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Practical Aspects of Section 147 & 68 of Income Tax Act, 1961 CA. Naveen ND Gupta NDG Center, B-4, Gulmohar Park, New Delhi – 110049 Ph: + 91 9810689998,

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Presentation on theme: "Practical Aspects of Section 147 & 68 of Income Tax Act, 1961 CA. Naveen ND Gupta NDG Center, B-4, Gulmohar Park, New Delhi – 110049 Ph: + 91 9810689998,"— Presentation transcript:

1 Practical Aspects of Section 147 & 68 of Income Tax Act, 1961 CA. Naveen ND Gupta NDG Center, B-4, Gulmohar Park, New Delhi – Ph: ,

2 Section 147 – Quoted If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of section 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year. Provided that where an assessment u/s. 143 (3) or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of failure on the part of assessee to make a return u/s. 139 or in response to a notice issued u/s. 142 (1) or 148 or to disclose duly and truly all material facts necessary for his assessment for that assessment year. Explanation 3: For the purpose of assessment or reassessment under this section the assessing officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue come to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reason for such issue have not been included in the reasons recorded under section 148 (2). 2

3 Section 147 – Quoted Issue 1: Whether after insertion of Explanation 3 to sec 147 sec 147 has effect that AO has to reassess income (‘such income’) which escaped assessment & which was basis of formation of belief & if he does so, he can also assess or reassess any other income which has escaped assessment & which comes to his notice during course of proceedings - Held, yes - Whether, however, if after issuing notice under section 148, he accepts contention of assessee & holds that income, for which he had initially formed a reason to believe that it had escaped assessment, has, as matter of fact, not escaped assessment, it is not open to him to independently assess some other income; if he intends to do so, fresh notice u/s 148 would be necessary, legality of which be tested in event of challenge by assessee. Jet Airways I Ltd 195 Taxman 117 (Bom) Issue 2:- As per Explanation (3) of Sec 147 if during course of the proceedings AO comes to conclusion that some items have escaped assessment, then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of proceedings & notice, he would be competent to make assessment of those items. However, legislature could not be presumed to have intended to give blanket powers to AO that on assuming jurisdiction u/s147 regarding reassessment of escaped income, he would keep on making roving inquiry & thereby including different items of income not connected or related with reasons to believe, on basis of which he assumed jurisdiction. For every new issue coming before Assessing Officer during the course of proceedings of reassessment of escaped income, & which he intends to take into account, he would be required to issue fresh notice u/s148. Ranbaxy Laboratories Ltd 200 Taxman 242 (Del) 2

4 Issues on Proviso 2 Issue 3: In case the assessing officer issued notice under section 143(2) after issuance of section 148 but before neither the return of income had fallen due by that time nor the same was filed in pursuance to notice under section 148, then the reassessment proceedings initiate by the assessing officer is bad in law and deserves to be quashed. Because same goes to show non application of mind by AO as it is obligatory for AO to apply his mind to the contents of return filed in response to notice u/s 148 and then issue notice u/s 143(2). Hindalco Industries Ltd. ITA 69/2006 dt. 25/07/11 Issue 1 : Where reassessment after four years & original assessment u/s 143(3); share application money received confirmed by share applicants. Merely having a reason to believe that income has escaped assessment was not sufficient to reopen assessment after four year period, the escapement of income from assessment must also be occasioned by failure on part of assessee to disclose material facts, fully & truly. JSRS UDYOG LTD. 313 ITR 321 (Del.) Issue 2: Where reassessment proceedings initiative beyond period of four year from the end of relevant assessment year. Assessment reopen on account of retrospective amendment to Section 80HHC. Held: If the legislature amends the provisions of the Act with retrospective effect, it cannot be said that there was failure on the part of the assessee to disclose fully and truly all material facts relevant for the purpose of assessment. K.Mohan & Co. ITA 2347/2010 dated 01/07/2011

5 File the Return of Income 4 Procedure For Re-assessment Proceedings (GKN Drive Shafts (I) Ltd. 259 ITR 19 (SC)) Application for certified copy of “Reason to Believe” File the objections for deficiencies in “Reason” Issue of Notice - Check limitation AO to dispose off “Objections” by speaking order Proceedings – Issue of notice u/s 143(2) / 142(1) CALCUTTA DISCOUNT CO. LTD. 41 ITR 191 (SC) : A Writ Petition is maintainable to challenge invocation of reassessment even though it is open to assessee to challenge same before AO during assessment and also before appellate authority. Notice u/s 148 without communication of reasons therefore is meaningless as AO is bound to furnish reasons within reasonable time. In case, where notice has been issued within said period of six years, but reasons have not been furnished within that period, in our view, any proceedings pursuant thereto would be hit by bar of limitation inasmuch as issuance of notice & communication & furnishing of reasons go hand-in-hand. Expression “within reasonable period of time” as used by in G.K.N. Driveshafts cannot be stretched to such an extent even beyond six years stipulated in sec 149. Haryana Acrylic C ITR 38 (Del); followed by Delhi ITAT at Gomti Textiles Ltd ITA 1520/Del/2011 dated 08/07/2011 & Balwant Rai Wadhwa ITA 4806/Del/2010 dated 14/01/2011

