order of the Commissioner (Appeals) on two fold reasons that the paper book that was filed did not bear any certificate that the documents included in the paper book were certified copies of the records before the Assessing Officer and that the statement of facts and the grounds of appeal were not signed.

The Calcutta High Court held that it was immaterial whether or not documentary evidence was furnished. It was necessary to examine the explanation furnished and arrive at a conclusion. If such conclusion could not be arrived at without a document, in that event, it was open to the Assessing Officer to ask for production of such document. From the record, it did not appear that any such step was taken.

Even if thereafter no such document was produced, the Assessing Officer had to record his conclusion that the explanation without the documentary evidence was not satisfactory. From the orders, it did not appear that it could be conclusively determined that no such explanation was at all ever submitted. Therefore, it was necessary for the authority concerned to examine the records of the Assessing Officer to find out the truth if any explanation was at all submitted.

The aforesaid decisions lay down guidelines that can be usefully followed by the tax authorities. If a fair and objective approach is brought to bear, courts would uphold assessments where adequate explanation is not provided for loans, cash credits and unsubstantiated investments.

In fact, the provisions of Sections 68 to 69-C are excellent tools in the hands of Assessing Officers in their fight against tax evasion. All that is necessary is a professional and determined approach to detect such cases and this is not difficult because while income can be suppressed, assets and investments are generally difficult to conceal.

(The author, a Mumbai-based advocate specialising in tax laws, can be contacted at ranina@bom2.vsnl.net.in.)

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