HANDLING OF CASH CREDITS - SECTION - 68
CIT (Appeals)-XXI, Ahmedabad
Sunil Kumar Jha
Addl CIT, Central Range, Baroda
Section 68 of the I T Act is one of the most powerful yet debated provision of the I T Act. This provision has given plethora of judgments, sometimes conflicting, both in favour of Revenue and the assessee. In light of those judgements an attempt is made to analyse Section 68 with the following sub headings:
1. Section 68 with latest amendment
2. The Proviso
3. General discussion
4. Important case laws in favour of departments
Section 68 of the Income tax Act reads as under:
68. Where any sum is found credited in the book 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 :
The following provisos shall be inserted in Section 68 by the Finance Act, 2012, w.e.f. 1-4-2013 :
Provided that where the assessee is a company, (not being a company in which the public are substantially interested) and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assesseecompany shall be deemed to be not satisfactory, unless –
(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:
Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of Section 10.
The Proviso- amendment
Finance Act, 2012 inserts two provisos to Section 68, with effect from 1-4-2013 (assessment year 2013-14). First proviso to enlarge the onus of a closely held company and provides that if a closely held company receives any share application money or share capital or share premium or the like, it should also establish the source of source (that is, the resident from whom such money is received). Second proviso provides that the first proviso will not apply if the receipt of sum (representing share application money or share capital or share premium etc.) is from a VCC or VCF [referred in Section 10(23FB)].
Objective of the amendment – As explained in the Memorandum:
“Certain judicial pronouncements have created doubts about the onus of proof and the requirements of this section, particularly, in cases where the sum which is credited as share capital, share premium etc.
Judicial pronouncements, while recognizing that the pernicious practice of conversion of unaccounted money through masquerade of investment in the share capital of a company needs to be prevented, have advised a balance to be maintained regarding onus of proof to be placed on the company. The Courts have drawn a distinction and emphasized that in case of private placement of shares the legal regime should be different from that which is followed in case of a company seeking share capital from the public at large.
In the case of closely held companies, investments are made by known persons. Therefore, a higher onus is required to be placed on such companies besides the general onus to establish identity and creditworthiness of creditor and genuineness of transaction. This additional onus needs to be placed on such companies to also prove the source of money in the hands of such shareholder or persons making payment towards issue of shares before such sum is accepted as genuine credit. If the company fails to discharge the additional onus, the sum shall be treated as income of the company and added to its income”.
Thus in case of private limited companies higher onus is cast upon them to explain even source of source of the share application money/ share premium etc.
1. According to 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 of the same or the explanation offered by him is not satisfactory in the opinion of A.O., the sum so credited may be charged to income tax as the income of the assessee of that previous year.
The basic precondition for the Section 68 is that the assessee should file a valid confirmation. Valid confirmation has no specific format but it must contain name, complete address of the lender. It is better if PAN of the lender is also obtained as, if no PAN given then ambit of doubt is far more for the AO. With the confirmation the AO must insist on some identity proof like copy of driving license, copy of passport, copy of ration card or election ID card etc.
The confirmation so filed must indicate complete details of transactions (like mode- cash or cheque, with number date of cheque with bank details). The AO have right to demand the copy of bank account of the lender evidencing such transactions and the same needs to be filed. In case transaction is in cash then AO must demand cash flow statement of the lender, preferably containing details of opening balance and its source thereof.
As far as the creditworthiness or financial strength of the creditor/subscriber is concerned, that can be proved by producing the bank statement of the creditors/subscribers showing that it had sufficient balance in its accounts to enable it to subscribe to the share capital. Once these documents are produced, the assessee would have satisfactorily discharged the onus cast upon him. Thereafter, it is for the Assessing Officer to scrutinize the same and in case he nurtures any doubt about the veracity of these documents, to probe the matter further. However, to discredit the documents produced by the assessee on the aforesaid aspects, there has to be some cogent reasons and materials for the Assessing Officer and he cannot go into the realm of suspicion. Thus element of credit worthiness and satisfaction of AO thereafter is subjective and requires more efforts/inquiry on the part of the AO to give a finding in the order that lender is not credit worthy.
If AO observe some cash deposit before issue of cheque then some ‘nexus’ must be established between the cash deposit and the lendee. A mere observation that cheque is issued after few days of cash deposit and additions made on this count will not sustain in the appellate stage. Hon’ble Gujarat HC has even held in 208 Taxman 35 that even if there is cash deposit before the cheque is issued same cannot be held has income of lendee if lender is income tax assessee.