6 Issue of Notice for re-assessment  Issue in 147 Vs. Serve in 143(2)  Sec No notice U/s 148 shall be issued for re-assessment Sec 148 – Before making assessment/reassessment U/s 147 AO shall serve on assessee a notice requiring him to furnish Return of Income.  Y. NARAYANA CHETTY 35 ITR 388 (SC) Service of Requisite Notice is a condition precedent for validity of Reassessment. Prescribed Notice cannot be regarded as a mere procedural requirement. It is only if said notice is served on assessee as required then AO would be justified in taking Reassessment proceedings against him.  LAXMI NARAIN 168 TAXMANN 128 (P&H) Non-Service of a notice under section 148 on proper person would go to roots and cannot be condoned. If no such notice is issued or notice issued is invalid and not in accordance with law or notice is not served on the proper person, then assessment framed would be illegal and without jurisdiction. 5 ConditionLimitation Period If escaped amount likely to be Rs. 1 lakh or more Notice be issued with in six years from the end of relevant assessment year If escaped amount likely to be less than Rs. 1 lakh Notice be issued with in four years from the end of relevant assessment year

7 Connected Issues to Notice Sec. 282 Service of notice generally. 282.(1) The service of a notice or summon or requisition or order or any other communication under this Act (hereafter in this section referred to as “communication”) may be made by delivering or transmitting a copy thereof, to the person therein named,— (a) by post or by such courier services as may be approved by the Board; or (b) in such manner as provided under the Code of Civil Procedure, 1908 (5 of 1908) for the purposes of service of summons; or (c) in the form of any electronic record as provided in Chapter IV of the Information Technology Act, 2000 (21 of 2000); or (d) by any other means of transmission of documents as provided by rules made by the Board in this behalf. Sec 292B Return of income, etc., not to be invalid on certain grounds. 292B. No return of income, assessment, notice, summons or other proceeding, furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act.] Sec 292BB Notice deemed to be valid in certain circumstances. 292BB.Where an assessee has appeared in any proceeding or co-operated in any inquiry relating to an assessment or reassessment, it shall be deemed that any notice under any provision of this Act, which is required to be served upon him, has been duly served upon him in time in accordance with the provisions of this Act and such assessee shall be precluded from taking any objection in any proceeding or inquiry under this Act that the notice was— (a)not served upon him; or (b)not served upon him in time; or (c)served upon him in an improper manner: 6

8 SECTION 282 SERVICE OF NOTICE GENERALLY  RAJESH KUMAR SHARMA 165 TAXMANN 488 (DEL) : (282) : Where revenue not been able to show that envelope containing notice under section 148 was correctly addressed, revenue’s case that envelope did not return with any remark to effect that it was undelivered and so it must be presumed that it was actually served upon assessee was unsustainable. Assessee entered into appearance, after receiving notices under sections 142(1) and 143(2) and categorically denied receipt of notice under section 148, argument of revenue that his appearance was in response to notice under section 148 did not advance case of revenue that notice under section 148 was actually served upon assessee.  ARUN LAL 124 ITD 85 (AGR) : (282) : It was apparent from records that date of issuance of notice by Assessing Officer was and on very next day he had directed notice server to serve notice by affixture - Whether since there was no material on record to show that any effort was made by Assessing Officer to serve notice in normal course before issuing directions to serve same by way of alternative mode i.e., by way of affixture, it was to be held that there was no valid service of notice and, therefore, reassessment proceedings were liable to be quashed.  HOTLINE INTERNATIONAL 161 TAXMANN 104 (DEL) : 282 : As per order V, rule 12 of the Code of Civil Procedure that wherever it is practicable, the service has to be effected on defendant in person or on his agent. Admittedly, in the instant case, notice under section 148 was not tendered to the assessee nor the same was refused at all by the assessee. It was an admitted case of the revenue that when the officials of the Department went to serve the notice under section 148 for the relevant assessment year, the security guard informed them that the company was closed for the Holi festival holidays. The security guard by no stretch of imagination could be said to be the agent of the assessee and, admittedly, no notice was tendered either to the assessee or his agent nor the same was refused either by the assessee or his agent. Under order V, rule 17 of the Code of Civil Procedure, the affixation can be done only when the assessee or his agent refused to sign the acknowledgement or could not be found. In the instant case, no effort was made by the Income-tax Department to serve the notice upon the assessee, since the company of the assessee was closed due to Holi festival holidays, and, admittedly, no effort was made by the serving officer to locate the assessee. 7

