Recent Developments in

Provisions of Sec 68

By – CA Kishor Phadke

Date : 27/05/23

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 Index
Sr. No. Particulars

1 Law prior to 1/4/1961 (old law)

2 Law from 1/4/1961 (new law) ….. Main section

3 Two (2) proviso

4 Issues

5 Take-away

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 Position prior to year 1961

• Section 68 was introduced in ITA for the 1st time since year 1961

• But prior to year 1961, any sum credit in books and not explained properly, was
held taxable in normal course

• The Supreme Court in the cases of A. Govindarajulu Mudaliar v. CIT [1958] 34 ITR
807; held that where the assessee has failed to prove satisfactorily the source and
nature of a credit entry in his books and it is held that the relevant amount is the
income of the assessee, it is not necessary for the department to locate its exact
source.

• Hence, section 68 is to be understood as “explicit” of the “implicit” coverage /

scope of the IT Act
• Jagdish T

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 Provision after 1/4/1961 i.e. section 68
Main section
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be
charged to income-tax as the income of the assessee of that
previous year

• It will be apt to construe meaning of various words used in

above main section….

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 … any sum …
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be charged to income-
tax as the income of the assessee of that previous year

• Section applies to “any sum” of money

• Sum v. Amount – HH Sri Rama Verma v. CIT (1991) 187 ITR

308

• Creditors for “in kind” transactions not covered ..

• However, a contrary view is possible considering the context ..

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 … any sum … (contd..)
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be charged to income-
tax as the income of the assessee of that previous year

• Allotment of shares in lieu of goodwill and without any

monetary consideration : Zexus Air Services Pvt Ltd 2021-
TIOL-1225-ITAT-DEL

• Issuance of shares at a premium by the assessee company to

other companies in exchange for their shares by showing
adjustments in its books does not attract section 68 : TS-634-
ITAT- 2020(Kol)

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 … any sum … (contd..)
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be charged to income-
tax as the income of the assessee of that previous year

• When the cash did not pass at any stage, there was no real
credit of cash in the cash book and hence, S. 68 held not
applicable : Jatia Investment Co.

• In respect of group company's shares acquired by assessee

against outstanding dues between group companies without
cash / sum not covered u/s. 68: Abhijeet Enterprise Ltd [TS-
189-ITAT-2019(Kol)]
• SC
• Section heading – Cash credits
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 … any sum … (contd..)
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be charged to income-
tax as the income of the assessee of that previous year

• Contrary view – 1
• Even though the heading of section 68 of the Act refers to ‘Cash
Credit’, the body of the section refers to any sum found credited
and thus, the section is not confined merely to credits in actual
‘cash’. Other credits by way of liabilities also require explanation
as stipulated under section 68 so that when they are not
satisfactorily explained, they are bound to be added – VISP (P)
Ltd. vs. CIT (2004) 265 ITR 202 (MP)

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 … any sum … (contd..)
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be charged to income-
tax as the income of the assessee of that previous year

• Contrary view – 2
• Expression ‘any sum’ used in section 68 does not say that credit
should be only in nature of cash receipt It covers all credits,
including loan, receipts and any other amount of similar nature ,
be that of cash or kind It covers all credits whether in name of
assessee’s capital account or in name of a third party
• DAVINDER SINGH vs. ACIT (2007) 104, ITD 325 (ASR)
• Section heading – Cash credits

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 … books…
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be charged to income-
tax as the income of the assessee of that previous year

• It was held that the Assessing Officer before invoking the power u/s
68 of the Act must be satisfied that there are books of accounts are
maintained by the assessee and the cash credit is recorded in the
said books of account and if the assessee fails to satisfy the
Assessing Officer, the said sum so credited has to be charged to
income-tax as the income of the assessee of that previous year. The
existence of books of account is a condition precedent for invoking
the power, discharging the burden is a subsequent condition Anand
Ram Raitani v. CIT [1997] 223 ITR 544 (Gauhati.)