If cash credit is disallowed for the reason of creditworthiness then some discussion must be there in the assessment order. Such discussion should reveal that some inquiries were conducted which help the AO to conclude that lender is not creditworthy. It may be pointed out that such inquiries must be confronted to the assessee and replies obtained in interest of natural justice.
2. There must exist books of accounts before making addition under Section 68: The addition under Section 68 can be made on the basis of unexplained cash credit found in the books of the asseessee, hence existence of books of an assessee is a condition precedent before an addition under Section 68 can be made.
3. Now the question is what may be termed as books of the assessee. As per Section 2(12A) of Income Tax Act books includes ledgers, day books, cash books, whether kept in the written form or as print outs of data stored in floppy, disc, tape or any other electro-magnetic data storage device.
4. In Central Bureau of Investigation v. V.C. Shukla  3 SCC 410, the Supreme Court has held that ‘Book” ordinarily means a collection of sheets of paper or other material, blank, written or printed, fastened or bound together so as to form a material whole. Loose sheets or scraps of paper cannot be termed as book for they can be easily detached and replaced.
5. Books of accounts must be of assessee himself and not of any other assessee. In Smt Shanta Devi v. CIT  171 ITR 532 (P&H), it was held that a perusal of Section 68 would show that the expression books has been used with reference to the word assessee. In other words, such books of account have to be books of the assessee himself and not of any other assessee. Thus books of account of a partnership firm cannot be considered to be the books of account of the partner. Any cash credit shown therein cannot be brought to tax as income under Section 68 in the hands of the partners.
6. Bank Pass book is not books of account for the purpose of Section 68. In CIT, Poona v. Bhaichand H. Gandhi 141 ITR 67 (Bom.) it was held that the pass book supplied by the bank to the assessee cannot be regarded as the book of the assessee, that is, a book maintained by the assessee or under his instructions. Therefore a cash credit for the previous year shown in the assessee’s bank pass book but not shown in the cash book maintained by the assessee for that year, does not fall within the ambit of Section 68 of Income Tax Act, 1961,thus if AO finds any unexplained transaction in the bank passbook of the assessee then same can be taxed as unexplained money under Section 69A of the act
8. It is not necessary that books of account must be rejected before making any addition under Section 68. In Devinder Singh v. ACIT  101 TTJ 505 (ITAT-Asr) it has been held that there is nothing in Section 68 that books of account must be rejected before making an addition under Section 68. This is an independent and deeming provision and will apply if the assessee fails to offer an explanation of the source of particular receipt/credit appearing in the books of account or if the explanation given by the assessee is found to be not satisfactory by the A.O.
9. Additions in the Partner’s capital account-whether firm is liable to explain and whether addition can be made to firm’s income in such case under Section 68. In CIT v. Metachem Industries  245 ITR 160(MP), it has been held that where the assessee-firm had satisfactorily explained the credits standing in the name of its partners, the responsibility of the assessee stands discharged.
10. Once it is established that the amount has been invested, by a particular person, be he a partner or an individual then the responsibility of the assessee firm is over. The assessee firm cannot ask the person who makes investment, whether the money invested is properly taxed or not. If that person owns the entry then the burden of the assessee firm is discharged. It is open to the A.O to undertake further investigation with regard to that individual who has deposited the amount.
11. In India Rice Mills v. CIT 218 ITR 508, 511 (All.) it was held that where the capital contributions are made by the partners prior to the commencement of the business by the assessee-firm, it is for the partners to explain the source of such capital contributions and if they fail to discharge such onus then such capital contributions, although entered in the books of accounts of the assessee-firm, cannot be regarded as income of the assessee-firm.
12. Proper enquiry must be made by A.O before making any addition under Section 68: The A.O must make proper enquiry before making any addition under Section 68. In Khandelwal Constructions v. CIT 227 ITR 900 (Gau.) it has been held that Section 68 of Income Tax Act, 1961, empowers the Assessing officer to make enquiry regarding cash credit. If he is satisfied that these entries are not genuine he has every right to add these as income from other sources. But before rejecting the assessee’s explanation A.O. must make proper enquiries and in the absence of proper enquiries, addition cannot be sustained.
