I would like to begin this piece with a simple poser to TIOL netizens - Name the Section in the Income Tax Act which is least understood by both the Income Tax authorities as well as practitioners and that generates maximum litigation? Most Netizens may prefer naming Section 68. If they do it, they cannot be faulted with. This Section provides that if the cash credit is unexplained, it would be treated as income.
The section reads as under:
68. Cash credits.--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 Income-tax Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.
The section is in chapter VI which is titled as ‘Aggregation of income and set off of loss’. This chapter is after the chapters of ‘Clubbing of income’ and ‘Heads of income’.
The moot point which is mostly misunderstood by income tax authorities is as to the head of income under which such unexplained cash credit is to be assessed.
It is generally argued that since business is the only source of income, unexplained cash credit should be treated as ‘business income’. This argument is fallacious. If an assessee has only source of income as income from house property, then, as per this argument, unexplained cash credit would be assessable as income from house property, and in such situation he would also claim standard deduction that is 30% for repairs etc. Similarly if agriculture is the only source of income of the assessee, then such income will have to be assessed as agricultural income. Obviously this argument is flawed and therefore, unexplained cash credit cannot logically be assessed as business income. If it is assessed as business income it would amount to recognizing a source of income which is against the very condition of section which says that source of cash credit income is not known.
Then a question arises as to under which head this amount should be assessed. There can be two possibilities. It should either be assessed as income from other source or it should be assessed u/s 68 itself, without any head of income. The point has rightly been discussed in detail by Gujarat High Court in the case of Fakir Mohd. Haji Hassan vs. CIT (2003-TIOL-243-HC-AHM-IT).
A credit is unexplained because source of money is not established to be believable. Since there is no source, there cannot be business income which necessarily entails existence of some source.
There is one more argument. How the assessee had earned this income which is introduced in books by way of cash credit is within his special knowledge and u/s 106 of Evidence Act, it is the burden on the assessee to prove his statement, that is, the source of income. Simply saying that it is business income is not enough. The AO has no material as to how the assessee had earned income and therefore the assessee, and the assessee only, has to furnish material to prove his case that the income is from business. Apparently if the assessee does not furnish any such material, the assessee cannot be discharged of his burden of proving it as business income. Therefore it cannot be assessed as business income. With similar argument, it can be said that it cannot be assessed as income from other sources. It is obviously income from undisclosed sources.
The section reads as under:
68. Cash credits.--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 Income-tax Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.
The section is in chapter VI which is titled as ‘Aggregation of income and set off of loss’. This chapter is after the chapters of ‘Clubbing of income’ and ‘Heads of income’.
The moot point which is mostly misunderstood by income tax authorities is as to the head of income under which such unexplained cash credit is to be assessed.
It is generally argued that since business is the only source of income, unexplained cash credit should be treated as ‘business income’. This argument is fallacious. If an assessee has only source of income as income from house property, then, as per this argument, unexplained cash credit would be assessable as income from house property, and in such situation he would also claim standard deduction that is 30% for repairs etc. Similarly if agriculture is the only source of income of the assessee, then such income will have to be assessed as agricultural income. Obviously this argument is flawed and therefore, unexplained cash credit cannot logically be assessed as business income. If it is assessed as business income it would amount to recognizing a source of income which is against the very condition of section which says that source of cash credit income is not known.
Then a question arises as to under which head this amount should be assessed. There can be two possibilities. It should either be assessed as income from other source or it should be assessed u/s 68 itself, without any head of income. The point has rightly been discussed in detail by Gujarat High Court in the case of Fakir Mohd. Haji Hassan vs. CIT (2003-TIOL-243-HC-AHM-IT).
A credit is unexplained because source of money is not established to be believable. Since there is no source, there cannot be business income which necessarily entails existence of some source.
There is one more argument. How the assessee had earned this income which is introduced in books by way of cash credit is within his special knowledge and u/s 106 of Evidence Act, it is the burden on the assessee to prove his statement, that is, the source of income. Simply saying that it is business income is not enough. The AO has no material as to how the assessee had earned income and therefore the assessee, and the assessee only, has to furnish material to prove his case that the income is from business. Apparently if the assessee does not furnish any such material, the assessee cannot be discharged of his burden of proving it as business income. Therefore it cannot be assessed as business income. With similar argument, it can be said that it cannot be assessed as income from other sources. It is obviously income from undisclosed sources.
Such income from undisclosed sources is assessable u/s 68 of I.T. Act. Section 68 is in chapter VI of IT Act, that is, outside Chapter IV which contains different sub-heads of source of income.
