Taxation

ITAT Approach towards Section 68 of IT Act

Section 68 of IT Act

The Income Tax Appellate Tribunal, most commonly referred to as ITAT, is a quasi-judicial body with the specialization of dealing in matters related to direct taxes, the orders of which are binding in nature. The ITAT has passed some remarkable orders in respect of direct taxation since its establishment.

The article discusses the ITAT Approach towards Section 68 of the IT Act with special reference to the case Dwarkadish Spinners Limited Vs. DCIT wherein the assessee filed the appeal against the order dated 16th July 2019  which was pronounced by the CIT(A)-34, New Delhi

What is section 68 of IT Act?

Section 68 of IT Act states that if the books of account that the assessee has maintained reflects a credited amount wherein the assessee has not provided any explanation or the explanation is not satisfactory according to the assessing officer, such amount is deemed to be undisclosed income and would form a part of the total income, which shall be chargeable under the Income Tax act 1961 and considered as the income of the previous year.

However, if the assessee is a company (not a company wherein the public is substantially interested), and the credited amount contains share application money, share premium, share capital or any such amount, any explanation offered by such assessee company shall be considered unsatisfactory, unless—

  • The lender also provides an explanation regarding the nature and source of  the amount, so credited ( Except in the case of a venture capital company or a venture capital fund 
  • The Assessing Officer finds the explanation satisfactory.

What is the Applicability of Section 68 of IT Act

Section 68 of the IT Act shall be applicable in the following cases –

  • Maintenance of books of accounts  by the Assessee
  • Existence of credit amount in the Assessee’s books of account 
  • Absence of a satisfactory explanation on the part of the assessee to the assessing officer regarding the amount credited into the accounts
  • Failure of the assessee to furnish the documentary evidence required to support the validity of the amount credited
  • Non-disclosure of the capital contribution made by the shareholders or disclosed contribution is not satisfactorily explained to the assessing officer.

What are the Requirements to avoid the application of Section 68 of the IT Act?

The assessee must prove the following to avoid application of the deeming provision, which the Hon’ble Calcutta High Court has observed in CIT vs Precision Finance Pvt. Ltd. (1994)208 ITR 465 (Cal) wherein the criteria for avoiding the application of Section 68 of IT Act was laid down.

Identification of the Creditors

This concept is also referred to as identifying the source of the source wherein the assessee is required to disclose the identity of the creditor who has provided the sum that has been credited in the books of account of the assessee. Such identification is important to ascertain the genuineness of the creditor.

Creditor’s Capacity to Advance Money

The next criterion is the capacity of the creditor to advance money which showcases the creditworthiness of the creditor; the creditworthiness acts as additional proof of the genuineness of the transaction.

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Genuineness of Transaction

This is an integral aspect in respect of avoidance of the application of Section 68 of the IT Act as it can prove that the transaction is devoid of any malafide intentions or the intention of committing any form of financial fraud. The genuineness of a transaction can be proved through furnishing the requisite documents, such as income tax return , balance sheet among others which can help the assessee to provide a satisfactory explanation to the Assessing Officer.

Taxability of Section 68 of IT Act

According to 115BBE of the IT Act, the income tax must be calculated at 60%, wherein the total income of the assessee is inclusive of the following income:

  • Income as per Sec 68, 69, 69A, 69B, 69C or 69D, as well as reflected in the income tax return furnished under Section 139 or
  • Income determined by the Assessing Officer and inclusive of any income as per Sec- 68, 69, 69A 69B 69C or 69D, if such income isn’t covered under clause (a). There shall be an increase of 25% surcharge and 6% penalty, i.e., the final tax rate would be 83.25% (including cess)
  • However, the 6% penalty shall not be levied in case the income under Sections 68, 69, etc., has been included in the income tax return and tax has been paid on or prior to the end of the relevant previous year.

There shall be no deduction of any allowance, expenditure, set off of any loss would be allowed to the assessee while the computation of his income as provided in (1)(a) of Section 115BBE

Dwarkadish Spinners Limited Vs. DCIT: Case Analysis

This is a landmark case regarding section 68 of the IT Act, which was decided on 14th October 2022 by Hon’ble Judge Chandra Mohan Garg. The facts, arguments and judgement of the same are discussed below-

