What is Cash Peak Credit under Income Tax Laws by taxquery

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Income Tax Act 1961: When ever banks accounts are used for depositing cash and withdrawing cash , the theory of peak credit is applicable if the cash is owned by the taxpayer and withdrawal is also explained for that purpose.

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									  Malad Goregaon CPE Study Circle
           WIRC of ICAI

              STUDY CIRCLE MEETING
                            On
               Sunday, 28th November, 2010

         Chapter – VI – Section 68 - Cash Credit
                Advocate Paras S. Savla


                                                                          1




Section 68    : Unexplained credits in the assessee's books of account.

Section 69    : Unexplained investments made by the assessee and not
                recorded in his books.

Section 69A   : Unexplained Money, Acquisition of tangible movable
                assets not recorded in books.

Section 69B   : Expenditure for acquisition of movable assets or making
                investments is found to be more than that recorded in
                books.

Section 69C   : Expenditure during previous year not accounted for.

Section 69D   : Amount borrowed or repaid on a hundi otherwise than
                through an account payee cheque.


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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.

                                                                      3




Object of the provision.— To tax concealed profits

Basic conditions

i)     existence of books of account of the assessee

ii)    credit entry in such books of account

iii)   assessee not in a position to offer satisfactory explanation
       about the nature and source of such credit in his books.

       Argument of Todar Mal vs. CIT (1977) 106 ITR 619
       (P & H) of more evidence, not sustainable

                                                                      4
  Statutory recognition of what was the state of law
even prior to enactment of the 1961 Act

 A deeming provision.
     The group of six sections starting from section 68 to
     section 69D have been introduced into the taxing
     enactment step by step in order to plug loopholes and
     in order to place certain situations beyond doubt even
     though there were judicial decisions covering some
     of the aspects.




                                                                            5




Charging section
     Bhogilal Virchand vs. CIT (1981) 127 ITR 591 (Bom)

Discretionary and not mandatory :
     Where assessee could not explain the credits appearing in his books,
     would it be mandatory to tax such credits as undisclosed income?

     - ITO vs. Padmanabh Investments Co.Ltd. (1990) 38 TTJ 555 (Bom)
     - CIT v P. K. Noorjehan (P.K.) (1999) 237 ITR 570 (SC)

Whether Credit has to be in cash.
     - V.I.S.P. (P) Ltd. vs. CIT (2004) 265 ITR 202 (MP).
     - CIT vs. Pandian Distributors (2003) 259 ITR 428 (Mad).

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Books of the assessee

    Bank pass book — whether assessee’s books ?

     - CIT vs. Bhaichand H. Gandhi (1983) 141 ITR 67 (Bom)
    - Ms Mayawati vs. DCIT (2008) 19 SOT 460 (Del)

    Rough books – Whether Assessee’s books?

    - Haji Nazir Hussain & Co. vs. ITO (2004) 91 ITD 42 (Asr.) (TM).

    Loose sheets are not books
    - S.P. Goyal vs. DCIT (2002) 82 ITD 85 (Mumbai) (TM).
    - ACIT vs. Satyapal Wassan (2008) 5 DTR 202 (Jab) (Trib)


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  Burden of proof
       In Civil cases, the initial burden is a prima facie one

       In Criminal cases, the requirement is that the evidence led by
       the prosecution should be beyond reasonable doubt.

       Taxation Statutes
       Where the statute places the burden of proof on the taxpayer, it
       is to be understood, that it is only the initial burden. Thus,
       where the explanation is prima facie credible, the burden will
       shift to the other party.

       Section 68 mentions “nature and source thereof”.


                                                                          8
Nature and source, thereof
    The expression "nature and source" has to be understood as a
    requirement of identification of the source and its genuineness.
    Where the prima facie inference on the facts is that the assessee's
    explanation is probable, the onus will shift to the Revenue.
    Confirmatory letters as evidence, the onus does not get discharged
    merely by such confirmatory letters - CIT vs. United Commercial &
    Industrial CO. (P) Ltd. (1991) 187 ITR 596 (Cal)

    Amount is received by an account payee cheque, makes it sacrosanct
    - CIT vs. Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal)

    Even income-tax file particulars, where the creditor is assessed, may
    not be sufficient - CIT vs. Korlay Trading Co. Ltd.