9 MATTERS REGARDING ISSUE OF NOTICE  Issue of notice & recording of reason to believe by same AO HYNOUP FOOD AND OIL INDUSTRIES LTD. 307 ITR 115 (Guj.) : Assessing Officer recording reasons under section 148(2) and Assessing Officer issuing notice under section 148(1) has to be same person; successor Assessing Officer cannot issue notice under section 148 on basis of satisfaction recorded by predecessor Assessing Officer, because reason to believe that income liable to tax for assessment year has escaped assessment within meaning of section 147 has to be of Assessing Officer concerned, viz., Assessing Officer issuing notice under section 148. ==================================================================================  Issue : Where reopening made by AO not having jurisdiction over assessee (i.e notice by non- jurisdictional AO) and final assessment by non-jurisdictional AO as proceedings are transferred mid way is valid? No Paramjeet Singh 220 ITR 446 (P&H) : Assessee's original assessment was completed at Pune - Thereafter he shifted to Jalandhar - His assessment records had not been transferred to Assessing Officer at Jalandhar by passing an order under section On basis of complaints received from assessee's relative Assessing Officer at Jalandhar initiated reassessment proceedings by issuing notice under section Whether Assessing Officer at Jalandhar had no jurisdiction to re-open assessment and, therefore, notice issued under section 148 was liable to be quashed - Held, yes Anjali Dua 219 CTR 183 (Del) Ranjit Singh 120 TTJ 517 (Del) 9

10 SECTION 150(1) Reassessment pursuance to Appeal/Revision  No limit for issue of notice in situation of section 150(1) i.e. 147 to give effect to finding / direction in appellate / revision order.  Sec 150 (2) & K.M SHARMA 122 TAXMANN 426 (SC) : Directions to make assessment or reassessment which has become time barred is not valid.  GREENWORLD CORPORATION 181 TAXMAN 111 (SC) : Whether for reopening of proceedings under section 150, records of proceedings must be before appropriate authority and it must examine records of proceedings; if there is no proceeding before it or if assessment year in question is also not a matter which would fall for consideration before higher authority, section 150 will have no application ==================================================================================  Issues: What are fetters on power of AO to initiate 148 once addition deleted in appeal: Second proviso to 147 provides partial merger of matters subject of appeal/revision i.e proceedings locked for reopening. Anand Samrat & Co. 240 ITR 852 (AP): After consideration of appeals by Commissioner (Appeals) and Tribunal, final order was passed determining taxable income - One month later, succeeding Assessing Officer sent a notice under section 148 holding that by reason of failure to disclose fully and truly all material facts, income chargeable to tax had escaped assessment - Whether initiation of reassessment proceedings under section 147(a) was unwarranted and beyond jurisdiction of respondent and in negation of principle of finality of decision of Tribunal and implied bar against initiation of reassessment proceedings on same set of facts twice over - Held, yes - Whether it is not open to assessing authority to go on resorting to reassessment proceedings piecemeal on a fresh appraisal of material and evidence that came to light during search and, hence, impugned notice was liable to be quashed. 10

11 REASONS TO BELIEVE : CHANGE OF OPINION (1) 1.( ) KELVINATOR OF INDIA LIMITED 123 TAXMANN 433 (DEL): Whether even after amendment of section 147 with effect from , a mere change in opinion would not confer jurisdiction upon Assessing Officer to initiate a proceeding under section Held yes - Whether Circular No. 549 allay fears that omission of expression ‘reason to believe’ from section 147 would give arbitrary powers to Assessing Officer to reopen past assessments on mere change of opinion - Held, yes - Whether by reason of section 147 if ITO exercises its jurisdiction for initiating a proceeding for reassessment only upon mere change of opinion, same may be held to be unconstitutional - Held, yes - Whether, however, if ‘reason to believe’ of Assessing Officer is founded on an information which might have been received by Assessing Officer after completion of assessment, it may be a sound foundation for exercising power under section 147, read with section Held, yes 2.( ) RAJESH JHAVERI STOCK BROKERS PVT. LTD. 161 TAXMAN 316 (SC): Intimation under section 143(1)(a) cannot be treated to be an order of assessment. As also, no opinion is expressed therein. 3.( ) BATRA BHATTA COMPANY 174 TAXMAN 444 (DEL):In the absence of anything new on record merely to scrutinize information available in return section 148 cannot be resorted and has observed that Rajesh Javeri has not diluted this legal position and has rather vindicated it. 11

