Key developments in India on Transfer Pricing

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					Cash Credit
A Critical Analysis

Dhinal Shah
Chartered Accountant
   Section 68 of the Act
   Practical Issues
   Share Capital
Section 68
Section 68
“Where any sum is found credited in the books of an
assessee maintained for any previous year, and the
assessee offers no explanation about the nature and
source thereof or the explanation offered by him is not ,
in the opinion of the Assessing Officer, satisfactory, the
sum so credited may be charged to income-tax as the
income of the assessee of that previous year.”
Scope of section 68
   There should a credit entry in the books;
   Assessee is unable to provide an explanation about the
    nature and source of the credit entry
    The explanation offered by the assessee is not to the
    satisfaction of the assessing officer;
Substantive Provision
Substantive provision
   Section 2(24) gives inclusive definition of term ‘income’ – enlarges
    the scope for addition of certain things which would otherwise not be
    regarded as income – therefore amount added u/s 68 constitutes
    income – CIT vs. Ganpatrai Gajanand (108 ITR 403)(Ori)

   Section 68 itself is a charging section and consequently is a
    substantive provision – Sikri & Co. Pvt. Ltd. vs. CIT (106 ITR 682)

   Section 68 is a charging provision in so far as unexplained cash
    credits are concerned – Bhogilal Virchand vs. CIT (127 ITR 591),
    CIT vs. Bihar Cotton Mills Ltd. (160 ITR 275)(Pat.)
Credit of sum in books
   Where relevant amount is not credited in the assessee’s books,
    section 68 does not come into play – Baladin Ram vs. CIT (71 ITR
    427) (SC) & Laxmi Narain Gupta vs. CIT (124 ITR 94) (Pat.)

   Section 68 gets activated only when any sum is found credited in
    the books of the assessee – Banshidher Agarwal Panna vs. CIT
    (148 ITR 523) (MP)
What if Only credit, No CASH…??
   Section 68 not to apply where entries are fictitious and are
    accommodating entries – Addl. CIT vs K.A. Kuppuswami Chettiar
    (130 ITR 464)

   Section 68 not attracted where despite credit entries, there is no
    actual passing or receipt of cash and transactions are mere book
    entries resulting in acquisition of an asset in kind while
    simultaneously creating a liability – Jatia Investment Co. vs CIT (206
    ITR 718)
What constitutes ‘books’…
   Section 2(12A) – ‘books or books of account’ means any book
    forming integral part of system of book keeping employed in any
    business – would include ledger and books of original entry – profit
    & loss account and balance sheet not books – CIT vs. Taj Borewells
    (291 ITR 232)(Mad)

   Books of accounts to be of assessee himself, not any other
    assessee – credit in books maintained by other assessees can’t be
    brought to tax in assessee’s hands u/s 68 – Smt. Shanta Devi vs.
    CIT (171 ITR 532)(P&H), Laxmi Narain Gupta vs. CIT (124 ITR
    94)(Pat), Munshi Ram vs. CIT (126 ITR 663)(P&H), Yadu Hari
    Dalmia vs. CIT (126 ITR 48)(Del)

   Pass book issued by bank cannot be treated as books of assessee
    – any credit appearing therein cannot be taxed u/s 68 – CIT vs.
    Bhaichand H Gandhi (141 ITR 67)(Bom)
Burden of Proof
Burden of proof on assessee…
   Prima facie burden on assessee to prove the transaction resulting in
    cash credit by proving –
       Identity of the creditor;
       Capacity of creditor to advance money;
       Genuineness of the transaction

   Mere establishment of creditor’s identity not enough
       Dulichand Omprakash (113 ITR 476 (Cal)
       Shankar Industries vs. CIT (114 ITR 689)(Cal)
       Harichand Virender Paul vs. CIT (140 ITR 148)(P&H)
       CIT vs. S. Kamaraja Pandian (150 ITR 703)(Mad)
       Edayamal Constructions vs. CIT (183 ITR 671)(Ker)

   In case of multiple creditors, burden of proof to be discharged in
    respect of each creditor – CIT vs. R.S. Rathore (212 ITR 390)(Raj.)
When onus discharged..??
   Confirmation of gift and source thereof by the donor – Murlidhar
    Lahorimal vs. CIT (280 ITR 512)(Guj)