                                                                              9




Burden of proof
    Shanker Industries vs. CIT (1978) 114 ITR 689 (Cal)
     -     identity of creditor
     -     credit worthiness of the creditor
     -     genuineness of the transaction

    Roshan Di Hatti vs. CIT (1977) 107 ITR 938 (SC).
Evidence to substantiate the genuineness of transaction depends on facts of
   each case and there can be no general thumb rule.

    DCIT v Rohini Builders(2002) 256 ITR 360 (Guj)
    The assessee has given the GIR numbers/PAN of the creditor and also
    showed that the amounts were received by account-payee cheques


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       No shortcuts
       Duty to produce creditors
        - Prima facie such failure of assessee in producing creditors will create
          possibility for contrary inference against the assessee. Any how,
          assessee will be under his right to request an Assessing Officer for
          issuance of summons to the creditors for proper examination
          Rajshree Synthetics (P) Ltd. vs. CIT (2002) 256 ITR 331 (Raj).

       - If the parties had received the summons but did not appear, the
         assessee could not be blamed
         CIT v. U.M. Shah, Proprietor, Shrenik Trading Co. [1973] 90 ITR
       396       (Bom.)
          ITO vs. Mayur Agarwal (2010) 133 TTJ 1 (Agra) (TM)

                                                                                         11




  Nature of explanation –

           -         The Section does not debar from giving alternative explanations
and if either        of them is accepted, the cash credit cannot be assessed as the income
of the     assessee.

                    Addl. CIT vs Ghai Lime Stone Co. (1983) 144 ITR 143 (MP).

        -           Explanation may be offered even for the first time before the
Commissioner        (Appeals).

                    Addl. CIT vs. Dharamdas Agarwal (1983) 144 ITR 143 (MP)




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Presumption regarding correctness of books under section 132(4A)
not available under section 68

- Pushkar Narain Saraf vs CIT (1990) 183 ITR 388 (All) approved in P. R.
Metrani vs. CIT (2006) 287 ITR 209 (SC).

Completion of creditors assessment

- ITO vs. Rai Chand Kothari (HUF) (1991) 39 TTJ (Gau – Trib) 530.

Fresh Enquiry in creditor’s assessment

- CIT vs. Ansari Cloth Merchant (1991) 59 Taxman 538 (Pat).

Undisclosed income in creditors assessment

- Gem Palace vs. CIT (1987) 168 ITR 543 – Raj.

                                                                       13




Important points to be covered in conformation

      Date of Signing of confirmation
      Confirmation of fact of transaction of giving the amount by the
      creditor
      Mode of Payment i.e through DD/Cash/cheque
      In case of banking channel adopted, particulars of cheque etc
      In interest bearing: state this vital fact
      PAN and place of assessment of creditor
      If possible, source of lending the money




                                                                       14
Explanation to be considered objectively
      The explanation given by the assessee cannot be rejected arbitrarily or
      capriciously, without sufficient grounds, on suspicion or on imaginary or
      irrelevant grounds.
              -         Sona Electric Company vs. CIT (1984) 152 ITR 507 (Del)
      The explanation cannot be rejected merely on the ground that the department
      is unable to verify its correctness.
              -         S. Hastimal vs. CIT (1963) 49 ITR 273 (Mad)
      Application of mind is the sine qua non for forming the opinion
              -         CIT v. P. Mohanakala (2007) 291 ITR 278 (SC).
      It was the duty of the Revenue to summon the creditor and make enquiry
              -         CIT vs. Orissa Corporation Pvt. Ltd. (1986) 159 ITR 78
      (SC)


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      The Assessing Officer cannot accept the explanation in part and reject it
      in part.
               -      Mehta Parikh & Co v CIT (1956) 30 ITR 181 (SC)


      No suspicion or surmises –
             -          Harish Kumar vs. DCIT (2003) 85 ITD 366 (Hyd – Trib).
             -         CIT v Bedi and Co Pvt Ltd (1998) 230 ITR 580 (SC).

      Affidavits filed cannot be rejected outright without cross-examination
             -           Mehta Parikh and Co v CIT (1956) 30 ITR 181.