13. The assessee is also entitled to cross-examine any person whose statement has been recorded by the A.O and such statement is proposed to be used by the A.O.-CIT v Eastern Commercial Enterprises 210 ITR 103 (Cal.).
14. If some depositor or any other person with whose evidence cash credit in question can be proved, does not cooperate in the assessment proceedings with the assessee concerned then assessee can also take assistance of Section 131 of the Act wherein ample powers have been given to the A.O for compelling the attendance of witnesses.
15. Provision applies to all credit entries :
In the cases where credit entry has been made in the books of the assessee, the ambit of Section 68 is wide and inclusive. Provision applies to all credit entries. The language of Section 68 shows that it is general in nature and applies to all credit entries in whomsoever name they may stand, that is, whether in the name of the assessee or a third party as held in the case of Gumani Ram Siri Ram v. CIT  98 ITR 337 (Punj. & Har.).
The section has applicability even in the cases of search as Section 68 is a provision of general application and there is nothing either in Section 132 or Section 68 or elsewhere to exclude the application of this general provision to a case where the business premises or the residence of a person has been searched and the documents and other things seized under Section 132 of the Act. The presumption under Section 132(4A) does not override or exclude Section 68, that is, it does not obviate the necessity to establish by independent evidence the genuineness of the cash credits under Section 68, nor does it do away with the burden which is on the assessee to establish the requisites of cash credits as held in the cases of Pushkar Narain Sarraf v.CIT  183 ITR 388 (All.) and Daya Chand v. CIT  250 ITR 327 (Delhi).
It is obvious by the above that the provision applies to noncommercial loans as well and it was precisely the same as held by the Hon. Calcutta High Court in the case of C. Kant & Co. v.CIT  126 ITR 63 (Cal.), observing that Section 68 does not make any distinction between commercial and non-commercial loans.
16. Burden of Proof :
The Assessing Officer when starts enquiry, specifically to satisfy himself of the source of such credit, and if during the enquiry, he is satisfied that the entries are not genuine, then he has every right to add the said sum represented by such credit entry as income of the assessee. The satisfaction of the assessing officer is the basis of invocation of provisions of Section 68. However, such satisfaction must not be illusory or imaginary but must have been derived from relevant facts and evidences, and on the basis of proper enquiry of all material before him. The enquiry envisaged under Section 68 is an enquiry which is reasonable and just. The amount of cash credits could not be included in the total income of the assessee if the Assessing Officer has not made proper enquiry. Under Section 68, the onus is on the assessee to offer explanation where any sum is found credited in the books of account and where the assessee fails to prove to the satisfaction of the Assessing Officer, the source and nature of the amount of cash credits, he is entitled to draw an inference that the credit entries represent income taxable in the hands of the assessee. It is not the duty of the Assessing Officer to locate the exact source of the cash credits. The burden to identify the source lies upon the assessee and he is required to explain the genuineness of the credit entry.
The issue of cash credit has always been a matter of vexed litigation. Section 68 enacts a golden rule of evidence which is not in dispute, i.e., if any sum is found credited in the books of account of an assessee, the onus is on him to explain the said entry. The principle embodied in Section 68 is only a statutory recognition of what was always understood to be the law based upon the rule that the burden of proof is on the taxpayer to prove the genuineness of borrowings since the relevant facts are exclusively within his knowledge. Even before the enactment of Section 68, this rule of evidence was applicable vide Kale Khan Mohammed Hanif v. CIT  50 ITR 1 (SC). Section 68 does not absolve the responsibility of the Assessing Officer to prove that the cash credits constitute the income of the assessee. In Orient Trading Co. Ltd. v. Commissioner of Income-tax (1963) 49 ITR 723 (Bom.), one of the questions referred to the Bombay High Court was whether there was any material before the Tribunal to hold that a sum standing in the books of the assessee to the credit of a third party belonged to the assessee. The Bombay High Court discussed the nature and significance of cash credits in such cases and observed as follows:
“When cash credits appear in the accounts of an assessee, whether in his own name or in the name of third parties, the Income-tax Officer is entitled to satisfy himself as to the true nature and source of the amounts entered therein, and if after investigation or inquiry he is satisfied that there is no satisfactory explanation as to the said entries, he would be entitled to regard them as representing the undisclosed income of the assessee. When these credit entries stand in the name of the assessee himself, the burden is undoubtedly on him to prove satisfactorily the nature and source of these entries and to show that they do not constitute a part of his business income liable to tax. When, however, entries stand, not in the assessee’s own name, but in the name of third parties, there has been some divergence of opinion expressed as to the question of the burden of proof. The Income-tax Officer’s rejection not of the explanation of the assessee, but of the explanation regarding the source of income of the depositors, cannot by itself lead to any inference regarding the non-genuine or fictitious character of the entries in the assessee’s books of account.”