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 … books… (contd..)
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be charged to income-
tax as the income of the assessee of that previous year
• Loose Sheet are not = Books
• The piece of paper seized during search if considered in light of section
32 of the Indian Evidence Act and General Clauses Act defining the
word ‘document’, the piece of paper contains jottings of certain figures
and does not described or express the substance of any transaction
and therefore the said paper does not come within the compass of
definition of the word ‘document’ to be used as evidence. It further
held that the piece of paper did not represent books of account for the
reason that as per Black’s Law Dictionary, books of account means
Mohd. Yusuf & Anr. vs. D & Anr. AIR 1968 Bom.

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 … books… (contd..)
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be charged to income-
tax as the income of the assessee of that previous year
• Loose Sheet are not = Books
• “A detailed statement, in the nature of debits and credits
between persons; an account or record of debits and credits
kept in a book; a book in which a detailed history of business
transaction is entered; a record of goods sold or services
rendered; statement in detail of the transactions between the
parties.”
• CBI vs. V.C. Shukla (1998) 3 SCC 410 (SC)

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 … books… (contd..)
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be charged to income-
tax as the income of the assessee of that previous year

 CIT vs. Bhaichand H. Gandhi (1983) 141 ITR 67 (Bom.)

• The pass book supplied by a bank to an assessee-constituent could not
be regarded as a book of the assessee which expression means a book
maintained by the assessee or under his instructions. It was so ruled
on the principle that when moneys are deposited in a bank the
relationship that is constituted between the bankers and the
customers is one of debtor and creditor and not that of trustee and
beneficiary. The pass book supplied is merely the copy of the
constituent’s account in the books maintained by the bank.

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 … books… (contd..)
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be charged to income-
tax as the income of the assessee of that previous year

• Contrary view ..
• In was held that where cash credits are recorded in the rough
cash book of the assessee and there is no proper explanation,
section 68 will apply and the credit amount can be assessed
as income of the assessee Haji Nazir Hussain vs. ITO (2004) 271 ITR
(AT) 14 (Del)

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 … year…
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be charged to income-
tax as the income of the assessee of that previous year

• In the 1922 Act, w.r.t. additions based on “entry” in books of account,

there were controversies … i.e. whether relevant previous year of
relevant financial year, etc.

• This controversy was settled in Baladin Ram V. CIT – 71 ITR 427 (SC)

• After the 1961 Act, i.e. present Act, addition has to be made in the
same year in which actual credit entry is passed in the books

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 … year… (contd..)
• 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
59[Assessing] Officer, satisfactory, the sum so credited may be charged to income-
tax as the income of the assessee of that previous year
• In day to day life, many situations arise in which, entire balances of
creditors / loans are added u/s 68

• One should be able to identify, how much amount is received /

credited during the year and how much for past years, etc.

• But to note, typically, authorities would have all out powers to even
reopen past years ….

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 … may be charged …
• 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 59[Assessing] Officer, satisfactory, the sum so credited may be
charged to income-tax as the income of the assessee of that previous year

• Liberty is given to the AO that, he may, or he may not, bring the subject sum to tax

• Earlier, when section 68 was introduced for the first time in 1961, the words
therein were “..the sum so credited shall be deemed to income of the assessee
and shall be chargeable to tax ..” … This compulsive wording was changed to “sum
so credited may be charged …”

• Reason, as per recommendation of Select Committee, was that, the AO should

pursue the third person who provides the credit …

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 … may be charged … (contd..)
• 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 59[Assessing] Officer, satisfactory, the sum so credited may be
charged to income-tax as the income of the assessee of that previous year

• With the liberated wording, the question of primary / secondary / absolute onus
got triggered

• Further, it was also construed that, the AO has a complete liberty to accept or
reject the version of assessee

• Act developed accordingly

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 Telescoping
• Where there are many credits, all treated as non-genuine, withdrawal from one
account should be treated as available for credit in another.

• Setting off withdrawals against later credits to arrive at the peak credit is a
permissible exercise, if the accounts are conceded as the assessee’s own accounts in
different names.

• Telescoping is recognized in Anantharam Veerasinghaiah & Co. v. CIT [1980] 123

ITR 457 [SC].

