A new section 277-A is proposed to be introduced by the Finance (No 2) Bill, 2004 with a view to stop such practice and to make the person who advances such loan liable to prosecution. This is done on the footing that the person advancing the funds by cheque would enable the recipient to convert his unaccounted tax-evaded money into official funds, thereby reducing his liability to pay income-tax, interest and penalties. The new provision would also apply where a third party makes an entry or statement which would enable the tax-payer to evade his tax liability.
Under section 278, punishment to a person who abets or induces any other person to evade tax is linked with the tax evasion by the other person and the charge of abetment in the case of the first person can be sustained only if tax evasion by the other person is established. Deterrence against preparing false books or documents with intent to enable another person to evade tax, penalty or interest can be effectively provided by declaring the maintaining of such books or documents an offence under the Income-tax Act.
It is, therefore, proposed to insert a new section 277-A to provide punishment with rigorous imprisonment for a term of not less than three months but which may extend to three years and with fine for falsification of books or documents, etc. with a view to induce or abet another person to evade tax, penalty or interest chargeable or imposable under the Act. Explanation to this section clarifies that it would be sufficient in any charge to allege the general intent to enable the other person to evade tax, penalty or interest without specifying any particular instance or sum of tax, penalty or interest which has been or would have been evaded by the other person. This amendment will take effect from October 1, 2004.
It may be mentioned that as far as the tax-payer is concerned, section 68 which has been on the statute book for the last 40 years treats any unexplained cash credit as the income of the tax-payer. This provision has been considered by the Kerala High Court in CK Gopinathan vs CIT (260 ITR 213). The facts in this case were that the Assessing Officer found that a sum of Rs 2,13,982 was introduced in the accounts of the assessee in the previous year relating to the assessment year 1989-90. The previous year ended on March 31, 1989. The issue related to the addition of a sum of Rs 2,13,982 which was introduced in the accounts of the assessee. The explanation of the assessee was that the amount came from the partnership firm, C, of which the assessee was the managing partner. The Assessing Officer wanted the assessee to establish the same by producing the accounts of the firm.
On verification of the accounts of the firm, it was found that there was no corresponding debit entry in the accounts. On that basis, the Assessing Officer added Rs. 2,13,982 as the unaccounted income of the assessee and completed the assessment. The Commissioner of Income-tax (Appeals) set aside the assessment and remitted the matter to the Assessing Officer. The Assessing Officer again made the same addition and this was upheld by the Commissioner of Income-tax (Appeals) and the Tribunal.
On appeal, the Court held that the assessee was the managing partner of the firm and he had a duty to see that the day book in which the daily transactions of the firm were recorded was properly maintained and accounts were written properly on the basis of such documents. Since the assessee had not made any effort in that direction, it could not be said that he had satisfactorily explained the source of the credits made in the books of account.
The Court further held that the alternative contention raised was that even assuming that the assessee had not established the source of the credit made in his books, the Assessing Officer should have accepted that the credits came out of the additions made for the earlier years which were much more than the peak credit taken by the Officer for making the additions. The Court, therefore, held that the Commissioner of Income-tax (Appeals) and the Tribunal were right in holding that the question could not be considered at that stage, and the addition was therefore justified.
In another case, Krishan Kumar Aggarwal v Assessing Officer ( 138 Taxman 1), the Delhi High Court upheld the assessment whereby certain cash credits were treated as income and the explanation of the tax-payer was not found to be satisfactory. Courts are now taking a strict view and upholding assessments as undisclosed income where cash credits have been shown in the books of the tax-payer and the explanation for the same is not found to be satisfactory.
Likewise, Courts are upholding assessments under sections 69, 69-A, 69-B and 69-C where investments and properties, gold ornaments, jewellery and other valuable articles cannot be justified by the level of income disclosed by the tax-payer in the past. Large expenditure on occasions like marriages is also being questioned and additions to taxable income have been made if no material or explanation is given showing the source of funds for the expenditure.
In the years to come, most of the assessments would be based on the aforesaid provisions with a view to bring tax-payers within the net and assess a higher amount than what is disclosed in the return of income.
The author is Advocate, Supreme Court