The expression “nature and source” in Section 68 has to be understood together as a requirement of identification of the source and the nature of the source, so that the genuineness or otherwise could be inferred. The Law on the subject has been illustrated in a number of decisions prior to 1968. Hon. Supreme Court, in Kale Khan Mohd. Hanif Vs. CIT (supra), pointed out that the onus on the assessee has to be understood with reference to the facts of each case and proper inference drawn from the facts. The law after Section 68 is not different. If the prima facie inference on the fact is that the assessee’s explanation is probable, the onus will shift to the Revenue. Though the Assessing Officers, often, acts on confirmatory letters as evidence, the onus does not get discharged merely by such confirmatory letters as found in CIT Vs. United Commercial and Industrial Co. (Pvt.) Ltd. (1991) 187 ITR 596 (Cal), nor is the fact that the amount is received by account payee cheques is sacrosanct as was pointed out in CIT vs. Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal). This view was further held in the case of Nemi Chand Kothari v. CIT  264 ITR 254 (Gau.) where in it was held that it cannot be said that a transaction, which takes place by way of cheque, is invariably sacrosanct. Once the assessee has proved the identity of his creditors the genuineness of the transactions, and the creditworthiness of his creditors vis-à-vis the transactions which he had with the creditors, his burden stands discharged and the burden then shifts to the revenue to show that though covered by cheques, the amounts in question, actually belonged to, or was owned by the assessee himself. Even the particulars from assessment records, where the creditor is assessed, may not be sufficient as observed in CIT vs. Korlay Trading Co.,. Ltd. (1998) 238 ITR 820 (Cal).
Further, in the case of Kamal Motors v. CIT  131 Taxman 155 (Raj.). It was held that the responsibility is on the assessee to discharge the onus that the cash creditor is a man of means to allow the cash credit. The burden to prove the source of receipt is in respect of each entry as held in the case of CIT v. R.S. Rathore  212 ITR 390 (Raj.), that while explaining the various credits and investments, it is possible that the assessee may be successful in explaining some of them, but that does not by itself mean that the entire investments has to be considered as explained. It is each and individual entry on which the mind has to be applied by the taxing authority when an explanation is offered by the assessee.
On the issue of burden of proof a very specific and illustrious decision was from the Hon. Calcutta High Court in CIT vs. Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal) where in it was laid down that the assessee is expected to establish:-
1. Identity of his creditors;
2. Capacity of creditors to advance money; and
3. Genuineness of transaction.
As to the issue of genuineness of transaction, it was further held in the above decision that the transaction is not genuine, simply because some, out of many, of the transactions are by cheque. Conversely, it is not open for the Assessing officer to add token amount merely for the purpose of making the returned income into a round figure. Where certain sum of money claimed by the assessee to have been borrowed from certain persons, it is for the assessee to prove, by cogent and proper evidence, that they are the genuine borrowings for the reason that the facts are exclusively within the assessee´s knowledge.