• The system of limiting addition to peak credit in the case of cash credits has also
been in vogue. The principle behind is that, the overall addition cannot amount to
an income beyond what is possible…..Refer to Excel sheet

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 Rejection of books + 68 addition
• Double addition … whether feasible …

• G.S. Tiwari & Co [2013] 357 ITR 651 (Allahabad): In an appropriate case,
Assessing Officer can make addition in respect of both cash credits under
section 68 as well as business income estimated by him under section
44AD after rejecting unreliable erroneous books of account of assessee

• Devi Prasad Vishwanath [1969] 72 ITR 194 (SC): There is nothing in law
which prevents the Income-tax Officer in an appropriate case in taxing
both the cash credit, the source and nature of which is not satisfactorily
explained, and the business income estimated by him under section 13 of
the Income-tax Act, after rejecting the books of account of the assessee as
unreliable.

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 Rejection of books + 68 addition
• Double addition … whether feasible …

• Bahubali Neminath Muttin [2016] 388 ITR 608 (Karnataka): where books of
account of assessee had been rejected by assessing authority, same books of
account could not be relied upon in an addition on account of trade creditors
under s. 69B and also for arriving at closing stock

• Dulla Ram, Labour Contractor [2014] 42 taxmann.com 349 (Punjab &

Haryana): where books of account are rejected in their entirety, Assessing
Officer cannot rely upon any entry in those books of account for making an
addition to assessee's taxable income under section 68

• Hence, contrary view is possible, especially when, creditors / loans have their
nexus with business activity of the assessee …

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 Opening balances
• Income from undisclosed sources-Addition under s. 68/69-Opening
capital or balance-Clear finding recorded by the Tribunal that the
impugned amount was credited in the books of account of the
assessee in the earlier previous year and was shown as closing
capital of that year-Carried forward amount of the previous year
does not become an investment or cash credit of the relevant year-
Therefore, order of the Tribunal deleting the addition is sustained –
CIT V. Parameshwar Bohra – 301 ITR 404 (Raj)

• …. Above principle is parallel to concept of addition only in that

year where actual credit takes place in books …

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 First year of formation
• Income—Cash credits—Addition—Assessee commenced its
business in previous year2000-01—On first day of that accounting
period cash credit entries appeared in books of account of assessee
—AO made addition on account of unexplained cash credit—
CIT(A)deleted addition—Tribunal upheld order of deletion of
addition—Held, no addition can be made u/s 68 in hands of firm or
any artificial person in first year of business that too on a day which
is the first day of its business—It was first year of business of
assessee, and no business activity having been shown to had been
conducted by it that could lead to generation of Rs. 92,32,000/- on
first day of relevant accounting period—Revenue’s appeal
dismissed. – CIT V. Lal Mohar & Others – 409 ITR 95 (All) [SLP
dismissed in 409 ITR st 2]

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 First year of formation
• Similar other decisions which hold that, addition u/s 68 not
possible in first year of formation –

• GHAZIABAD FOOTWEAR (P.) LTD. 142 TAXMAN 18 (DELHI)

• Bharat Engg. & Construction Co., (1972) 83 ITR 187 (SC)
• TAJ BOREWELLS [2007] 291 ITR 232 (Mad)
• All Bharat Engineering & Construction Company 83 ITR 187,
• Roshan Di Hatti 107 ITR 938 (SC)

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 Head of income
• Addition u/s 68 (or other connected sections), can be made only
after, the source thereof is not substantiated

• In such a case, addition u/s 68 can’t be pushed into any of the

five regular heads of income

• Similar was the ruling in following cases

- CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78 (SC)
- Fakir Mohamed Haji Hasan (2002) 120 Taxman 11.

• However, a distant view could be possible if link / nexus is demonstrated

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 Subsequent settlement / Squaring off
• At times, situations arise which demonstrate that, in subsequent period,
some loan / debt is settled …

• Issue arises, whether, such a factum will eliminate possibility of addition

u/s 68

• Favorable views
Neotech Nutrients Pvt Ltd Vs ACIT 2020-TIOL-1632-ITAT-DEL
Rohini Builders 256 ITR 360 Guj
Ras Concepts Pvt. Ltd. 95 ITR Tri 46 Ahd.