12 REASONS TO BELIEVE : CHANGE OF OPINION (2) 4.( ) KELVINATOR OF INDIA LIMITED 187 TAXMANN 312 (SC): Assessing Officer has power to re-open, provided there is ‘tangible material’ to come to conclusion that there is escapement of income from assessment; reasons must have a live link with formation of belief 5.O.P CHAWLA 114 ITD 69 (DEL)(TM): The fact that the notice of reopening was not prompted by a mere change of opinion cannot save the notice if the Assessing Officer had no ‘reason to believe’ but had only ‘reason to suspect’ that income chargeable to tax had escaped assessment. Secondly, a ‘change of opinion’ - a re-look or review of the facts without any further facts or a change in the law - does not exhaust the meaning and content of the expression ‘reason to believe’. It is only one facet or illustration of what does not amount to ‘reason to believe’. There may be several other facets or cases or illustrations or fact-situations of what cannot be construed as ‘reason to believe’. For example, there can be a case of reopening based merely on suspicion, gossip or rumour. There can be a case of a mere pretence and masquerading as a reason to believe. A change of opinion on the same facts and legal position is only one instance of what is not ‘reason to believe’. Therefore, merely because the instant case for whatever reason was not covered by the yardstick of a mere change of opinion, it did not automatically follow that it fulfilled all the requirements of the expression ‘reason to believe’. 12

13 SANCTIONS & APPROVALS SEC 151 o In situation if return processed U/s 143(1) earlier  Within 4 Yrs By Assessing Officer (after recording Reasons to Believe)  After 4 yrs Joint Commissioner or Assessing Officer below after JCIT approval & sanction o In situation of earlier Sec 143(3) or 147  Within 4 Yrs ACIT/DCIT AO Below ACIT/DCIT after JCIT approval & sanction  After 4 Yrs AO after CIT/CCIT approval & sanction Failure of assessee to make Return of Income or disclose fully & truly all material facts.(Proviso to section 147) 14

14 SANCTIONS & APPROVALS SEC 151 (2) CHHUGAMAL RAJPAL 79 ITR 603 (SC) Whether ITO had not even come to a prima facie conclusion that transactions to which he referred were not genuine transactions and conclusion arrived on a vague feeling that they might be bogus transactions did not fulfil requirements of section 151(2) Held, yes – Whether his conclusion that there was a case for investigating as to truth of alleged transactions, was not same thing as saying that there were reasons to issue notice under section 148 – Held, yes – Whether report submitted by ITO under section 151(2) did not mention any reason for coming to the conclusion that it was a fit case for issue of a notice under section 148 and Commissioner had mechanically accorded permission – Held, yes – Whether important safeguards provided in sections 147 and 151 were lightly treated by ITO as well as by Commissioner and, therefore, impugned notice was invalid and had to be quashed. VINITA JAIN 163 TAXMANN 325 (DEL) From the decision of the Supreme Court in Chhugamal Rajpal v. S.P. Chaliha [1971] 79 ITR 603, it is clear that a mere statement of facts in the form of a report is not a substitute for reasons that are required to be recorded before issuing a notice under section 148. The Supreme Court also noted that substance cannot be substituted by form and it is in that context that the Supreme Court expressed the view that by merely saying ‘Yes’, the Commissioner did not fulfil the duty cast upon him.79 ITR

15 Reopening is not permissible on borrowed satisfaction  GREEN WORLD CORPORATION 314 ITR 81 (SC) : “It is beyond doubt or dispute that only in terms of directions issued by CIT u/s. 263 notices u/s. 148 were issued. Undisputedly CIT (Shimla) had no jurisdiction to issue directions. Notices issued pursuant thereto would be bad in law.  SH RAJASTHAN SYNTEX 178 TAXMANN 33 (RAJ.) On basis of opinion of Assessing Officer in case of lessee, Assessing Officer of assessee reopened its assessment and disallowed depreciation when Assessing Officer had taken decision after considering all facts, reopening of assessment on basis of opinion of another Assessing Officer was unjustified.  SHEO NARAIN JAISWAL 45 TAXMANN 213 (PAT.) Section 147, read with section 148, of the Income-tax Act, Reassessment - General - Whether when correspondence between ITO and his higher authorities revealed that ITO did not form independent requisite belief regarding escapement of income for initiating proceedings under section 147 but acted on dictates of higher authorities, his assumption of jurisdiction under section 148 would be illegal. 16

