• Study Circle Notes: June 30th, 2014

• Issues & Developments relating to Sections 68 & 69 of the Income Tax Act, 1961

• By CA. Gaurav Sharma

Section 68 of the Act - Features

• Any Sum• Found credited in the Books of an Assessee

maintained for any Previous Year• Assessee offers no explanation• Or the explanation offered by him is not in

the opinion of the Assessing Officer, satisfactory,

• May be charged to Income Tax• As the income of the Assessee of that

Previous Year

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S ection 68 - Y ear of Cha rge

Held in:

CIT vs. Prameshwar Bohra (2008) 301 ITR 404 (Raj)CIT vs. Usha Stud Agricultural Farms Limited (2008) 301 ITR 384 (Del)

Year of applicability of Section 68

Year of credit of any sum in the Books of Accounts of the Assessee

Confronta tion a nd Cross E xamina tion during Assessment Proceedings

• Whether information gathered by the AO during the course of Assessment Proceedings needs to be confronted to the Assessee or not before passing the Order?

• Yes, It is mandatory as is held in:

• Jindal Vegetable Products (ITA 428 of 2007) (Del)• CIT vs. Geetanjali Education Society [2008] 174 Taxma

nn 440 (Raj.),• Kishinchand Chellaram vs. CIT (1980) 125 ITR 713 (SC)• Laxman S Patel [2008] 174 Taxman 206 (Guj)• ACIT vs. Geetanjali Education Society (2008) 114 TTJ

697 (ITAT Jodhpur)

Confrontation and Cross Examination during Assessment Proceedings

• If AO does not provide the material gathered by him on the request of the Assessee, whether the addition will be tenable in law?

• No, the addition will not be tenable in law as is held in:

• Dhakeshwari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 (SC)

• R. B. Shreeram Durga Prasad & Fatechand Nursing Das vs. Sett. Comm. (1989) 176 ITR 169 (SC)

• Dhirajlal Girdharilal v/s C.I.T. (1954) 26 ITR 736 (S.C.)

Confrontation and Cross Examination during Assessment Proceedings

• In case assessee borrower gives complete identity & address details of lender to AO and requests to AO to issue summons u/s 131 – it is duty of AO to issue said summons (if not issued, matter can be remanded back). This has been held in the following cases:

• CIT vs. N. P. Garodia (2009) 310 ITR 62 (P&H)• Brij Pal Sharma (17.02.2009) ITA no. 685 of 2008 (P&H)• Food Corporation Of India vs Provident Fund

Commissioner (1 SCC 68) (SC) (1989)

S ection 68 : S ha re Applica tion Money• Supreme Court Ruling in Lovely Exports Pvt.

Ltd. (2008) 216 CTR 195

• The question raised was that whether share application money can be treated as undisclosed income of the assessee?

• Supreme Court replied that, “If the Share Application Money is received from alleged bogus shareholders, whose names are given to AO, then department is free to proceed to reopen their individual assessment in accordance with law, but it cannot be regarded as undisclosed income of the assessee.”

S ection 68 : S ha re Applica tion Money

• The judgment of Supreme Court in the case of Lovely Exports has been applied in:

• Bhav Shakti Steel Mines Pvt. Ltd. vs. CIT (2010) 320 ITR 619 (Del)

• CIT vs. Gangour Investments (2009) 18 DTR 242 (Del)

• Samir Bio-tech (P) Ltd., [2009] 17 DTR (Del) 224• Value Capital Service Pvt. Ltd. (2009)

221 CTR 511 (Del)• CIT vs. Creative World Telefilm Ltd. (2011) (333 ITR

116) (Bom) • CIT vs. GP International Ltd. (2010) 229 CTR (P&H)

86• Siddharth Marketing Services Pvt. Ltd. (2011) IT(SS)A

Nos. 57 to 59/Ind/2009 (ITAT Indore)• Rank Shipping Agency Pvt. Ltd. (2014) ITA

No.5946/Mum/2008 (ITAT Mumbai)

S ection 68 : S ha re Application Money

• Supreme Court Judgment in Lovely Exports:

Issue Possible View

Whether SC ruling in Lovely Exports can be applied in context of UNSECURED LOANS taken by a corporate assessee?

Seems to be Yes (more in case of corporate lenders)

Whether SLP dismissal by speaking order in Lovely Exports attract binding force of Article 141?

