SECTION

68

Historical

No corresponding provision in Act of

1922.
Sec.68 gives legislative recognition to
a long line of judicial decisions.

Purpose

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To give more powers to I. T.

Authorities by enacting a deeming
provision
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Why deemed income

Stages of tax evasion :
a) Manipulation of P & L a/c
b) Less profit & less tax BUT less
capital as well
c) Accumulation of assets out of books

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Why deemed income

Use of accumulated funds without
payment of taxes :
a) Ploughed back to books loans/gifts /
exempt income / share application
b) Invest out books wholly / partly
c) Expenses out of books
d) Keep it in cash, valuables etc.
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Why deemed income

Problem that even after detection A.O.
had to prove :
a) It is an income
b) How did the income accrue ?
c) To which year does income belong ?
d) The onus to prove is on A.O.
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Why deemed income

The concept of deemed income has the
following advantages :
a) No need to prove how income accrued
b) Year of earning income no more
necessary
c) Primary onus shifts to assessee
d) Such deployment of funds treated as
income
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Deemed income
Sec. 68 : Cash credit 1961
Proviso 2012
Share application - 2012 ( s.56 (2)viib )

Sec.69 :
Sec.69A
Sec.69B
Sec.69C

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Unexplained investment 1961

: Unexplained money etc. 1964
: Unexplained inv. & money - 1965
: Unexplained expenditure etc. 1975
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Section 68
The need

to introduce bogus cash credits in

books arises due to :
a) requirement of accounted funds
for working capital needs.
b) desire to recycle idle unaccounted
funds in garb of business credits.
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SECTION 68
any sum...
Sum of money cash / cheque /draft etc.

Credited into books ...

Recd. from a creditor.
maintenance of books is necessary .
Most important is cash book - includes
bank book

For a previous year

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now F.Y.
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 Offer of explanation...
By assessee
No explanation about its nature and source
Expln. not satisfactory

may be charged as income...

`may` denotes discretion but discretion is a
judicious discretion

Section 68 not applicable

In a case where no books of accounts are
maintained.
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BURDEN OF PROOF
Sec 68
Onus on a to explain nature and source
of credit entry and show that it is not his
income - a negative burden on a because
facts are in his special knowledge (sec
106 Evidence Act)
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 As such, a credit entry

operates as an evidence against a
raising a rebuttable presumption
( Sheelekha Banerjee Vs CIT
49 ITR 112 S.C.) Lack of explanation or unsatisfactory
explanation A.O. to invoke sec. 68. But it is not
necessary for A.O. to establish source of
credit
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(CIT Vs Devi Prasadnadt72 ITR 194 S.C.).

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The Nature Of Onus

Primary onus is on the assessee to establish :
(a) Identity of the creditor
(b) Credit worthiness or financial
capacity of the creditor
(c) Genuineness of transaction
(Shankar Ind. vs. CIT 114
ITR 689 (cal.)

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Once this primary onus is discharged it is

for A.O. to investigate further.
The onus often shifts from assessee to
A.O. and vice versa.

Principles of Natural Justice must be

followed appropriately.
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Nature of Enquiry/Investigation u/s 68

(a) Identity of - Creditor must be an
creditor
existing person
- when only address of creditor
is given A.O.to make
further inquiries.
- when a person is produced
A.O. to
verify his identity.
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(b) Credit worthiness of Creditor :

- A.O. to inquire whether creditor has
adequate financial
capacity - from I.T. records or otherwise.
- In cases of doubt creditor should be
examined in detail.
- Normally, a should be asked to produce
the creditor instead of summoning him
directly.
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c) Genuineness of Transaction
To be ascertained from surrounding
viz...

circumstances

Nature and extent of lenders business

Whether payment by crossed a/c payee
cheque
Whether interest paid and whether TDS
deducted
Facts regarding repayment,security
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etc.
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Enquiry u/s 68 (contd.)

Bank books and cash books of assessee as
well as the creditor should be examined.In
case of drafts etc.enquiry may also be made
from the issuing bank.Payment by cheque is
not sufficient to make the transaction
genuine.
For a credit to be accepted all 3 conditions
have to be satisfied cumulatively.
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Some other relevant points

Entries on own account
A) Sec.68 covers the case of an entry in
own capital account.
B) Cash withdrawn from bank and
deposit entries made in the cash
book can be examined for the
purpose of sec.68
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Capital introduction by partner in Firm

Application of Sec.68 in the hands of the

firm is not appropriate.
The right approach would be to invoke
Sec.69/69A in the hands of the partner.

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 Sum credited in the books of an a...

Means books of the a only e.g. Credit in the
capital a/c of a partner in the books of the firm,
partner not maintaining separate books, addition
u/s 68 not to be made in the case of the partner
(Sunderlal Jain Vs CIT 117 ITR 316 [All])

Credit in the bank pass book

Is not hit by Section 68.
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 Creating fictitious entities (capital build up

cases)
Filing ROI for fake persons
Bogus disclosure under VDS
Creating family controlled Trusts/Invest.Cos.
and building capital by fake donations/incomes.