But at the same time, the law does not expect the impossible on the part of the tax payer as was pointed out in Life Insurance Corporation of India vs. CIT (1996) 219 ITR 410 (SC), although pronounced in a different context. All that matter is that the explanation is prima facie reasonable. If it is so, it cannot be rejected on mere surmises. It was so held in CIT vs. Bedi & Co. Pvt. Ltd. (198) 230 ITR 580 (SC). The affidavits filed cannot be rejected outright without cross examination as was found by the Hon. Supreme Court in Mehta Parikh & Co. vs. CIT (1956) 30 ITR 181(SC). It was pointed out that where the assessee’s account were accepted as genuine, it is ordinarily not possible to show that the credits therein do not come from the sources attributed for them. These and other decisions would indicate that the ultimate inference in such cases is to draw from the facts and the preponderant probability of such explanation and difficulty in proving an explanation is a fact which cannot be ignored as observed in S. Hastimal vs. CIT (1963) 49 ITR 273 (Mad.). To say that the borrowing has not come from the accounted source of the lender may not be sufficient in itself to reach a presumption as it was held in the case of CIT vs. Metachem Industries (2000) 245 ITR 160 (MP) that there is no further responsibility to show, that it has come from the accounted source of the lender. In the case of Jalan Timbers v. CIT  223 ITR 11 (Gauhati), it was held that where, in respect of certain cash credits, the assessee had not only disclosed them in his return of income but also produced confirmatory letters from the creditors, and the creditors had also declared the amounts in their incometax returns which were accepted by the ITO, addition made as cash credits by ignoring the aforesaid facts would not be justified. It was also held in the case of CIT v. U.M. Shah, Proprietor, Shrenik Trading Co.  90 ITR 396 (Bom.) that If the parties had received the summons but did not appear, the assessee could not be blamed. However, where the summons was returned with the postal remark ‘not known’ (and ‘not found’), the said is an endorsement of the presupposed that at the specific address furnished by the assessee the addressee could not be traced. In such cases, the question of issuing a second summons would arise only if the address given earlier was erroneous, and not when it was almost identical as held in the case of Ram Kumar Jalan v. CIT  105 ITR 331 (Bom.). A decision often referred to by the assessee and tax practitioners on the issue of burden of proof in respect of cash credit is from Hon. Gujarat High Court in the case of DCIT vs. Rohini Builders (2002) 256 ITR 360 (Guj). It was held in this case that mere identification of the source of the creditors even without evidence as to the nature of the income could justify acceptance, where the assessee has given PAN of the creditor and also shows that the amounts were received by account payee cheques. Hon. High Court, in this case, endorsed the findings of the Tribunal that it is not necessary that there should be explanation as to the source of the money on the part of the creditors in every case.
It may, however, be understood that the above view was expressed by the Hon. High Court in a given facts and circumstances and it does not necessarily mean that in each and every case the onus on the part of the assessee is discharged by merely providing the PAN of the creditors. In fact, there are enough judicial pronouncements favouring Revenue where it has been acknowledged that the burden does not shift merely by providing PAN of the creditors or by simply identifying the source of cash credit. More so, in the cases where efforts have been made by the Assessing Officers to gather evidences by conducting enquiry to examine the truth in respect of the cash credit. In CIT vs. Bhan & Sons (2005) 273 ITR 206 (P & H), it was found that the credits were received by account payee cheques and the creditors were income tax assessees. But the contention of the Assessing Officer was that the assessee did not respond to the requirements of the production of creditors before him for verification. The first appellate authority and the High Court felt that it was possible for the Assessing Officer to have accepted the same or make further enquiries with reference to the files of the creditors, since they were assessees. Even so, the High Court reversing the finding of the Tribunal observed as under :
“the appellate authorities have failed to appreciate that in the present case the assessee had totally failed to respond to the notice of the Assessing Officer. Further, even if they were of the view that the Assessing Officer should have made cross verification with the records of the creditors available with him, they ought to have directed the Assessing Officer to do so instead of straight way accepting the assessee’s version without affording any opportunity to the Assessing Officer to make the verification. In the alternative, the appellant authorities could have themselves verified the material placed before them with the records of the creditors. This has not been done. Accordingly, we are satisfied that the appellate authorities have not dealt with the matter properly.”
The principle, as envisaged by the Hon. High Court in the above case, is one of absolutely liability, in which case the burden does not shift. Further, mere mention of incometax file number of creditor will not suffice to discharge the onus as held in the case of CIT v. Korlay Trading Co. Ltd.  232 ITR 820 (Cal.), where in it was held that where, without filing confirmation letter from the creditor, the assessee merely mentioned the income-tax file number of the creditor (which was also not supported by any affidavit from the creditor), the genuineness of the cash credit cannot be said to have been proved by the assessee.
In fact, the principle of onus, that the assessee is required to establish the identity, prove the genuineness of the transaction and establish the creditworthiness of the donor, has been reiterated even in a recent decisionof Hon. Delhi High Court in the case of CIT vs. Oasis Hospitalities Pvt. Ltd., 333 ITR 119 (Delhi)(2011). In this case it was held by the Hon. Court that “The initial onus is upon the assessee to establish three things necessary to obviate the mischief of Section 68. Those are: (i) identity of the investors; (ii) their creditworthiness/investments; and (iii) genuineness of the transaction. Only when these three ingredients are established prima facie, the department is required to undertake further exercise.”
