2024 (9) TMI 1741 - AT - Income Tax

Unexplained Cash Deposits Rejected: Section 68 Inapplicable Without Proper Accounting Records and Substantive Evidence

The SC/Tribunal ruled that Section 68 of the Income-tax Act cannot be invoked when an assessee lacks books of account. Bank passbooks do not constitute ... Addition u/s 68 - assessee had not maintained any books of account - HELD THAT:- The provisions of Section 68 starts with “where any sum is found credited in the books of an assessee maintained for any previous year”. The emphasis is on the sum found credited in the books therefore, if the assessee has not maintained any books of account, then the provisions of Section 68 are not applicable. As relying on BHAICHAND H. GANDHI [1982 (2) TMI 28 - BOMBAY HIGH COURT] considering the fact that the cash was found to be deposited in the bank and since the assessee has not maintained any books of account therefore, in our considered opinion and in the light of the judicial decisions discussed hereinabove provisions of Section 68 are not applicable and therefore no addition could have been made by the AO u/s 68. Appeal of the assessee is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal are:Whether the provisions of Section 68 of the Income-tax Act, 1961 (hereinafter 'the Act') are applicable when the assessee has not maintained any books of account;Whether a cash deposit reflected only in the bank passbook, but not recorded in any books of account maintained by the assessee, can be treated as unexplained cash credit under Section 68;Whether the Assessing Officer (AO) was justified in making an addition of Rs. 30,83,300/- under Section 68 based on cash deposits in the bank without any supporting books of account;Whether the enhancement of addition by Rs. 8 lakhs by the Commissioner of Income Tax (Appeals) (CIT(A)) under Section 68 was justified;Whether reliance on bank passbook alone, without corresponding books of account maintained by the assessee, can sustain additions under Section 68.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Applicability of Section 68 when no books of account are maintained by the assesseeRelevant legal framework and precedents: Section 68 of the Act applies 'where any sum is found credited in the books of an assessee maintained for any previous year.' The phrase 'books of account' was inserted by the Finance Act, 2001, and includes ledgers, day-books, cash books, account books, and other records, whether in written form or electronic data storage. The applicability of Section 68 hinges on the presence of such books maintained by the assessee.The Bombay High Court in Bhaichand N. Gandhi 141 ITR 67 held that a bank passbook is not a book of account maintained by the assessee but is a record maintained by the bank. The relationship between banker and customer is debtor-creditor, not trustee-beneficiary, and the passbook is merely a copy of the bank's records, not maintained under the instructions of the customer. Therefore, sums reflected only in the bank passbook and not in the assessee's books do not fall within the ambit of Section 68.Coordinate benches of the Tribunal have followed this principle in cases such as Mehul V. Vyas Vs. ITO 164 ITD 296 (Mumbai), Smt Manshi Mahendra Pitkar Vs. ITO 160 ITD 605 (Mumbai), and Asha Soni Vs. DCIT. The Jaipur Bench in Dr. Vishan Swaroop Gupta Vs. ITO also affirmed this position.CBDT's Standard Operating Procedure (SOP) dated 10.01.2018 reiterates that Section 68 applies only if the assessee has maintained books of account where the sum is credited.Court's interpretation and reasoning: The Tribunal emphasized the statutory language of Section 68, which requires the sum to be credited in the books of the assessee. Since the assessee in the present case did not maintain any books of account, the provision could not be invoked. The Tribunal relied heavily on the authoritative pronouncement of the Bombay High Court in Bhaichand N. Gandhi and subsequent consistent decisions.Key evidence and findings: The AO discovered cash deposits of Rs. 30,83,300/- in the assessee's ICICI Bank account via AIR information. However, the assessee had not maintained any books of account reflecting these deposits or any other transactions.Application of law to facts: Since no books of account were maintained, the cash credits in the bank passbook alone do not satisfy the statutory condition for invoking Section 68. The AO's addition and CIT(A)'s confirmation and enhancement under Section 68 were therefore not sustainable.Treatment of competing arguments: The assessee's counsel argued that Section 68 cannot apply without books of account, relying on judicial precedents and CBDT SOP. The Revenue's representative supported the AO's addition but failed to distinguish the binding precedents or the statutory requirement of books of account. The Tribunal found the assessee's arguments legally sound and the Revenue's contentions unpersuasive.Conclusion: Section 68 is inapplicable in the absence of books of account maintained by the assessee. The addition made under this provision must be deleted.Issue 2: Justification for addition and enhancement under Section 68 based solely on bank depositsRelevant legal framework and precedents: Section 68 requires unexplained cash credits to be reflected in the books of account. Mere deposits in bank accounts, without corresponding entries in books maintained by the assessee, cannot be treated as unexplained credits under Section 68. The case law cited above supports this principle.Court's interpretation and reasoning: The Tribunal noted that the AO's addition was based solely on cash deposits in the bank account. Since the assessee did not maintain books, the deposits were not 'credited' in any books of the assessee. The CIT(A)'s enhancement of the addition by Rs. 8 lakhs was also made under the same misapprehension of law.Key evidence and findings: The bank passbook showed deposits; no books of account existed to record these sums. The assessee failed to provide any explanation or source for the deposits, but the statutory condition for Section 68 was not met.Application of law to facts: The AO and CIT(A) erred in applying Section 68 without the existence of books of account. The Tribunal held that the addition and enhancement lacked legal basis and deserved deletion.Treatment of competing arguments: The Revenue argued that unexplained cash deposits justify additions under Section 68. The Tribunal rejected this, emphasizing the statutory language and judicial precedents requiring sums to be credited in books maintained by the assessee.Conclusion: The addition and enhancement under Section 68 based solely on bank deposits without books of account are not sustainable.3. SIGNIFICANT HOLDINGSThe Tribunal held:'The provisions of Section 68 start with 'where any sum is found credited in the books of an assessee maintained for any previous year'. The emphasis is on the sum found credited in the books therefore, if the assessee has not maintained any books of account, then the provisions of Section 68 are not applicable.''The pass book supplied by the bank to the assessee in the present case could not be regarded as a book of the assessee, that is, a book maintained by the assessee or under his instructions.''Considering the fact that the cash was found to be deposited in the bank and since the assessee has not maintained any books of account therefore, in our considered opinion and in the light of the judicial decisions discussed hereinabove provisions of Section 68 are not applicable and therefore no addition could have been made by the AO u/s 68 of the Act which deserves to be deleted and the enhancement made by the ld. CIT(A) again u/s 68 of the Act also deserves to be deleted.'Core principles established:Section 68 applies only where sums are credited in books of account maintained by the assessee;Bank passbooks are not books of account of the assessee and cannot be treated as such for invoking Section 68;Absence of books of account precludes the applicability of Section 68, even if there are unexplained cash deposits in bank accounts;Additions under Section 68 without satisfying these conditions are unsustainable.Final determinations:The addition of Rs. 30,83,300/- made by the AO under Section 68 was deleted;The enhancement of Rs. 8 lakhs made by the CIT(A) under Section 68 was also deleted;The appeal of the assessee was allowed accordingly.