• Contrary view appears in CIT V. Seema Jain – 406 ITR 411 (Del)

• Remains a question of facts … hence, debatable …

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 Onus
• Section 68 creates rule of evidence, i.e. who has to discharge the onus,
is what is stated here
• Primary onus v. absolute onus
• The primary onus to substantiate credit, explaining the nature and
source thereof satisfactorily, is on the assessee.
• Parameters of primary onus are three-fold – i.e.
(i) identity,
(ii) capacity and
(iii) genuineness

• Primary onus is required to be discharged on the basis of relevant

material … mere saying in words is not sufficient unless backed up with
evidence

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 Onus
• 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

• From the above wording, it transpires that,

– As far as AO is concerned, it is his opinion
– As far as Assessee is concerned, he has to lead evidence of a satisfactory manner

• Degrees in ITA
– Suspicion
– Information
– Opinion
– Reason to believe
– Satisfaction

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 Onus
• 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

• Imagine, what would be the fate, if the AO was to be “satisfied” that, explanations of
the Assessee are not satisfactory……. Onus would have been in court of the AO at an
early stage

• Imagine what would happen if onus as to “satisfactory “ compliance by “A” is not

present above, even then, ………………..………… Onus would have been discharged at
much earlier stage

• But present case is much different … where, answers are not available in the main
section (reproduced above) …… hence, principles of Evidence Act become relevant

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 Onus
Section 101- Indian Evidence Act, 1872 - Burden of proof
101. Whoever desires any Court to give judgment as to any legal right or liability
dependent on the existence of facts which he asserts, must prove that those
facts exist. When a person is bound to prove the existence of any fact, it is
said that the burden of proof lies on that person.
Illustrations
(a) A desires a Court to give judgment that B shall be punished for a crime
which A says B has committed.
-A must prove that B has committed the crime.
(b) A desires a Court to give judgment that he is entitled to certain land in the
possession of B, by reason of facts which he asserts, and which B denies, to be
true.
-A must prove the existence of those facts.

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 Onus
On whom burden of proof lies
102. The burden of proof in a suit or proceeding lies on that person who would
fail if no evidence at all were given on either side.
Illustrations
(a) A sues B for land of which B is in possession, and which, as A asserts, was
left to A by the will of C, B's father.
-If no evidence were given on either side, B would be entitled to retain his
possession. Therefore, the burden of proof is on A.

(b) A sues B for money due on a bond. The execution of the bond is
admitted, but B says that it was obtained by fraud, which A denies.
-If no evidence were given on either side, A would succeed, as the bond is not
disputed and the fraud is not proved. Therefore, the burden of proof is on B.

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 Onus
Burden of proving fact especially within knowledge
106. When any fact is especially within the knowledge of any person, the
burden of proving that fact is upon him.

Illustrations
(a) When a person does an act with some intention other than that which the
character and circumstances of the act suggest, the burden of proving that
intention is upon him.
(b) A is charged with travelling on a railway without a ticket. The burden of
proving that he had a ticket is on him.

110. When the question is whether any person is owner of anything of which he is
shown to be in possession, the burden of proving that he is not the owner is on
the person who affirms that he is not the owner

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 Onus
• Now, after learning principles of Evidence Act, and after
knowing the heavy duty on “A”, the compliance has to be
ensured ..

• In other words, the task of discharge of burden needs to be

ensured

• This task is tricky .. though not impossible ..

• Tricky task has to be understood from heaviness or lightness

of factual matrix

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 Onus
Onus is lighter or heavier depending upon
 AE Vs. non AE
 Cash Vs. Non-cash
 Audit situation Vs Non-audit
 Public co Vs. Private co.
 Paper company vs Operational company
 Regulatory law exists Vs no such law exists
 Accommodation or bogus entries Vs. Regular (non-objectionable) entities
 Survey Search case V. non-search case
 Privately augmented funds Vs. Public offering of (say) shares or (say) deposits
 Transparent framework Vs. Opaque framework
 Affidavit of assessee on bonafide, etc. etc.

