In Nanak Chandra Laxman Das v. CIT the Allahabad High Court has taken the same view that:
Where any sum is found credited in the books of the assessee, the initial onus is on the assessee to offer an explanation of the nature and source of a cash credit. If the explanation is not found satisfactory or reasonable, the Income-tax Officer can treat such money as the assessee’s income from undisclosed sources. It is not necessary for the Income-tax Officer to locate the exact source of the credits. The assessee can prove the genuineness of the credits by establishing from some plausible evidence the identity of the creditor and his creditworthiness.
In CIT v. Kishorilal Santoshilal it was held that:
In the case of cash credits in the accounts of a firm
(i) there is no distinction between the cash credit entry 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 is on the firm;
(iii) if the cash credit is not satisfactorily explained, the Income-tax Officer is 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 accounts has to be taken into consideration by the taxing authorities, and
(vi) if the explanation is not supported by any documentary or other evidence,
then the deeming fiction created by Section 68 of the Income-tax Act, 1961, can be invoked.
III. The absence of a satisfactory explanation by the assessee about the nature and source of the sum credited.
III. A. Assessee can furnish alternative explanations:
Section 68 provides that 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 ITO, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. The section, on a proper construction, does not debar the assessee from offering alternative explanations and if either of them is accepted, the cash credit cannot be charged as the income of the assessee. Therefore, an assessee can furnish alternative explanations, and if any one of them is accepted, the cash credit cannot be charged as the income of the assessee.
III. B. Assessing Officer “must” be satisfied:
The section requires that the assessing officer must be satisfied that the explanation offered by the assessee is genuine. 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. When the law has given to the Assessing Officer discretion and it is his satisfaction upon which genuineness has to be decided, his inference on the basis of the facts is a finding of fact.
In CIT v. Daulat Ram Rawatmull, the Supreme Court held that the fact that the depositor had not been able to give a satisfactory explanation regarding the source of deposit would not be decisive even of the matters as to whether the depositor was or was not the owner of the amount, that a person could still be held to be the owner of a sum of money even though the explanation furnished by him regarding the source of that money was found to be incorrect, and that from the simple fact that the explanation regarding the source of the money had been found to be false, it would be a remote and farfetched conclusion to hold that the money belonged to the assessee.
III. C. Unexplained cash credit “may” be charged to income-tax: The section requires that the assessing officer must be satisfied that the explanation offered by the assessee is genuine; but it also provides that in the absence of a satisfactory explanation, the unexplained cash credit “may” be charged to income tax- therefore, the unsatisfactory explanation does not automatically result in deeming the amount credited in the books as income of the assessee.
The phraseology of section 68 is clear. The Legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year. The legislative mandate is not in terms of the words “shall be charged to income-tax as the income of the assessee of that previous year”. In CIT v. Smt. P. K. Noorjahan, the Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word “may” and not “shall”. Thus the unsatisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee.
Therefore, according to Section 68, the first burden is on the assessee to satisfactorily explain the credit entry in the books of account of the previous year. If the explanation given by the assessee is satisfactory, then that entry will not be charged with the income of the previous year of the assessee. In case the explanation offered by the assessee is not satisfactory or the source offered by the assessee-firm is not satisfactory, then in that case, the amount should be taken to be the income of the assessee.