Taxability of Receipts Under Section 68 of Income Tax Act, 1961

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Taxability of Receipts under section 68 of Income
Tax Act, 1961
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• Income Tax Act 1961, provides statutory powers to
  the parliament to levy and collect tax on the
  income of the persons. The act provides 5
  different natures of income called as 5 heads of
  income under which an income is taxed. Apart from
  these 5 heads of income there is another category
  of income which is treated separately and tax
  accordingly and that is undisclosed income or the
  black money. India is well known for its parallel
  economy and there is huge amount of black money
  rotating in the system. Many a time specific
  attempts are made by assesses to convert and
  legalize these unaccounted money and they may be
  in the form of accommodation entries through the
  complex chain of shell and bogus companies. In
  order to curb these black money and undisclosed
  income there are specific provisions Section 68
  to section 69D under the income Tax Act that
  provides taxability of undisclosed income and
  thereby provides important weapon available to
  parliament to tax the untaxed income. In this
  article, taxability of undisclosed cash credits
  u/s. is discussed at lengths.
• 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, satisfactory, the sum so
  credited may be charged to income-tax as the
  income of the assessee of that previous
  year

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• Provided that where the assessee is a company
  (not being a company in which the public are
  substantially interested), and the sum so
  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
• (a) the person, being a resident in whose name
  such credit is recorded in the books of such
  company also offers an explanation about the
  nature and source of such sum so credited and
• (b) such explanation in the opinion of the
  Assessing Officer aforesaid has been found to be
  satisfactory Provided further that nothing
  contained in the first proviso or second
  proviso shall apply if the person, in whose name
  the sum referred to therein is recorded, is a
  venture capital fund or a venture capital company
  as referred to in clause (23FB) of section 10.

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• Elements of Section 68
• 1. Sum credited in books of assessee
• The first element of section 68 provides that
  any sum to be credited in the books of assessee.
  The credit may be in any form- it may be in the
  form of loans, share application money, gifts,
  consideration received on sale of shares or any
  other form by whatever name called. The scope of
  the word Sum is very wide and include all the
  transactions whether commercial or
  non-commercial. Punjab Haryana High Court in
  case of G.R. Siri Ram v. CIT (1975) 98 ITR 337
  held that the term sum used in the section
  has a very wide connotation. It applies to all
  the credits by whatever the name called.
• The other condition is that sum should be
  credited in books of assessee. If the sum is
  credited in any other books, assesses cannot be
  taxed. For example, books of partnership firm
  cannot form basis for taxing the credits in
  partners hand. In this regards, reliance is
  placed upon Smt Shanta Devi v. CIT (1998) 171
  ITR 532 (PH), wherein it was held that on a
  perusal of section 68 would show that the
  expression books has been used with reference to
  the word assessee.

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• What happened if assessee does not record the
  transaction in his books of accounts and claim
  that sum is not taxable as the same is not
  credited in books of accounts. Here come the case
  law of Sudhir  Kumar  Sharma (HUF) v/s.
  CIT (2014) 224 Taxmann 178  wherein it was held
  that it was the bounded duty of the assessee to
  explain the nature and source of cash deposits.
  It has been therefore rightly held that assessee
  cannot take any advantage of the transaction as
  he had not kept any books of accounts. Similar
  view was taken by Bombay High court in case of
  Shri Arunkumar J Muchhala vs CIT 363 of
  2015.

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• 2. Explanation about nature and source of money
  The second element of section 68 is that assessee
  should offer an explanation about the nature and
  source of the credit entry. The credit entry will
  be treated as the income of assessee in following
  two cases. a. Assessee fails to provide
  sufficient explanation. b. Assessee provides the
  explanation but the same is not satisfactory in
  the opinion of the assessing officer. In order to
  provide the explanations about nature and sources
  of the transaction, various forums held that
  assessee should produce necessary documents in
  support of below. (i) identity of the
  investors/person in whose name credit entry
  appears (ii) their creditworthiness/investments
  and (iii) genuineness of the transaction Further,
  Honourable Supreme Court in landmark judgement of
  PCIT vs NRA Iron and Steel Pvt. Ltd. CIVIL
  APPEAL NO. _OF 2019 held that