Yes Refer SC in 245 ITR 360

S ection 68 : S ha re Application Money

Company (not being a company in which the public are substantially interested)

Except

Venture Capital Fund or a Venture Capital Company as referred to in Section 10(23FB)

Proviso to Section 68 introduced with effect from 1.4.2013

Share Application Money, Share Capital, Share Premium or any such amount by whatever name called

Resident Person

Then SOURCE of such Resident Person is also required to be proved by the Assessee Company, otherwise addition will be made in the hands of the Assessee Company

S ection 68 : S ha re Application Money

After the introduction of the Proviso to Section 69

Share Application Money, Share Capital, Share Premium, etc. received by Pvt. Ltd. Company

Proviso to Section 69 applicable

Source of Source to be proved by Pvt. Ltd. Company

Tax implication on the Investor can be initiated u/s 115BBE

Share Application Money, Share Capital, Share Premium, etc. received by other than Pvt. Ltd. Company

Judgment of SC of Lovely Exports applicable

Source of Source not to be proved by the Assessee

Tax implication on the Investor can be initiated u/s 115BBE

S ection 68 : Uns ecured L oa ns

• Assessee to prove IDENTITY & CREDITWORTHINESS of Lender as well as GENUINENESS of Transaction and source of source is not required to be established.

• Case Laws:CIT vs. Orissa Corporation (P) Ltd. (159 ITR 78)CIT vs. Rohini Builders (256 ITR 360) (SC)CIT v. Metachem Industries (2000) 245 ITR 160 (MP)Nemi Chand Kothari v. CIT 264 ITR 254(Gau)Rajokri Farms Pvt. Ltd. (ITA 1410/2008) Delhi HCCIT vs. Real Time Marketing Pvt. Ltd. 221 CTR 716CIT vs. Diamond Products (2009) 177 Taxman 331 (Del)Sh. Brij Mohan Sharma Vs ITO 220 CTR 622 (Raj)Labh Chand Bohra Vs ITO 219 CTR 571 (Raj)Kanhaialal Jangid Vs. ACIT 217 CTR 354 (Raj)CIT Vs Laul Transport Corporation 214 Taxation 329 (P&H) and many more case laws

S ection 68 : Uns ecured L oa ns

Further Mere Non production of Lender or Shareholder cannot by itself be a ground for making addition u/s 68. Held in following:

a) Anil Kumar Midha vs. ITO (2006) 100 TTJ 644 (Jodh)b) Divine Leasing & Finance Ltd. (2008) 299 ITR 268

(Del)c) CIT v. Steller Investment Ltd. vs. CIT (1987) 168 ITR

493 (Cal)d) Guj HC in Rohini Builders (supra)e) SC in Orissa Corporation (supra)f) Anis Ahmed (2008) 297 ITR 441 (SC)g) CIT vs. U.M. Shah [1973] 90 ITR 396 (Bom.)h) Hanuman Agarwal (1985) 151 ITR 150 (Pat)

S ection 68 : Uns ecured L oa ns

How to prove Identity & Creditworthiness of Lender and Genuineness of Transaction?

The following are required to be furnished:a) Confirmation of fact of transaction of giving

the amount by the creditorb) Mode of Payment i.e through DD/Cash/cheque

c) In case of banking channel adopted, particulars of cheque etc

d) In interest bearing: state this vital facte) PAN and place of assessment of creditorf) If possible, source of lending the money, like, if the

money has been received through Bank Account then explain the immediate Credit entry of the Lender before lending the amount to the Assessee

Section 68: Capital Introduction

Addition cannot be made in the hands of the Firm or Capital u/s 68 if Partners or Shareholders claim that the money invested are their own. Action if lie, will lie against the Partners or Shareholders u/s 69:

a) CIT vs. Metal & Metals of India 208 CTR 459 (2007) (P&H)

b) CIT vs. Rameshwar Das (2007) 208 CTR 457 (P&H)c) CIT vs. R. N. Goel (1997) 224 ITR 180 (P&H)d) Metachem Industries – 245 ITR 160 (Madhya

Pradesh)e) Mad HC in Taj Browellers 291 ITR 232f) SC in Lovely Exports (supra)g) Jaiswal Motor Finance – 141 ITR 706 (Allahabad)h) All HC in 141 ITR 706

S ection 68 : Capital Introduction

If Credit is introduced in the first previous year in the books of the Assessee Firm/Company or before commencement of the business, then no addition u/s 68 is made in the hands of the Firm/Company:

a) Luthra Jewellers (ITA 280/2009) (Del)b) Mad HC in Taj Browllers (supra)c) Engg. & Construction Co. [1972] 83 ITR 187 (SC)d) CIT vs. Kewal Krishan Partners (2009) 18 DTR 121