      It was pointed out that after a lapse of a decade, the assessee should not be
      placed upon the rack and called upon to explain not merely the origin and
      source of a capital contribution, but also the origin of the origin and the
      source of the source as well.
              -         Hastimal (S) v CIT (1963) 49 ITR 273 (Mad)



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             Assessee cannot be asked to prove origin of origin and source of source.
                     -          CIT vs. Daulatram Rawatmull (1973) 87 ITR 349 (SC)
                     -          S. Hastimal vs. CIT (1963) 49 ITR 273 (Mad).


             Assessee’s burden is confined to prove creditworthiness of creditor with
             reference to transaction between assessee and creditor
                     -          Nemichand Kothari vs. CIT (2003) 264 ITR 254 (Gau)
                     -          Aravali Trading Co. vs. ITO (2008) 220 CTR 622 (Raj)
                     -          CIT vs. Uttamchand Jain (2010) 320 ITR 554 (Bom)


             Minor variations
                     -          ITO vs. Thakur Das (1988) 36 Taxman 70 (Jp) (Tax -
Mag)
                                                                                        17




             Effect of change in the stand earlier taken by creditor.
                     -         Sohan Lal vs. CIT (1995) 215 ITR 544 (Raj)


             When Assessing Officer believes that creditor is a mere name lender
                     -          CIT vs. Gani Silk Palace (1988) 171 ITR 373 (Mad).


             No Requirement of funds
                     -          Rightmens Construction Co. vs. ITO (1996) 131 Taxation
123 (Del –
                                Trib).


             Cash deposited in creditors account
                     -          ITO vs. M S Advance (P) Ltd. (2005) 93 TTJ (Asr – Trib)
778.


             Several Credits
                     -          CIT vs. Rathore R S (1995) 212 ITR 390 (Raj).           18
    Branch transfers
-          CIT vs. N. Jayaprakash (2006) 285 ITR 369 (Ker)

    Adjustment entries
-          CIT vs. Kerala Transport Co. (1995) 124 Taxation (Coch – Trib).

    Relationship not required for gifts
-          CIT vs. R.S. Sibal 135 Taxman 492 (Del)

    Amount received through Will
-         JCIT vs. Budh Kishore (2004) 87 TTJ 140 (Del)

    Opening balances cannot be taxed u/s 68.
-         CIT vs. Usha Stud Agricultural Farms Ltd.(2008) 301 ITR 384 (Del)
-         CIT vs. Prameshwar Bohra (2007) 208 CTR 218 (Raj)




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    Non – residents

    Money brought by Non residents from their foreign bank accounts (being
    money earned Outside India) in India (deposited in Indian NRE account etc)

    -       Delhi ITAT in DCIT vs. Finlay Corporation Ltd. (2003) 86 ITD 626
    held,

    a) Cannot be examined u/s 68 in absence of books

    b) As regards section 69, same gets satisfied since the assessee has proved
    by way of FIRC (Foreign Inward REMITTANCE certificate) that money
    was transferred out of foreign bank account.

    Further CBDT Circular No 5 dated 20/2/1969 states That “Money brought
    into India by non residents for investments or other purposes is not liable to
    Indian Income Tax.”



                                                                                 20
 Evidences collected back of the assessee –
            -       Kishinchand Chellaram vs. CIT (1980) 125 ITR 713 (SC),
            -       DCIT vs. GVS Investments (P) Ltd. (2005) 92 TTJ (Del-Trib) 706,
            -       Yamuna Synthetics (P) Ltd. vs. DCIT 141 Taxman 57 (Del – Trib).


 Credit Purchases–
            Section 68 is not applicable to purchases on credit where the A.O. has
accepted the purchases, sales and also the trading result disclosed by the assessee.
                    -          CIT vs. Pancham Dass Jain (2006) 156 Taxman 507 (All)
                    -          CIT vs. M.K. Brothers (1987) 163 ITR 249 (Guj)
                    -          Also see Manoj Aggarwal vs. DCIT (2008) 113 ITD 377
(Del)(SB)

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   Deposits in banks : The degree of satisfaction required on the part of the Assessing
   Officer in the matter of fixed deposits in a bank, may not be the same as for borrowings
   from others. - CIT v Pragati Co-operative Bank Ltd (2005) 278 ITR 170 (Guj).


