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When loans may be treated as income
July, 28th 2007

Sections 68, 69 and 69-A are useful tools to fight tax evasion. But they need to be used judiciously.

H.P. Ranina

Loans may be a liability in more ways than one. This is especially so when a loan is taken from an unknown source or from individuals who generally are not involved in the money-lending business. In such cases, the provisions of Section 68 may be invoked by the tax department.

Several cases have been decided from time to time on this issue, the facts of which are never the same. In C.I.T. v. Vishwanath & Co. (I-T Appeal No. 87 of 1999), the assessee-firm was an excise contractor. It filed return for the assessment year 1985-86. The Assessing Officer noticed that the assessee had taken a loan of Rs 61,85,000 from A without any security, and credited the loan amount in cash in the name of A in its books of account.

The Assessing Officer summoned A, the lender, and recorded his statement. The Officer observed that he was employed in the toddy business, and his salary was Rs 500-1,000 per month; he was staying in a rented house on monthly payment of Rs 600. No written document was produced.

After considering the statement, the Assessing Officer was of the view that A had no capacity to lend such a huge amount, treated the loan amount as income from an unexplained source and made an addition under Section 68 in the hands of the firm. On appeal, the Commissioner (Appeals) upheld the addition. On further appeal, the Tribunal observed that there was no doubt about the fact that A was not a man of sufficient means to be able to lend the huge amount of Rs 61,85,000 to the assessee-firm.

The Tribunal, however, observed that it was an acknowledged fact that in the excise business, huge amounts of cash loans were transacted between different contractors for short periods by way of accommodation without charging any interest; such seemed to be the case with regard to the loan accommodated by A to the assessee, and A was simply a front-man for other businesspersons engaged in the business of excise contracts. In view of observation, the Tribunal accepted the genuineness of the transaction.

Just Conjecture

On revenues appeal, the Karnataka High Court held that in the light of various factors mentioned by the Assessing Officer and the Commissioner, it could not be understood, how the Tribunal, having expressed disbelief and suspicion, could subsequently take the view that the transaction was genuine in terms of the excise contract. The acceptance of the genuineness of transaction by the Tribunal despite expressing suspicion could not be accepted in law. The findings of the Tribunal with regard to genuineness on the facts of the case had to be set aside.

The assessee had failed to prove the cash transaction in question. The findings of the Tribunal were nothing but surmises and conjectures, as understood in law. All that Section 68 requires is acceptable proof in a matter such as the instant one. Apart from identity of the creditor, satisfaction has to be with reference to the bundle of facts including the capacity to pay for proving the genuineness of the transaction. The income has to be explained in terms of Section 68. Unfortunately, in the instant case, the assessee was unable to explain to the satisfaction of the assessing authority with regard to the genuineness of the transaction.

Source Unexplained

In M. Sundaram v. C.I.T. (161 Taxman 54), the assessee filed return of income declaring salary, besides income from bank deposits. The Income-Tax authorities conducted a search operation at Canara Bank and State Bank of India. The revenue found a sum of Rs 2,04,27,106 credited at various branches of State Bank of India and Central Co-operative Bank in the name of the assessee.

The assessee explained that the above-said amount belonged to one Mr Verma and one Mr Jain. However, the assessee could not provide the address and other details of the said Mr Verma and Mr Jain. Therefore, the Assessing Officer added the entire amount as unexplained money under Section 69-A as the income of the assessee. The first appellate authority confirmed the order of the Assessing Officer. Aggrieved by the order, the assessee filed an appeal to the Income-Tax Appellate Tribunal. The Income-Tax Appellate Tribunal dismissed the appeal and confirmed the order of the lower authorities.

The Madras High Court held that no businessman will receive a sum of Rs 2 crores without knowing the identity and address. When the assessee claimed that he did not know the addresses of Mr Verma and Mr Jain, it was obvious that he wanted to suppress relevant evidence. The admitted facts were that the entire sum was credited in the bank accounts of the assessee by cash and that he, through his father, withdrew the entire money from the banks just prior to the date of the raid.

The assessee was receiving a small amount as salary. Since the entire amount was deposited in the assessees bank accounts and he was not prepared to disclose the source of its receipt, the natural presumption would be that the assessee was the owner of the entire money. It was for him to prove that the money did not belong to him. The assessee failed to prove that the money did not belong to him and, hence, the authorities were right in assessing his income under Section 69-A of the Act.

The scope of Section 68 has been explained by the Supreme Court in C.I.T. v. P. Mohanakala (161 Taxman 169). According to the Court, Section 68 provides that where any sum is found credited in the books of the assessees for any previous year, the same may be charged to income-tax as the income of the assessees of the previous year, if the explanation offered by the assessees, about the nature and source of such sums found credited in the books of the assessees, is in the opinion of the Assessing Officer not satisfactory.

Such opinion formed constitutes prima facie evidence against the assessees, viz., the receipt of money, and if the assessees fail to rebut the evidence, the same can be used against them by holding that it was a receipt of income.

To conclude, a strict view taken by Courts has made the provisions of Sections 68, 69, 69-A, etc. a handy tool in the hands of the Tax Department to fight tax evasion. However, this tool, potent as it is, needs to be used judiciously and with great circumspection, to ensure that undue harassment is not caused to taxpayers where genuine loans are received.

(The author, a Mumbai-based advocate specialising in tax laws
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