16 LATEST DEVELOPMENTS Issue: Whether DVO report justify 148? Dhariya Construction Co. 197 Taxman 202 (SC): Having examined the record, we find that in this case, the Department sought reopening of the assessment based on the opinion given by the District Valuation Officer (DVO). The opinion of the DVO per se is not an information for the purposes of reopening assessment under section 147 of the Income-tax Act, The Assessing Officer has to apply his mind to the information, if any, collected and must form a belief thereon. The Department was not entitled to reopen the assessment Issue: 148 qua 154 Honda Siel Power Products Ltd 197 Taxman 415 (Del) : Whether rectification of a mistake apparent from record cannot be equated with power of reopening under sections 147 and 148 which is conferred on Assessing Officer to reopen cases under assessment when conditions mentioned in said sections are satisfied - Held, yes - Whether language of section 147 shows that pre-requisites of said provision are not controlled, curbed and regulated with requirement of a mistake which is apparent from record and, therefore, it cannot be said that if notice under section 154 is issued, then notice under section 147/148 is barred or prohibited - Held, yes 16

17 21 General Principles: Sun Engineering Works P Ltd. 64 TAXMAN 442 (SC) 1.On reassessment u/s 147,original assessment is not wiped off but it remains. 2.Matters lost in original assessment proceedings which have since acquired finality (i.e. against which no appeal / rectification application / revision application filed) cannot be claimed in reassessment proceedings. Hence, expenses disallowed / incomes taxed in original assessment against which no appeal / revision / rectification application filed cannot be claimed as allowable / non-taxable in the reassessment proceeding u/s Expenses not claimed in original assessment cannot be claimed in reassessment proceedings u/s 147. But, the expenses pertaining to income which has escaped assessment can be claimed. 4.U/s 147 the income cannot be reduced below the income originally assessed. Similarly, u/s 147 the losses cannot be assessed above the losses originally assessed. 5.Section 147 is for the benefit of revenue and not for the benefit of the assessee. Therefore, if no return was filed earlier and no assessment was made earlier, then u/s 147, the AO cannot compute the loss of the assessee.

18 21 SECTION 68: UNEXPLAINED TAX CREDIT 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 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.

19 LATEST DEVELOPMENTS ON 147 VIS-À-VIS SECTION 68 1.SFIL STOCK BROKING 325 ITR 285 (DEL.) The first sentence of the Reasons recorded by AO was mere information from DDIT (Inv). The second sentence was direction given by same DDIT to issue notice U/s 148 and third sentence was direction given by Addl.CIT to initiate proceedings U/s 148 I.R.O. cases of relevant ward. The AO referred to information and two directions as reason U/s 148. This could not be reasons for proceedings U/s 147 as it was not at all discernible whether applied mind to information and independently arrived at belief. 2.SARTHAK SECURITIES CO. (P.) LTD. 195 TAXMAN 262 (DEL.) : Facts : AO issued notice U/s148 on ground that on basis of information received from investigation wing, he had reason to believe that assessee received accommodation entries from four companies as share application money or unsecured loan. Held : In the instant case, the AO was aware of existence of four companies with whom assessee had entered into transactions. Neither the reasons in initial notice nor the communication providing reasons remotely indicated independent application of mind. True it is, at that stage, it was not necessary to have the fact of escapement of income established but what was necessary was that there was material on record on which a reasonable person could have formed the requisite belief. To elaborate, the conclusive proof was not germane at that stage but the formation of belief had to be on the basis or foundation or platform of prudence, which a reasonable person was required to apply. As was manifest from the perusal of the supply of reasons and the order of rejection of objections, the names of the companies were available with the authority. Their existence was not disputed. What was mentioned was that those companies were used as conduits. In that view of the matter, the principle laid down in CIT v. Lovely Exports (P.) Ltd. [2008] 216 CTR (SC) 195 got squarely attracted. The same had not been referred to while passing the order of rejection. The assessee, in its objections, had clearly stated that the said four companies had bank accounts and payments were made to the assessee-company through banking channels. The identities of the companies were not disputed. Under those circumstances, it would not be appropriate to require the assessee to go through the entire gamut of proceedings. It was totally unwarranted. [Para 23] 19