(Raj)e) ACIT vs. Pennar Aqua Exports Pvt. Ltd. (2013) (ITA

No. 1846/Hyd/2011) f) Surender Prasad Mishra (Luck ITAT) (7 SOT 457) g) Sai Baba Rupadas (ITA 1543/98) (Delhi ITAT)h) Ghaziabad Footwear (142 Taxman 8) (Delhi ITAT)i) Smt Meera Devi (All ITAT) (14 SOT 190)

S ection 68 : Capital Introduction

Company (not being a company in which the public are substantially interested)

Except

Venture Capital Fund or a Venture Capital Company as referred to in Section 10(23FB)

Introduction of Section 56(2)(viib)

Consideration for issue of Shares

+

Consideration is more than Face Value of Shares

Resident Person

Then if the Consideration is more than the Fair Market Value of the Shares of the Assessee Company, then the excess amount of Consideration will be assessed in the hands of Assessee Company as income u/s 56(2)(viib) of the Act

Section 68: “May” not “Shall”

• If explanation offered by the Assessee is found unacceptable, whether addition u/s 68 of the Act is Automatic?

• No, held by Supreme Court in P.K.Noorjahan 237 ITR 570

• Depends upon the facts of the Case, example:

• where an assessee cannot be supposed to have earned undisclosed income, given the fact a lady aged 17 years – never engaged in business),

• first year cash credit where assessee operated for few months in a year)

Section 68: “Books”

• Maintenance of Books is a condition precedent for application of Section 68 (DCIT vs. Finlay Corporation Ltd. 86 ITD 626 (Del ITAT)

• Amount not credited in Books cannot be brought to tax u/s 68 (Baladin Ram vs. CIT (71 ITR 427) (SC))

• Books means Books of Original Entry wherein Accounts are updated, entries are made in routine basis (CIT vs. C. Shukla (1998) 3 SCC 410)

• Pass Book/Bank Statement are not “Books” (Bhai Chand Gandhi (141 ITR 67) (Bom), Ms Mayawati vs. DCIT (2008) 113 TTJ 178 (Del), Jawaharlal Oswal 71 ITD 324 (ITAT Chd)

Section 68: Trade CreditorsWhether section 68 is applicable to Creditors arising out of purchases made in normal course of business, which have not been doubted u/s 37 of the Act?

Held No, as per the following case laws:• CIT vs. Pancham Dass Jain (2006) 205 CTR All 444 (All)

• Goyal Synthetics Pvt. Ltd. (2012) ITA No.989/Ahd/2006 (Ahd ITAT)

• Dhiraj R. Rungta vs. ITO in ITA No. 1687/2010 (Ahd ITAT)

• Balaji Textile Industries (1994) (49 ITD 177) (Bom)• CIT vs. M. K. Brothers (163 ITR 249) (Guj)• JCIT vs. Mathura Dass Ashok Kumar' 101 TTJ (All) 81• M. B. Traders (132 TTJ 490) (Nagpur)• Sheo Narain Jaiswal (176 ITR 352) (Patna)• Chhugamal Rajpal (79 ITR 603) (SC)

Sale of Jewellery declared under VDIS

In case of sale of jewellery declared under VDIS, capital gains thereon albeit can be examined u/s 68 of the Act, however no addition for the same can be made in case assessee has furnished:

• Conformation from jewellery purchaser• Bank a/c copy for transaction proof• Sale/Purchase Voucher of Jewellery etc.

(Refer BHC in CIT vs. Inder V. Nankani, ITA No. 128 of 2009), CIT vs. Uttamchand Jain (2009) 26 DTR (Bom) 23, Vinay C. Shah vs. DIT (2011) (ITA No. 1372/PN/2009) (ITAT, Pune)

Section 68:

Section 68: Security Deposits

Sufficient for Landlord to prove IDENTITY of tenant and GENUINENESS of transaction (No need to prove CREDITWORTHINESS)

• CIT v. Nevendram Ahuja [2007] 290 ITR 453 (MP)• REWA Group (Jab ITAT) 109 TTJ 657• Tulip Finance (15 DTR 185) (Del)

In case deposits subsequently adjusted against Rentals - duly accounted for - No question of taxation u/s 68

Section 68: Advance Bookings

ADVANCE BOOKING AMOUNT RECEIVED BY REAL ESTATE DELVELOPER

If subsequent sales made or refunded, then no addition under Section 68

Otherwise, SC Judgment of Lovely Exports will apply and Identities of the Persons are to be proved

