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Study Circle Notes: June 30 th , 2014

Study Circle Notes: June 30 th , 2014 Issues & Developments relating to Sections 68 & 69 of the Income Tax Act, 1961 By C A . Gaurav Sharma. Section 68 of the Act - Features. Any Sum Found credited in the Books of an Assessee maintained for any Previous Year

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Study Circle Notes: June 30 th , 2014

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  1. Study Circle Notes: June 30th, 2014 • Issues & Developments relating to Sections 68 & 69 of the Income Tax Act, 1961 • By CA. Gaurav Sharma

  2. Section 68 of the Act - Features • Any Sum • Found credited in the Books of an Assessee maintained for any Previous Year • Assessee offers no explanation • Or the explanation offered by him is not in the opinion of the Assessing Officer, satisfactory, • May be charged to Income Tax • As the income of the Assessee of that Previous Year

  3. Section68-YearofCharge Year of applicability of Section 68 Year of credit of any sum in the Books of Accounts of the Assessee Held in: CIT vs. Prameshwar Bohra(2008) 301 ITR 404 (Raj) CIT vs. Usha Stud Agricultural Farms Limited (2008) 301 ITR 384 (Del) 3

  4. ConfrontationandCrossExaminationduringAssessmentProceedings • Whether information gathered by the AO during the course of Assessment Proceedings needs to be confronted to the Assessee or not before passing the Order? • Yes, It is mandatory as is held in: • Jindal Vegetable Products (ITA428of2007) (Del) • CIT vs. Geetanjali Education Society [2008] 174 Taxmann 440 (Raj.), • Kishinchand Chellaram vs. CIT (1980) 125 ITR 713 (SC) • Laxman S Patel [2008] 174 Taxman 206 (Guj) • ACIT vs. Geetanjali Education Society (2008) 114 TTJ 697 (ITAT Jodhpur)

  5. ConfrontationandCrossExaminationduringAssessmentProceedings • If AO does not provide the material gathered by him on the request of the Assessee, whether the addition will be tenable in law? • No, the addition will not be tenable in law as is held in: • Dhakeshwari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 (SC) • R. B. Shreeram Durga Prasad & Fatechand Nursing Das vs. Sett. Comm. (1989) 176 ITR 169 (SC) • Dhirajlal Girdharilal v/s C.I.T. (1954) 26 ITR 736 (S.C.)

  6. ConfrontationandCrossExaminationduringAssessmentProceedings • In case assesseeborrowergivescompleteidentity& address details of lender to AO and requests to AOtoissuesummonsu/s131–itisdutyofAO toissuesaidsummons(ifnotissued,mattercan beremandedback). This has been held in the following cases: • CIT vs. N. P. Garodia (2009) 310 ITR 62 (P&H) • Brij Pal Sharma (17.02.2009) ITA no. 685 of 2008 (P&H) • Food Corporation Of India vs Provident Fund Commissioner (1SCC68) (SC) (1989)

  7. Section68: ShareApplicationMoney • Supreme Court Ruling inLovely Exports Pvt.Ltd. (2008) 216 CTR 195 • The question raised was that whethershare application moneycanbetreatedasundisclosedincome of the assessee? • Supreme Court replied that, “Ifthe Share Application Money isreceivedfrom allegedbogusshareholders,whosenamesaregiventoAO, then departmentisfreetoproceedtoreopentheir individualassessment inaccordance with law,butit cannot beregardedasundisclosedincomeoftheassessee.”

  8. Section68: ShareApplicationMoney • The judgment of Supreme Court in the case of LovelyExportshas been applied in: • Bhav Shakti Steel Mines Pvt. Ltd. vs. CIT (2010) 320 ITR 619 (Del) • CIT vs. Gangour Investments (2009) 18 DTR 242 (Del) • Samir Bio-tech (P) Ltd., [2009] 17 DTR (Del)224 • Value Capital Service Pvt. Ltd. (2009) 221 CTR 511 (Del) • CIT vs. Creative World Telefilm Ltd. (2011) (333 ITR 116) (Bom)  • CIT vs. GP International Ltd. (2010) 229 CTR (P&H) 86 • Siddharth Marketing Services Pvt. Ltd. (2011) IT(SS)A Nos. 57 to 59/Ind/2009 (ITAT Indore) • Rank Shipping Agency Pvt. Ltd. (2014) ITA No.5946/Mum/2008 (ITAT Mumbai)