20 LATEST DEVELOPMENTS VIS-À-VIS SECTION Signature Hotels Ltd W P (C ) Mo. 8067/2010 dated “ We may notice that M/s Swetu Stone Pvt. Ltd. is incorporated company & petitioner has pleaded that said company has paid-up capital of Rs.90 lacs. Company was incorporated on 4th January, 1989 & was also allotted permanent account number in Sept, To this extent, there is no dispute. In these circumstances, we feel judgments of Delhi High Court in SFIL Stock Broking Ltd, 325 ITR 285 (Del) & Sarthak Securities Co P Ltd 329 ITR 110 (Del), in which Lovely Exports (P) Ltd 216 CTR 195 (SC) has been applied and followed, are applicable. We may notice here that respondent in their counter affidavit have stated that Swetu Stone Pvt. Ltd. is unidentifiable & therefore, aforesaid decisions should not be applied & ratio of AGR Investment Limited be applied. In said decision, decisions in case of Sarthak & SFIL Stock Broking was distinguished as: The facts indicated above do not show that M/s. Swetu is non-existing and fictitious entity. Decision in AGR therefore does not help the case of respondent.For the reasons stated above, the present writ petition is allowed. _______________________________________________________________________________ Precautions while making preliminary objections: Indicate in clear terms that shareholders “Identity” established w.r.t. PAN, Bank A/c no. etc. State in clear terms that shareholders not fictitious entities State in clear terms that lovely exports 216 CTR 195 applicable Request for dropping re-assessment proceedings

21 LATEST DEVELOPMENTS VIS-À-VIS SECTION Creative Infotech Pvt. Ltd. ITA 2503(Del)/200 8 dt Money was received as sale proceeds of shares and transaction of purchase and sales were entered in P&L A/c. The AO did not make any verification about transaction summarily came to conclusions based on reports of investigation wing that deposits represented unexplained income. It was held that facts of Lakshya exim pvt. Ltd. 131 TTJ 621(Kol.) are identical and reopening of assessment is bad in law as AO did not make any enquiry to ascertain the nature of transaction so as to come to conclusion that any income has escaped assessment.

22 21 SECTION 68: YEAR OF CHARGE If the sum is credited in the books of account in AY , the same cannot be taxed in any other assessment year other than AY Prameshwar Bohra. 301 ITR 404 (Raj.) Carried forward cash credit balances can only be examined in the year in which they are firstly/freshly introduced. Usha Stud 301 ITR 384 (Del)

23 21 SECTION 68: General Principles 1.Credit entry in the books of assessee for any previous year. - Bank Pass Book : (whether bank pass book is “books of assessee”?) Relationship between banker & customer is one of debtor & creditor & not trustee & beneficiary. So, pass book supplied by bank to its constituent is only a copy of constituent's account in books of bank. It is not pass book is maintained by bank as agent of constituent, nor can it be said that pass book is maintained by bank under instructions of constituent. So, pass book supplied to assessee can’t be regarded as book of assessee. Bhaichand Gandhi 141 ITR 67 (Bom.) -Loose Sheets are not books: On basis of SC in V.C Shukla 3 SCC 410 and also Third Member ITAT ruling in S.P.Goyal 269 ITR (AT) Rough Books:. For benefit of PEAK CREDIT factual foundation had to be laid by assessee. He had to own all cash credit entries in books only then question of peak credit could be raised. In instant case cash credits were standing in names of different persons which assessee had been claiming to be genuine deposit. Withdrawal/payment of the amount to different persons during the previous years would not at all entitle assessee to claim benefit of peak credit. Bhaiyalal Shyam Bihari 276 ITR 38 (ALL.)

24 21 SECTION 68: SHARE APPLICATION MONEY 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 asst. in accordance with law, but it cannot be regarded as undisclosed income of the assessee. Lovely Exports P Ltd. 216 CTR 195(SC) Lovely Exports applied in Bhavshakti Steels 18 DTR 194 (Del); Gangour Investments 18 DTR 242 (Del); Value Capital 221 CTR 511 (Del). SLP dismissal by speaking order in Lovely Exports attracts binding force of Article 141. Kunhyammed 245 ITR 360 SC Points to establish Lovely Exports: Indicate in clear terms that shareholders “Identity” established w.r.t. PAN, Bank A/c no. etc. State in clear terms that shareholders not fictitious entities State in clear terms that lovely exports 216 CTR 195 applicable Enclose confirmation from shareholders, copy of PAN card etc. establishing identity

25 21 SECTION 68: UNSECURED LOANS Satisfactory explanation by assessee about nature and source of sum credited - Identity - Creditworthiness - Genuineness Mere Non production of lender/shareholder etc cannot by itself be a ground for making addition (as precaution make request to summon creditor)u/s 68 Held in a) Anil Kumar Midha 100 TTJ 644 (Jodh) b) Divine Leasing 299 ITR 268 (Del) c) Cal HC in 168 ITR 493 d) Guj HC in Rohini Builders e) SC Orissa Corporation (supra) f) SC in Anis Ahmed 297 ITR 441 g) BHC in 90 ITR 396 h) Patna HC in 151 ITR 150 i) DHC in Rungta Irrigation