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Peak Credit
Is a tool which prevents double taxation
of the same amount. They represent
rotation of the same amount.
The computation of peak credit is
basically based on common sense and
application of logic.
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Peak

Credit

In an account containing periodic credits and

debits there could be a claim that the source for
some credits is explained by the preceding
debits - and the aggregate of credits should not
be considered u/s 68.
Such a plea is generally acceptable UNLESS
there is something to show that an earlier with
drawl could not be available on the date of
subsequent deposit.
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Peak Credit
Application depends on facts of each case
Benefit of peak theory to be given only if
recycling of funds is proved.
The onus of proving that with drawls
were not utilized and were available for
subsequent deposits, lies on the assessee.
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Unexplained cash credit & estimated

business income
Whether both may be taxed !
Nothing in Law to prevent that , if
circumstances so require - A.O. to judge.
( Kale khan Md.Hanif vs. CIT
50 ITR 1 (S.C.) )
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Cash credit on first day of accounting

year / incorporation
Sec.68 - as against some decisions to the
contrary under the 1922 Act permits to assess such a cash credit, if
found unexplained.
However, it is to be assessed as deemed
income under the head IFOS.
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Share Capital of a Company

Provisions of Sec.68 are applicable in the
case of Share Capital in the hands of the
company, when the shareholders are found
to be bogus.
( CIT vs. Sophia Finance Ltd.
205 ITR 98 Delhi )
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GIFTS
Sec. 68 can also be applied in the
case of Gifts if transaction
is not proved beyond doubt.

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Telescoping
In a case where an assessee claims that the
cash credit is relatable to intangible
disallowances out of business expenses
made in earlier years, the onus lies on the
assessee to establish a `direct nexus`
between the two.
A.O. to judge in the light of circumstantial
evidence
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Voluntary Disclosure Schemes

Immunity granted only to the Declarant and
not to the debtor.
Therefore,nature and source of money can
be examined in the hands of the assessee
even if it is claimed that the money came
out of disclosure made by the creditor under
the Amnesty scheme. (Kanhaiyalal v. CIT 130
ITR
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244 (S.C.)
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Presumption u /s 132(4A)
cannot be claimed by an assessee for
escaping from the provisions of Sec.68
Genuineness of cash credit found in the
seized documents has to be properly
explained.
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Penalty beyond period of limitation

possible
An a takes a plea - certain cash credits
covered by certain earlier intangible
additions.
Then,for the purpose of sec.271(1),expln.2
provides for levy of penalty for concealment
against him in respect of the year of
intangible addition although the prescribed
period of limitation had expired.
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Sec.69

Unexplained Investments

Background :
No similar provision in 1922
Act.
Introduced in 1961 Act on the basis of
recommendation of Law Commission.
However, judicial opinion was already there
for treating unexplained investments as
undisclosed income of the assessee.
(Madras H.C .in a case for A.Y.1955-56)
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Elements of Sec. 69
- where in the F.Y.preceding the A.Y.
- the `a` has made an investment which is not
recorded in books,if any,maintained by `a`for
any source and
- the `a`offers no expln.about the nature and
source of such investment or
- the expln. is not satisfactory
then,
- the value of such investment may be deemed
as the income of `a`for such F.Y.
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Scope of Sec. 69
Sec.69
lays down a rule of evidence
similar to sec.68 creating a rebuttable
presumption against the `a`- on fulfilment of
certain pre-conditions.
2) is a deeming provision.
3) applies even to cases where books are not
maintained.
4) onus of estb. the fact and value of
investment is on the A.O.
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Sec.68 vis--vis Sec.69

Sec.68 applies when the `sum` in respect of
which explanation is not accepted, is found
credited in the books of account.
Sec.69 applies to unexplained investments
which are not recorded in the books of
account,if any, maintained by the assessee.
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Unexplained stock-in-trade
whether covered u/s 69 ?
Conflict of judicial opinion
Guj.H.C.- sec.69 cannot be invoked for
unexplained stock.
( Addl.CIT vs. Dahyabhai
Pitambardas & co.1974 Taxation
36(1)25-26 (Guj.)
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Contd.
But Bombay H.C. gave contrary judgement in
Ramanlal Kacharulal Tejmal vs. CIT
(1984) 146 ITR 368 (Bom.)
Similar view : 157 ITR 451 Raj.
107 CTR 27 Cal.
228 ITR 664 Ker.
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Investment by assessee
Investment should be in name of a himself.
If he makes investment in name of some
other person, it is for A.O. to prove that it is
the benami property of the assessee.
In such cases where A.O. is unable to prove
ownership of the assessee, it is advisable to
go for protective assessment also.
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Miscellaneous
Assessee entitled to an opportunity to
explain the investment.
Joint Investments : A.O. to take a fair and
reasonable view in the
circumstances of the case
Investments spread :
over a no. of years
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And when investment recorded in

the books !
Where `a` makes an investment out of his
undisclosed income and records it in his
books - what do you do ?
Sec.69 - not applicable
The answer lies in identifying some
corresponding credit entries and then
applying provisions of sec.68.
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Sec. 69A Unexplained money etc.

