2. BY CA ANIL SATHE

3.  Introduced for the first time in Income Tax Act 1961 – there was no corresponding provision in Income Tax Act 1922  Purpose to tax unexplained credit entries – including moneys outstanding in capital accounts  Receipt of share application money – initial onus on assessee to prove genuineness, creditworthiness and identity  No satisfactory explanation – No automatic deeming fiction – addition depends upon discretion of AO & facts and circumstances of the case  CIT vs. Smt. P. K. Noorjahan 237 ITR 570 (SC) CA ANIL SATHE

4.  Sum found credited  in the books of the assessee  assessee offers no explanation about the nature and source OR  explanation offered by him is not satisfactory - in the opinion of the AO  the sum so credited may be charged as the income of the assessee  of that previous year  Section 68 to 69D – known as “Rules of Evidence” CA ANIL SATHE

5.  Established position of law ◦ Sum credited in the books ◦ Books – maintained by assessee ◦ Assessee to offer prime facie proof/evidence of source ◦ Prima facie proof – qua assessee and qua quantum ◦ Degree of burden of proof to vary depending on the nature of credit and person from whom received ◦ Depends upon relation of assessee with creditor ◦ assessee not bound to establish “source of source” – onus restricted only to the extent of first source ◦ once assessee discharges initial burden the same to shift to the AO ◦ Also applicable to non-commercial loans and share application money CA ANIL SATHE

6.  Assessee should prove identity, capacity of lenders as well as genuineness of transaction  Where lender is assessed to tax, assessee can avoid addition by filing confirmation with particulars of PAN  Precautions to be taken while furnishing confirmation of unsecured loans: ◦ Mode of payment – Cash/DD/ Cheque ◦ Particulars of Bank, if available ◦ Whether interest-bearing loan ◦ Immediate source – If possible CA ANIL SATHE

7.  Independent evidence adduced by revenue calling for information u/s 133(6) or issuing summons u/s 131  Mandatory that the assessee is confronted with the said evidence and an opportunity of cross – examination afforded  However cross-examination to be conducted within a reasonable time by assessee  Failure to avail of opportunity may prove counter productive CA ANIL SATHE

8.  Affidavit is only an assertion by the lender and needs to be corroborated by independent additional evidence  Such evidence may be documentary or oral by way of examination of the deponent CA ANIL SATHE

9.  Credit in the account of partner of firm admitted by the partner  Credit in the books on the first day of the previous year where the assessee is a firm or company and business has not commenced  Sale of jewellery declared under VDIS  Amounts received through gifts from residents or non residents  Amounts received through wills CA ANIL SATHE

10.  Suspicion however great cannot take the place of evidence  Burden to prove apparent is not real lies on the revenue  Addition cannot be made merely on the basis of conjectures and surmises  Theory of human probabilities and surrounding circumstances is to be applied where there is no evidence or the evidence is insufficient CA ANIL SATHE

11.  Initial burden on assessee to explain “nature & source” of credit  Prove identity of shareholder – by way of physical presence, registered address, PAN, etc.  Prove Genuineness – Confirmation letter, bank statements, shareholder register, share application form, share transfer register, etc.  Prove Creditworthiness – Creditor’s IT return, Balance Sheet – Profit & loss A/c CA ANIL SATHE

12.  Initial burden being discharged, onus on the Department to enquire and investigate about the creditworthiness & veracity of transaction – before making addition u/s 68  AO duty bound to prove that such addition on account of share application money or share capital – indeed income of the assessee  No addition u/s 68 – merely because creditor fails to respond to Department notices  Assessee’s AO cannot question creditor’s IT return or himself examine the Profit & Loss A/c – unless the return has been rejected by creditor’s AO CA ANIL SATHE

13.  CIT vs. Lovely Exports (P) Ltd. 216 CTR 195 (SC)  CIT vs. Oasis Hospitalities Pvt.Ltd.333 ITR 119 (Del)  CIT vs. Divine Leasing & Finance Ltd. 158 Taxman 440 (Del)  CIT vs. Value Capital Services P. Ltd. 307 ITR 334 (Del)  CIT Vs. Dataware Pvt. Ltd. (Cal HC)  15 Taxmann.com 225 (Del)  15 Taxmann.com 183 (Bom)  15 Taxmann.com 226 (Kar) CA ANIL SATHE