• Amount recd through Will cannot be taxed by rejecting the will on conjectures and surmises (that is will is not on stamp paper, there are no witnesses, it merely bears thumb impression etc) - Delhi ITAT in Budh Kishore 87 TTJ 140, Jodhpur ITAT in 102 TTJ 161

• Since assessee has disclosed the source of funds, so he cannot be asked source of source and any addition if required can be made in hands of deceased under section 69 – SC Judgment in Lovely Exports

• Burden to prove that money received from Will actually emerged from assessee is not discharged by Revenue

Section 68: Amount received through Will or Gift

Section 68: Entities claiming Deductions u/s 80-I SeriesDeduction u/s 80-I on income declared during the survey is not available if the Assessee fails to prove that the same is generated from or derived from Industrial Undertaking:

1. Home Tex vs. CIT [2012] 20 Taxmann.com 729 (Punj. & Har.)

2. Maa Vaishno Devi Ginning Pressing Udhyog Dhamnod Vs. DCIT (2011) ITA NO. 538/IND/2010 (ITAT Indore)

3. Suresh Kumar Tayal vs. CIT(A) (2013) (ITA No. 3273/Del/ 2008) (ITAT Delhi)

4. M/s National Legguard Works vs. CIT(A) (2006) I.T.A. No.302 of 2005 (P&H)

5. Commissioner of Income-tax v Harshwardhan Chemicals [2003] 131 Taxman 813 (RAJ.) High Court of Rajasthan, Jaipur

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S ection 68 vers us S ection 145

AO, after rejecting the Books of Accounts, can both enhance the G.P. or N.P. Rate on estimate basis and can make addition on account of unexplained cash credits in the books of the Assessee (K.M.N. Naidu 221 ITR 451, APHC in 120 ITR 294, Kale Khan (SC) 50 ITR 1)

If unexplained Cash Credits proved to be earned out of business, then benefit of telescoping available (Mad HC in 149 ITR 127, BHC in 151 ITR 353, Raj HC in 165 ITR 453

Otherwise, no benefit of telescoping

S ection 69 ; S ection 69 B;S ection 69 C vers us S

ection 68 Contras t

27

Provision.

Jurisdictional Fact

Section 68 Where any sum is found credited..

Section 69 Where assessee has made investments not recorded in books…

Section 69A Where assessee is found to be the owner of any money…

Section 69B Where assessee’s investments are undervalued in his books

Section 69C Where assessee incurs any expense…

S ection 69 ; S ection 69 B;S ection 69 C vers us S

ection 68 Contras t

28

For Section 68, the onus is wholly on the Assessee to explain the source of the entry

For Section 69, 69A etc., the phraseology shows that before any of these sections are invoked, the condition as to existence of investment, expenditure, etc. must be established by material on record or evidencea) 10 SOT 319b) 116 Taxman 271c) 19 SOT 201d) 8 SOT 6

Section 69/69A/69B/69C

29

ADDITION U/S 69 CAN BE MADE IN THE YEAR IN WHICH UNEXPLAINED INVESTMENT IS MADE

• Shankar R. Mhatre vs. ACIT (2009) (117 ITD 241) (ITAT Mumbai)

Year of Charge

Section 69: Inflated Stock to Bank• In case of inflated stock to avail higher credit

facility, whether addition of difference in stock value can be made as undisclosed investment?

• Following can be the factors in favour of the Assessee:

1. Bank never vouched the quantity declared,2. Mere value inflated (no quantity declared), 3. Physical control always with assessee, 4. Books audited, 5. No trading outside the books detected

• Cases favouring Assessee having aforesaid facts:1. Mad HC in 241 ITR 363,2. 158 Taxman 363,3. 236 ITR 340, 4. J&K HC in 201 CTR 178

Section 69: No Adverse Decisions under Other Acts – Effect on Income Tax Act

31

In case income tax proceedings proposing to add certain income are initiated on Excise proceedings, wherein Excise Tribunal/CESTAT has decided the issue in favour of the Assessee, then the same is also binding on the Income Tax Department

• CIT vs. Mascot (India) Tools & Forgings (P) Ltd. (2010) 320 ITR 116 (Allahabad)

• Shiva Exports vs. ITO (2009) 28 SOT 512 (ITAT Chd)

• Shanker Rice Co. vs. ITO (2000) 72 ITD 139 (ASR)(SB)

• Kumar Aerosoles (P) Ltd. vs. ACIT (1996) 55 TTJ (ITAT Del) 385

Section 69: Unexplained Production

32

GENERAL POINTS• Sizes and quality of Finished Products• Sizes and quality of Raw Materials• Temperatures at different stages• Fuel in the Reheating Furnace• Delays/Breakdowns• Technology and speed of Mill• Mill condition• Motors condition• Electrical Transmission System• Types of Mill Equipment installed• Operating parameters• Skill of Manpower

Electricity Cases

Section 69: Unexplained Production

33

OTHER POINTS• That no excess stock of any raw material or finished

goods has been found.• Even the Assessing Officer has not found any fault

in the Audited Books of Accounts and no statement of the Assessee has been recorded.

