ADDITION U/S 68 AND 69 WITH SPECIAL REFERENCE TO DEPOSIT DURING DEMONETIZATION PERIOD AND SURENDER DURING SURVEY

Spread the love

Reading Time: 16 minutes

By : CA Palak B Pavagadhi

(વાંચક મિત્રો, પલકભાઇ પાવાગઢી વ્યવસાયે CA છે. તેઓ અમદાવાદ ખાતે પ્રેક્ટિસ કરે છે. તેઓ નવકાર ઈન્સ્ટીટ્યૂટ ખાતે લેક્ચરર તરીકે પણ સેવા આપે છે. તેઓ ભવિષ્યના CA ના નિર્માણ માં ખૂબ મહત્વનો ફાળો આપી રહ્યા છે)

DEMONETIZATION PERIOD: 09/11/2016 TO 30/12/2016

OPERATION CLEAN MONEY:

As a part of post-demonetization exercise, Income Tax Department had to analyze cash deposit data and seek information to identify possible cases of tax evasion. Operation Clean Money (OCM) was launched on 31st January 2017, with the mission to “Create a tax compliant society through a fair, transparent and non-intrusive tax administration where every Indian takes pride in paying taxes”.

For income tax purposes, ‘Operation Clean Money’ primarily stands for verification of cash deposits during demonetisation period.

APPLICABILITY OF SECTIONS:

In the case of cash deposits in a bank account, there is some confusion regarding the section under which addition should be made. Hence, at a time when large chunk of Assessing officers used section 68 whereas on other side various Assessing officers had used section 69A of the Act. In this regard, definition of Section 68, Section 69A and Section 2(12A) of I-T. Act is reproduced below:

SECTION 68 – Cash Credits:

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:”

SECTION 69A – Unexplained money, etc

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 is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.”

SECTION 2(12A) – Books of Accounts:

Books or Books of account’ includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device;

ANALYSIS OF LANGUAGE OF SECTION 68 AND 69A

As per plain reading following condition must be fulfilled for –

Applicability of Section 68:

Any sum found credited in the books of accounts maintainedby the assesse.
Assesse offers no explanation about such credit,
Explanation of the assesse is not found satisfactory by AO.

As per language of section, Maintenance of books of accounts is MUST for invoking of section 68. There may be situation where the assesse was required to maintain books of accounts as per section 44AA but NO books of accounts was maintained then provision of section 68 can-not be invoked.

Applicability of Section 69A:

Assesse is found to be owner of any money, Bullion, Jewellery etc.
Such Money is not recordedin the books of accounts, If any maintained by him for any source of income, AND
Assesse offers no explanation or explanation is found not satisfactory by AO

As per language of section, Section 69A can be invoked only when the assesse has not recorded such money in the books of accounts and offers no explanation or unsatisfactory explanation. Both the condition given in point no 2 and 3 are cumulative and satisfaction of either of condition does not automatically triggers rigours of section 69A.

ANALYSIS OF ADDITION MADE UNDER DIFFERENT SITUATIONS:

Books of accounts maintained and addition made u/s 69A for unsatisfactory explanation:

In various cases, It is observed that assesse had explained to the AO that amount deposited during demonetisation period is from cash sales, receipts from debtors etc and such transaction is duly recorded in the books of the assesse but AO has not considered explanation of the assesse satisfactory and made addition u/s 69A.

In such a situation addition is not tenable in the eyes of law because assesse had RECORDED such transaction in his books of accounts and once it is recorded then no explanation is required to be made for section 69A. It is fair chances that such addition may be quashed by the courts.

If AO would have made addition u/s 68 then situation would have been different. If addition is made u/s 68 in such a situation then assesse has to prove genuineness and credential of the transaction to the satisfaction of AO and case would be decided by appellate authorities on merits and facts.

Book of accounts not maintained and addition made u/s 68 for unsatisfactory explanation:

In various cases, it is observed that assesse had not maintained any books of accounts but addition is made u/s 68 of the Act.

In such a situation, such type of addition is not tenable in the eyes of Law because provisions of section 68 can be invoked only when the assesse has maintained books of accounts.