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• This Court in the land mark case of Kale Khan
  Mohammad Hanif v. CIT3 and, Roshan Di Hatti v.
  CIT4 laid down that the onus of proving the
  source of a sum of money found to have been
  received by an assessee, is on the assessee. Once
  the assessee has submitted the documents relating
  to identity, genuineness of the transaction, and
  credit-worthiness, then the AO must conduct an
  inquiry, and call for more details before
  invoking Section 68. Honorable Court at para 9
  has hold that The Judgments cited hold that the
  Assessing Officer ought to conduct an independent
  enquiry to verify the genuineness of the credit
  entries.      
•   The Apex court in the same case laid down some
  important principles for taxing the receipt u/s.
  68. These are. The assessee is under a legal
  obligation to prove the genuineness of the
  transaction, the identity of the creditors, and
  credit-worthiness of the investors who should
  have the financial capacity to make the
  investment in question, to the satisfaction of
  the AO, so as to discharge the primary onus. The
  Assessing Officer is duty bound to investigate
  the credit-worthiness of the creditor/
  subscriber, verify the identity of the
  subscribers, and ascertain whether the
  transaction is genuine, or these are bogus
  entries of name-lenders. If the enquiries and
  investigations reveal that the identity of the
  creditors to be dubious or doubtful, or lack
  credit-worthiness, then the genuineness of the
  transaction would not be established 3. Special
  provisions for Corporate Assessee. First proviso
  to section 68 which talks about furnishing the
  explanations about nature and source of funds in
  the hands of person making share application was
  added in the year 2012 vide Finance Act
  2012.

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• Position before finance Act 2012 There was no
  such provision before the finance Act 2012 and
  the company assessee would not have any onus to
  provide any explanation of funds in the hands of
  investor. It would discharge its onus by
  furnishing the Name, Address and PAN of the
  investor. Honorable Apex Court in case of CIT vs.
  Lovely Exports P. Ltd. 216 CTR 195(SC), held
  that if the share application money is received
  by the assessee company from alleged bogus
  shareholders, whose names are given to the AO,
  then the Department is free to proceed to reopen
  their individual assessments in accordance with
  law. Assessee would not have any further
  obligations in view of the above ruling. The
  Amendment proposed in Finance Act 2012 The
  amendment was proposed to discourage the practice
  of conversion of unaccounted money and provides
  the obligation on the assessee company being
  closely held company to provide explanation about
  nature and source of funds credited in the hands
  of the investor. Note that this would be
  applicable only in case of resident investors and
  in case of closely held company.
  

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• 4. Amendment by Finance Act 2022 Finance Act 2022
• provides for the addition of below proviso to
  the erstwhile section 68. Provided that where
  the sum so credited consists of loan or borrowing
  or any such amount, by whatever name called, any
  explanation offered by such assessee shall be
  deemed to be not satisfactory, unless- (a) The
  person in whose name such credit is recorded in
  the books of such assessee also offers an
  explanation about the nature and source of such
  sum so credited and (b) Such explanation in the
  opinion of the A.O. aforesaid has been found to
  be satisfactory In the erstwhile provision onus
  to prove nature and source of funds in the hands
  of Source (Source of Source) was there only in
  case of share application money. Therefore, in
  case where the accommodation entry was in the
  nature of loans or borrowings, various courts
  have held that identity and creditworthiness of
  creditor and genuineness of transactions for
  explaining the credit in the books of account is
  sufficient, and the onus does not extend to
  explaining the source of funds in the hands of
  the creditor and therefore rendering the
  provision ineffective. Therefore, finance act
  2022 proposes above amendment to provide onus on
  the borrower to provide explanations about the
  nature and source of funds in the hands of lender
  also.

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• Onus of Proof Section 68 is the deeming fiction
  and provides that sum credited in books of
  assesses will be treated as the income of
  assesses if he fails to provide satisfactory
  explanation about its nature and source.
  Therefore, prima facie the onus to prove that the
  alleged transaction is not in the nature of
  income lies on the assesse. Honorable Delhi High
  Court in case of CIT v. Kamdhenu Steel Alloys
  Ltd. (2012) 361 ITR 220 (Delhi) SLP dismissed by
  SC, SLP (Civil) CC 15640 of 2012 held that
  though initial burden is upon the assessee, once
  he proves the identity of credit/share
  applications by either furnishing permanent
  account numbers or copies of bank accounts and
  shows the genuineness of the transaction by
  showing money in the banks is by account payee
  cheques or by draft, etc., then the onus to would
  shift to the revenue. Similar ruling was also
  provided in below cases. A. CIT vs. STL Extrusion
  (P) Ltd. 333 ITR 269- Madhya Pradesh HC B. CIT
  v/s Vrindavan Farms Pvt. Ltd. Tax Appeal No. 71
  of 2015- Delhi High Court C. CIT v/s Ujala
  Dyeing and Printing Mills (P) Ltd. 328 ITR 437-
  Gujarat High Court Modus Operandi u/s 68 There
  are various forms of alleged transaction u/s. 68
  and the most common of them are share
  application money at high premiums, bogus loans
  and penny stock. These transactions are commonly
  called as accommodation entries or the fictious
  transactions. These kinds of transactions are
  commonly routed through the chain of shell or the
  bogus companies. Usually, a person called as
  Operator creates the complex chain of Shell
  companies and thereafter undertakes the series of
  fictious transaction to avoid audit trail and
  gave them colour. The other party is called as
  beneficiary who convert his unaccounted money
  through the shell company. The operator charges
  commission in consideration of providing the
  accommodation entries. 1. Share Application money
  at Higher Premiums Share application money is the
  most common form of accommodation entries to
  convert unaccounted money. Assessee being
  corporate person (a closely held company) would
  receive accommodation entry in nature of
  subscription to shares of the company. The share
  would be then issued to the subscribes at very
  high premium to avoid dilution of equity. For
  instances shares having face value of Rs. 10
  would be issued at the premium as high as Rs 990
  making it Rs.1000. Government Action Parliament
  in Finance Act 2016 amended the section
  56(2)(viib) of the Act to provides that where any
  closely held company receive any consideration
  from resident person for issuance of share and
  the consideration is in excess of the fair value
  of the share, then such difference between fair
  value and consideration would be treated as the
  income of the assessee.
• This amendment was made specifically to
  discourage the issuance of shares at Higher
  premiums. Note that certain categories of Venture
  Capital Funds and other specified class of
  persons are exempted from this section.