• No documentary evidence has been disclosed by the Department as to from whom the Assessee has acquired/purchased the raw materials for the alleged manufacture of Rounds/Angles allegedly cleared clandestinely, to whom they had sold the Rounds/Angles.

• No enquiry has been made from the Truck Drivers as to whether they had delivered the raw materials to the Assessee

Electricity Cases

Section 69: Unexplained Production

34

OTHER POINTS• The addition is based on assumptions, conjectures

and surmises. • At first, the assumption is that the Assessee

Company must have purchased the raw materials/consumables/stores & spares outside the Books of Accounts

• Another assumption of extra wages outside the books of accounts, extra freight paid on such purchase is also outside the books of accounts and has also incurred other costs of production outside the books of accounts.

• Again assumption of the sales of whole of unaccounted production outside the books of accounts.

• Lastly, Concept of Rotation

Electricity Cases

Section 69: Effect of Third Party Statements & Third Party Books of Accounts

80

Merely on basis of affidavit filed by seller (purchaser for assessee) during sale tax proceedings, purchases made by assessee from seller cannot be held to be bogus so as to justify addition in that respect

• Jodhpur ITAT in Jagdamba Trading (107 TTJ 398)• Permanand (107 TTJ 395) : alleged bogus• Nahar Spinning Mills Ltd. (8 SOT 6) (Chd ITAT)• Jodhpur ITAT in R.K.Synthetics 81 TTJ 909

Characterization of Deemed Income

36

Surrender in a Search/Survey

Otherwise caught by AO

Taken in Heads of Income

Taken u/s 68/69 of the Act

After 1.4.2013

Can be taken back in Heads of Income

Set off of losses available + Taxable at

Normal Rates

Before 1.4.2013

Some Cases - Yes and therefore Set

off of losses available

No, and therefore No Set off of losses

available + Taxable @ 30%

(Section 115BBE)

Some Cases – No and therefore No Set off of losses

available

Characterization of Deemed Income

37

Heads of Incomea) Mad HC in 212 CTR 539b) SC in Lakhmichand

Baijnath (1959) 35 ITR 416c) Cal HC in 48 ITR 254; 64

ITR 593; 201 ITR 747Recents• Chensing Ventures 291 ITR

258 (Mad.)• Radhey Developers India

Ltd. (2010) 329 ITR 001 (Guj)

• CIT Vs. Shilpa Dyeing & Printing Mills P. Ltd., (2013) 39 taxmann.com 3 (Gujarat)

Question 1: Surrender to be taken in Heads of Income or u/s 68/69?

Section 68/69a) Guj HC in Fakir Mohamed Haji

Hasan (1983) 247 ITR 290b) P&H HC in 288 ITR 18c) Mum ITAT in 7 SOT 208

Recents• Dulari Digital Photo Services

(2012) (In ITA No.984/Chd/ 2010) (ITAT Chd) BASED ON FAKIR MOHAMED HAJI HASAN

Characterization of Deemed Income

38

Question 1: From point of view of KIM PHARMA (P&H HC)

A/Y 2005-06

Surrender on account of sundry credits, repairs to building and advances to staff,

Decision in Kim Pharma (P&H) -Relatable to Business

Therefore considered as Income from Business

A/Y 2004-05

Surrender as income from other sources

Decision in Kim Pharma (P&H) – Not Relatable to Business

Therefore considered as Income under Section 68/69

Characterization of Deemed Income

39

Question 2: Whether Additions u/s 68/69 are taxable under the Heads of Income?

• Dulari Digital Photo Services (2012) (In ITA No.984/Chd/ 2010) (ITAT Chd) BASED ON FAKIR MOHAMED HAJI HASAN

• Chensing Ventures 291 ITR 258 (Mad.)

• Radhey Developers India Ltd. (2010) 329 ITR 001 (Guj)

• CIT Vs. Shilpa Dyeing & Printing Mills P. Ltd., (2013) 39 taxmann.com 3 (Gujarat)

Thank You

CA. GAURAV SHARMA

(M) - 9988242443

info@ipxedu.com

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