Case laws:

Teena Bethala v/s ITO (ITA No 1383/Bang/2019) dated 28/08/2019The Ld. Bangalore branch had delivered that :

“On a reading of section 69A (supra), it is clear that the onus is upon the AO to find the assessee to be the owner of any money, bullion, jewellery or valuable article and such money, bullion, jewellery or valuable article was not recorded in the books of account, if any, maintained by the assessee for any source of income. In these circumstances, the AO can resort to making an addition under section 69A of the Act only in respect of such monies / assets / articles or things which are not recorded in the assessee’s books of account. In the case on hand, the cash deposits are recorded in the books of account and are reportedly made on the receipt from a creditor Further, the PAN and address of the creditor as well as ledger account copies of the creditor in the assessee’s books of account have also been field before the AO. In these circumstances, it is evident that the AO has not made out a case calling for an addition under section 69A of the Act. Probably, an addition under section 68 of the Act could have been considered; but then that is not the case of the AO.”

DCIT Vs. Karthik Construction Co. in ITA No. 2292/Mum/2016 dated 23.02.2018, Ld. ITAT – Mumbai Branchheld that –

“Addition under section 69A of the Act cannot be made in respect of those assets / monies / entries which are recorded in the assessee’s books of account.”

Whether passbook is books of accounts:

Some-times it is argued by the department that definition of books of accounts is inclusive hence bank statement can be considered as books of accounts. In such a situation various courts has rendered decisions in favour of the assesse that mere bank statement or passbook is not books of accounts.

Case laws:

CIT vs. Bhaichand N. Gandhi (1982) (141 ITR 67) (Bom)

Sri Girish V. Yalakkishettar vs. The Income Tax officer (ITA No. 354/ Bang/ 2019) (Dtd. 27.01.2020) (SMC) (Bangalore)

Thomas Eapen vs. Income Tax officer, Ward – 5, Alappuzha [2020] 113 taxmann.com 268 (Cochin – Trib)

Mehul V. Vyas vs. Income Tax Officer, 23(2)(3), Mumbai [2017] 80 taxmann.com 311 (Mumbai – Trib)

MadhuRaitani vs. ACIT [2011] 45 SOT 231 (Gauhati) ™

Nirmala Yadav vs. Income Tax Officer [2017] 88 taxmann.com 870 (Jodhpur – Trib)

Mayawati vs. Deputy Commissioner of Income Tax, Central Circle – II, New Delhi [2008] 19 SOT 460 (Delhi)

Rejection of books and addition made u/s 68 by passing assessment order u/s 144:

In various cases, it was seen that the assessment orders were passed by rejecting the books of accounts on the ground that the sales and purchases shown are not justified or on the basis of stock register not being maintained. In this regards, we hereby state as under:

The A.O may proceed under Section 145(3) under any of the following circumstances:

Where he is not satisfied about the correctness or completeness of the accounts; or
Where method of accounting cash or mercantile has not been regularly followed by the assessee ; or
Accounting Standards as notified by the Central Government have not been regularly followed by the assessee.

Therefore, broad parameters have been laid down in the Section itself under which the provisions are required to be invoked for rejection of books of account in a particular case. However, in a large number of cases the provisions of Section are invoked merely on the basis of variations in the turnover ratios without observing genuineness of the cases or having any evidential proof about incorrectness of the books of accounts.

Further, it is also to be noted that when books of account of the assessee are not reliable and rejected by the authorities then there is no reason to make addition u/s 40A(3) or section 68 of the Income Tax Act.

Case laws:

Deepak Mittal vs. ACIT (ITAT Delhi) ITA.No.4709/Del./2017 the hon’able Tribunal held that –

“when A.O. rejected the books of account of the assessee and applied gross profit rate on suppressed sales, A.O. cannot make separate addition on account of unexplained investment, undisclosed income and even the provisions of Section 40A(3) could not be invoked.”