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• 2. Bogus Unsecured Loans Bogus unsecured loans
  are accommodation entries on simar patterns of
  share application money. Unaccounted money
  received in the books of the beneficiary would be
  recorded as unsecured loan. The transaction would
  be structured in such a manner as it would
  appears genuine including payment of interest,
  TDS compliances as well. The Loan is later repaid
  and accommodation entry is reversed. It may be
  noted that Honourable Gujarat High Court in case
  of CIT vs Ayachi Chandrashekar Narsanji 42
  taxmann.com 251 wherein at para 6, it was held
  that It has also come on record that the said
  loan amount s been repaid by the assessee to Shri
  Ishwar Adwani in the immediate next financial
  year and the Department has accepted the
  repayment of loan without probing into it. In the
  aforesaid facts and circumstances of the case,
  when the ITAT has held that the matter is not
  required to be remanded as no other view would be
  possible, we see no reason to interfere with the
  impugned order passed by the ITAT. No question of
  law, much less substantial question of law arises
  in the present Tax Appeal. Hence, the present Tax
  Appeal deserves to be dismissed and is
  accordingly dismissed. Government Action-
  Parliament in Finance Act 2022 has amended the
  section 68 and provides that where the credit
  entry is in the form of unsecured loan, assessee
  would be also required to prove the source of the
  source of transaction. (This is discussed in
  details in Elements of S.68 part) 3. Penny stock.
  Kolkata Investigation wing in year 2015 has came
  up with the report on the Bogus LTCG/STCG
  through BSE listed penny stock wherein they have
  identified bogus accommodation entries in form of
  LTCG/STCG amounting to Rs 38,000 Crores. Under
  these type of accommodation entries, beneficiary
  would convert their unaccounted money in the form
  of consideration for sale of penny stock and
  claim exemption for the same u/s. 10(38) of the
  Act. It was the normal practice wherein prices of
  these penny stock would be inflated
  systematically through transaction between the
  groups of entry operators and the beneficiary
  would gave colour of consideration from sale of
  listed equity shares to there unaccounted money
  and claims exemption u/s. 68.Read more
  at https//taxguru.in/income-tax/taxability-recei
  pts-section-68-income-tax-act-1961.htmlCopyright
  Taxguru.in

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• Government Action Finance Act 2017 has removed
  this exemption u/s. 10(38) available on capital
  gains arising on transfer of long team capital
  asset being listed equity shares and mutual funds
  subject to Securities Transaction Tax. Tax Rates
  for income charged u/s 68 Section 115BBE(1)
  provides the taxability of the unaccounted
  income. It provides that any undisclosed or
  unaccounted income charged under section 68 to
  69D will be taxable at 60. Further 25 surcharge
  would be levied in addition to the tax making
  effective tax rate to 78 (including 4 cess).
  Section 115BBE(2) further provides that assessee
  would not eligible to claim deduction of any
  expenses or allowances for set off any losses
  while computing the income as per above
  provisions. Position before Demonetization It may
  be noted that the tax rate under section 115BBE
  was revised after demonetization. Earlier the tax
  rate was 30 which was later increased to
  existing rate of 60 by the Taxation Laws (Second
  Amendment) Act, 2016. Penalty u/s. 271AAC Section
  271AAC provides for the penalty where any income
  is determined u/s. 68 to 69D. The penalty would
  be 10 of the tax payable u/s. 115BBE(1) i.e 10
  of 60 of tax. Note that the penalty would not
  be leviable to the extent income u/s. 68 to 69D
  has been included in the return of income
  furnished by the assesses and the tax has been
  paid thereon before the end of relevant previous
  year.
• Tags Section 68Read more at https//taxguru.in
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  tax-act-1961.htmlCopyright Taxguru.in