   Merely because there were irregularities in following Reserve Bank of India guidelines in
   accepting the deposit, the addition is not justified - CIT v Orissa Corporation P. Ltd
   (1989) 159 ITR 78 (SC)


   A recent press report on investigation of bank deposits by the Income-tax Department
   indicates, that a considerable amount of unaccounted income, is found in bank deposits,
   usually split up into small denominations to avoid tax deduction at source and possible
   enquiry. In view of the requirements under the Money Laundering Act and the Know
   Your Customer (KYC) requirement expected of the bank by the Reserve Bank, banks
   are required to exercise caution in acceptance of deposits in ensuring identification of the
   depositor.

                                                                                              22
Charitable Institutions



-      Director of Income-tax (E) v Keshav Social and Charitable Foundation
       (2005) 278 ITR 152 (Del)



-      Benefit u/s 10(22) allowed – DIT vs. Raunaq Education Foundation (2007)
       294 ITR 76 (Del)




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Partner and the Firm

    Double assessment in both partner and firm on same income not tenable.—
-     (CIT vs. Jairamdass Lokesh Kumar (2001) 250 ITR 526 (Raj).
-     Favour – Addl. CIT vs. Precision Metal Works (1985) 156 ITR 693 (Del)

    Firm or partner? Who should be assessed?—
-      Smt. Shanta Devi vs. CIT (1988) 171 ITR 532 (P&H)

-      India Rice Mills v CIT (1996) 218 ITR 508 (All). Also see. CIT vs. Taj
       Borewells (2007) 291 ITR 232 (Mad). Jaiswal Grain stores (2005) 272 ITR
       136 (All)
    Against
-      CIT vs. Shiv Shakti Timbers (1998) 229 ITR 505 (MP)
-      CIT vs. Anupam Udyog (1983) 142 ITR 133

    The principle for (first year) was applied in case of individual in ACIT vs. Smt.
    Meera Devi (2007) 108 TTJ 88 (All)




                                                                                        24
  Share capital –
      Share application money — whether on par with cash credits ?

       - Sky High Properties (P) Ltd. vs. ITO (2002) 258 ITR (AT) 98 (Del – Trib).
       – CIT vs. Stellar Investments Ltd. (1991) 192 ITR 287 (Del), affirmed by Supreme
       Court, CIT vs. Stellar Investment Ltd. (2001) 251 ITR 263 (SC). Similar view in
       CIT vs. Lovely Exports (P) Ltd. (2008) 216 CTR 195 (SC)

    Against

       - CIT vs. Sophia Finance Ltd. (1994) 205 ITR 98 (Del)(FB) after considering
       Stellar Investments (1991) 192 ITR 287 (Del)




                                                                                         25




  Share capital –

  It is to be carefully appreciated that Supreme Court reaffirmed Delhi High Court’s
  decision in Stellar’s case covering only such cases where identity of the shareholders
  and receipt of monies against capital issued, were established. In such cases, it is not
  legally permitted to assess the capital as undisclosed income of the company under
  sec. 68. Whereas import of Sophia Finance’s case (supra) is altogether on a different
  plane dealing with those cases where the very shareholders were non existing. In view
  of the same, there is no conflict between both the rulings and they would operate in
  their respective domains.

  Where the assessee pleads its inability to produce the shareholders and requests the
  Assessing Officer to issue summons under section 131 to enable verification, the
  Assessing Officer has no option except to comply with the request before proceeding
  further in the matter CIT vs. (Kamdhenu Vyapar Co. Ltd. (2003) 263 ITR 692
  (Cal).

  The liability cannot be avoided merely because it was received towards share capital.
  Bhola Shankar Cold Storage (P) Ltd. Vs. JCIT (2004) 270 ITR 487 (Cal).

– Interlink Petroleum Ltd vs. DCIT (2004) 83 TTJ (Ahd – Trib) 274.


