2015 (3) TMI 1450 - AT - Income Tax

Addition under s.68 upheld for credited book entry despite unencashed cheque; assessee must explain paper transactions

The DCIT, Circle 4 (1), Chandigarh Versus M/s Metlonics Industries (P) Ltd. Chandigarh

ITAT held that an addition under s.68 was correctly made where a sum was credited in the assessee's books, even though the cheque was not encashed; the ... Additions u/s 68 - entry of a sum credited in the books of account - physical receipt of sum - Scope of real income theory - CIT(A) deleted addition as no credit to the bank account of the appellant company - assessee submitted that in this case admittedly the cheque received was never encashed by the assessee company and simply because there is an entry of a sum credited in the books of account will not attract the provisions of section 68 - HELD THAT:- Section 68 would get invoked the movement the entry for credit of a sum is made in the books of account. CIT(A) totally misdirected himself to the extent and meaning of section 68 by observing that this section can be invoked only when the money is credited in the bank account. Perusal of the section which has been reproduced in the above decision clearly shows that provision can be invoked once a credit is made in the books of account. Therefore, in our opinion the addition has been correctly made by the AO. Assessee had vehemently argued that assessee has not actually received the money and it was only a paper transaction - As no further details have been given why this paper transactions were carried out by the assessee. The Hon'ble Supreme Court has clearly observed in the case of CIT v Best and Co. (P.) Ltd. [1965 (11) TMI 23 - SUPREME COUR]] that if some information was in the possession of assessee then it is only the assessee who can disclose such information and Revenue authorities would have the right to take adverse inference in the absence of reasons given for hidden information - unless and until the assessee is ready to explain why paper entries were made in the books of account, no cognizance can be taken of this contention and section 68 has to be invoked once a sum is found to be credited. Unless and until the real income come to the assessee, the assessee cannot fasten with a liability - Generally speaking there is no doubt that it is only the real income which can be taxed but this theory has to be understood subject to some limitations. If particular item of income is taxable because of some specific provision then same cannot be held to be not taxable on the basis of real income theory. Similarly u/s 2(22)(e) deemed dividends are subject to tax. This section provides that if a loans is given by a company to its substantial share holder i.e. a share holding more than 10% of the share holding out of the accumulated profits, then such loan would be treated as ‘deemed dividend’ i.e income of the assessee. Normally, a loan cannot be treated as income but because of this deeming provision in a particular set of circumstances, the loan may also be treated as income. Merely because real income is not accrued to a particular person will not make a specific item exempt because of this theory if the clear provision is there. Otherwise, for example the loan taken by a share holder is not income in the commercial sense but is taxable u/s 2(22)(e) in some circumstances. Therefore, wherever a specific provision is there to tax a particular item of income is there, then such provision cannot be rendered meaningless on the basis of real income theory. On the basis of this discussion, we are of the opinion that section 68 cannot be rendered meaningless simply on the basis of real income theory. Appeal filed by the Revenue is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether section 68 applies where a sum is shown credited in the books of account but no corresponding credit appears in the assessee's bank account (i.e., whether physical receipt into bank is a prerequisite for invoking section 68). 2. Whether a journal or 'paper' entry (including entries shown as 'cheque pending realization/encashment') that results in a credit in the books can be treated as a sum 'found credited in the books of an assessee' within the meaning of section 68. 3. Whether the assessee discharged the onus under section 68 by producing explanations/undertakings and a confirmatory letter from the alleged creditor, or whether adverse inference may be drawn in the absence of satisfactory explanation about identity, genuineness and capacity of the creditor. 4. Whether the 'real income' theory (i.e., that only real funds actually received can be taxed) can negate the operation of section 68 where entries are alleged to be paper transactions. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Requirement of bank credit for invocation of section 68 Legal framework: Section 68 applies where 'any sum is found credited in the books of an assessee' and, if explanation about nature and source is not offered or is unsatisfactory, the sum may be charged as income. Precedent treatment: The Court examined prior decisions where the meaning of 'credit' and the scope of section 68 have been addressed, including higher court authority holding that the provision operates when a sum is credited in books and that onus lies on the assessee to explain identity, genuineness and capacity of creditor, and that adverse inferences are permissible where material is within the assessee's exclusive possession. Interpretation and reasoning: The Tribunal held that the plain language of section 68 requires only that a sum be credited in the books; there is no statutory requirement that the sum must have been credited to the bank account of the assessee. The CIT(A)'s observation limiting application of section 68 to sums credited in bank accounts was held to be a misdirection. The Tribunal reasoned that if the books show a credit entry for a sum, section 68 can be invoked irrespective of whether bank funds moved, because the statutory trigger is the bookkeeping credit. Ratio vs. Obiter: Ratio - section 68 is triggered by a credit in books; lack of bank credit does not preclude invocation. Obiter - discussions of particular facts as to bank status that do not decide broader classes of transactions. Conclusion: Section 68 may be applied even where no corresponding bank credit exists, provided a sum is found credited in the books and explanation is unsatisfactory. Issue 2 - Treatment of journal/paper entries and entries shown as 'cheque pending realization/encashment' under section 68 Legal framework: Section 68 contemplates 'any sum found credited' - the provision does not distinguish between types of book entries (cash credit, journal entry, etc.). Precedent treatment: The Tribunal reviewed decisions where journal entries were considered and decisions where entries at commencement of business were treated differently; it emphasized authorities that the character of the bookkeeping entry (journal versus cash) does not, by itself, exclude applicability of section 68. Interpretation and reasoning: The Tribunal rejected the submission that section 68 applies only to cash or bank credits. It emphasized that the statutory language is broad and includes any credited sum. Even when an entry is described as 'cheque pending realization/encashment' or otherwise not actually encashed, such entries, if credited in the books, can give rise to an obligation on the assessee to explain identity, genuineness and capacity of the creditor. Further, where the assessee alone possesses facts explaining why such paper entries were made, adverse inference may be drawn if those facts are not produced. Ratio vs. Obiter: Ratio - book entries that credit a sum (including journal or 'cheque pending' entries) fall within section 68's scope when not satisfactorily explained. Obiter - comparison to distinct factual contexts where wrong entries arose from demonstrable accounting errors and were explained to the satisfaction of authorities. Conclusion: Paper or journal entries and items shown as 'cheque pending realization/encashment' are within the ambit of section 68 if credited in the books and not satisfactorily explained. Issue 3 - Onus on the assessee to prove identity, genuineness and capacity of the creditor; admissibility of adverse inferences Legal framework: Judicial authority recognizes that where sums are found credited in books, prima facie evidence of receipt exists and the onus to offer a satisfactory explanation shifts to the assessee; the explanation must address identity, genuineness and capacity of the creditor and source of funds. Precedent treatment: The Tribunal referenced higher court rulings that require objective application of mind by the AO when rejecting explanations and allow adverse inference where material is exclusively within the assessee's possession and not produced. Interpretation and reasoning: The Tribunal found the assessee's submissions (undertaking from the creditor and a confirmatory letter) insufficient to discharge the onus. The record showed the alleged creditor's own return reflected inadequate means to advance the amount, and the cheque was not encashed; the Assessing Officer's view that the explanation was an afterthought and that material to explain the 'paper transaction' lay within the assessee's knowledge was accepted. The Tribunal affirmed that absent credible, probative evidence on identity, genuineness and capacity, the addition under section 68 is sustainable and adverse inference is proper. Ratio vs. Obiter: Ratio - burden shifts to assessee to provide satisfactory, objective evidence of identity, genuineness and capacity; failure permits addition. Obiter - commentary on the sufficiency of a specific type of corroboration in varying factual matrices. Conclusion: The assessee failed to discharge the onus; adverse inference and addition under section 68 were justified. Issue 4 - Applicability of the 'real income' theory to defeat section 68 additions where funds did not actually reach assessee Legal framework: The 'real income' theory posits that only actual receipts represent taxable income; however, the Act contains deeming provisions (including section 68) which may operate irrespective of whether funds physically moved into bank accounts, provided statutory conditions are met. Precedent treatment: The Tribunal reviewed authorities recognizing limits to the pure 'real income' approach where statutes create deeming or charging consequences (e.g., treatment of notional income, deemed dividends). It noted higher court decisions that require pragmatic assessment of accrual and human probabilities but do not render deeming provisions inapplicable. Interpretation and reasoning: The Tribunal observed that while real income theory is generally relevant, it cannot override a clear statutory provision that treats credited sums as income if not satisfactorily explained. The Tribunal explained that specific provisions may tax deemed receipts even if no real money was realized, and section 68 is such a provision that focuses on credited sums in books rather than exclusive reliance on actual cash movements. Ratio vs. Obiter: Ratio - real income theory does not negate the statutory operation of section 68; where a statutory deeming provision applies, its operation must be given effect. Obiter - illustrative references to other deeming provisions and notional income contexts. Conclusion: The assertion that no real funds arrived does not preclude invocation of section 68 where a credited sum in books is not satisfactorily explained. Overall Conclusion of the Court/Tribunal The order of the CIT(A) that restricted the operation of section 68 to sums credited to the bank account was set aside. The Tribunal held that section 68 is triggered by any sum found credited in the books; the assessee failed to provide satisfactory explanation as to identity, genuineness and capacity of the creditor and about the nature of the alleged paper transaction; adverse inference was permissible; and the addition under section 68 was sustained. The Revenue's appeal was therefore allowed.