  9. Section68: ShareApplicationMoney • Supreme Court Judgment inLovelyExports:

  10. Section68: ShareApplicationMoney Proviso to Section 68 introduced with effect from 1.4.2013 Company (not being a company in which the public are substantially interested) Except Venture Capital Fund or a Venture Capital Company as referred to in Section 10(23FB) Resident Person Share Application Money, Share Capital, Share Premium or any such amount by whatever name called Then SOURCE of such Resident Person is also required to be proved by the Assessee Company, otherwise addition will be made in the hands of the Assessee Company

  11. Section68: ShareApplicationMoney After the introduction of the Proviso to Section 69 Share Application Money, Share Capital, Share Premium, etc. received by Pvt. Ltd. Company Share Application Money, Share Capital, Share Premium, etc. received by other than Pvt. Ltd. Company Proviso to Section 69 applicable Judgment of SC of Lovely Exports applicable Source of Source to be proved by Pvt. Ltd. Company Source of Source not to be proved by the Assessee Tax implication on the Investor can be initiated u/s 115BBE Tax implication on the Investor can be initiated u/s 115BBE

  12. Section68:UnsecuredLoans • Assessee to prove IDENTITY &CREDITWORTHINESS of LenderaswellasGENUINENESSofTransactionand source of source is not required to be established. • Case Laws: • CITvs.OrissaCorporation(P)Ltd.(159ITR78) • CIT vs. Rohini Builders (256 ITR 360) (SC) • CIT v. Metachem Industries (2000) 245 ITR 160 (MP) • Nemi Chand Kothari v. CIT 264 ITR 254(Gau) • RajokriFarms Pvt. Ltd. (ITA 1410/2008) Delhi HC • CIT vs. Real Time Marketing Pvt. Ltd. 221 CTR 716 • CIT vs. Diamond Products (2009) 177 Taxman 331 (Del) • Sh. Brij Mohan Sharma Vs ITO 220 CTR 622 (Raj) • Labh Chand Bohra Vs ITO 219 CTR 571 (Raj) • KanhaialalJangid Vs. ACIT 217 CTR 354 (Raj) • CIT Vs Laul Transport Corporation 214 Taxation 329 (P&H) and many more case laws

  13. Section68:UnsecuredLoans Further MereNonproductionofLender or Shareholder cannotbyitselfbeagroundformakingadditionu/s 68. Held in following: Anil Kumar Midha vs. ITO (2006) 100 TTJ 644 (Jodh) DivineLeasing & Finance Ltd. (2008) 299ITR268 (Del) CIT v. Steller Investment Ltd. vs. CIT (1987) 168 ITR 493 (Cal) GujHCinRohiniBuilders(supra) SCin OrissaCorporation(supra) AnisAhmed(2008) 297ITR441 (SC) CIT vs. U.M. Shah [1973] 90 ITR 396 (Bom.) Hanuman Agarwal (1985) 151 ITR 150 (Pat)

  14. Section68:UnsecuredLoans How to prove Identity & Creditworthiness of Lender and Genuineness of Transaction? The following are required to be furnished: Confirmation of fact of transaction of giving the amountbythecreditor ModeofPaymenti.e throughDD/Cash/cheque Incaseofbankingchanneladopted,particularsof chequeetc Ininterestbearing:statethisvitalfact PANandplaceofassessmentofcreditor Ifpossible,sourceoflendingthemoney, like, if the money has been received through Bank Account then explain the immediate Credit entry of the Lender before lending the amount to the Assessee

  15. Section68:Capital Introduction Addition cannot be made in the hands of the Firm or Capital u/s 68 if Partners or Shareholders claim that the money invested are their own. Action if lie, will lie against the Partners or Shareholders u/s 69: CIT vs. Metal & Metals of India 208 CTR 459 (2007) (P&H) CIT vs. Rameshwar Das (2007) 208 CTR 457 (P&H) CIT vs. R. N. Goel (1997) 224 ITR 180 (P&H) Metachem Industries – 245 ITR 160 (Madhya Pradesh) MadHCinTajBrowellers291ITR232 SCinLovelyExports(supra) Jaiswal Motor Finance – 141 ITR 706 (Allahabad) AllHCin141ITR706

