Under section 68 of the Income Tax Act, 1961, unexplained cash credits are treated as income. The tax authorities, generally in the case of private or closely held companies, have attempted in suspicious cases to tax the share capital raised by such a company as unexplained income. In the case of a company, the following are the propositions of law under section 68. The assessee has to prima facie prove the identity of the shareholder or subscriber, the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels, the creditworthiness or financial strength of the subscriber, whether relevant details of the address or PAN identity of the subscriber are furnished to the department along with copies of the shareholders? register, share application forms, share transfer register, etc.

The department would not be justified in drawing an adverse inference simply because the subscriber fails or neglects to respond to its notices. The onus would not stand discharged if the subscriber denies or repudiates the transaction entered into with the assessee.

In the case of a public issue, the company concerned cannot be expected to know every detail pertaining to the identity as well as financial worth of each of its subscribers. The company must, however, maintain and make available to the assessing officer for his perusal, all the information contained in the statutory share application documents. A delicate balance must be maintained while walking the tightrope of sections 68 and 69 of the Act. The burden of proof can seldom be discharged to the hilt by the assessee if the assessing officer harbours doubts of the legitimacy of any subscription, who is empowered to carry out thorough investigations. However, if the assessing officer fails to unearth any wrong or illegal dealings, he cannot act on suspicion and treat the subscribed capital as the undisclosed income of the company.

In C.I.T. v. Sophia Finance Ltd. (205 I.T.R. 98), the Full Bench of the Delhi High Court held that section 68 reposes in the assessing officer the jurisdiction to inquire from the assessee the nature and source of the sum found credited in its books of account. If the explanation offered by the assessee is found not to be satisfactory, further enquiries can be made by the assessing officer himself, both, in regard to the nature and the source of the sum credited by the assessee in its books of account, since the wording of section 68 is very wide.

The Full Bench opined that ?If the shareholders exist then, possibly, no further enquiry need be made. But if the income tax officer finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital. Shares cannot be issued in the name of non-existing persons. If the shareholders are identified and it is established that they have invested money in the purchase of shares then the amount received would be regarded as a capital receipt. But if the assessee offers no explanation at all or the explanation offered is not satisfactory, then the provisions of section 68 may be invoked.?

The court had not reflected upon the question whether the burden of proof rested entirely on the assessee, and at which point, if any, this burden could justifiably be shifted to the assessing officer. The Full Bench in fact clarified that they were ?not deciding as to whom and to what extent is the onus to show that an amount credited in the books of account is share capital and when does that onus stand discharged. This will depend on the facts of each case.?

The Calcutta High Court held in CIT v Precision Finance P Ltd (208 ITR 465) that it is not sufficient for an assessee to disclose that credits in their books had been received through banking channels; the identity as well as creditworthiness of the creditor must nevertheless be proved. In Sajan Dass and Sons v CIT (264 ITR 435), the Division Bench was not convinced that merely because monies could be identified and traced through banking channels the genuineness of the gift in question stood established. This is obviously because an assessee can scarcely be heard to say that he does not know all particulars pertaining to the donor.

In CIT v Antartica Investment P Ltd (262 ITR 493), the court was satisfied that no interference was justified, since the assessee had produced the share application forms along with confirmation letters and copies of their accounts, copies of their bank accounts of cheque payments and their auditors report. The assessing officer?s conclusion that the genuineness of the transaction had not been made good was not upheld.

This conclusion was reached despite the fact that notices received by one of the common directors of the two subscribing companies had been ignored and no information was forthcoming from the latter. However, the under secretary (land revenue, Government of Sikkim, Gangtok) had stated that both the subscribing companies were incorporated in Sikkim and their addresses were disclosed in the return of allotments; the subscribers thus stood identified. Their financial standing or capacity was not investigated by the court. The decision in CIT v Achal Investment Ltd (268 ITR 211) is also on the same lines.

In CIT v S Kamaraja Pandian (150 ITR 703) the Madras High Court took the view that it is for the assessee to initially prove the genuineness of the loan, and that the onus shifts to the department only after the assessee has prima facie substantiated this fact. In that case, one of the creditors had denied the transaction. The Patna High Court in CIT v Hanuman Agarwal (151 ITR 150) was faced with the availability of a confirmatory letter filed by an assessee in whose books of account a credit was found. GIR number of the creditor was supplied, and it appears that he had confessed that this transaction was not genuine.

In CIT v Divine Leasing and Finance Ltd (299 ITR 268), the company had commenced its business of extending finance to industrial enterprises. The total issued, subscribed and paid-up capital in the assessment years 1984-85, 1985-86 and 1986-87 was Rs 99,80,000 received from directors or promoters and also by way of a public issue. These sums were received through banking channels and complete records were maintained. The assessing officer made additions to the income for all the years. In March, 1987, the assessee filed a revised return for the assessment years 1984-85 and 1985-86 taking advantage of the Amnesty Scheme and surrendered Rs 62,500 and Rs 1,87,000 in the respective years.

On appeal, the Delhi High Court held that the Tribunal had categorically held that the assessee ?has discharged its onus of proving the identity of the share subscribers?. Had any suspicion still remained in the mind of the assessing officer, he could have initiated ?coercive process? but this course of action had not been adopted. The aforesaid decisions provide the requisite guidelines for determining the circumstances in which the onerous provisions of section 68 of the Act may be invoked.

The author is advocate, Supreme Court