   In light of positive evidence like existence of creditors, their IT file
    numbers, confirmation letters from creditors etc utilization of fictitious
    hundies would not make the assessee liable u/s 68 – CIT vs. S.C.
    Ghosal (106 ITR 980)(Cal)

   Production of letters of confirmation by creditors, discharged
    hundies and particulars of creditors along with their IT file numbers
    is sufficient to discharge the burden of proof – CIT vs. Orissa Corp.
    P. Ltd. (159 ITR 78)(SC)

   Where the creditor is a not a man of means and barely able to
    sustain by himself, explanation regarding cash credits could not be
    accepted as genuine – Gujarat Fertilisers vs CIT (210 ITR 594)
Onus in case of receipts of gifts
   Section 68 applicable where explanation offered by assessee found to
    be unacceptable and gifts from NRIs not real even though the money
    may be routed through banking channel – CIT vs. P. Mohanakala & Ors.
    (291 ITR 278)(SC)

   Assessee failed to prove relationship with donor working abroad as well
    as failed to state full name and other details of donor – gift received
    cannot be treated as genuine – Tirath Ram Gupta vs. CIT (304 ITR
    145)(P&H); Subhash Chander Sekhri vs. Dy. CIT (290 ITR 300)(P&H)

   Failure to prove genuineness of gift, capacity of donor to make gift and
    source of gift – Gift cannot be considered as genuine – Yash Pal Goel
    vs. CIT (310 ITR 75)(P&H); CIT vs. Anil Kumar (292 ITR 552)(Del); CIT
    vs. R.S. Sibal (269 ITR 429)(Del)

   Where identity of donor, relationship with assessee, genuineness of
    transaction is proved, section 68 cannot be invoked – CIT vs. Dr. R.S.
    Gupta (165 ITR 36)(SC); Sonia Bhatia vs. State of UP (AIR 1981 SC
    1274); CIT vs. Kulwant Industries (214 CTR 223)(P&H)
Shifting of onus on to department…
   Once source of credit, genuineness of remittance and identity of
    remitter established, onus shifts on department to counter the same
    – Bedi & Co. Pvt. Ltd. vs. CIT (144 ITR 352)(Kar), Roop Chand
    Manoj Kumar vs. CIT (235 ITR 461)(Gau)
   Mere absence of explanation not enough – decision to made after
    applying the tests laid down by Supreme Court in CIT vs. P.K.
    Noorjahan (155 CTR 509) – Mitesh Rolling Mills (P) Ltd. (258 ITR
   Burden of assessee is to prove genuineness of the transactions and
    creditworthiness of the creditor – he is not required to show the
    source of his creditor or prove creditworthiness of his creditors’
    creditor – Nemi Chand Kothari vs CIT & Anr (264 ITR 254)(Gau)
   When assessee discharges his onus and proves genuineness of
    transaction, he cannot be further required to prove source of the
    source of money out of which loan was given – S Hastimal vs CIT &
    Anr (49 ITR 273)(Mad.)
Rejection of Proof
Explanation, when can be rejected…?
   Where explanation is prima facie reasonable, it cannot be rejected
    except on cogent grounds – Lalchand Bhagat Ambica Ram vs. CIT
    (37 ITR 288)(SC)

   Initial onus discharged by assessee by submitting reasonable
    evidence – before rejecting evidence, Department must point out
    inherent weakness in such explanation or rebut it by some other
    information - It cannot act unreasonably and convert good proof into
    no proof – Sreelekha Banerjee vs. CIT (49 ITR 112)(SC),

   While judging reasonableness, Department to look into surrounding
    circumstances to know the facts – matter to be considered by
    applying test of human probabilities – Sumati Dayal vs. CIT (214
    ITR 801)(SC)
Separate addition despite estimation of business income
Separate addition despite addition made
on income estimated…?
   Separate addition may be made even where books are rejected and
    income is determined on an estimation basis – Source of estimated
    income is business while there is no source for cash credit – Kale
    Khan Mohammed Hanif vs. CIT (50 ITR 1)(SC)

