Addition u/s 68 on account of cheque received from director of the company on the last day of the financial year which was reversed on 1st day of next financial year – SLP dismissed
In a recent order Hon’ble Supreme Court has dismissed the SLP of the assessee against the judgment of the Hon’ble High Court of Punjab and Haryana confirming the addition u/s 68 on account of cheque received from the director of the company on the last day of the financial year which was reversed on 1st day of next financial year.
ABCAUS Case Law Citation:
4352 (2024) (12) abcaus.in SC
Important Case Laws relied upon by Parties:
M/s Sri Balamurugan Textile Processing Ltd. Vs The ACIT
CIT v Best And Company
ACIT vs Mahendra Kumar Agrawal
CIT v Kusum Products Ltd 361 ITR 632
CIT vs Shoorji Vallabhdas & Co. 46 ITR 144 (SC)
CIT vs Kerala State Drugs & Pharmaceuticals Ltd., 192 ITR 1 (Ker)
Sree Lekha Banerjee v. CIT
The appellant assessee was a private limited company which has taken various loans from director and their relatives. During enquiries in respect of these loans, it was noticed that in case of one individual who was wife of the Director had advanced a large amount to the company. However, the return of income filed by her did not depict commensurate income. Therefore, assessee was asked to explain how she could advance such huge amount to the company when she did not had commensurate sources of income.
In response, an undertaking from her was filed claiming that she had made payment from her Bank. It was further explained that said amount was given by her on 31st March being the last date of the financial year and taken back on 1st April of the very next financial year and, therefore, it was only a paper transaction.
The Assessing Officer after examination of these submissions observed that it was merely an after thought. He also observed that assessee has failed to prove the creditworthiness of the depositor. However, since the assessee had shown this transaction in the books of account and created a liability on the same and had also given effect on the asset side as cheque pending realization / encashment.
The Assessing Officer observed that even if it was a paper transaction then it was a manipulation of the account which is best known to the assessee. According to AO the provisions of section 68 were clearly applicable and, therefore, he added a sum of the income to the assessee company.
However, the CIT(A) observed that if there was no credit to the bank account of the appellant company, which was the case, there cannot be any question of application of section 68 of the Act. The CIT(A) opined that Section 68 applies only when a sum is found credited in the books which in the case in hand would imply the bank account.
The CIT(A) questioned the when was no credit entry in the bank account, Section 68 can not be invoked. He further observed that if the amount would have been credited to the bank account of the appellant, the source of the credit would have stood explained, it having been transferred from the bank account of the director and even in that case, no action could have been taken. As a result, the CIT(A) deleted the addition.
Before the Tribunal, the assessee contended that admittedly the cheque received was never encashed by the assessee company. Simply because there is an entry of a sum credited in the books of account will not attract the provisions of section 68. According to him, section 68 can be invoked if the real funds have moved to the accounts of the assessee. In this regard, he relied on the observations made by the Jaipur ITAT. He further submitted that simply because the assessee has done some window dressing in the account will not fasten the liability on the assessee and in this regard, he strongly relied on the decision of Hon’ble Calcutta High Court. Further relying on the judgment of the Hon’ble Supreme Court he contended that in any case if funds had not moved to the company and no real money has come to the company, the same cannot be construed as income because of the theory that only real income can be subjected to tax.
The Tribunal noted that identical issue came before the Chennai Bench of the Tribunal which dismissed the appeal of the assessee.
The Tribunal observed that from the order and discussion of the Chennai Bench, it absolutely clear that Section 68 would get invoked the movement the entry for credit of a sum is made in the books of account. The CIT(A) totally misdirected himself to the extent and meaning of section 68 by observing that this section can be invoked only when the money is credited in the bank account. The section clearly shows that provision can be invoked once a credit is made in the books of account. Therefore, the addition had been correctly made by the Assessing Officer.