14.  Where the assessee is company (in which public are not substantially interested) ◦ Sum 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- ◦ the person, being resident in whose name such credit is recorded ◦ also offers an explanation about the nature and source of the sum credited and ◦ such explanation in the opinion of the assessing officer is found to be satisfactory  Exclusion ◦ in regard to sum received from person who is a VCF or a VCC CA ANIL SATHE

15.  Total change from established position of law  Complete deeming fiction to treat initial explanation by assessee company to be unsatisfactory  The further explanation can be offered only by a resident person  Non-resident not entitled to offer any explanation  No mechanism to require AO to enforce co-operation from creditor CA ANIL SATHE

16.  Explanation to be offered by resident person – distinct views o Whether proviso is applicable only to residents and no explanation required to be offered by non-resident OR o That any explanation offered by non-resident deemed to be not satisfactory OR o Confirmation and Identity proof required – as per existing provision – would satisfy the AO  The person offers an explanation – whether physical appearance or through written communication directly addressed to assessee’s AO required CA ANIL SATHE

17.  Where in the financial year immediately preceding the assessment year  the assessee has made investments which are not recorded in the books of account  and the assessee offers no explanation about the nature and source of the investments  or the explanation offered by him is not satisfactory in the opinion of the assessing officer  the value of investments may be deemed to be income of the assessee  for the financial year CA ANIL SATHE

18.  where in any financial year  the assessee is found to be the owner of  any money, bullion, jewellery or other valuable article  and such money bullion jewellery or valuable article or thing  is not recorded in the books of account, if any  maintained by the assessee  and the assessee offers no explanation about the nature and source of acquisition  or the explanation offered by him is in the opinion of the assessing officer not satisfactory  then the money and the value of bullion jewellery or other valuable article  may be deemed to be the income of the assessee for such financial year CA ANIL SATHE

19.  Where in any financial year  Assessee has incurred any expenditure  and he offers no explanation about the source of such expenditure or part thereof  Or the explanation offered by him is not satisfactory in the opinion of AO  the amount covered by such expenditure or part thereof  may be deemed to be income of the assessee for such financial year CA ANIL SATHE

20.  Section 68 requires the assessee to explain credit in books of accounts  Section 69 to 69 B require establishing of sources of investments, money, bullion jewellery or other valuable article, not recorded in books of account.  In section 68 onus is only on assessee to explain the source of the entry  In section 69 to 69B the revenue is to establish that the investment has been made by the assessee  Or the assessee is found to be the owner of money bullion jewellery or any other valuable article  In section 69 C it is essential to establish that the assessee has incurred the expenditure - before the provisions can be invoked CA ANIL SATHE

21.  Inflated stock to bank  Investment by one person in the name of another person  Understatement of purchase consideration  Unexplained household expenditure  Unaccounted marriage expenses  Unverifiable purchases CA ANIL SATHE

22.  Where total income of an assessee includes income referred to in sections 68 to 69D ◦ amount of income taxable shall be aggregate of ◦ amount of income tax calculated on income referred to in 68 to 69D ◦ at the rate of 30% and ◦ the amount of income tax with which assessee would have been chargeable ◦ had his total income been reduced by the aforementioned sums ◦ No deduction in respect of any expenditure to be allowed ◦ in computing income referred to in 68 to 69D CA ANIL SATHE

23. Issues  Earlier section 68 – only a Rule of Evidence – general principle to charge as Income from Business or Income from Other Sources  Now section 115BBE – Charging Section – tax income referred to in section 68  What is the character of income u/s 68 – whether Income from Business or Income from Other Sources – provision de horse of both heads of income  Sec 115BBE – whether reference to character of income or quantum of income CA ANIL SATHE

24.  Whether provision applicable irrespective of slab rates or basic exemptions  No deduction of expenses – but whether set-off of losses allowed  Total income “includes” Income referred to in sec 68 – “Income” different concept than “sum to be treated as income”  Whether Chapter VI-A deduction allowed – or income taxable under similar lines as winning from lottery, puzzles u/s 115BB CA ANIL SATHE