17. Onus of proof: Prima facie onus is always on the assessee to prove the cash credit entry found in the books of account of the assessee. In land mark cases like Kale Khan Mohammad Hanif v CIT 50 ITR 1 (SC), Roshan Di Hatti v CIT  107 ITR (SC) it has been held that the law is well settled that the onus of proving the source of a sum of money found to have been received by an assessee, is on him. Where the nature and source thereof cannot be explained satisfactorily, it is open to the revenue to hold that it is the income of the assessee and no further burden is on the revenue to show that the income is from any particular source. It may also be pointed out that the burden of proof is fluid for the purposes of Section 68. Once assessee has submitted basic documents relating to identity, genuineness of transaction and creditworthiness then AO must do some inquiry to call for more details to invoke Section 68.
18. If the partner is source, is it income of firm or partner :
One argument taken by the assessee in the cases of firm that where the money has come from partner and genuineness of the same is not proved, addition if any, has to be made in the case of partner and not in the case of firm. On this issue it is most important to refer to the decision in the case of CIT v. Kishorilal Santoshilal  216 ITR 9 (Raj.), where in it was held that In the case of cash credits in accounts of firm, the following points need be noted:
(i) there is no distinction between the cash credit existing in the books of the firm, whether it is of a partner or of a third party;
(ii) the burden to prove the identity, capacity and genuineness has to be on the assessee;
(iii) if the cash credit is not satisfactorily explained, the ITO will be justified to treat it as income from undisclosed sources;
(iv) the firm has to establish that the amount was actually given by the lender;
(v) the genuineness and regularity in the maintenance of the account has to be taken into consideration by the taxing authorities;
(vi) if the explanation is not supported by any documentary or other evidence, then the deeming fiction created by Section 68 can be invoked;
(vii) simply because the amount is credited in the books of the firm in the partner’s capital account, it cannot be said that it is not the undisclosed income of the firm and that in all cases it has to be assessed as an undisclosed income of the partner alone.
19. An assessee can discharge his onus of proof by proving three things: Identity of the creditor, capacity of the creditor and the genuineness of the transaction in question. Once the assessee proves all three things his onus is discharged. It is also to be noted that there are many case laws wherein it has been held that the assessee only needs to prove the source of an entry he need not to prove the source of the source or the creditor’s creditor(position changed w.e.f AY 2013-14 for private limited companies where they have to prove source of source as discussed earlier).
20. In ITO v Suresh Kalmadi  32 TTJ (Pune) TM 300 it was held that where identity of creditor is established and entry shown to be not fictitious, the burden shifts on to the department to show as to why the entry still represented the suppressed income of the assessee. The assessee cannot be called upon to prove the worth of his creditor’s creditor. The fact that in the books of the creditors exactly the same amounts had been credited in the name of other parties and that immediately after repayment, the creditors withdrew the money could not lead to any adverse inference when this was their modus operandi and assessee’s case was not the solitary transaction.
A decision of Hon. ITAT Agra Bench in the case of Smt. Suman Gupta vs.Income-tax Officer, Ward 1, Aligarh  25 taxmann.com 220 (Agra) may also be referred to on this issue. In this case the assessee was found to have received Rs. 13 lakh as loans from six persons. Assessing Officer noted that immediately before amounts were lent to assessee, identical amounts were deposited in bank accounts of said persons. Assessee could produce only one lender for examination. Assessing Officer found that lenders had no creditworthiness to give loan as they had very small bank balances and were earning small income. In the given facts, it was held by the Tribunal that it was money of assessee which was routed through bank accounts of lenders for purpose of giving credits to assessee and entries were only accommodation entries and as such, could not be considered as genuine transactions.
21. Merely proving the identity of the creditor does not discharge the onus of the assessee if the capacity or creditworthiness of the creditors is not proved. The assessee also has to prove the capacity to give credit of the creditor. For example in Shankar Ghosh v ITO  23 TTJ (Cal.) 20 the assessee failed to prove the capacity of the person from whom he had allegedly taken loan. Further the assessee could not explain the need for the loan and the manner in which the loan amount was spent. The creditor issued two letters demanding repayment but did nothing on non compliance therewith, such letters did not therefore carry any conviction about the explanation of the assessee. Loan amount was rightly held as assessee’s own undisclosed income.