The Tribunal noted that the assessee particularly relied on the observation made by the ITAT Jaipur as under:
”in s. 68 the words used are “where any sum is found credited in the books of an assessee”. In this connection the word “sum” is of paramount importance. The words “any sum” cannot be taken as parallel to “any entry”. The provisions of s. 68 are deeming provisions and therefore, onus is on the Department to prove that any sum was credited to the books of the assessee.”
The Tribunal observed that the above observation was made in the context of facts which in the case in hand are totally distinguishable. In any case, these observations are quite contradictory to the observations made by Hon’ble Supreme Court.
The assessee argued that it had not actually received the money and it was only a paper transaction. The Tribunal observed that no further details were given why this paper transactions were carried out by the assessee. The Chennai Bench of the Tribunal also dealt with this issue. The Supreme Court had clearly observed that if some information was in the possession of assessee then it is only the assessee who can disclose such information and Revenue authorities would have the right to take adverse inference in the absence of reasons given for hidden information. Therefore, unless and until the assessee is ready to explain why paper entries were made in the books of account, no cognizance can be taken of this contention and section 68 has to be invoked once a sum is found to be credited.
The Tribunal further observed that another contention was made that unless and until the real income come to the assessee, the assessee cannot fasten with a liability. The ITAT opined that generally speaking there is no doubt that it is only the real income which can be taxed but this theory has to be understood subject to some limitations. For example u/s 22 which deals with the income form house property. The above section has been interpreted by various authorities to mean that even if house property is not let out, even then the rent which a particular owner might have received is required to be taxed as notional income. Similarly u/s 2(22)(e) deemed dividends are subject to tax on notional basis. Therefore, section 68 cannot be rendered meaningless simply on the basis of real income theory
As a result, the Tribunal allowed the appeal of the Revenue. The assessee challenged the order of the ITAT before the Hon’ble High Court.
The Hon’ble High Court admitted the appeal on the following substantial questions of law:
(i) Whether in facts and circumstances of the case, the Authorities below erred in law in making the provisions of section 68 of the Act applicable to the assessee in a mechanical manner without controverting the fact finding in favour of the assessee?
(ii) Whether income tax is on real income ascertained as per the provisions of the Act and not on hypothetical income?
It was contended by the appellant company that in terms of Section 68 of the Income Tax Act, the said entries cannot be said to be the income for the previous year as it was wrongfully entered and reversed immediately on the next day. It was further submitted that one of the Directors had issued cheque which was returned back on the next day.
The Hon’ble High Court observed that there is no question of mens rea involved to be examined by invoking the provisions of section 68. The Hon’ble High Court opined that once amount is credited in the books of accounts and the same is returned on the next day, realising that too only on 31st March i.e. last day of the assessment year, would be including of the said amount as part of the income of that year. Returning back the same on the next day would not result in the income of the previous year being reduced. If we allow such entries, one cannot lose sight that the assessees may make fictitious entries and return the same on the next day for taking tax benefits. There may be cases where the entries in the books of accounts may not be reflected in the bank account as the entries may be made in cash or in cheque which may not be ultimately encashed.
The Hon’ble High Court further observed that it is now trite law that the income to be assessed and ascertained under the provisions of the Act is the accrued income and not the actual income which the assessee may have acquired in a financial year. Therefore, the actual income of the assessee which accrues to him during the financial year, if there is an entry of any amount in the books of accounts as on 31st March, the same would be included as income of the assessee, even if he/ she may not have encashed the cheque on that day.
With the above observations, the Hon’ble High Court answered questions in favour of the revenue and dismissed the appeal of the assessee.
Not satisfied with the order of the Hon’ble High Court, the assessee filed a Special Leave Petition (SLP) before the Hon’ble Supreme Court challenging the said judgment. The Hon’ble Supreme Court dismissed the SLP with following observations:
“There is a delay of 122 days in filing the Special Leave Petition which has not been satisfactorily explained. Even otherwise, we have gone through the Special Leave Petition and do not find any merit in the same. The Special Leave Petition is, therefore, dismissed on the ground of delay as well as on merits.”
Download Full Judgment Click Here >>
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