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 Onus

• It is here, that, main section 68 needs to be

further analysed

• Let is compare the family of section 68

• Here is an attempt

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 Analysis - family of 6 sections
Particulars 68 69 69A 69B 69C 69D
Maintenance Yes No No Yes No No
of Books of
Accounts

Burden of Wholly Evidence Evidence of Evidence of Evidence of Borrowing

Proof upon of ownership of incomplete expenditure / Repaying
Assessee investment money on disclosure incurred on a hundi on
on AO AO on AO AO AO

Year of Tax Year in Year in Year in Year in Year in Year in

Liability which which which found which which which
Credited Invested as owner invested / incurred borrowing /
found as repaying
owner takes place

Opportunity Yes Yes Yes Yes Yes Not

of Being stipulated
Heard

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 Analysis - family of 6 sections
• S. 68 - A credit entry “may” be charged to tax
• S. 69D – A hundi amount “shall” be deemed to be income
• (different expression … discretion v. compulsion .... )

• S. 68 – A sum is “found” credited …

• S. 69 – Assessee has “made” investment…
• S. 69C – Assessee has “incurred” expenditure …
• (similar expression … action for trigger point has to be exist..)

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 Onus
• Further, it would be relevant to compare
wordings in other sections with section 68
• Section 68 Vs. Explanation-1 to Section 37
• Section 68 V. Section 40A(2)
• Section 68 V. Section 50-C
• Section 68 V. S. 56(2)(viib)
• Section 68 Vs. Section 13A
• Section 68 V. 273B or 271!)(c)
• Section 68 V. Section 115BBC
• Section 68 Vs. Black Money Act
• Section 68 Vs. Benami Act / PMLA, etc.

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 Onus
• Thus, finally, Onus u/s 68 gets discharged according to the
facts of each case ..

• In many cases, primary discharge of onus was held as

sufficient e.g.
– Orient Trading Company V. CIT – 49 ITR 723 (Bom)
– CIT V. Orissa Corporation P Ltd – 159 ITR 78 (SC)
– CIT V. Dwarkadhish Investments P Ltd – 330 ITR 298 (Del)

• But, other view started becoming dominant day-by-day i.e.

– NR Portfolios P Ltd V. CIT – 42 Taxmann.com 339 (Del)
– PCIT V. NRA Iron & Steel Pvt Ltd – 412 ITR 161 (SC)

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 Onus
• Reasons of change of thinking / divergent view appears
manyfold e.g..

• Ease of funds transfer

• Ease of formation of multi layer of structure
• Ease of putting signs / e-verifications
• Computerization & ease of compliance
• Dominance of shell companies
• Ease of sourcing foreign funds
• Increased levels of corrupt practices
• Tendency of changing colour of money / laundering of funds
• …. and so on …

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 1st proviso
• As a result of challenges faced, legislature introduced the 1st
proviso as follows –

• 1st proviso – 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 Assessing Officer aforesaid has
been found to be satisfactory:

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 Provision of section 68
• Then, recently, in year 2022, 2nd proviso was introduced as
under
• 2nd proviso - [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 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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 Comparison of two proviso

• Wording has been changed drastically

• Per se, liberty to tax the assessee or not tax the assessee, is
done away with

• Further, satisfaction of AO is now, w.r.t. the 3rd party which has

extended the funds

• This is a far reaching amendment

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 Critical Analysis – within S 68 itself
• 1st proviso relates to special cases of loan or borrowing or any such
sum …. ejus dem generis rule to apply…

• Hence, it can be deduced that, issues like, capital of partners in firm /

members in AOP or BOI, etc. not covered herein

• In 1st proviso, nature & source of the creditor is required to be

substantiated …. But, no such rule appears for the main section

• Hence, 1st proviso may ease out the situation for all general cases

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 Critical Analysis – within S 68 itself
• 2nd proviso relates to special cases of share capital, share premium
or share application money or any such amount …. ejus dem generis
rule to apply…

• Hence, it can be deduced that, all amounts not falling in the

category of share capital or such related amounts are not covered
herein

• In 2nd proviso, nature & source of the investor is required to be

substantiated …. But, no such rule appears for the main section

• Hence, 2nd proviso may ease out the situation for all general cases

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 2012 Amendment reason
The Explanatory Memorandum to the Finance Bill, 2012, is as follows

“In the case of closely held companies, investments are made by

known persons. Therefore, a higher onus is required to be placed on
such companies besides the general onus to establish identity and
credit worthiness of creditor and genuineness of transaction. This
additional onus, needs to be placed on such companies to also
prove the source of money in the hands of such shareholder or
persons making payment towards issue of shares before such sum is
accepted as genuine credit.”