  16. Section68:Capital Introduction IfCredit is introducedin the firstpreviousyear in the books oftheAssessee Firm/Company orbefore commencementofthebusiness,thennoadditionu/s68is made in the hands of the Firm/Company: LuthraJewellers (ITA 280/2009) (Del) MadHCinTajBrowllers(supra) Engg. & Construction Co. [1972] 83 ITR 187 (SC) CIT vs. Kewal Krishan Partners (2009) 18 DTR 121 (Raj) ACIT vs. Pennar Aqua Exports Pvt. Ltd. (2013) (ITA No. 1846/Hyd/2011) SurenderPrasadMishra (Luck ITAT) (7 SOT 457) SaiBaba Rupadas(ITA 1543/98) (Delhi ITAT) GhaziabadFootwear(142Taxman8) (Delhi ITAT) SmtMeera Devi (All ITAT) (14 SOT 190)

  17. Section68: Capital Introduction Introduction of Section 56(2)(viib) Company (not being a company in which the public are substantially interested) Except Venture Capital Fund or a Venture Capital Company as referred to in Section 10(23FB) Resident Person Consideration for issue of Shares + Consideration is more than Face Value of Shares Then if the Consideration is more than the Fair Market Value of the Shares of the Assessee Company, then the excess amount of Consideration will be assessed in the hands of Assessee Company as income u/s 56(2)(viib) of the Act

  18. Section 68: “May” not “Shall” • Ifexplanationofferedbythe Assesseeisfound unacceptable,whetheradditionu/s68oftheActis Automatic? • No, heldbySupreme CourtinP.K.Noorjahan237ITR 570 • Depends upon the facts of the Case, example: • where an assessee cannotbesupposedtohaveearnedundisclosed income, giventhefact a lady aged 17 years –never engaged in business), • firstyearcashcredit where assessee operated for few months in a year)

  19. Section 68: “Books” • Maintenance of Books is a condition precedent for application of Section 68 (DCIT vs. Finlay Corporation Ltd. 86 ITD 626 (Del ITAT) • Amount not credited in Books cannot be brought to tax u/s 68 (Baladin Ram vs. CIT (71 ITR 427) (SC)) • Books means Books of Original Entry wherein Accounts are updated, entries are made in routine basis (CIT vs. C. Shukla (1998) 3 SCC 410) • PassBook/BankStatementarenot “Books”(Bhai ChandGandhi(141ITR67) (Bom),MsMayawati vs. DCIT(2008) 113 TTJ 178 (Del), JawaharlalOswal 71 ITD 324 (ITAT Chd)

  20. Section 68: Trade Creditors Whethersection68isapplicabletoCreditorsarising outofpurchasesmadeinnormalcourseofbusiness, whichhavenotbeendoubtedu/s 37oftheAct? HeldNo, as per the following case laws: • CIT vs. PanchamDass Jain (2006) 205 CTR All 444 (All) • Goyal Synthetics Pvt. Ltd. (2012) ITA No.989/Ahd/2006 (Ahd ITAT) • Dhiraj R. Rungta vs. ITO in ITA No. 1687/2010 (Ahd ITAT) • Balaji Textile Industries (1994) (49 ITD 177) (Bom) • CIT vs. M. K. Brothers (163 ITR 249) (Guj) • JCIT vs. Mathura Dass Ashok Kumar' 101 TTJ (All) 81 • M. B. Traders (132 TTJ 490) (Nagpur) • SheoNarainJaiswal (176 ITR 352) (Patna) • ChhugamalRajpal (79 ITR 603) (SC)

  21. Section 68: Sale of Jewellery declared under VDIS • In case of sale of jewellerydeclared under VDIS, capitalgainsthereonalbeitcanbeexaminedu/s 68 oftheAct,howevernoadditionforthesamecanbe made in case assessee has furnished: • Conformation from jewellerypurchaser • Banka/ccopyfortransactionproof • Sale/Purchase Voucher of Jewellery etc. • (ReferBHCinCIT vs. Inder V. Nankani, ITA No. 128 of 2009),CIT vs. Uttamchand Jain (2009) 26 DTR (Bom) 23, Vinay C. Shah vs. DIT (2011) (ITA No. 1372/PN/2009) (ITAT, Pune)

  22. Section 68: Security Deposits • SufficientforLandlord to proveIDENTITYoftenantandGENUINENESSof transaction(NoneedtoproveCREDITWORTHINESS) • CIT v. Nevendram Ahuja [2007] 290 ITR 453 (MP) • REWAGroup(JabITAT)109TTJ657 • TulipFinance(15DTR185) (Del) • Incasedeposits subsequentlyadjustedagainstRentals-duly accountedfor- Noquestionoftaxationu/s 68

