1982 (5) TMI 7 - HC - Income Tax

Tax Court Rules Unexplained Credits as Taxable Income

The court held that sums introduced in the assessee's books for the year ending 31st December, 1961, and cash credits for the previous year could be taxed ... Cash Credits Issues Involved:1. Applicability of Section 68 of the Income-tax Act, 1961, to sums introduced in the books of the assessee for the year ending 31st December, 1961.2. Taxability of cash credits in the books of the assessee for the previous year ending 31st December, 1961, for the assessment year 1962-63.Issue-Wise Detailed Analysis:Issue 1: Applicability of Section 68 of the Income-tax Act, 1961The primary question was whether the sums introduced in the books of the assessee for the year ending 31st December, 1961, but credited before 1st April, 1961, could be taxed for the assessment year 1962-63 under Section 68 of the Income-tax Act, 1961. The Tribunal had held that these sums could not be brought to tax for the assessment year 1962-63.The Tribunal's view was that the law applicable on the first day of April of a particular assessment year should be applied. It noted that Section 68 of the I.T. Act, 1961, had no retrospective effect and thus, the law as of 1st April, 1961, did not incorporate Section 68. The Tribunal further opined that income from undisclosed sources should be taxed in the earliest assessment year in which it became assessable. Therefore, credits occurring in the financial year 1960-61 could only be considered for the assessment year 1961-62.However, upon review, it was concluded that Section 68 applies to any sum found credited in the books of an assessee maintained for any previous year, and if no satisfactory explanation is offered, the sum may be charged to income-tax as the income of that previous year. The court noted that the assessment year under consideration was 1962-63, and the previous year was from 1st January, 1961, to 31st December, 1961. Therefore, the sums credited in the books during this period should be assessed under Section 68 for the assessment year 1962-63.Issue 2: Taxability of Cash Credits for the Previous Year Ending 31st December, 1961The second question was whether the cash credits in the books of the assessee for the previous year ending 31st December, 1961, could be taxed for the assessment year 1962-63. The Tribunal had held that credits falling within the financial year 1960-61 could not be taxed in the assessment year 1962-63.The Tribunal relied on the principle that income-tax is an annual tax and should be applied based on the law effective on the first day of April of the assessment year. It argued that since Section 68 was part of the I.T. Act, 1961, effective from 1st April, 1962, it did not apply to credits from the financial year 1960-61. The Tribunal also referred to decisions from the Supreme Court and other High Courts to support its view that income from undisclosed sources should be taxed in the earliest assessment year in which it became assessable.Upon review, the court disagreed with the Tribunal's interpretation. It emphasized that Section 68 applies to any sum found credited in the books of an assessee for any previous year, and if no satisfactory explanation is provided, the sum may be taxed as income for that previous year. The court clarified that the assessment year 1962-63 and the previous year from 1st January, 1961, to 31st December, 1961, were relevant for applying Section 68. Thus, the cash credits for the previous year ending 31st December, 1961, should be taxed for the assessment year 1962-63.Conclusion:The court concluded that the Tribunal was in error in holding that the sums found in the books of the assessee for the year ending 31st December, 1961, could not be brought to tax for the assessment year 1962-63. Similarly, it held that the Tribunal was wrong in concluding that the cash credits for the previous year ending 31st December, 1961, could not be taxed for the assessment year 1962-63. The court emphasized that the moment a sum is found credited in the books for which no satisfactory explanation is offered, it should be taxed as income for that previous year, regardless of whether the credits represented income from undisclosed sources in an earlier year. The questions were answered in favor of the Revenue, and each party was to bear its own costs.