TaxTMI 
TaxTMI 
TaxTMI 
Links and references:
Section 68 of the Income- tax Act, 1961.
The Negotiable Instruments Act 1881 (in short NIA)- Provisions of relating to cheque have been reproduced with highlights added by author.
The crux and summary:
As per heading of S.68 that is ‘CASH CREDITS’, first impression one get is that it is applicable only in respect to sums received in cash and credited in books of account. This view get strength and enforcement on reading of provisions of the NIA in relation to cheques.
This is because when a payment is received against cheque held in due course, presented to drawee bank (directly for payment or through bank account for transfer or clearing) and is honoured and paid by the drawee bank, on such presentation and in due course, then sum credited in books of account of payee should not be called ‘cash credit’ particularly for allowing wide discretion to the AO to treat sum credited as income of assessee when in fact it is not income.
In this regard, judgments holding that S.68 is applicable in case of cheques, need to be read again and reviewed in light of provisions of NIA to find out whether counsels have pressed properly provisions of NIA and whether Courts have properly considered the provisions relating to cheques while allowing invocation of S.68 for sums credited on realisation of cheque by the payee.
This has become more important because tax authorities are trying to invoke S.68 in respect of any sum credited in books and then applying section 115BBE to impose higher tax. By this way even disclosed regular income is also being doubted and attempt is being made to impose higher rate of tax. While doing so they are ignoring ground realities, limitations of person receiving money and human probabilities from the point of view of person receiving money.
In this regard popular sayings LIKE “Beggars and borrowers cannot be choosers “ , दान की बछिया के दांत नहीं गिने जाते. / don't look a gift horse in the mouth truly reflect position of most of persons who receives money from other persons and hardly have options to force upon person paying money.
Presumption about person paying and ground realities:
In commercial and social world it is presumption that a person paying money is making payment out of proper source belonging to him – it may be his capital, cash flows from operations, borrowed funds, credits etc.
The payee has no authority in any manner to ask or insist upon the person paying to show or satisfy about source of money.
In fact the payee should not have botheration and should not doubt about person paying, what is important for him is that he is receiving a payment, in good faith and without any doubt, and that he accepts payment.
If a person receiving payment asks the payer to inform his source of money, it will be misbehaviour, and will not be even a personal or commercial etiquette expected from any person in the society.
It is ground reality that if a person receiving payment ask the payer information about his source of payment, payment will not be forthcoming, and the receiver may lose chance to get payment.
A receiver has hardly any option to ask payer about source of payment:
Ground reality is that a person who is receiving money from other person cannot ask the person paying to make payment out of proper or particular source. Even a mode of payment cannot be dictated. It is discretion of the person paying money to pay from any of his source or account.
Only due to legal requirement if any particular provision is attracted, the payee can request payer to pay money in particular manner and by particular type of instrument. For example, when law require that a loan or deposit should be accepted by way of A/c payee cheque or draft, the person receiving loan or deposit can request the payer/ lender / depositor to pay by way of prescribed mode. If the payer does not want to make payment in such manner, the payee can at best refuse to accept payment but he cannot insist upon the payer to adopt particular mode or particular source to pay. It is prerogative of person paying whether to pay in particular manner or not.
Loan or deposit:
It may be due to above ground reality that in provisions relating to loan or deposit restrictions are imposed on the person receiving loan or deposit to receive and repay in prescribed modes only. Similarly he has to follow prescribed mode even for repayment.
There is no such provision for person making loan or deposit or receiving repayment of loan or deposit. Provisions for penalty are also provided for person receiving loan or deposit or repaying loan or deposit otherwise than prescribed modes.
S. 269SS and 269T were challenged for this reason also that only one party to the transaction is imposed with the obligation and not the other party. However, Courts did not find this a valid reason to hold such provisions invalid.
Therefore, as per provisions of the Income-tax Act also it is seen that money lender / depositor has no restrictions.
Person receiving any payment cannot ask much to the person paying:
A very important fact and ground reality of commercial, as well as social world is that a person who receives payment or anything from another has hardly any authority to ask the person paying about from where he has received money or thing.
Even in case of gifts popular Hindi saying is “Daan ki bachiya ke daant nahin gine jaate / gin sakte” - दान की बछिया के दांत नहीं गिने जाते. / don't look a gift horse in the mouth
It is also said Beggars and borrowers cannot be choosers. This is also reality for many who borrow money even in a competitive world where bankers and money lender compete against each other, but are not interested to lend money to particular person. When it comes about deal between lender and borrower the lender has his important say in the deal. Only a good borrower can insist some terms and conditions.
When you receive a calf in charity, you do not count it's teeth. It means that beggars are not choosers or have no right to criticize a thing received in charity.
Means a person receiving gift from other cannot ask the donor about source and quality of gift being given.
At most the person receiving can deny to receive gift and say sorry I do not accept your charity / gift.