22. Assessee also have to prove the genuineness of the transaction in question in addition to the identity and capacity of the creditors. In CIT v Sahibganj Electric cables (p) Ltd.  115 ITR 408 (Cal.) where the amounts of loan received by cheques and repayments also made by cheques through asessee’s bankers, the creditors gave confirmation letters mentioning therein their income tax file numbers. ITO without making any further enquiry, disbelieving the evidence of the assessee made addition. ITAT held the additions not justified as the assessee discharged the onus. High Court held that Tribunal is justified in deleting the addition.
23. Some case laws in favour of AO which could be used to draw conclusions. The AOs may read the judgement before applying it to the facts of his case. (Source: Case laws in favour of department by Shivaji P Jacob)
1. Onus of proving the source of a sum of money found to have been received by an assessee is on him. When the nature and source of a receipt, whether it be of money or other property, cannot be satisfactorily explained by the assessee, it is open to the revenue to hold that it is the income of the assessee and no further burden lies on the revenue to show that the income is from any particular source.
Roshan Di Hatti Vs CIT (SC) 107 ITR 938
Kale Khan Mohammad Hanif Vs CIT (SC) 50 ITR 1
2. Credits in the name of third parties – Assessee must prove identity of credits, capacity of creditor to advance money and genuineness of transaction – Then only burden shifts to the Department.
Shankar Industries Vs CIT (Cal) 114 ITR 689
Hari Chand Virender Paul Vs CIT (P&H) 140 ITR 148
CIT Vs Biju Patnaik (SC) 160 ITR 674
CIT Vs Precision Finance P. Ltd. (Cal) 208 ITR 465
Dhanalakshmi Steel Re-rolling Mills Vs CIT (AP) 228 ITR 780
Sanil K.M.P. Vs CIT (Ker) 177 Taxman 481
3. Assessee failed to prove the genuineness of credit-mere proof of identity of creditor or that transaction was by cheque, is not sufficient – Addition under Section 68 upheld Mangilal Jain Vs ITO (Mad) 315 ITR 105
CIT Vs Precision Finance P. Ltd. (Cal) 208 ITR 465
4. Rejection of opening capital on the ground that assessee failed to prove source and how it got accumulated over the years Justified C. Packirisamy Vs ACIT (Mad) 315 ITR 293
5. Cash credit in books of account of HUF – Assessable under Section 68 in the hands of HUF in whose books the credit appears and not in the hands of members of HUF in whose name the credit stands.
Munshi Ram Vs CIT (P&H) 126 ITR 663
6. Firm’s books showing cash credit in names of partners – No satisfactory explanation – Will be deemed to be income of firm.
CIT Vs Shiv Shakthi Timbers (M.P) 229 ITR 505
Anand Ram Raitani Vs CIT (Gau) 223 ITR 544
Shanta Devi Vs CIT (P&H) 171 ITR 532
CIT Vs Kishorilal Sontishilal (Raj) 216 ITR 9
Hardwarmal Onkarmal Vs CIT (Pat) 102 ITR 779
CIT Vs Deepak Iron and Steel Rolling Mills (P&H) 336 ITR 307
7. Cash credit can be assessed even when business income is estimated – There is nothing in law which prevents ITO in taxing both unexplained cash credit and business income estimated after rejecting books being unreliable – It is for the assessee to prove that even if the cash credit represents income, it is from a source which has already been taxed
CIT Vs Devi Prasad Viswanath Prasad (SC) 72 ITR 194 Kale Khan Mohammed Hanif Vs CIT (SC) 50 ITR 1 Ratanchand Dipchand Vs CIT (MP) 38 ITR 188 CIT Vs Maduri Rajaiahgari Kistaiah (AP) 120 ITR 294 D.C. Auddy & Bros. Vs CIT (Cal) 28 ITR 713
8. Where any sum is found credited in the books of the assessee for any previous year it may be charged to Income Tax as the income of the assessee for that previous year if the explanation offered by assessee about the nature and source thereof is, in the opinion of the Assessing Officer, not satisfactory.
Sumati Dayal Vs CIT (SC) 214 ITR 801
Vasantibai N. Shah Vs CIT (Bom) 213 ITR 805
Sreelekha Banerjee & Ors. Vs CIT (SC) 49 ITR 112
9. Mere filing of Income Tax file number is not enough to prove genuineness of cash credit.
CIT Vs Korlay Trading Co.Ltd. (Cal) 232 ITR 820
10. Cash credit can be assessed even if transaction is through cheques.
CIT Vs Precision Finance P. Ltd. (Cal) 208 ITR 465
K.C.N. Chandrasekhar Vs ACIT (ITAT, Bang) 66 TTJ 355
CIT Vs United Commercial & Industrial Co.(P) Ld. (Cal) 187 ITR 596
11. Sec. 68 applicable even to share application money – Use of the words “any sum found credited in the books” indicates that the section is widely worded and ITO is not precluded from making enquiry as to the true nature and source thereof even if the sum is credited as share application money.
