SECTION 68 APPLIES ONLY TO UNEXPLAINED CREDIT ENTRIES WITHOUT PROPER EXPLANATION
• What is Section 68 of Income Tax Act, 1961?
Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year .
• What is Unexplained Cash Credit ?
Section 68 considers any sum credited in the books of taxpayers in a financial year and not already offered to tax as income of the taxpayer during such financial year, if the following conditions are satisfied:
• Taxpayer offers no explanation about the nature and source of such credit
• Explanation offered by a taxpayer about the nature and source of such credit is not satisfactory in the opinion of assessing officer.
Such credit is referred to as unexplained cash credit.
• Taxability of Unexplained Cash Credit .
Unexplained cash credit is treated as income in the year in which it is received and taxed at a flat rate of 60% without providing any benefit of basic exemption limit, irrespective of the tax slab. There is a 25% surcharge and 6% penalty, and the final tax rate comes to 83.25% (including cess).
No deduction/allowance is allowed, and no loss can be set off against such unexplained cash credit which is considered as income. Penalty is not levied if unexplained cash credit is already included in the return of income and tax on the same is paid on or before the end of the financial year
RELATED CASE LAW:
K N R Roofing Pvt. Ltd. Vs ACIT (ITAT Bangalore)
The assessee is a company engaged in the business of manufacturing and trading of roofing sheets, roofing accessories and turbo ventilators. For the AY 2015-16, the assessee filed a return of income declaring a loss of Rs.30,58,063. In the course of assessment proceedings u/s. 143(3) of the Income-Tax Act, 1961 [“the Act”], the AO noticed that there were creditors in the balance sheet and these creditors represented purchases on credit by the Assessee to the tune of Rs.28,37,588.
ITAT have considered the rival submissions. ITAT are of the view that u/s. 68 of the Act, it is only the credit entry appearing in the books of account of an assessee for the relevant previous year, that can be treated as unexplained cash credit in the absence of proper explanation by the assessee. Therefore, the opening balances cannot be added u/s. 68 of the Act.
FULL TEXT OF THE HIGH COURT ORDER / JUDGEMENT
The Honourable High Court mentioned that, Though the assessee did not file ledger accounts to prove the quantum of opening balance appearing in the various creditors account, the same ought to have been looked into by the CIT(Appeals), in exercise of powers under Rule 46A(4) of the Rules. It is always open to the CIT(Appeals) to confront the material in the form of additional evidence to the AO and then take a decision on the stand taken by the assessee before the CIT(Appeals) . We are therefore of the view that the additional evidence sought to be filed by the assessee ought to have been admitted for adjudication by the CIT(Appeals). We therefore set aside the order of CIT(Appeals) and remand the issue to the AO for fresh consideration with regard to the issue of addition u/s. 68 of the Act. The AO will consider the additional evidence filed by the assessee before the CIT(Appeals) and after giving opportunity of being heard to the assessee, decide the addition u/s. 68 of the Act afresh in accordance with the law.
As far as the refusal of the AO to allow set off of current year business loss against income added u/s. 68 of the Act by relying on the provisions of section 115BBE(2) of the Act which was inserted by the Finance Act, 2016 w.e.f. 1.4.2017, it is not in dispute before us that the CBDT in Circular No.11 of 2019 dated 19.6.2019 clarified that the amendment sought to be relied upon by the AO is applicable only prospectively and therefore not applicable to AY 2015-16. Hence even in the event of addition being made u/s. 68 in the set aside proceedings, the assessee should be given the benefit of set off of current year’s business loss against the addition u/s. 68 of the Act. In the result, the appeal by the assessee is partly allowed.
Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year:
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