Same thing apply in case of payment received. A payee cannot ask the person paying / payer to satisfy the payee about source of payment being made. For examples:
(a) A doctor receiving payment from his patient cannot ask his patient from where he has got the money / currency note/ cheque which he is paying to Doctor.
(b.) A CA cannot ask his client to pay his fees from a particular source. He cannot say his client not to issue cheque against cash deposited in account of client. He cannot deny to receive payment even if cash is paid. If he deny, his payment can be delayed.
Similarly a borrower cannot ask the money lender to show proper source of money from which he is lending money.
Human probabilities about person receiving money:
It is not probable that a person who received payment and issued acknowledgement thus became liable to repay or otherwise admit any other commercial liability will do so without receiving money. A person who on receipt of money issues receipt, and admit liability in any form or manner like doing some work for person paying money, or repaying money received after some time or on demand, or issues promissory note or post-dated cheque for repayment or issues bonds or debenture or issues share to the person paying will not do so without actually having received money.
However, in some circles of income-tax department and in some situations like issue of shares, of bonds, the department is not considering the human probability from the point of view of person receiving money. This is even doubted when payment is received by way of A/c payee cheques.
Receipt by way of a/c payee cheque , cheque even bearer cheque payable in cash:
When a payment is received by way of A/c payee cheque, the cheque is received and held as a holder in due course. The holder who is payee written on cheque is person who can only encash the cheque by depositing the cheque in his bank account. His banker presents cheque through clearing system in vogue and applicable to the drawee bank (on whom cheque is drawn by the drawer). The drawee bank check the cheque in all respect, and if there is adequate balance available in account of drawer of cheque, the cheque is honoured and the banker of payee receives payment from clearing house and it is credited to the account of payee, in the account in which he deposited the cheque.
Therefore, in such circumstances so far payee is concerned, his source of money received is the cheque received from drawer, the nature is the purpose for which cheque has been received and acknowledged by payee ( it can be sale proceed of goods or properties, fees, advance , loan , share capital, or gift or any other nature of receipt as may be applicable).
The cheque is honoured and paid by drawee bank, as payment in due course and against balance available in account of drawer of cheque.
Therefore, there should not be any doubt about source of money received on realisation of cheque by the drawee bank.
Even if a cheque payable to bearer or specific payee mentioned on the cheque is payable in cash and the drawee bank has honoured and paid amount of cheque on presentation, in cash, there should not be doubt about source of money received.
Whether S.68 should be applicable in case of sums received / credited on realisation of cheque when honoured by drawee bank:
As per heading of S.68 that is ‘CASH CREDIT’, first impression one get is that it is applicable only in respect to sums received in cash that is it relates to credit entries made in books of account for cash received.
On reading of provisions of the NIA in relation to cheques, also the above first impression get enforcement because when a payment is received against cheque held in due course, presented to drawee bank (directly for payment or through bank account for transfer or clearing) and is honoured and paid by the drawee bank, on such presentation and in due course, then sum credited in books of account of payee cannot be called ‘cash credit’.
In this regard, judgments holding that S.68 is applicable in case of cheques, need to be read again and reviewed in light of provisions of NIA to find out whether Courts have properly considered the provisions relating to cheques while allowing invocation of S.68 for sums credited on realisation of cheque by the payee.
Cheque:
Cheque is a very important mode of payment in commercial world. A draft issued by banker whether called demand draft, manager’s cheque, pay order etc. is also a cheque subject of suitable changes about drawer of such cheque and drawee.
Cheque can be physical cheque, electronic cheque, and truncated cheque.
Provisions of the Income-tax Act, 1961 prescribes some situations in which cheque or particular type of cheque is to be used for making payment or receiving payment.
Payment and receipts by cheque are governed by law namely the Negotiable Instruments Act, 1881 (in short NIA) governs provisions about definition, types, manner and usages of cheques and legal implications are provided including provisions about honour of cheque, dishonour of cheque and consequences and penalties in case of dishonour of cheque.
In view of provisions of NIA, it is generally beyond doubt and payee can say that when a payment is made to him by other party who paid by a cheque, the source of money received on realisation of cheque received by him is balance available in account of drawer of cheque.
In case of cheques, consideration is presumed. The drawer of cheque has legal, commercial and moral obligations. The drawee bank also has some legal and commercial obligations in respect to payment of cheque properly drawn and for which funds are available in account of the drawer of cheque.
In case cheque is dishonoured for insufficient funds, the drawer of cheque has liability to pay amount of cheque and in case of further failure can be penalized if proceeded by payee / holder of cheque.
In view of provisions of NIA it can be said that the person receiving cheque has the cheque as source of credit in his books of account and the source of drawer of cheque is proved when it is honoured by the drawee bank.
Therefore, there on part of payee of cheque there is no further need to prove source of credit, capacity of the creditor / drawer of cheque.