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 2022 Amendment reason
The Explanatory Memorandum to the Finance Bill, 2022, is as follows

• The onus of satisfactorily explaining such credits remains on the person in whose
books such sum is credited. If such person fails to offer an explanation or the
explanation is not found to be satisfactory then the sum is added to the total
income of the person. Certain judicial pronouncements have created doubts about
the onus of proof and the requirements of this section, particularly, in cases where
the sum which is credited as loan or borrowing It is noticed that there is a
pernicious practice of conversion of unaccounted money by crediting it to the
books of assesses through a masquerade of loan or borrowing.

• Vide Finance Act, 2012, it was provided that the nature and source of any sum, in
the nature of share application money, share capital, share premium or any such
amount by whatever name called, credited in the books of a closely held company
shall be treated as explained only if the source of funds is also explained in the
hands of the shareholder.

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 2022 Amendment reason
The Explanatory Memorandum to the Finance Bill, 2022, continued ..

• However, in case of loan or borrowing, the judicial decisions have held that only
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. It is
proposed to amend the provisions of section 68 of the Act so as to provide that
the nature and source of any sum, whether in form of loan or borrowing, or any
other liability credited in the books of an assessee shall be treated as explained
only if the source of funds is also explained in the hands of the creditor or entry
provider.

• However, this additional onus of proof of satisfactorily explaining the source in the
hands of the creditor, would not apply if the creditor is a well regulated entity, i.e.,
it is a Venture Capital Fund, Venture Capital Company registered with SEBI.

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 Onus for the two proviso situations
• The extreme of burden discharge process is now casted upon the
assessee

• It is rather difficult, at times impossible, to meet out this challenge

• 3rd party may or may not be willing to share details

• It is a cardinal principle that, no person should be put under an

obligation which he can’t honour

• In the entire process, a larger risk remains that, actual guilty

persons may escape and scapegoat assessee may be crucified

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 Different parts of section 68

1st Proviso 2nd Proviso Reminder of Main

(any person..) (Pvt companies) Section 68

What is covered here is What is covered here is All other cases, i.e. cases
“loan” or “borrowing” or SC + SP + SAM or such not specifically covered
such amount by amount by whatever by 1st and 2nd proviso ….
whatever name called name called …..
……

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 Different parts of section 68

1st Proviso 2nd Proviso Reminder of main Section 68

For all For all private - Firm – Capital introduced by partners
assessee, Company assessee, - AOP – Capital introduced by members
loans / Share capital, - Creditor for goods / services
borrowing Share premium,
- Deposits (since not loan / borrowing)
Share application
money - Lease / Security deposit
- Share capital of Public Company
- Venture Capital / V-C Fund u/s 10(23FB)
- …etc….etc….

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Applicability of 1st and 2nd Proviso
All Cash Credits u/s 68

Whether
covered Yes
by 1st
Proviso
Prove
Source of
No Source

No Covered
General Test by 2nd
Proviso Yes

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 Analysis
Steps to invoke rigors Section 68
Steps Process

Step 1 Trigger Point – finding of some sum credited in books

Step 2 “A” Explanation … if main section – as per traditional tests

.. if 1st or 2nd proviso – sufficient means of creditor

Step 3 Explanation offered to be considered by AO

Step 4 If necessary, to conduct enquiries, etc.,

Step 5 If still AO not satisfied, lead to section 115BBE

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 Effective Tax Rates Comparison
Particulars Case – I Case - II Case – III
(Normal Tr.) (Unexplained Tr.) (Unexplained Tr.)
(Not a 115BBE Tr.) (i.e. 115BBE Tr.) (i.e. 115BBE Tr.)
+
Not reflected in Books
Tax Rate (A) (say) 30% 60% 60%

Add : Surcharge (B) 12% of tax 25% of tax 25% of tax

(C)=A+B 33.60% 75.00% 75.00%

Add : Education Cess (D) 4% of C 4% of C 4% of C

Effective Rate (E) = C + D 34.944% 78.00% 78.00%

Add : Penalty u/s 271AAC N.A N.A 10% of tax

Effective Rate 85.80%

Note : With Under-reporting & Misreporting penalty, effective total tax liability to be > 100% of income

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 The two proviso of Sec 68
• Is it possible to look at an opportunity in this whole scenario….