   There is nothing in law to prevent an ITO to tax both unexplained
    cash credit and business income estimated by ITO after rejecting
    books of account as unreliable – in case of unexplained cash credit,
    ITO can hold the same to be the income of assessee without further
    burden to prove its source – it is for assessee to show that cash
    credit is from source which has already been taxed – CIT vs. Devi
    Prasad Vishwanath Prasad (72 ITR 194)(SC)
Scope of unexplained cash credit
Unexplained cash credit, covers…
   Section 68 is not confined to cash entries in accounts – fictitious
    liability created by bogus purchases can also be covered u/s 68 –
    V.I.S.P. (P) Ltd. vs. CIT & Anr. (265 ITR 202)(MP)

   Operation of section 68 cannot be restricted to sums borrowed alone
    – section 68 can be invoked in credit in assessee’s capital account –
    Dharmavat Provision Stores vs. CIT (139 ITR 700)(Bom)

   Share Application, Increase in Share Capital, whether covered…??
Cash Credit and Share Capital
Credit in share application – whether
   The words “any sum found credited in the books” in section 68 has a wide
    scope and gives the assessing officer powers to inquire in nature and
    source of amount irrespective of nature given by the assessee; this would
    also cover share application money account – Sophia Finance Ltd (205 ITR
    98) (Del HC)

   Provisions of section 68 are applicable to share application money received
    by assessee company – Dhar Ispat (P) Ltd. (180 CTR 491) (MP)

   Genuineness of share application money not established where shareholder
    companies were found non-existent - amounts paid by such companies
    received by them on same day - addition u/s 68 justified – Rathi Finlease
    Ltd. (215 CTR 429) (MP)
Credit in share application – addition not
   Even if it be assumed that subscribers to share capital were not genuine,
    share capital cannot be regarded as undisclosed income – Stellar
    Investment Ltd. (192 ITR 287) (Del. HC)
       This decision was overruled by Delhi High Court in case of Sophia Finance Ltd.
        (205 ITR 98); However, the Supreme Court in affirmed the decision of the High
        Court in CIT vs. Stellar Investments (251 ITR 263) (SC)

   Supreme Court decision of Stellar Investments followed by Madras High
    Court in Electro Polychem Ltd. (294 ITR 661)

   Share application money received from alleged bogus shareholders, –
    names given to the AO – Department free to proceed against such
    shareholders and not as unexplained income in hands of company – Lovely
    Exports (P) Ltd. (216 CTR 195) (SC)
Cash Credit and Past intangible additions
Set-off of cash credits against intangible
   If unexplained cash credits can be reasonably related to amount
    covered by intangible additions made in the past or in that year,
    necessary set-off may be given by authorities on that account –
    Anantharam Veerasinghaiah & Co. vs. CIT (123 ITR 457)(SC)
    approving Lagadapati Subba Ramaiah vs. CIT (30 ITR 593)(AP) and S.
    Kuppuswami Mudaliar vs. CIT(51 ITR 757)(Mad) and followed by CIT
    vs. Nabadwip Chandra Dey (190 ITR 133)(Gau)

   However, burden to establish the nexus of unexplained cash credit and
    past intangible additions is on the assessee – automatic adjustment of
    unexplained cash credit against available past intangible additions is
    untenable – CIT vs. Kulwant Kaur & Ors. (121 ITR 914) (Del)

   Only if unexplained cash credit can be reasonably related to the amount
    covered by intangible addition, necessary set-off be allowed – Late R.
    Dalmia through LR vs. CIT (172 CTR 180)(Del) relying on Supreme
    Court’s decision in CIT vs. Manik Sons (74 ITR 1)
Cash Credit – Income from business or IFOS
Income from business or other sources?
   Section 68 does not provide that cash credits should necessarily be
    deemed to profits of business for which books are maintained –
    cash credits may be assessed as business profits or income from
    other sources – CIT vs. Orissa Corpn. P. Ltd. (159 ITR 78)(SC) and
    CIT vs. Anupam Udyog (142 ITR 133)(Pat.)

   There is no rule that amount credited in business account is to be
    taken as receipt from business – classification would depend upon
    evidence and explanation of assessee – Kalooram Tirasilal vs. ITO
    (59 ITR 308)(MP), Ratanchand Dipchand vs. CIT (38 ITR 188)(MP)

   Unless there are strong reasons for connecting unexplained cash
    credits with known source of income of assessee, it should be
    treated as income from other sources – D.C. Auddy & Bros. vs. CIT
    (218 ITR 713)(Cal)
Thank You

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