Inordinate delay in deposit of cash from withdrawals ie. 5-6 months from withdrawals from bank:

In various cases, It may have been argued by the assesse that cash deposited during demo period sourced from withdrawals from the banks i.e.1-6 months prior to deposit. In most of cases, Department has not considered the said arguments and made addition on the ground that what was the use of money in intervening period and where it was kept etc.

Case laws:

Gordhan, Delhi vs. DCIT dated 19/10/2019honarable Delhi Tribunal held that –

“No addition can be made u/s 68 on the sole reason that there is a time gap of 5 months between the date of withdrawals from bank account and redeposit the same in the bank account , Unless the AO demonstrate that the amount in question has been used by the assesse for any other purpose. In my view addition is made on inferences and presumptions which is bad in law.”

Sri Sri Nilkantha Narayan Singh vs. CIT (1951) 20 ITR 8

The assessee furnished withdrawal details of past 7 years. The explanation of the assessee cannot be rejected that the cash was deposited from accumulated past savings.

Relevant similar case laws –

ACIT vs Baldev Raj Charla 121 TTJ 366 (Delhi)

CIT vs Kulwant Rai in 291 ITR 36 (Delhi)

Neeta Breja vs. ITO (ITA No. 524/ D/ 17/ 25-11-2019) (Delhi ITAT)

Moongipa Investment Ltd. vs. ITO (2016) (Tax Appeal No. 1106 of 2006 dated 07/06/2016) (Guj)

Regular cash sale converted as unexplained cash credit:

In various cases, It is observed that regular cash sale just before demonetisation period is also not accepted and addition were made on the basis of deviation in ratio as set out in various SOP issued by CBDT.

Case laws:

Agons Global P Ltd V/S Acit (Appeal No 3741 To 3746/Del/2019 the Ld. Delhi ITAT held that –

“mere addition made on this ground that there is deviation in ratio is not proper. When the assesse had regular cash sale and deposit of cash in bank accounts and if nothing incrementing is found contrary then addition u/s 68 of such cash sale would tantamount to double taxation.”

Dewas Soya Ltd, Ujjain V/S Income Tax (Appeal No 336/Ind/2012 the Ld. Indore Bench held that –

“The claim of the appellant that such addition resulted into double taxation of the same income in the same year is also acceptable because on one hand cost of the sales has been taxed (after deducting gross profit from same price ultimately credited to profit & loss account) and on the other hand amounts received from above parties has also been added u/s. 68 of the Act.”

CIT vs Devi Prasad Vishwnath Prasad (1969) 72ITR194 (SC)honorable Apex court held that –

“It is for the assessee to prove that even if the cash credit represents income, it is income from a source, which has already been taxed”. The assessee has already offered the sales for taxation hence the onus has been discharged by it and the same income cannot be taxed again.”

Harshila Chordia vs ITO (2008) 298 ITR 349wherein it was held that –

“Addition u/s 68 could not be made in respect of the amount which was found to be cash receipts from the customers against which delivery of goods was made to them”

ITO vs. Surana Traders, (2005)93 TTJ 875: (2005)92 ITD 212 hon’ble Mumbai ITAT held that –

” So merely because for the reasons that the purchaser parties were not traceable, the assessee could not be penalized. In the sales documents, the assessee has made available all necessary details, i.e. the total weight sold as well as the rate per kilogram. Undisputedly, the assessee has maintained complete books of accounts along with day to day and kilogram to kilogram stock register. These were produced before the A 0 by the assessee. The assessee also submitted stock tally sheet along with the audited accounts. The audit report of the assessee also bears ample testimony in favour of the assessee. The factum of the assessee having maintained stock register and quantitative details have been mentioned by the A 0 in the assessment order. No mistake were pointed out by the AO in these records maintained by the assessee—-Since the purchases have been held to be genuine, the corresponding sales cannot, by any stretch of imagination be termed as hawala transaction———– It is the burden of the department to prove the correctness of such additions. When, in such like cases, a quantitative tally is furnished, even if purchases are not available no addition is called for.”

Cash is directly deposited in the bank account of the assese in another city by debtors or cash sale by medical stores, Milk sellers, Petrol Pumps etc on wrong interpretation of notification:

In certain cases the cash deposits in SBN were made by the purchases but later on the purchase parties refused to provide confirmation and so such deposits were treated as cash credits.