Sec.69A analysed :
- in any F.Y.assessee found to be the owner of any
money,jewellery etc.
- ...the value of such money etc, not recorded in the
books,if any ,maintained by him for any source.
AND
- ...the aoffers no expln. about the nature
and
source of such money etc. OR
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Contd.
- the expln .is found to be unsatisfactory
Then,
value of such money,jewellery etc. is
deemed to be the income of the a for such
F.Y.
Sec.69A - is also a deeming provision.
Sec.69A applies to movable assets only.
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Presumption as to ownership
For sec.69A to apply, assessee should be found
to be the owner of ..
There is a presumption that if a person
is found to be in possession of something, he
is deemed to be its owner and the onus would
be on him to show otherwise - sec.110 of
Evidence Act.
Various High Courts have confirmed
application of this principle to sec.69A.
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Sec.69 B - Amount of investments etc.

not fully disclosed in books of account
Ingredients:
- a has made investment or a is found to be
owner of money,jewellery etc.
- found that amount spent on such investment
or valuable etc.exceeds the amount recorded in
books of account.
AND
- either aoffers no expln.or expln. is not
satisfactory.
contd.
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Contd.
when all these circumstances exist, the excess
amount may be deemed to be the income of the
assessee for the concerned F.Y.
Again, sec.69 B is a legal fiction - a deeming
provision.
Onus of proving these circumstances is on
A.O.- to show that real investment is more.
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A common example
where there was a discrepancy between the
value of the stock disclosed to the bank and the
value shown in the books of account and no
satisfactory explanation regarding such
discrepancy was forthcoming, the amount of
discrepancy has been held assessable under
sec.69 B. (Dhansiram Agarwalla v.
CIT (1993) 201 ITR 192
Gauh.) SLP
dismissed.
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Sec.69 A and Sec.69 B - fields of

operation
Sec.69 A comes into oparation when A.O. finds that the value
of the acquisition of jewellery etc. is not recorded in the
books of account.
Sec.69 B comes into operation where such value is not fully
recorded.
Clearly, for sec.69 B to apply maintenance of books is
necessary and the sec. applies to movable as well as
immovable assets.

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Sec.69 C : Unexplained Expenditure

Elements :
in any F.Y. a has incurred expenditure
he offers no expln. about the source of
such expenditure or part thereof or
the expln. offered is not satisfactory,
the amount covered by such expenditure
may be deemed as income for the F.Y.
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Scope of Sec.69 C
Sec. merely codifies normal rule of
presumption relating to matters in special
knowledge of a( sec.106 Evidence Act)
Primary onus on A.O. to estb. fact of
expenditure and extent of expenditure
sec.69 C can be used on basis of information
gathered u/s 133A(5) or u/s132
proviso added w.e.f. A.Y. 99-2000.
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Miscellaneous
Provisions merely clarificatory
Expenses related to marriages etc. :
In order to invoke sec.69 C, the primary
requisite to be estb. is that it is the assessee
himself who has incurred the expenditure in
question - in India it is customary that such
expenditure is often shared.
contd.
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Contd.
In a case where there is no direct evidence to
show that assessee has incurred a definite
amount of expenditure, it is possible for A.O.
to make a fair estimate and assess
accordingly.
For making an estimate detailed
enquiry,survey or investigation is desirable.
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Sec.69 D Amount borrowed or

repaid on hundi
Sec.69 D - w.e.f. 1-4-77
A hundi in common parlance, denotes an
indigenous form of bill of exchange, in a
vernacular language, used by the business
community in India.
Elements of sec.69 D
- where any money is borrowed on
hundi or
contd.
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Contd.
- any amount due thereon is repaid
otherwise than through an a/c payee cheque;
- then the amount so borrowed or repaid
shall be deemed to be the income of the
person borrowing or repaying the amount,
for the P.Y.in which such amount was
borrowed or repaid
Proviso - same hundi loan cannot be added
twice - at the stage of borrowing and
repayment both.
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Scope of Sec.69 D
Sec.does not refer to an a/c payee D.D. should be treated as an a/c payee cheque.
Expln. to sec. - repayment includes interest
paid.
Sec.69 D - only the borrower is hit by this
provision.
Provision of sec.69 D is limited to the mode
of transaction only.
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Characteristics of hundi transactions

A)There are three parties to the transaction drawer, drawee and payee.Bilateral transactions
are generally not hundis.
B) A hundi is payable to a specified person or order
or negotiable without endorsement by the payee.
C) A holder is entitled to sue on a hundi without an
endorsement in his favour.
Contd.
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Contd.
d) A hundi once accepted by the drawee can be
negotiated without endorsement.
E) If a hundi is lost, owner can claim a
duplicate or a triplicate from the drawer.
F) A hundi is normally in an oriental language
- Madras ITAT refused to accept a document
in English as a hundi.High Court and
Supreme Court refused to intervene.
( CIT v Thiraviarathna Nadar 187 ITR 37 )
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