26 21 SECTION 68: UNSECURED LOANS While furnishing Confirmation for Unsecured loans etc: precautions (points to be covered in confirmation) a) Date of Signing of confirmation b) Confirmation of fact of transaction of giving the amount by the creditor c) Mode of Payment i.e through DD/Cash/cheque d) In case of banking channel adopted, particulars of cheque etc e) In interest bearing: state this vital fact f) PAN and place of assessment of creditor g) If possible, source of lending the money

27 21 SECTION 68: ADVANCE BY PARTNER In case of firm, once a partner having accepted that he advanced certain sum to the firm: No addition in hands of firm (investment can be examined in hands of partner as per section 69 etc): a) Ram Narain Goel 224 ITR 180 (P&H) b) Taj Browellers 291 ITR 232 (Mad.)

28 21 SECTION 68: TRADE CREDITORS Whether section 68 is applicable to creditor arising out of purchases made in normal course of business, Which have not been doubted u/s 37 of the Act (that is purchase stands allowed) Held No Pancham Dass 205 CTR 222 (All.) P.S. Cars Pvt. Ltd. 95 TTJ 71 (Del.) M.K. Borthers 163 ITR 249 (Guj.) Mathura Das Ashok Kumar 101 TTJ 810 (Ahd.)

29 21 SECTION 68: DEPOSIT (Tenancy) & Advance Booking Nevendram Ahuja 290 ITR 453(MP); Held sufficient if landlord Proves identity of tenant and genuineness of transaction (no need to prove creditworthiness) Also see Rewa Group 109 TTJ 657 (Jab) Tulip Finance 15 DTR 185(Del): In case deposits Subsequently Adjusted against rentals – duly accounted for- No question of taxation u/s 68 Applicability of section 68 to ADVANCE BOOKING AMOUNT RECEIVED BY REAL ESTATE DELVELOPER: In case subsequently offered to taxation as sale price or refunded to flat bookers- DHC in Tulip Finance can be applied - No taxation u/s 68

30 21 SECTION 68: Amount Received Through Will Delhi ITAT in Budh Kishore 87 TTJ 140: 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) Also similar conclusion by Jodhpur ITAT in 102 TTJ 161 _______________________________________________________________ Primafacie View: Since affidavit of witness of Will has not been rejected and Will witnesses have not been examined- no addition is possible Since assessee has disclosed the source of funds - he cannot be asked source of source Since assessee has duly identified the source of money - any addition if required can be made in hands of deceased under section 69 - SC Lovely Exports Burden to prove that money recd from Will actually emerged from assessee is not discharged by revenue

31 21 SECTION 68 & Old & Unclaimed Liabilities U/s 41(1) Unclaimed liabilities remaining outstanding for number of years- Whether can be brought to tax u/s 41(1) and section 68 ?: Refer: Ahd ITAT in Govindbhai Patel ITA 1675/ /10/2009 (For Non - expense item i.e no trading liability) AO added Rs crores on account of outstanding sundry credit balances holding that liability in respect of these creditors ceased to exist and it had become liable to be treated as deemed income under Explanation I to section 41(1) On instant appeal, it was noted that in assessee’s balance sheet liability of Rs crores was shown indicating acknowledgement of debt payable by assessee - Moreover, there was no bilateral act of assessee and creditors on record, which proved that said liability had ceased to exist - Tribunal had rightly set aside impugned addition made by Assessing Officer. Sita Devi Juneja 325 ITR 593 (P&H)

32 21 SECTION 68: CHARITABLE TRUST DHC in Keshav Social Charitable 278 ITR 152 (applied by Jodhpur ITAT in Geetanjali Education Society 114 TTJ 697 affirmed by Raj HC in 174 Taxman 440) “In the present case, assessee has not only disclosed its donations, but has submitted a list of Donors. The fact the complete list of donors were not filed or the donors were not produced, does not necessarily lead to an inference that assessee was trying to introduce unaccounted money by way of donation receipts. This is more particularly when assessee has applied more than 75% of its donations for charitable purposes ”

