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The crunch of cash credits
December, 09th 2006
Sections 69, 69-A, 69-B and 69-C of the Income-Tax Act are useful tools that treat unexplained investments and unexplained expenditure as deemed income by a fiction of law where the nature and source of investment or expenditure have not been satisfactorily explained.

The Government proposes to pull up its socks and tighten the tax administration for ensuring that amounts taxable as income do not escape the taxman.

Useful tools for doing so are the provisions of Sections 69, 69-A, 69-B and 69-C of the Income-Tax Act, 1961, which treat unexplained investments, unexplained money, bullion, etc., and unexplained expenditure as deemed income by a fiction of law where the nature and source of investment, acquisition or expenditure, as the case may be, have not been satisfactorily explained.

In these cases, the source not being known, such deemed income will not fall even under the head `Income from other sources'; consequently, the deductions that are applicable to the income under any head will not be permitted.

Further, the fiction created under Sections 68, 69, 69-A, 69-B and 69-C cannot apply to penalty proceedings to raise a presumption of concealment of such income.

Assessing cash credits

Though Section 68 provides that the previous year for which the books are maintained may be taken as the previous year for assessing the cash credits, it does not further provide that the cash credits should necessarily be deemed to be the profits of the business for which the books are maintained; the cash credits may be assessed either as business profits or as income from other sources.

Under this Section, even in such a case the unexplained cash credit may be assessed as the income of the accounting year for which the books are maintained.

The assessee can furnish explanations and if any one of them is accepted, the cash credit cannot be charged as the income of the assessee.

The Section requires that the Assessing Officer must be satisfied that the explanation offered by the assessee is genuine; but it also provides that in the absence of a satisfactory explanation, the unexplained cash credit `may' be charged to income-tax - therefore, the lack of cogency of the explanation does not automatically result in deeming the amount credited in the books as income of the assessee.

The Madras High Court considered the applicability of Section 68 where a taxpayer had received gifts. In A. Rajendran v. Assistant Commissioner, Special Investigation ((2006) 155 Taxman 364), the assessees filed their return of income for the relevant assessment years.

While completing the assessment of the assessees, the Assessing Officer found that certain sum was credited in the books of account of those assessees. The assessees explained that the amount credited in their respective accounts represented gift received from an NRI.

The assessees explained further that the donor was an industrialist in the UK and as one of the assessees had rendered help to the donor's father during difficult times, the donor had made the gifts. They also stated that all the transactions were through normal banking channels and the respective receipts had been credited into the accounts of the assessees and the donor was an income-tax assessee in the UK as well as in India.

NRI gifts

The Assessing Officer had summoned the donor. The donor in his statement had saidthat as a gratitude for the help rendered by one of the assessees to his father, which enabled him to come up in life and that too, to such an exalted position, he had made the gift.

The Assessing Officer, however, rejected the explanation offered by the assessees and he also did not believe the statement of the donor on the ground that there was nothing on record to show that the gifts received by the assessees were sent by the donor in his own name as the letters which were written contained some other name. The Assessing Officer, therefore, proceeded to add the gifted amount as income of the assessees from an undisclosed source by invoking Section 68.

The High Court held that the donor was identified as an industrialist in the UK. It was shown that the donor was the son of a poor driver, who was driving a car of one of the assessees.

The assessees were closely related. The donor was a young boy at that time and having regard to his family poverty, one of the assessees had been helping the donor's father to meet both ends, which enabled the donor's father to give him good education.

The Tribunal had held that the donor had produced all the materials in proof of his claim. Therefore, it was clear that the assessees had established the identity of the donor, namely, the source, the solvency of the donor and his love and gratitude for the family of the assesses, which prompted him to make the gift.

In fact, the Assessing Officer himself had referred to a letter of the donor, which showed that, as one of the assessees was constructing a new house, and as it was in progress, any additional resources would enhance the construction progress and that was why he was sending a gift.

The Madras High Court referred to the decision in Nemi Chand Kothari v. C.I.T. (264 ITR 254). The Guwahati High Court held that in order to establish the receipt of a cash credit as required under Section 68, the assessee must satisfy three conditions: (1) identity of the creditor, (2) genuineness of the transaction and (3) creditworthiness of the creditor. Once this is established, then the assessee would be considered to have discharged his burden.

Case in point

Applying this test, the Madras High Court held in the A. Rajendran case that the donor had shown his love and gratitude for the family of the assessees by making the gift.

Further, he had routed the transactions through banking channels and he had confirmed in his declaration that he had made the gifts. In these circumstances, the Court held that it was not for the income-tax authorities "to go one step further and read his mind as to why he had decided to make a substantial gift".

Simply because close relatives were not the beneficiaries of such gifts, the gift itself would not be invalidated in law.

On the facts of the instant case, rejection of that explanation was definitely due to arbitrary and unreasonable exercise of power by the tax authorities.

Thus, the Tribunal was not justified in holding that the gifts received by the assessees through normal banking channels were not genuine. Hence, the gifted sum was not liable to be assessed under Section 68.

While this decision is based entirely on the interpretation of Section 68, it needs to be pointed out that gifts received on or after September 30, 2004 from persons who are not relatives would be liable to tax under Section 56(2)(v). This provision treats amounts received as gifts from non-relatives as income from other sources, even in case of bona fide gifts, where the donor confirms the genuineness of the gifts.

Therefore, Section 56 prevails, where Section 68 fails and the amount would be taxable as income.

H. P. Ranina
(The author, a Mumbai-based advocate specialising in tax laws)

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