Whose income is it anyway?

While every person likes to earn income, sometimes he disowns his right over the same or even ownership of his assets when he gets caught in the tax net. Sections 68, 69, 69-A, 69-B and 69-C of the Income-tax Act, 1961 have made elaborate rules which fix the presumption in respect of ownership of assets on the person who is found to be in possession of the same.

Under the first provision, where an assessee has failed to prove satisfactorily the source and nature of certain amounts of cash received during the accounting year, the assessing officer is entitled to draw the inference that the receipts are of an income nature. The Supreme Court laid down in Kalekhan Mohammed Hanif v CIT (50 ITR 1) that the onus is on the assessee to explain the nature and source of cash credits, whether they stand in the assessee?s books of account or in the books of a third party.

The furnishing of particulars or the mere fact of payment by an account payee cheque, or the mere submission of a confirmatory letter by the creditor is, by itself, not enough to shift the onus to the department, although these facts may, along with other facts, be relevant in establishing the genuineness of the transaction.

In the case of cash credits the assessee must prove three important conditions, namely identity of the person, the genuineness of the transaction and the capability of the person. All that section 68 of the Income-tax Act, 1961, requires is acceptable proof. In CIT v Vishwanath and Company (292 ITR 225), the assessee was an excise contractor. He returned a loss for the assessment year 1985-86. His statement showed that he was employed in toddy business and his salary was meagre and he lived in a rented house. The amount shown as credits was included in the income of the assessee. The Tribunal deleted the addition of cash credit of Rs 61,85,000.

On appeal, the Karnataka High Court held that a transaction of around Rs. 62 lakhs cannot be done without anything in writing. The want of written document, the nature of the transaction and the conduct of A would go against the assessee. The addition was justified.

In Sumerchand Jain v CIT (292 ITR 241), there was a search and seizure operation under section 132 at the business premises of the assessee-firm from October 29, 1985 to November 2, 1985. In the course of such search, on physical verification stock of silver ornaments weighing 314.63 kg was found. In the course of the assessment proceedings, the assessing officer found that there was purchase of 98.437 kg of silver ornaments from C.

These purchases were by two bills. The first purchase bill was found recorded in the books of account found at the time of search, while the second purchase bill was not recorded in such books. The purchase of 98.473 kg from C was treated as non-genuine and accordingly the addition of Rs 2,49,552 was made.

On a reference, the Madhya Pradesh High Court held that the source of C was not essential to be proved inasmuch as the assessee had been able to prove the identity, entry and source of the third party and that should be regarded as discharge of the burden of proof by the assessee. Hence, as far as the transaction relating to purchase of silver made by the assessee-firm from C on credit basis which found mention in the books of account was concerned, no addition could be made to the income of the assessee.

Section 69 provides in effect that:

(i) The value of an unexplained investment not recorded in the assessee?s books of account may be assessed as income;

(ii) For the above purpose, the financial year in which the investment is made may be taken as the previous year; and

(iii) The assessment should be made regardless of the question whether income sufficiently large to match the investment could possibly have been earned during the period between the commencement of the relevant financial year and the date of the investment.

For the purpose of this section and section 69-B, it is not necessary that the books of account should be rejected expressly by the assessing officer. An opportunity must be given to the assessee to explain the transaction before the amount of unexplained investment is included in the total income of the assessee. Where secret business dealings of the assessee involve unexplained investments, the amount invested is assessable under this section.

This section was held in some cases to be applicable in cases of discrepancies in the value of stocks, example, a difference between the value of stocks declared to the bank and the value recorded in the assessee?s books, but a contrary view has also been taken in other cases. This section may also apply in case where sales of a commodity are in excess of the quantity recorded in the assessee?s books as purchased by him.

A bare reading of section 69-C of the Income-tax Act, 1961, makes it clear that if the assessee incurred any expenditure, but offered no explanation about the source of such expenditure or part thereof, or the explanation so offered is not satisfactory, such expenditure may be deemed to be the income of the assessee.

In Grand Bazzar v CIT (292 ITR 269), the assessee-firm carried on the business of selling garments. It filed its returns for the assessment years 1981-82 and 1984-85. There were cash credits in its accounts. When the assessee was required to prove the genuineness of the credits, the assessee admitted that the credits were nothing but suppressed sales. The assessing officer made addition of Rs 1,66,825 and Rs 5,08,031 respectively for the assessment years 1981-82 and 1984-85. On appeal, the Madras High Court held that the assessee had not explained the source of the purchases and the additions under section 69-C of the Act were, therefore, sustainable.

Under section 69-D, where any amount is borrowed on a hundi from, or any amount thereon is repaid to, any person otherwise than through an account payee cheque drawn on a bank, the amount so borrowed or repaid is deemed to be the income of the person borrowing or repaying the amount for the previous year in which the amount was borrowed or repaid, as the case may be.

To conclude, the aforesaid provisions elaborately seek to tighten the noose round the neck of the tax payer. Even if heavy expenditure is incurred on any occasion and no satisfactory explanation is offered about the source of such expenditure, the amount representing such expenditure is deemed to be the income of the tax payer in the year in which it has been incurred under section 69-C of the Act.

?The author is advocate, Supreme Court