CIT Vs Sophia Finance Limited (Del-FB) 205 ITR 98
CIT Vs Nivedan Vanijyya Niyojan Ltd. (Cal) 263 ITR 623
CIT Vs Rathi Finlease Ltd. (MP) 215 CTR 429 ] explained
Dhingra Global Credence P. Ltd. Vs ITO (ITAT, Del) 1 ITR (Trib) 529 ] decision
Agarwal Coal Corporation (P) Ltd. Vs Addl. CIT (ITAT, Indore) 135 ITD 270] of
SC in CIT Vs Lovely Exports P. Ltd. [ 319 ITR (ST) 5 ] and distinguished
12. No evidence on record to show that cash credit was covered by intangible additions made for earlier year – Addition upheld.
CIT Vs Manick Sons (SC) 74 ITR 1
13. Assessee must establish nexus between credits and amount disclosed under VDIS Radio Instruments Associates (P) Ltd. Vs CIT (AP) 166 ITR 718
CIT Vs Assam Cold Storage Co. (Gau) 204 ITR 540
Jamnaprasad Kanhaiyalal Vs CIT (SC) 130 ITR 244
Radhey Shyam Tibrewal Vs CIT & Ors.(SC) 145 ITR 186
ITO Vs Ratanlal (SC) 145 ITR 183
14 Mere filing of gift deeds, PAN cards, I.T. returns etc. did not by itself discharge assessee from preliminary burden to establish genuineness of gifts where donors were not found at the address given in the returns or PAN card – In such circumstances, it is the duty of the assessee to produce donors / creditors before the Assessing Officer as otherwise addition under Section 68 has to be made. Prakashchandra Singhvi (HUF) Vs ITO (ITAT, Ahd) 134 ITD 283
15. Sec. 68 does not confine to cash entries in books – If the liability shown in the account is found to be bogus and there is no plausible and reasonable explanation of the assessee, the amount can certainly be added towards the income of the assessee V.I.S.P (P) Ltd. Vs CIT (MP) 265 ITR 202
16. Cash credit in books of accounts seized under Section 132 – Presumption under Section 132 (4A) does not absolve assessee of explaining source of cash credit Daya Chand v. CIT (Del) 250 ITR 327
17. Cash receipts entered in note book / rough cash book found during the course of survey – Section 68 applies. Haji Nazir Hussain & Co. Vs ITO (ITAT, Del-TM) 91 ITD 42
18. Mere entries of sale in books of accounts of assessee were not enough to justify cash credit – Some evidence of sale generating extra-ordinary income, was required to be placed by assessee – Sales amount treated as cash introduced from undisclosed sources.
Addl. CIT Vs Gurshant Rotary Compressors Ltd. (ITAT, Del-TM) 116 ITD 131
19. Credits in accounts claimed as advance received towards sale of shops and affidavit filed from such creditors – But none of them were produced before the Assessing Officer for authenticating their signature and explaining the contents of the affidavit – Possession of shops not handed over or money was not returned even after lapse of considerable time Addition under Section 68 upheld.
Krishan Kumar Jhamb Vs ITO & Anr (P&H) 17 DTR 249
20. Transaction of purchase and sale of shares – Allegedly made through a broker who is not registered with Stock Exchange Concerned company and broker denied transaction – Income from undisclosed sources – Addition under Section 68 upheld.
CIT Vs Hakumat Rai (P&H) 49 DTR 266
21. Assessing Officer has the power to examine the genuineness of brought forward creditors – Assessee failed to establish the unclaimed balance in the name of clients – Letters from creditors show discrepancy in balance – Addition on account of discrepancy upheld Suresh Kumar T. Jain Vs ITO 2010-TIOL-354-ITATBANG
22. Unexplained credit and debit entries of like amount in the ‘Haste Khate’ – Explanation offered by assessee was found untrue – Theory of peak credit could not be applied – Addition of all credits sustained Jhamatmal Takhatmal Kiranan Merchants Vs CIT (MP) 152 CTR 311