Section 68 allows tax officer to probe nature and source of credited sums and tax unexplained entries as income

HC held that section 68 authorizes the Income-tax Officer to inquire into the nature and source of any sums credited in a company's books, regardless of the assessee's labels, and to treat unexplained or unsatisfactorily explained credits as taxable income in the year of entry. The court doubted prior observations suggesting an officer could not probe the existence of alleged shareholders, clarifying that genuine identification and investment by shareholders yields a capital receipt, but where no satisfactory explanation is offered s.68 may be invoked. The court did not decide on allocation of onus in specific cases.

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Issues Involved:
1. Correct interpretation of section 68 of the Income-tax Act, 1961.
2. Whether the question proposed is one of fact and whether it can be reframed.

Summary:

1. Correct Interpretation of Section 68 of the Income-tax Act, 1961:

The court examined the interpretation of section 68, which states: "Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year." The court clarified that section 68 allows the Income-tax Officer (ITO) to inquire into the nature and source of any sum credited in the books of the assessee, irrespective of the nomenclature or source indicated by the assessee. This includes sums credited as share application money. If the shareholders are found to be non-existent, the ITO can treat the credited sum as the income of the assessee.

2. Whether the Question Proposed is One of Fact and Whether it Can be Reframed:

The court addressed whether the question proposed by the petitioner was one of fact and whether it could be reframed. The Commissioner of Income-tax had revised the assessment order u/s 263, citing lack of enquiry by the ITO into the genuineness of the shareholders. The Tribunal had set aside this order, stating that the ITO had made the necessary enquiries. The court noted that the real issue was whether the Commissioner was correct in concluding that the ITO had not made the necessary enquiries. The court held that this was a question of law and could be reframed to reflect the real controversy. The court directed the Tribunal to state the case and refer the reframed question: "Was the Tribunal right in setting aside the order of the Commissioner u/s 263 of the Income-tax Act and in holding that the assessment order of the assessee could not be said to be erroneous or prejudicial to the RevenueRs."

Conclusion:

The court concluded that section 68 empowers the ITO to inquire into the nature and source of any sum credited in the books of the assessee, including share application money. It also held that the question of whether the Commissioner was correct in revising the assessment order u/s 263 due to lack of enquiry by the ITO is a question of law and directed the Tribunal to refer the reframed question to the court.

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