  23. Section 68: Advance Bookings ADVANCEBOOKING AMOUNTRECEIVEDBYREALESTATEDELVELOPER If subsequent sales made or refunded, then no addition under Section 68 Otherwise, SC Judgment of Lovely Exports will apply and Identities of the Persons are to be proved

  24. Section 68: Amount received through Will or Gift • AmountrecdthroughWillcannotbetaxedby rejectingthewillonconjectures and surmises (that iswillisnotonstamppaper,thereareno witnesses,itmerelybearsthumbimpressionetc) - DelhiITATinBudhKishore 87TTJ140, JodhpurITATin102TTJ 161 • Sinceassesseehasdisclosedthesourceoffunds, so hecannotbeaskedsourceofsource andanyadditionifrequiredcanbemadein handsofdeceasedundersection69–SC Judgment in Lovely Exports • Burden to prove that money received from Will actuallyemergedfromassesseeisnotdischarged by Revenue

  25. Section 68: Entities claiming Deductions u/s 80-I Series Deduction u/s 80-I on income declared during the survey is not available if the Assessee fails to prove that the same is generated from or derived from Industrial Undertaking: Home Texvs. CIT [2012] 20 Taxmann.com 729 (Punj. & Har.) MaaVaishno Devi Ginning Pressing UdhyogDhamnod Vs. DCIT (2011) ITA NO. 538/IND/2010 (ITAT Indore) Suresh Kumar Tayal vs. CIT(A) (2013) (ITA No. 3273/Del/ 2008) (ITAT Delhi) M/s National Legguard Works vs. CIT(A) (2006) I.T.A. No.302 of 2005 (P&H) Commissioner of Income-tax v Harshwardhan Chemicals [2003] 131 Taxman 813 (RAJ.) High Court of Rajasthan, Jaipur

  26. Section68versusSection145 AO, after rejecting the Books of Accounts, can both enhance the G.P. or N.P. Rate on estimate basis and can make addition on account of unexplained cash credits in the books of the Assessee (K.M.N. Naidu221ITR451,APHCin120ITR294,KaleKhan (SC)50 ITR1) If unexplained Cash Credits proved to be earned out of business, then benefit of telescoping available (MadHCin149ITR127,BHCin151ITR353, RajHCin165ITR453 Otherwise, no benefit of telescoping 50

  27. Section69; Section69B; Section69CversusSection68Contrast

  28. Section69; Section69B; Section69CversusSection68Contrast For Section 68, the onus is wholly on the Assessee to explain the source of the entry For Section 69, 69A etc., the phraseology shows that before any of these sections are invoked, the condition as to existence of investment, expenditure, etc. must be established by material on record or evidence 10 SOT 319 116Taxman 271 19 SOT 201 8 SOT 6

  29. Section69/69A/69B/69C Year of Charge • ADDITIONU/S69CANBEMADEINTHEYEARIN WHICHUNEXPLAINEDINVESTMENTISMADE • Shankar R. Mhatre vs. ACIT (2009)(117 ITD 241) (ITAT Mumbai)

  30. Section 69: Inflated Stock to Bank • In case of inflated stock to avail higher creditfacility,whetheradditionofdifference instock value can be made as undisclosed investment? • Following can be the factors in favour of the Assessee: • Bank never vouched the quantitydeclared, • Merevalueinflated (noquantitydeclared), • Physical control always withassessee, • Books audited, • No tradingoutsidethebooksdetected • Cases favouring Assessee having aforesaid facts: • Mad HC in 241 ITR 363, • 158 Taxman363, • 236 ITR 340, • J&K HC in 201 CTR 178

  31. Section 69: No Adverse Decisions under Other Acts – Effect on Income Tax Act • Incaseincometaxproceedingsproposingtoadd certain income are initiated on Excise proceedings, wherein Excise Tribunal/CESTAT has decided the issue in favour of the Assessee, then the same is also binding on the Income Tax Department • CIT vs. Mascot (India) Tools & Forgings (P) Ltd. (2010) 320 ITR 116 (Allahabad) • Shiva Exports vs. ITO (2009) 28 SOT 512 (ITAT Chd) • Shanker Rice Co. vs. ITO (2000) 72 ITD 139 (ASR)(SB) • Kumar Aerosoles (P) Ltd. vs. ACIT (1996) 55 TTJ (ITAT Del) 385