• Can it be said that, doctrine of impossibility will be applicable for the two
proviso situations

• And at the other hand, can it be said that, for non-proviso situations,
normal rule (as per Orient + Orissa cases) will be applicable

• Can the challenge of NRA Iron not be met by pointing out that,
Legislature, in it’s wisdom, has provided for heavy burden for the two
proviso situations…and in turn, can it not be said that for the normal
situations (other than those covered by the two provisos) source of source
principle is inapplicable

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 Cash deposit and challenge of period u/s 68
Reasonable Time for Deposit of Cash
Sr. Case Issues involved Time in Decision
No. cash re-
deposit
1 ACIT V. Baldev Raj The assessee deposited the amount in bank 4 to 5 Since, apart from the explanation of the assessee that
Charla account after a gap of 4 to 5 months. There is months cash deposited is out of the withdrawal made earlier,
121 TTJ 366(DELHI) one to one linkage of withdrawal made and no other findings recorded by the AO or CIT(A), the
(29/12/2008) amount deposited. addition could not be made merely because there is
time gap between deposits and withdrawal.

2 Gurpreet Singh V. ITO The assessee has stated specifically that the 1 week Re-deposit of excess withdrawals made out of
40 ITR(T) 467 amount was re-deposited on withdrawal from explained bank deposits can't be held as unexplained
(Chandigarh - Trib.) the bank and sufficient cash was available. money. It was the duty of the Assessing Officer to
(30/01/2015) examine this fact. Further nothing is brought on
record that the amount was utilized by the assessee
on withdrawal from the bank account.

3 Gordhan C/o Kapil Withdrawal of Rs. 8,00,000 on 21.04.2010 and 5 to 6 Merely, because there was a time gap between the
Goel Adv. V ITO Ward kept with assessee himself and re deposited months cash withdrawal and cash re-deposit in the Bank,
1(2) Gurgaon the same on 29.09.2010. Addition is made unless there is a finding given by the AO, that the
ITA No. 811/Del/2015 only on the ground of presumption that the amount in question was actually used somewhere
(19/10/2015) period of 5 months, from the date of else.
withdrawals and the date of deposits, is not
explained.

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 Cash deposit period u/s 68 (contd..)
Sr. Case Issues involved Time in Decision
No. cash re-
deposit
4 ITO Ward 1(2) V The appellant has re-deposited the cash which 1 to 5 Merely because there was a time gap between
Mrs, Deepali had been withdrawn from bank account as well months withdrawal of cash and its further deposit to the bank
Sehgal as from the capital account of her partnership account, the amount cannot be treated as income
I.T.A firm. from undisclosed sources u/s 69 of the Act in the
.No.-5660/Del/20 hands of the assessee.
12
(05/09/2014)
5 DCIT Circle 4(1), The appellant has submitted that withdrawals 5 to 6 Addition cannot be made or sustained on the basis
New Delhi V Shri had been made in cash since it was interested Months that there was time gap between cash withdrawal
Nikhil Nanda in purchasing immovable properties, but since from bank account and cash deposits in bank account.
ITA NO. the deals did not materialize therefore, the
3644/Del/2013 amount was re deposited in his bank accounts
(18/03/2015) by way of cash.

6 Moongipa The reason for frequent withdrawals and Varied The addition could not be made or sustained on the
investments Ltd. deposits from the bank account was to basis that there was time gap between withdrawal and
Vs ITO maintain NSE margins and to ensure the deposits. Therefore, the addition was to be deleted.
30 taxmann.com clearance of cheques issued.
113 (Delhi - Trib.)
(05/08/2011)

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 Issues u/s Sec 68
Issue-1
Can Assessee seek aid of section 131 to prove the genuineness of
transactions:
CIT v. Kamdhenu Vyapar Co. Ltd. [2003] 263 ITR 692 (Cal.),
It has been observed that simple disclosure of certain materials will not help
the assessee to discharge the burden of proving the credits u/s. 68 of the
Income-tax Act, 1961. Until the onus is prima facie discharged by the
assessee, it never shifts on the Department. But in order to ascertain
whether prima facie onus has or has not been discharged, the A.O. has a duty
to enquire into the materials so disclosed. The assessee may seek assistance
of section 131 of the Act for the purpose of proving its own case

