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Cash Credits and income tax liability

Where any sum is found credited in the books of an assessee maintained for any previous year, and the said assessee offers no explanation about the nature and source thereof or the explanation offered is unsatisfactory in the opinion of the concerned Assessing Officer (AO), section 68 of the Income Tax Act 1961 (the Act) empowers the AO to charge such sum to income tax as the income of the said assessee of that previous year.


Additional Disclosure Requirements on Assessee-Companies and ‘deemed’ unsatisfactory explanation

Section 68 of the Act places additional information disclosure obligations on a Assessee-Company (in which ‘public not substantially interested’; see section 2(18) of the Act) with respect to the above said ‘cash credits’, where the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, by ‘deeming’ any explanation offered by the concerned Assessee-Company unsatisfactory, unless—

  • The person (not a ‘venture capital fund’ or a ‘venture capital company’; see section 10(23FB)of the Act), 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
  • Such explanation in the opinion of the concerned AO has been found to be satisfactory.

Through various judicial pronouncements on the above said provision, the above said obligations thereunder place an intial onus or burden on the concerned assessee to prima facie prove all of the following—

  • Identity of the source of ‘cash credits’;
  • ‘Creditworthiness‘ of the source; and
  • ‘Genuineness’ of the transaction.


Unsatisfactory Explanation and grounds for additions against Company-Assessee

Section 68 of the Act is in the general nature of an anti-money laundering provision, which seeks to check and tax in appropriate cases, the undisclosed or unaccounted for moneys of the concerned assessee. In a recent matter^ before the Hon’ble Gujarat High Court, the concerned Assessee sought to quash a reassessment notice issued under section 148 of the Act on the grounds that the concerned Assessing Officer (AO) had recorded reasons which did not disclose any information which could enable him to form a belief that income chargeable to tax had escaped assessment and that no incriminating material was found during the course of survey that could permit such re-opening of previously concluded assessment. (These grounds have not been further discussed by the author in this article)

The second contention of the said Assessee was that, in any case, the unaccounted investments in shares could not be taxed in the hands of the Company (Assessee) and that it could only be taxed in the hands of the investors concerned.


High Court’s Adjudication

Deciding in Revenue’s favour against the Assessee, the Hon’ble Court held as follows—

(Edited and paraphrased in parts by the Author)

  • Whether the income can be taxed through section 68 of the Act in the hands of the assessee (Company), or the Department can proceed only against the relevant investors would depend on various facts and circumstances.
  • When share investment is made by the large number of persons, the company, in whose shares such investments are made, cannot be held responsible for unaccounted investments of such investors.
  • Nevertheless, if it is found that the entire transaction of the so called investment is wholly bogus, routing unaccounted income of the company itself through large scale allotment of shares to bogus entities and so-called investors, the question of taxing the company itself may arise.
  • Where there was evidence and material to show that the shareholder company was only a paper company having no source of income, but had made substantial and huge investments in the form of share application money. The primary requirements, which should be satisfied in such cases is, identification of the creditors/shareholder, creditworthiness of creditors/shareholder and genuineness of the transaction.
  • A reasonable approach has to be adopted and whether initial onus stands discharged (by the assessee concerned) would depend upon facts and circumstances of each case.
  • As a general proposition, it would be improper to universally hold that the assessee cannot plead that they had received money, but could do nothing more and it was for the Assessing Officer to enforce shareholders’ attendance in spite of the fact that the shareholders were missing and not available. Their reluctance and hiding may reflect on the genuineness of the transaction and creditworthiness of the creditor.

 

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^Refer Sagun Construction Pvt Ltd vs Income Tax Officer as decided by the Hon’ble Gujarat High Court in C/SCA/13514/2015 on 13 October 2016

 

Featured image © Zack McCarthy used under the CC Attribution 2.0 Generic license

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