Also, in certain cases it is observed that medical shop keepers, Milk Sellers, Private Petrol Pumps and grocery stores had accepted cash after demonetisation also in SBN and deposited such SBN in their bank accounts but faced the heat of tax department and addition were made on various grounds out of which main ground is that an assesse cannot deal in non-legal tender. In such a cases, one can rely upon various notifications issued by the Government of India, permitting acceptance of SBN to certain categories of persons till specified dates.

Ministry of Finance passed a notification dated 08/11/2016 wherein the Central Government declared that the specified bank notes shall not be ceased to be legal tender, with effect from the 9^th November, 2016 until the 11^th November, 2016 for specified categories of persons. Further, vide notification dated 24^thNovember, 2016, the Government further extended the time of limit of accepting old 500 and 1000 currency notes in all the exempted categories of persons.

Huge Cash on hand balance maintained even though loan taken in the books of accounts:

In certain cases, it is seen that the cash deposits were made out of cash balance in the books of accounts but it was rejected treating it as sham on the ground that it should have been utilized for the re-payment of loans.

Case laws:

TS-6737-ITAT-2014 (Delhi) –O hon’ble Delhi ITAT held that –

“there is no negative cash balance at any point of time, and furthermore, It is not the AO’s case that the amounts withdrawn were utilized anywhere else. Also, no material was placed on record against the assessee for explanation that cash withdrawn from the bank and the capital account of her partnership firm was deposited in bank. Ld. CIT(A) notes that it is not mandatory under any law of the land that an individual has to keep his/ her savings in the bank account only and not as cash in hand”

The Ld. ITAT held that mere ground that the act of assessee created huge interest liability on partnership firm does not enable revenue authorities to consider the cash withdrawn and its deposit into the same bank account after a substantial gap of time, as unexplained income u/s 69A of the Act.

Late Return filed for A.Y. 2015-16 and A.Y. 2016-17 and cash deposits made out of the cash on hand balance:

In certain cases, it was seen that the return of income for A.Y. 2015-16 and A.Y. 2016-17 were filed after the date of demonetization as belated returns and the cash deposits were claimed to have been made out of said cash balances disclosed in the returns.

Case laws:

TS-8479-ITAT-2019 (Delhi)-O

Tax return filed after 07.11.2016 and cash deposit reported in Statement of Financial Transactions (SFT) – ITAT: Provisions of section 69A can be invoked if, in any financial year, the assessee is found to be the owner of any money, etc… which has not been recorded in the books of accounts – ITAT rules in assessee’s favour, holding that mere cash deposit in bank account after the date of demonetization, i.e., 08.11.2016 does not mean that the cash-in-hand as on 31.3.2015 and 31.03.2016 duly shown in the balance sheet and disclosed to the department in the respective income tax returns filed much earlier, is unexplained.

Explanation about each and every 1000 denomination note:

The assessee cannot be asked to prove the acquisition of each and every Rs. 1000 denomination note held by him. It is neither the business practice nor the requirement of any law to maintain details of currency notes of various denominations received by an assessee.

Case laws:

Narendra G. Goradia vs. CIT (1998) (234 ITR 571) (Bombay HC)

An assessee cannot be expected to keep the particulars of the currency notes of various denominations received by him from time to time.

Kanpur Steel Co. Ltd. vs. CIT (1957) 32 ITR 56 (All.)

It is logical to keep the high denomination notes of cash in hand which provides great ease for safety storing as well as accounting.

Principle of preponderance of probability:

Various cases are seen wherein the A.O. has made addition applying the theory of preponderance of probability wherein the A.O. ought to have drawn the conclusions on the basis of certain admitted facts* and materials and not on the basis of presumption of facts that might go against assessee.

* It is very important for us to first understand what is a Fact, FACT has been defined by Indian Evidence Act, 1872, as Facts means and includes –

Anything, state of things or relation of things capable of being perceived by senses,
Any mental condition of which any person is conscious.

