Bounced cheque can not be treated unexplained credits u/s 68 – ITAT

Bounced cheque can not be treated unexplained credits u/s 68. Onus to prove identity, genuineness and creditworthiness of the party out of question – ITAT

ABCAUS Case Law Citation:
ABCAUS 2385 (2018) 06 ITAT

In a recent judgment, ITAT Hyderabad has held that bounced cheque can not be treated unexplained credits u/s 68 of the Income Tax Act, 1961 (the Act).

The instant appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) deleting inter alia the addition made by the Assessing Officer u/s 68 of the Act

During the scrutiny, the AO noticed that assessee had received some un-secured loans from six persons. The assessee submitted that she had approached the said six parties for finance and they had given cheques but those cheques had bounced and as such no loan had been taken from the above parties.

Explaining the entries appearing in the books of account, the assessee explained that those were squared up entries which were nothing but entries made for cheque deposit and consequent bouncing of the same.

However, the AO was of the view that bank had credited the amount in the bank account and accordingly, they were to be considered as cash credits and since assessee had not proved the identity of the creditors.

Accordingly he made the impugned addition  for the amount and added it to the income of the assessee u/s 68 of the Act.

On appeal by the assessee, the CIT(A) deleted the addition.

The CIT observed that the entries in the books of account in the names of the parties who had advanced loans were nothing but cheque deposit and consequent bouncing of the same, which was proved by the entries in the bank statements.

CIT-A opined that it is the standard procedure of the bank that as and when a cheque is deposited a suspense credit is given in the statement and when the cheque which was deposited bounces, the bank debits the account.

CIT-A held that the entries which the AO had added were reflected both in the debit and credit side as contra when deposited and bounced and as the cheques had bounced, the above amounts were not received by the appellant and hence, the same could not be treated as unexplained credits and hence the further onus to prove the identity of the creditors, genuineness of the credits and creditworthiness of the creditors does not arise.

Aggrieved by the order of the CIT-A, the revenue filed the appeal before the Tribunal.

In the course of appellate proceedings, the Tribunal directed the Revenue to furnish the authorization given by the CIT with reference to the grounds raised. The grounds originally filed by the AO were revised.

The Tribunal was perplexed as to how an AO could make addition on the bounced cheques. It is a general banking practice that once cheques are presented for clearance, bank credits out of its own funds, subject to clearance and when cheques are not cleared, the amounts are reversed. Thus in practice, once the cheque is presented, banks credit the amount of cheque value. Therefore, the credits in the bank account are the funds of the bank which cannot be treated as ‘unexplained’ in any manner.

The ITAT opined that since the cheques have been bounced, there are corresponding debits also and as assessee is maintaining books of account under Mercantile System of Accounting, both the deposit of cheques and bouncing of the cheques are bound to be recorded in the books of account.  Under what circumstances, AO considered that these amounts as unexplained credits u/s 68 of the Act was not explainable.

The Tribunal observed that the CIT(A) had examined the issue and very clearly stated that this cannot be considered as unexplained cash credits u/s 68. In spite of that, both in the original grounds of appeal and  revised grounds of appeal, this issue was contested.

The Tribunal commented that perhaps the Senior Officers like CIT are not applying their mind to the facts of the issue before preferring appeals which reflects sorry state of affairs. The Tribunal cautioned that at least while preferring second appeal to the ITAT, the Senior Officers should exercise caution and prefer appeals only on meritorious issues.

The ground was dismissed

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