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 Issues u/s Sec 68
Issue-2
Can Assessee file an Affidavit confirming the factual matrix and state
that, cash credits are genuine … whether it has a legal acceptance
Mehta Parikh & Co V. CIT – 30 ITR 181 (SC)
The cash book of the appellants was accepted and the entries therein were
not challenged. No further documents or vouchers in relation to those entries
were called for, nor was the presence of the deponents of the three affidavits
considered necessary by either party. The appellants took it that the
affidavits of these parties were enough and neither the AAC, nor the ITO,
who was present at the hearing of the appeal before the AAC, considered it
necessary to call for them in order to cross- examine them with reference to
the statements made by them in their affidavits. Under these circumstances,
it was not open to the Revenue to challenge the correctness of the cash
entries or the statements made by those deponents in their affidavits.

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 Issues u/s Sec 68
Issue-3
Whether scheme of the two provisos of section 68 leads to double /
triple addition ? If so when addition takes place in source
company, automatically target co should get benefit

If we peruse the overall scheme (and especially the two provisos), it appears, assessee
has to substantiate sources of funds of the 3rd party creditor. Now, if “a” in unable to
prove the same, there will be addition in “a” hands … for sure …

Tomorrow, it may happen that, the AO of the 3rd party creditor does not treat the
investments of such creditor as unexplained / tainted … then double taxation will take
place

Can this 3rd party assessment be not made a cause for removal of additions

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 Issues u/s Sec 68
Issue-4
Whether presumption of “truthness of records” found in search /
survey u/s 132 or 133A of the ITA, 1961, have any impact on
presumption u/s 68 ?

In search / survey case, law presumes that whatever reecords found during the
course of search / survey is deemed as “true” as per section 132(4) / 292C

If some creditors are appearing in books found and seized in case of search, or
impounded in course of survey, whether this fiction runs counter to the heavy
onus concept in case of “a”

If not, are we not having a conflict ??

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 Issues u/s Sec 68
Issue-5
Whether presumption u/s 68 (i.e. taxing Assessee as owner of the
income represented by some creditor) runs contrary to BENAMI
Act

Under BENAMI Act, if an assessee is unable to substantiate the identity of real owner, it is
presumed to be a benami property

Hence, such a benamidar will suffer penalty / punishment for holding some other person’s
property in his name

Under ITA, same assessee will suffer penalty / punishment for showing some other person’s name

Conflict ….

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 Issues u/s Sec 68
Issue-6
Can an assessee make a declaration of some additional income, and
request the same to be telescoped against plausible S. 68
additions?

In real life situation, at times, ad-hoc declarations are made

If some such ad-hoc declaration is made (say additional cash consideration for
sale of flats by a builder), he should be able to set-off the same against the
tainted cash-credits

Difference will be material …. 30% taxation V. 75% taxation …

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 Issues u/s Sec 68
Issue-7
Can rigors of section 68 be applied to a charitable trust ?

For a charity, all incomes / grants / contributions received are taxable per se.

Hence, by this logic, S. 68 should apply to it.

However, the underlying principle of S. 68 is, disguised income

For a charity, there is no such question (typically)

Hence, S. 68 ought not to apply for genuine charities

But, matter is debatable …

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 Issues u/s Sec 68
Issue-9
Bogus creditors / circulatory creditors / paper creditors, can they be
added u/s 68

This is purely a factual issue and extremely relevant is day-to-day life

Rigors of S. 68 are for actual credit of (sum) amount in books

For a fictious entry, S. 68 ought not to apply

Similar view aired in case of Rich paints Ltd V. ITO – 186 ITD 425 (Ahd)

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 Issues u/s Sec 68
Issue-10
Section 68 V. PMLA

This is another serious issue

Under PMLA, even an abator / accomplice of wrong-doer is punishable

Assume a case of crime money introduced through funds / parties

And assume that the compliances are not to the park

And further assume that, PMLA is invoked for such parties

Then, quite likely that, an assessee may suffer

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Thank You

CA Kishor Phadke

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