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  SET OFF OF INTANGIBLE ADDITIONS

Any addition made by an Assessing Officer on an estimate basis in the hands of
  an assessee is called an intangible addition. Books of account produced by the
  assessee and the financial statements submitted would be rejected in a case
  where Assessing Officer holds a view that accounts maintained by the
  assessee are incomplete and incorrect. He would then proceed completing the
  assessment of the assessee by estimating the income. Such estimation results
  in an addition to the income returned by the assessee. Such addition which is
  known as intangible addition is presumed by the Assessing Officer as
  undisclosed income of the assessee not forming part of the books produced by
  the assessee.

                                                                                       27




  SET OFF OF INTANGIBLE ADDITIONS
      Having made an intangible addition, an Assessing Officer cannot turn around and
      say that the same is not true or real income and is to be only considered for
      charging taxes. Any such proposition by an Assessing Officer would be illegal
      and untenable. This was so held by the Supreme Court in Anantharam
      Veerasinghiah & Co vs. CIT (1980) 123 ITR 457 (SC). It was held that such
      income although commonly described as “intangible”, is as much a part of his
      real income as that disclosed by his account books. It has the same concrete
      existence. It could be available to the assessee as the book profits could be.



  "Peak credit" theory and telescoping



                                                                                       28
SET OFF
       An assessee may explain that cash credits under scrutiny in the current year have
       been sourced from intangible additions made in the past years. The same is
       known as set off. It is prima facie possible for an assessee to take recourse to
       such set off.– CIT vs. Durga Prasad Rajaram Aratiya (1986) 160 ITR 328 (MP).

       No such presumption - There can be no general or absolute rule to provide past
       intangible additions must be regarded as sources for unexplained cash credits in
       the books of the assessee – CIT vs. Jhaverbhai Biharilal & Co. (1986) 160 ITR
       634 (Patna).

       Same accounting year itself. - CIT vs. K V Muniswamy Mudaliar (1978) 113
       ITR 802 (Mad).

       Explained as balancing exercise from the accounting perspective.– Maddi
       Sudarsanam Oil Mills Co. vs. CIT (1959) 37 ITR 369 (AP).
                                                                                       29




Large additions       – CIT vs. Gun Nidhi Dalmia (1987) 168 ITR 282 (Del), CIT vs.

Tyaryamal Balchand (1987) 165 ITR 453 (Raj).



Telescoping one addition into the other necessary.—CIT vs. Guruswamy Nadar
& Sons (1984) 149 ITR 127 (Mad)


Plea of telescoping may be raised for the first time in appeal. Right to raise an
alternative argument– CIT vs. Sri Venkateswara Timber Depot (1996) 222 ITR 768
(AP)




                                                                                       30
  Every addition is not available for set off.

  -       Import Export Sales Corpn. vs. CIT (1994) 149 ITR 318 (Del).



   Peak of estimate higher of two

  -       CIT vs. Neemar Ram Badlu Ram (1980) 122 ITR 68 (All)

  -       Sanjay Kumar Jain vs. CIT (2002) 254 ITR 38 (Cal).



  Admission of the assessee

  -       Sahu & Co. vs. CIT (1981) 132 ITR 122 (Ori)




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  Penalty u/s 271(1)(c) w.r.s. 68
Explanation 2 had been introduced to sec. 271(1)(c) by the Taxation Laws (Amendment)
  Act, 1975 which provides that any intangible addition of a past year for which no
  concealment penalty was levied then and which was proposed to be claimed as source
  for certain deposits or cash credits etc., during a subsequent year, penalty for
  concealment of so much amount utilized out of such intangible addition may be
  imposed against the assessee in respect of the year of intangible addition (if not so far
  imposed), although prescribed period of limitation had expired. This provision had
  been brought in to check abuse of set off while simultaneously getting over levy of
  penalty. This acts as deterrent against erring assessees abusing the law. Invariably an
  assessee who claims set off would be visited with penal consequences as per
  Explanation 2 to sec. 271 (1) (c).



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  Estimate of income after rejection of books as unreliable under section 145.—
  There is nothing in law which prevents an Assessing Officer, in an appropriate case,
  from taxing both the cash credit, the entry and source of which is not satisfactorily
  explained, and the business income estimated by him under section 145 of the Act
  "after rejecting the books of account of the assessee as unreliable".



