2025 (9) TMI 278 - AT - Income Tax

Section 68: Assessee's cash deposits treated as unexplained credits where employment and sale-proceeds link not proved

Koneni Reddeppa Naidu Versus The Income Tax Officer, Ward-1, Chitoor District

Koneni Reddeppa Naidu Versus The Income Tax Officer, Ward-1, Chitoor District - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether credits (cash deposits and other bank credits) in the assessee's bank accounts can be treated as unexplained cash credits and added to income under section 68 where the assessee claims the amounts are collections on behalf of two firms and attributable to salary/collection activity. 2. Whether an income-tax return filed after issuance of a notice under section 148 and contemporaneous affidavits and bank statements suffice as 'credible evidence' to establish an employee-employer relationship and source of disputed bank credits for the purposes of section 68. 3. What is the evidentiary standard and burden of proof on an assessee who alleges that contested bank credits represent third-party receipts (sales collections) and are subsequently transferred to those third parties' accounts. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of addition under section 68 for disputed bank credits Legal framework: Section 68 permits treating unexplained credits in the hands of the assessee as income where the assessee fails to satisfactorily explain the nature and source of such credits; assessing authorities may add such amounts when explanation is not substantiated. Precedent Treatment: No specific judicial precedents were relied upon or considered in the text of the order; the Tribunal proceeded on statutory principles and evidentiary requirements under section 68. Interpretation and reasoning: The Tribunal accepted that large cash deposits and other credits existed in the assessee's bank accounts. It evaluated the assessee's explanation that the deposits represented sale proceeds collected on behalf of two firms and that he acted as a collection agent. The Tribunal examined whether the explanation was substantiated by credible, contemporaneous, corroborative evidence (appointment letter, salary slips, day-to-day collection register, evidence of employment-related disclosures to excise/licensing authorities). Finding no such corroboration, and noting that the assessee was a non-filer and had not filed the return within the time specified in the section 148 notice, the Tribunal concluded the explanation was not satisfactory for the purposes of section 68. The Tribunal also rejected reliance on post-notice conduct (return filed after section 148 notice) as an acceptable substitute for independent proof of source. Ratio vs. Obiter: Ratio - where an assessee fails to produce credible corroborative evidence to substantiate that bank credits are third-party sales collections, such credits may be treated as unexplained and added under section 68. Obiter - observations on demonetisation period and security rationale for depositing collections in the assessee's account; these contextual remarks assist reasoning but are ancillary to the legal holding. Conclusion: The addition under section 68 was validly sustained because the assessee did not discharge the obligation to satisfactorily explain the source of the bank credits. Issue 2 - Effect of return filed after issue of section 148 notice and affidavits as proof Legal framework: Evidentiary sufficiency to prove source under section 68 requires credible documentation or contemporaneous records demonstrating the nature of receipts; timing and context of filings are relevant to weight of evidence. Precedent Treatment: The decision did not cite authorities but followed established evidentiary norms that after-thought filings may have limited probative value. Interpretation and reasoning: The Tribunal treated the return filed after issuance of the section 148 notice and the affidavits from proprietors as susceptible to being afterthoughts. The Tribunal emphasized that such post-notice documents, without independent corroboration (appointment letters, payroll records, day-to-day registers, licensing disclosures), do not establish employment or the claimed source. The Tribunal noted that mere correspondence of some banking entries does not conclusively demonstrate that cash deposits were sale proceeds rather than other transactions between the parties. Ratio vs. Obiter: Ratio - post-notice filings and affidavits, standing alone and lacking contemporaneous corroboration, are insufficient to discharge the assessee's burden under section 68. Obiter - cautionary remarks that transfers between accounts, while relevant, require explanatory context to negate an addition. Conclusion: The Tribunal held that the late return and affidavits did not constitute credible corroborative evidence and could not prevent the addition under section 68. Issue 3 - Burden and nature of evidentiary proof required to establish claimed collector/employee status and linkage of receipts to third-party sales Legal framework: The assessee bears the burden to satisfactorily explain bank credits; explanation must be backed by credible evidence sufficient to demonstrate the identity and genuineness of the creditor or the nature of receipts when claimed to be third-party transactions. Precedent Treatment: No specific precedents were invoked; the Tribunal applied general principles of burden of proof and requirement for contemporaneous documentary evidence. Interpretation and reasoning: The Tribunal set out the kinds of evidence expected to substantiate an employment/collection relationship and source of funds: appointment letters, salary slips, day-to-day cash collection registers specifying amounts and persons, licensing/employee disclosures under excise laws, and contemporaneous bank entries consistently explained. Absence of these materials, especially coupled with non-filing and delayed return, weakened the assessee's explanation. The Tribunal further reasoned that isolated bank transfer matches do not exclude alternative explanations (e.g., other transactions between the parties) and therefore are insufficient to conclusively link disputed cash deposits to third-party sales. Ratio vs. Obiter: Ratio - an assessee alleging third-party receipts must produce contemporaneous, credible documentation specifically demonstrating the relationship and the origin of receipts; mere assertions, after-filed returns or selective bank entry correspondence do not discharge the burden. Obiter - illustrative list of acceptable supportive documents (appointment letters, payroll records, excise license employee disclosures) are guidance rather than exhaustive prerequisites. Conclusion: The Tribunal concluded that the assessee failed to meet the evidentiary standard to establish that the disputed credits were third-party sales collections or salary receipts; consequently the addition under section 68 was justified. Cross-reference and overall conclusion Cross-reference: Issues 1-3 are interlinked - failure to produce credible employment evidence (Issue 2) meant the assessee could not meet the evidentiary burden (Issue 3), leading to the lawful addition under section 68 (Issue 1). The Tribunal treated post-notice filings and isolated banking correspondences as inadequate to rebut the statutory presumption against unexplained credits. Overall conclusion (ratio): Where an assessee with substantial bank credits does not produce credible, contemporaneous corroboration of the asserted source (third-party sales collections and employment relationship), and where supporting documents are filed only after initiation of reassessment proceedings, the assessing authority is entitled to treat such credits as unexplained and add them to the assessee's income under section 68.