Burden of Proof and Extent of Onus on Cash credits U/s.68 of Income tax Act

Onus on assessee to prove the source and nature of receipt:
The onus of proving the source of a sum of money found to have been received by an assessee is on him. If he disputes the liability for tax, it is for him to show either that the receipt was not income or that if it was, it was exempt from taxation under the provisions of the Act. In the absence of such proof, the Revenue is entitled to treat it as tax able income.

In A. Govindarajulu Mudaliar v. CIT the Court came to the conclusion that:
“There is ample authority for the position that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipt are of an assessable nature.”

In Kale Khan Mohammad Hanif v. Commissioner of Income-tax the Supreme Court, in answering the question “Whether the burden of proving the source of the cash credit is on the assessee” observed that:
“It is well established that the onus of proving the source of a sum of money found to have been received by the assessee is on him. If he disputes liability for tax it is for him to show either that the receipt was not income or that if it was, it was exempt from taxation under the provisions of the Act. In the absence of such proof, the Income-tax Officer is entitled to treat to as taxable income.”

Shifting of onus to the department:
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. This section has, therefore, removed the distinction which was drawn in some decisions between the credits held in the name of the assessee and those held in the name of a third party. Under Section 68 now the assessee has to prove that such third party was in a position to lend such sums and that he did, in fact, so lend to the assessee in order to satisfy the Income-tax Officer that the credits shown in the account books were genuine. This section has laid the onus of proof on the assessee.

In Orient Trading Co. Ltd. v. Commissioner of Income-tax 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.

Treatment of Explanation by the assessee. The length of time taken after assessee is called upon to explain a cash credit is also a relevant factor in considering whether the evidence produced is satisfactory. Inability of the department to verify the explanation offered by the assessee is not a sufficient cause for rejection of the explanation. At the same time, it is not correct to say that the AO is not entitled to reject the explanation without some other positive evidence falsifying the assessee’s case. The true test is that, while the AO is not bound to accept as true any possible explanation which the assessee may put forth, he cannot also arbitrarily reject the assessee’s explanation.

Section 68 of the Act does not stop at advancing of explanation about the nature and source of any sum found credited in the books by the assessee; the Assessing Officer is also required to be satisfied that the explanation offered by the assessee is acceptable and/or in other words, genuine.

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