  Kale Khan Mohammad Hanif v CIT (1963) 50 ITR 1 (SC) - it is for the assessee to
  establish a connection between the cash credits and the intangible addition.



  It was held that an Assessing Officer shall not rely on the same books of account for
  working out peak credit after having rejected such books under sec.145

  -       CIT vs. K.M.N. Naidu (1996) 221 ITR 451 (Mad).

  -       CIT vs. G. K. Contractor (2009) 19 DTR 305 (Raj)
                                                                                      33




  Set off of losses

  -       Addl. CIT vs. Ghasiram Phoolchand (1987) 167 ITR 243 (Bom).
  Powers of the appellate authorities to reappreciate the evidence.

  -       CIT vs. Sardar Gurudev Singh Gill (1995) 212 ITR 85 (Ori)

  Discharge of assessee's burden not automatic on filing declaration.

  -       Radio Instruments Associates (P) Ltd. Vs. CIT (1987) 166 ITR 718 (AP)

  Declaration under VDIS in the case of a creditor
- Jamna Prasad Kanhaiyalal vs. CIT (1981) 130 ITR 244 (SC).
  Onus of proof on the assessee to spread over number of years

  -       Gordhandas Hargovandas vs. CIT (1980) 126 ITR 560 (Bom)

  Whether sec. 68 has application to sales tax assessment?
- Giridharilal Nannelal vs. CST (1977) 109 ITR 726 (SC).


                                                                                      34
   Direct Tax Code – Clause 58 (2) (n)

   (n) any amount found credited in the books of the person maintained for the

       financial year, if —

(i) the person      offers no explanation about the nature and source thereof;

(ii)the person      offers an explanation but fails to substantiate the explanation; or

(iii) the   explanation offered by him is, in the opinion of the Assessing Officer,
   not satisfactory;




                                                                                                     35




   Certain Basic Principles:
            Suspicion however great cannot take the place of evidence SC in Umacharan 37 ITR 271
            applied by P&HHC in Anupam Kapoor 299 ITR 179 (useful ruling for addition and
            reopening in context of alleged bogus capital gains/share capital etc)



            Burden to Prove, that apparent is not real, lies on the shoulders of the revenue SC in 125
            ITR 713 – Kishanchand Chellaram; SC in 26 ITR 775 Dhakeshwari Cotton Mills; SC in 87
            ITR 349



            Addition cannot be made merely on the basis of conjectures and surmises. The department
            cannot draw inferences and assume that there has been some illegality in the assessee’s
            transaction in the absence of any material in its possession Refer Mad HC in 34 ITR 328 &
            Ker HC in 117 ITR 371



                                                                                                     36
Certain Basic Principles:
    It is not open to the department while rejecting assessee’s explanation to make presumption
    that the witness come forward to give false evidence to oblige the assessee Refer All HC in
    72 ITR 766

    In cases where the assessee furnishes full details regarding the alleged lenders/creditors etc,
    it is up to the department to peruse the matter further to examine these and to examine their
    creditworthiness Refer SC in 159 ITR 78; Raj HC in 270 ITR 477 etc

    An explanation given by the assessee has to be considered objectively before AO takes a
    decision to accept it or reject it that is, department cannot convert a good proof into no
    proof on mere ipsedixit (suspicion etc) – Refer SC in 49 ITR 112

    Theory of human probabilities and sorrounding circumstances sc in 82 ITR 540 & 214 ITR
    801 Held: Tribunal etc are entitled to disbelieve any story which is prima-facie fantastic
    and which does not accord with human probabilities. Taxing authorities are not required to
    put blinkers while looking into documents produced before them and they were entitled to
    look into surrounding circumstances.
                                                                                                  37




Things to Ponder

    Section 68 vs. Section 56

    Whether gift from relatives etc being specifically exempt u/s 56, can be
    examined still under section 68 on touchstone of parameters thereunder viz.
    creditworthiness etc?



    Unclaimed liabilities - Section 68 & Section 41(1)

    Can A.O. tax previous credits under section 41(1) if they are found to be bogus.




                                                                                                  38
Malad Goregaon CPE Study Circle WIRC of ICAI




                     THANK YOU

       Paras S. Savla & Sameer Dalal, Advocates




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