Section 68 has been introduced in order to plug loopholes and in order to place certain situations beyond doubt even though there were judicial decisions covering some of the aspects. For example, even long prior to the introduction of s. 68 in the statute book, courts had held that where any amounts were found credited in the books of the assessee in the previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was, in the opinion of the ITO, not satisfactory, the sums so credited could be charged to income-tax as income of the assessee of a relevant previous year. Section 68 was inserted in the I.T. Act, 1961, only to provide statutory recognition to a principle which had been clearly enumerated in judicial decisions.
The conditions for the applicability of s. 68 are:
I. The existence of books of accounts maintained by the assessee himself;
II. A credit entry in the books of account; and
III. The absence of a satisfactory explanation by the assessee about the nature and source of the sum credited.
I. The existence of books of accounts maintained by the assessee himself:
Examination of Section 68 of the Income-tax Act would show that in relation to the expression “books”, the emphasis is on the word “assessee”. In other words, such books have to be the books of the assessee himself and not of any other assessee. In Smt. Shanta Devi v. Commissioner of Income-tax the assessee maintained no books of account. The cash credit entry, of which the sum in question forms part, was found in the books of the account of the partnership firm which in its own right is an assessee. It was held that the books of account of the partnership firm cannot be considered as those of the individual assessee and, therefore, section 68 of the Income-tax Act would not be attracted to the case.
I.B. Existence of Books of Accounts is a condition precedent for s. 68: In Anand Ram Raitani v. Commissioner of Income-tax High Court Of Gauhati held that under Section 68 of the Act 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. The Assessing Officer before invoking the power under Section 68 of the Act must be satisfied that there are books of account maintained by the assessee and the cash credit is recorded in the said books of account and if the assessee fails to satisfy the Assessing Officer, the said sum so credited has to be charged to income-tax as the income of the assessee of that previous year. The existence of books of account is a condition precedent for invoking of the power. The first condition necessary for invocation of the power is the existence of the books of account.
Books of Accounts of partnership firm and partners are different: Section 68 applies where the books of the assessee show a cash credit entry. The term “assessee” has been defined by Clause (7) of Section 2 to mean a person by whom any tax or any other sum of money is payable under this Act. Section 2(31) defines the expression “persons” to include an individual, a Hindu undivided family, a company, a firm or association, etc. The I.T. Act makes a distinction between an individual as a person who is liable as an assessee on the one hand and a firm on the other being as much an entity liable to assessment independently of the individuals who may constitute its partners. When Section 68 uses the term “books of an assessee”, it refers to the assessee whose books show the cash credit entry.
A partnership firm is an assessable entity distinct from the individual partner. The books of account of a partnership cannot be treated as those of the individual partner. And in the case of the firm, the books maintained by the firm should show a cash credit entry and the firm’s explanation should be found unsatisfactory, then only Section 68 will entitle the ITO to include the amount of the entry as the income of the assessee-firm. The above position of law is enunciated from the principle that a partnership firm is an assessable entity distinct from its individual partners constituting the firm.
II. A credit entry in the books of account is must : The provisions of sections 68 and 69 were introduced in order to check bogus entries which are resorted to by firms in order to raise the corpus of the firm and the money which is being invested may not come from a valid source. Both these Sections were engrafted so as to raise a statutory presumption in the event of unsatisfactory explanation of those entries. This was with a view to check the evil of illegal bogus entries. For the purpose of avoidance of tax, certain black money of the firm is sought to be invested in the names of bogus persons so as to convert it into white investment. Therefore, law has made such a strong presumption so as to deter this kind of tendency.
A close reading of both these Sections makes it clear that in Section 68, there should be a credit entry in the books of account, whereas in Section 69, there may not be an entry in the books of account. This is a fundamental difference between the two provisions. In the case of Section 69 only where investment has been made but has not been satisfactorily explained, the income should be treated to be the income of the assessee whereas in the case of Section 68, there should be a book entry and if that book entry is not satisfactorily explained, then it should be treated as income of the assessee.