The facts in relation to any dispute is nothing but the papers/documents relied upon by either of the parties to dispute.

The primary liability is of the assessee to justify the claim of expense made by him. If, all the details in relation to expense made are submitted then in such case, it can be said that assessee has discharged his primary liability and now onus shifts on the assessing officer to prove that details submitted or explanation given by the assessee is not correct.

Case Laws:

TS-5175-HC-2018 (Delhi)-O

Assessee withdrew Rs.2 lakhs to buy immovable property in cash from bank account and re-deposited cash of Rs. 1,60,000/- from the amount withdrawn after more than 7 months as the deal could not be finalized. HC held that addition u/s 68 of amount re-deposited was unjustified, noting that one should not consider and reject an explanation as concocted and contrived by applying the prudent man’s behaviour test; Principle of preponderance of probability as a test is to be applied and is sufficient to discharge the onus. Probability here means likelihood of anything to be true.

Sumati Dayal vs. CIT 214 ITR 801 (1995) (SC)/ 80 taxmann 89

Explanation offered by assessee as income from race winnings has been rejected unreasonably and the finding that those amounts are the assessee’s income from other sources is not based on evidence. SC relied on co-ordinate bench ruling in Durga Prasad More [TS-5156-SC-1971-O] that the apparent must be considered real until it is shown that there are reasons to believe that the apparent is not real, and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality. The matter has to be considered by applying test of human probabilities.

Peak Credit theory:

Various cases are observed wherein the A.O. had added entire credits of bank statement without considering debit entries in the bank account. The principle of peak credit comes into play where there are several credit and debit entries in one bank account. The funds operated from such account is taken to be one and the same and only the highest or peak of the amounts in that account is taxed as unexplained cash credit.

Peak credit theory can be applied in a case where there is only rotation of funds whereby the funds withdrawn on earlier dates were deposited back subsequently and there were no fresh deposits.

Case laws:

CIT v Tirupati Construction Company: 230 Taxman 198 (Guj.)
CIT v Purushottam Jhawar: 220 Taxman 74 (AP)
CIT v Fertilizer Traders: 222 Taxman 162 (All.)
ITO v Pawan Kumar: 153 ITD 448 (Delhi Trib.)

SECTION 115BBE: TAX ON INCOME REFERRED TO IN SECTIONS 68 AND 69

In the cases where addition was made under sections 68, 69, 69A, 69B, 69C or section 69D of the Act, tax shall be levied at the rates specified under section 115BBE of the Act.

Herein , it has to be noted that the assessment order must specifically contain direction for charging tax u/s 115BBE where such addition is made.

Particulars	Tax Rate
Tax on income referred to u/s 68, 69, 69A, 69B, 69C and 69D	60%*
Add: Surcharge	25%
Add: Cess	1%
Add: Penalty u/s 271AAC w.e.f. 2017-18 (if not declared in ROI)	10%
Total Tax	83.16%

Note:

No deduction in respect of any expenditure or allowance (or set off of any loss) shall be allowed in computing his income referred to in sections 68, 69, 69A to 69D of the Act.
*Amendment was made by the Taxation Laws (Second Amendment) Act, 2016, w.e.f. assessment year 2017-18, i.e., after demonetization which took place on 08.11.2016, wherein existing tax rate @ 30% was increased to 60%.

PENALTY PROVISIONS:

PENALTY U/S 270A:

Penalty u/s 270A is leviable for –

Section 270A(9): a person shall be considered to have mis-reported his income if –

Misrepresentation or suppression of facts;
Failure to record investments in the books of accounts;
Claim of expenditure not substantiated by any evidence;
Recording of any false entry in the books of accounts;
Failure to record any receipt in books of account having a bearing on total income; and
Failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

Section 270(6): Exceptions:

Bonafide claim explained
Estimate – Dispute with regard to the method
Estimate – Disclosed all facts declared
International Transaction/ ALP maintained and disclosed all the facts, documents and information as per Section 92D declared.
Amount declared in Section 270AA (immunity)

Comparison of Section 270A with earlier section 271(1)(c):