  32. Section 69: Unexplained Production Electricity Cases • GENERAL POINTS • Sizes and quality of Finished Products • Sizes and quality of Raw Materials • Temperatures at different stages • Fuel in the Reheating Furnace • Delays/Breakdowns • Technology and speed of Mill • Mill condition • Motors condition • Electrical Transmission System • Types of Mill Equipment installed • Operating parameters • Skill of Manpower

  33. Section 69: Unexplained Production Electricity Cases • OTHER POINTS • That no excess stock of any raw material or finished goods has been found. • Even the Assessing Officer has not found any fault in the Audited Books of Accounts and no statement of the Assessee has been recorded. • No documentary evidence has been disclosed by the Department as to from whom the Assessee has acquired/purchased the raw materials for the alleged manufacture of Rounds/Angles allegedly cleared clandestinely, to whom they had sold the Rounds/Angles. • No enquiry has been made from the Truck Drivers as to whether they had delivered the raw materials to the Assessee

  34. Section 69: Unexplained Production Electricity Cases • OTHER POINTS • The addition is based on assumptions, conjectures and surmises. • At first, the assumption is that the Assessee Company must have purchased the raw materials/consumables/stores & spares outside the Books of Accounts • Another assumption of extra wages outside the books of accounts, extra freight paid on such purchase is also outside the books of accounts and has also incurred other costs of production outside the books of accounts. • Again assumption of the sales of whole of unaccounted production outside the books of accounts. • Lastly, Concept of Rotation

  35. Section 69: Effect of Third Party Statements & Third Party Books of Accounts • Merelyonbasisofaffidavitfiledbyseller (purchaser for assessee) during sale tax proceedings,purchasesmadebyassesseefrom sellercannotbeheldtobebogussoastojustify addition in that respect • Jodhpur ITAT in JagdambaTrading (107 TTJ 398) • Permanand(107TTJ395):allegedbogus • Nahar Spinning Mills Ltd. (8 SOT 6) (Chd ITAT) • JodhpurITATinR.K.Synthetics81TTJ909 80

  36. Characterization of Deemed Income Surrender in a Search/Survey Otherwise caught by AO Taken in Heads of Income Taken u/s 68/69 of the Act Set off of losses available + Taxable at Normal Rates Can be taken back in Heads of Income After 1.4.2013 Before 1.4.2013 No, and therefore No Set off of losses available + Taxable @ 30% (Section 115BBE) Some Cases – No and therefore No Set off of losses available Some Cases - Yes and therefore Set off of losses available

  37. Characterization of Deemed Income Question 1: Surrender to be taken in Heads of Income or u/s 68/69? • Section 68/69 • GujHCin Fakir Mohamed Haji Hasan (1983)247ITR290 • P&HHCin288 ITR 18 • Mum ITAT in 7 SOT 208 • Recents • Dulari Digital Photo Services (2012) (In ITA No.984/Chd/ 2010) (ITAT Chd) BASED ON FAKIR MOHAMED HAJI HASAN • Heads of Income • Mad HC in 212 CTR 539 • SC in LakhmichandBaijnath (1959) 35 ITR 416 • CalHCin48ITR254;64ITR593;201ITR747 • Recents • Chensing Ventures 291 ITR 258 (Mad.) • Radhey Developers India Ltd. (2010) 329 ITR 001 (Guj) • CIT Vs. Shilpa Dyeing & Printing Mills P. Ltd., (2013) 39 taxmann.com 3 (Gujarat)

  38. Characterization of Deemed Income Question 1: From point of view of KIM PHARMA (P&H HC) A/Y 2005-06 Surrender on account of sundry credits, repairs to building and advances to staff, Decision in Kim Pharma (P&H) -Relatable to Business Therefore considered as Income from Business A/Y 2004-05 Surrender as income from other sources Decision in Kim Pharma (P&H) – Not Relatable to Business Therefore considered as Income under Section 68/69

  39. Characterization of Deemed Income Question 2: Whether Additions u/s 68/69 are taxable under the Heads of Income? • Dulari Digital Photo Services (2012) (In ITA No.984/Chd/ 2010) (ITAT Chd) BASED ON FAKIR MOHAMED HAJI HASAN • Chensing Ventures 291 ITR 258 (Mad.) • Radhey Developers India Ltd. (2010) 329 ITR 001 (Guj) • CIT Vs. Shilpa Dyeing & Printing Mills P. Ltd., (2013) 39 taxmann.com 3 (Gujarat)

  40. Thank You CA. GAURAV SHARMA (M) - 9988242443 info@ipxedu.com www.ipxedu.com (Coming Soon)

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