Facts of the Case

The facts of the case are briefly discussed herein under –

  • The assessee, in this case, was a company that filed the income tax return through e-filing on 29th September 2012, wherein it declared a loss of Rs. 1,24,94,251/.
  • The company was selected for scrutiny, followed by an issue of notice u/s 143(2) on 27th September 2013, which was duly served upon the assessee.
  • The company’s authorised representative appeared before the Assessing Officer, followed by filing the requisite details, which were noted by the officer in the assessment order.
  • During the course of the assessment, it was noted by the A.O that the assessee company had received an unsecured loan from companies Associates, i.e., Rs. 19,55,000/- received from Shamken Spinners Ltd., on various dates through Account payee cheques and Rs. 13,12,859/- received from Shamken Multifab Ltd., on several dates through A/c payee cheques & Rs. 10,000/- from Mr Sanjay Chaturvedi on 5th December 2011 vide A/c payee cheque No. 048463, totalling to Rs. 32,77,859/-
  • In lieu of the same, the A.O called upon the assessee company for the purpose of proving the genuineness of the lender of the unsecured loan in question.
  • The respondent failed to produce any documentary evidence such as ITR, Bank A/c, confirmation etc., as a result of which the A.O. made the addition of Rs. 32,77,859/- on account of unsecured loans as per section 68 of the I.T. Act, 1961 besides making addition on account of other expenses amounting to Rs. 5,29,973/-, addition on account of depreciation of Rs. 3,12,13,605/- u/s 32 of the ITA, 1961 and followed by the determination of the total income of the assessee at Rs. 2,25,35,040/- u/s 143(3) of Income Tax Act, 1961 against the returned loss of Rs. 1,24,94,251/- followed by the initiation of penalty proceedings as per 271(1)(c) of the Income Tax separately on account of providing inaccurate particulars of income.
  • Aggrieved by order of the A.O., the assessee filed an appeal before the Ld. CIT(A), who was responsible for allowing the appeal of the assessee partially vide order dated 16.07.2019
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Arguments by the Assessee

The assessee in appeal before the Tribunal and has raised the following grounds:

  1. The assessee argued that the Ld. CIT has erred in allowing the addition of Rs. 13,12,859/- as per section 68 of the Act regarding the payment made by M/s. Shamken Multifab Ltd., on behalf of the assessee and the amount of Rs. 19,55,000/ the sum received by the assessee from M/s. Shamken Spinners Ltd. by the Ld Assessing officer without appreciating that such company is an associate company of the assessee along with being listed on stock exchanges and such payment made by the company on behalf of the assessee has duly been reflected in the audited financials of M/s. Shamken Multifab Ltd and M/s. Shamken Spinners Ltd.
  2. The CIT Appeals have failed to appreciate the fact that the payment made by M/s. Shamken Multifab Ltd, on behalf of the appellant, were genuine expenses of the business, and the same has not been disputed.
  3. Another fact that hasn’t been appreciated by the CIT ( Appeals) is   that both of the companies mentioned above are public companies, i.e. listed on the stock exchange, along with the payment being made by banking channels making the addition made under section 68 of IT Act by the AO unsustainable under the law.
  4. The final argument of the appellant was the Ld. CIT (Appeals) has failed to appreciate that the appellant has furnished complete particulars of both the creditors, and there was the absence of any enquiry from such creditors before making the addition, thereby making the addition made unsustainable in law.”
  • The Counsel of the Appellant also submitted that the companies are listed in the stock exchange resulting in their availability in the public domain as well as in the Department PAN data, which is sufficient to prove the genuineness and creditworthiness of the said transaction.
  • In addition, the appellant has also filed the acknowledgement of return of income as of 31.03.2012 for the A.Y. 2012-13, PAN Card, and in respect of M/s. Shamken Spinners Ltd, the appellant, had filed a bank statement, acknowledgement of return of income as of 31.03.2012 for the impugned A.Y. 2012-13 and PAN Card before the authorities, thereby discharging the appellant and his company from the initial onus to prove the creditworthiness and genuineness of the transaction and meeting the all the ingredients of Section 68 of I.T. Act, 1961. Hence the addition of Rs. 32,77,859/- inclusive of the amount received from the companies and the cheque under the said act is unsustainable in law, and the same must be deleted
  • The Learned D.R relied on the decision of the CIT (A) in respect of the failure of the assessee in  establishing  the creditworthiness and genuineness of the transaction in question, therefore, praying that the ITAT confirm the orders of the CIT ( A).
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Decision

It was held that the alleged funds had been received by the assessee company by the companies listed in the stock exchange, which are very much in the public domain. The tribunal also examined the relevant pages of the paper book, which reflects that the assessee company has filed sufficient documentary evidence before the appropriate authorities like the acknowledgement of return of income, and balance sheet as on 31st March .2012 for the impugned A.Y. 2012-13, bank statements, PAN etc., of both the companies thereby discharging its initial onus of proving  the transaction’s genuineness and creditworthiness in the matter and have met the prerequisites of Section 68 of the I.T. Act, 1961[1].

It was further observed that it is already a settled law that when the assessee has successfully proved the genuineness and creditworthiness of the lenders, the said transaction won’t attract any additions as per section 68 of the IT Act.

 The tribunal declined to accept the reasoning recorded by the Ld. CIT(A), and confirmed the part addition made by the assessee regarding two creditors totalling Rs. 32,67,859/-and, allowed the grounds of the assessee, directing the A.O. to delete the entire addition confirmed by the Ld. CIT(A)

Conclusion

 ITAT’s approach towards Section 68 of IT Act has been discussed through numerous judgements, but the decision in the case Dwarkadish Spinners Limited Vs. DCIT can provide the much-needed relief to the assessee in respect of matters of Section 68 of the IT Act, as it has been clearly discussed in the order that the assessee cannot be booked under Section 68 of IT Act if he is successful in providing a satisfactory explanation regarding the sum credited as reflected in the assessee’s books of accounts.

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