Particulars	Section 271(1)(c)	Section 270A
Burden of Proof	Applying the decisions rendered u/s 271(1)(c) prior to insertion of Explanation 1 such as Anwar Ali (1970) 76 ITR 696 (SC) etc, it can be fairly concluded that the burden is on the AO to prove that there is misreporting	Under-reported Income Section 270(6) lays down the initial burden on the assessee to show that the exclusion under sub-section (6) is available to the assessee. Mis-reported Income Since no explanation similar to explanation 1 is appended to misreporting the initial burden of proof will be on the revenue to prove that there is misrepresentation, suppression, failure and falsify in terms of six cases of mis-reporting.
Requirement of Mens Rea	The Apex Court in Dilip N. Shroff v. CIT (2007) 291 ITR 519 held that in order to attract penalty u/s 271(1)(c), mens rea was necessary. However, subsequently by the decision of Union of India v. Dharmendra Textile Processors (2008) 306 ITR 277, the court came to the conclusion that there was no necessity of mens rea.	From the scheme of section 270A, it appears that where there is under-reporting or mis-reporting of income, the objective is to remedy loss to the revenue and is thus a strict and civil liability not requiring existence of mens-rea. This issue will be settled only through litigation.
Whether levy of penalty u/s 270A is automatic?	Penalty u/s 271(1)(c) is not automatic but discretionary and that the assessing officer must exercise the discretion judicially.	Under-reported Income: Sub-section 1 of section 270A uses the term “may”. Further sub-section 6 provides for situations when it cannot be said that there is under-reported income. Hence, just because a person has under-reported his income in terms of sub-section 2 and 3, would not automatically lead to conclusion that penalty u/s 270A is leviable. Misreported Income: As the burden of proving misreporting will be on the AO, penalty for misreporting cannot be automatic.
Can Penalty u/s 270A be levied on an incorrect legal claim/ debatable issue	Penalty u/s 271(1)(c) cannot be levied on an incorrect legal claim.	Where a debatable issue is involved or an incorrect legal claim is involved then penalty u/s 270A for under-reporting or mis-reporting of income cannot be levied

SECTION 270AA: IMMUNITY FROM IMPOSITION OF PENALTY:

If an assessee wants to surrender and is desirous to keep the penalty proceedings in abeyance, he can apply for immunity u/s 270AA.

Conditions:

Tax payment within 30 days of service of notice of demand u/s 156
Application within 30 days from service of assessment order
Undertaking that I will not prefer any appeal against such order

Important points:

In case of penalty on under-reported income which is not as a consequence of misreporting, AO is bound to grant immunity subject to fulfillment of other conditions.
In case of misreporting AO has a discretion
It appears that where penalty is levied on certain additions on ground of mis-reporting and certain additions on ground of only under-reporting then assessee will have to make a choice whether to file appeal or make application for immunity as he cannot file appeal on penalty levied on mis-reported income and immunity application for under-reported income.
There is no bar to filing appeal against quantum order with application for condonation of delay after rejection of application for immunity.
There is no specific bar prohibiting revision u/s 263 of order accepting immunity application.

SECTION 271AAC

Penalty u/s 271AAC(1) is leviable if addition is made under section 68, 69, 69A, 69C and section 69D of the Act.

However, no penalty shall be levied if –

Such income is disclosed in the return of income; and
Tax on such income is paid u/s 115BBE on or before the end of relevant previous year.

No penalty under section 270A shall be imposed upon the assessee in respect of income referred to in sub-section (1)

Rate of Penalty: 10% of sum of Tax computed u/s 115BBE

એડિટર નોંધ: આ લેખ મારા દ્વારા ધ્યાને આવેલ ઇન્કમ ટેક્સ કાયદા ની કલમ 68, 69 તથા 69A ઉપરનો સર્વશ્રેષ્ઠ લેખ છે. આ લેખ વાચકો ને ખાસ ઉપયોગી થશે તેવો વિશ્વાસ છે. પલક પાવાગઢી સાહેબ નો આ તકે ટેક્સ ટુડે ના સૌ વાંચકો વતી ખાસ આભાર.