33 Head of Income  Whether the unexplained cash credits are referable to a business or not will have to be decided on the facts of each case. If there is no source of income other than the business, which disclosed the cash credits, the presumption is that these credits represent income from the same business - Lakhmichand Baijnath 35 ITR 416 (SC) Rajshree Cinema Pvt. Ltd. 247 ITR 76 (M.P.) Margaret’s Hope Tea Co. Ltd. 201 ITR 747 (Cal.) Daulatram Rawatmull 64 ITR 593 (Cal.)  Relevance of Head of Income Telescoping Carry Forward and Set Off Exempted Income and Deductions 2

34 Head of Income  Relevance of Head of Income - Telescoping: Benefit of telescoping available: 222 ITR 768 &19 Txmn 533 : In case where 2 additions are made i.e on account of suppressed profits & unexplained cash credits. It is open to assessee to prove that suppressed profits during year had been brought in as cash credits and, therefore, one is to be telescoped into the other and there can be only one addition - Exempted Income and Deductions : DHC in Raunaq Education Foundation 294 ITR 76: Held Undisclosed Income u/s 68 is eligible for exemption u/s 10(22) of the Act since words “derived from” are not used there under (the Underlying ratio can be applied to contend that undisclosed/unexplained Income u/sec (s) 68/69 etc can be treated/tagged as business income (if facts justify) and hence eligible (if facts justify) for consequential Benefit of carried forward loss set off etc) - Carry Forward and Set Off 2

35 Section 68 v/s. 271(1) (c) 2 Bhalotia Engineering Works Pvt. Ltd. 275 ITR 399 (Jharkhand) – Section 269SS was inserted with view to prevent transactions in black money & to ensure payments of Rs. 20,000 & above are traceable through bank. If mischief that is sought to be averted is kept in mind, it will be appropriate to hold any payment of Rs. 20,000 or above made to company as share application money should be as provided in section 269SS. Even if share application money cannot be considered to be a loan within the meaning of section 269SS it partakes character of deposit, since it is repayable in specie on refusal to allot shares and is repayable if recalled by the applicant, before allotment of shares & the conclusion of the contract. Hence the acceptance of share application money in cash amounting to Rs. 20,000 or more violates the provisions of section 269SS. ======================================================================= Speedways Rubber P Ltd. 326 ITR 31 (P & H): The assessee accepted share application money being Rs. 20,000 in cash. The Commissioner (Appeals) upheld the stand of the assessee that the amount received was not loan or deposit and no interest was payable. It was further held that the transaction was bona fide and default was of technical nature and in any case, the amount was received from the public and not from directors or shareholders. Hence, it was held that levy of penalty on the assessee under section 271D was not justified.

36 Section 68Section 269SS r/w 271D  Definition If any Sum is found credited in books of accounts and assessee does not after any satisfactory explanation about nature and source then such sum is undisclosed income Prohibits taking or accepting loans or deposits otherwise than by an account payee cheque or bank draft if such amount or aggregate of such amount is Rs. 20,000 or more. If contravention; penalty u/s 271D of amount equal to such loan or deposit  Action Point Identity Credit Worthiness Genuineness Identity Credit Worthiness Genuineness Business Exigency Reasonable cause u/s 273B Section 68 v/s. 269SS r/w 271D 2 Genuine Transaction for urgent business needs in violation of section 269SS/269T - are protected by reasonable cause – Ratna Agencies 284 ITR 609 (Mad); Saini Medical Stores 277 ITR 420 (P&H).

37 Section 68Section 271 (1)(c) assessee offers no explanation about the nature and source has concealed the particulars of his income Explanation offered is not, in the opinion of the Assessing officer, satisfactory furnished inaccurate particulars of such income such person fails to offer an explanation offers an explanation which is found to be false such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bonafide and that all the facts relating to the same and material to computation of his total income have been disclosed by him Section 68 v/s. 271(1) (c) 2 Balbir Singh 164 Taxmann 65 (P&H) - Where NRE gift received by assessee was treated as bogus but tribunal found that gift received by banking channel and from an identifiable source and no evidence with regard to concealment has been placed on record by revenue, tribunal was justified in holding that asseessee has not concealed particulars of income or furnished inaccurate particulars of income and as such no penalty u/s. 271(1) (c) was leviable.

38 21 SECTION 68: 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 apparent is not real lies on the shoulders of the revenue SC in 125 ITR Kishanchand Chellaram;  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  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.

39 21 SECTION 68: CERTAIN BASIC PRINCIPLES  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 ipse- dixit (suspicion etc) - Refer SC in 49 ITR 112 ============================================================  Confrontation & Cross Examination of back material mandatory Kishinchand Chellaram125 ITR 713 (SC).  If assessee requests confrontation of back material and denied opportunity then back material will become unreliable and addition to be deleted. Dhakeshwari Cotton Mills 26 ITR 775 (SC)

40 26 Thank You

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