Under Chapter IV sub-heads of income are as under :-
a) income from salary
b) income from house property
c) income from business
d) capital gain
e) income from other sources
b) income from house property
c) income from business
d) capital gain
e) income from other sources
All these sub-heads are in respect of those incomes for which source is explained and verifiable. The income has to fall under any of the above heads. If the income does not fall in first four heads, it would be income from other sources. However, if the assessee does not explain the source of his income, then it cannot be categorized as income under any particular head simply because source itself is not known.
It may be noted that the general perception among tax practitioners and the department is that such income should be assessed under the head income from other source but this is not correct interpretation, because Sec.68 is very much outside the provisions of sec.56 to 59 i.e. Chapter for income for undisclosed source. Obviously the legislature intended that income covered by section 68 should not fall u/s 56. If income from undisclosed source is assessed as income from other source, there would be a risk of assessing salary and business income under the head income from other source simply because the assessee has suo moto chosen not to disclose the source of income to the AO. This will go against the very spirit of various heads.
Sec.14 provides that income can be classified only under 5 heads as discussed above. However, there is a rider. This is evident from the opening clause of sec.14 which starts with the clause, “save as otherwise provided’. This clearly means that sec.14 had also envisaged a situation where income is not to be classified under any of the heads. Such envisaged situation as per the above clause of section 14 is in respect of income that is covered by sec.68 and 69 of the I.T. Act. These sections are in different Chapter that is Chapter VI. The title of this Chapter is ‘Aggregation of income and set off or carry forward of loss’. Thus, the scheme of the Act is very clear that income covered by sec.68 & 69 are to be aggregated with other incomes. They are not to be classified under any of the heads of income as given in Chapter IV. Thus, it is very clear that income covered by Sec.68 and 69 are not to be placed under any heads of income. This view was expressed by Gujrat High Court in the case of Fakir Mohd. Haji Hassan vs. CIT (2003-TIOL-243-HC-AHM-IT).
Now an important and relevant question arises, that is, whether the assessee is eligible for set off of loss under the head business or under any other head, with such income. On a careful reading of various provisions of set off, it would be found that there is no such provision in the Act for such set off. Sec.70 is for set off within same head of income. Sec.71 is for set off amongst different heads of income. There is no provision of set off where the income is outside all the heads of income. Therefore, the assessee is not eligible for any set off. (In practice the departmental officers usually give such set off without allowing a wrinkle on their foreheads!)
It may be noted that only the assessee knows as to how in reality he has earned that income. However, he is willfully not showing as to how he has earned the income, because he had introduced it as cash credit. In such situation, the AO can take a best judgment view, because the assessee is not coming forward with the truth. In absence of full facts only an adverse view is to be taken on the basis of material available. Suppose, if in reality, the income is from gambling or from lottery, then the assessee is not eligible for any deduction against such income under the provisions of Act. However, the assesse can claim various deductions if he conceals real source of income and offers it as unexplained cash credit? Obviously the AO must not give any deduction to the assessee so long as real source of income is not known. It is therefore proper to hold a view that the assessee cannot be permitted to avail benefit of set off of losses from income by way of unexplained cash credit. Therefore, benefit of set off is to be denied to the assessee so long as the assessee does not disclose true facts of the case and the true source of income. Therefore, set off is not permissible. Entire amount assessable as unexplained cash credit should be taxable as income u/s 68 without any set off from business loss and business loss should be allowed to be carried forward as it is.
It may be noted that the general perception among tax practitioners and the department is that such income should be assessed under the head income from other source but this is not correct interpretation, because Sec.68 is very much outside the provisions of sec.56 to 59 i.e. Chapter for income for undisclosed source. Obviously the legislature intended that income covered by section 68 should not fall u/s 56. If income from undisclosed source is assessed as income from other source, there would be a risk of assessing salary and business income under the head income from other source simply because the assessee has suo moto chosen not to disclose the source of income to the AO. This will go against the very spirit of various heads.
Sec.14 provides that income can be classified only under 5 heads as discussed above. However, there is a rider. This is evident from the opening clause of sec.14 which starts with the clause, “save as otherwise provided’. This clearly means that sec.14 had also envisaged a situation where income is not to be classified under any of the heads. Such envisaged situation as per the above clause of section 14 is in respect of income that is covered by sec.68 and 69 of the I.T. Act. These sections are in different Chapter that is Chapter VI. The title of this Chapter is ‘Aggregation of income and set off or carry forward of loss’. Thus, the scheme of the Act is very clear that income covered by sec.68 & 69 are to be aggregated with other incomes. They are not to be classified under any of the heads of income as given in Chapter IV. Thus, it is very clear that income covered by Sec.68 and 69 are not to be placed under any heads of income. This view was expressed by Gujrat High Court in the case of Fakir Mohd. Haji Hassan vs. CIT (2003-TIOL-243-HC-AHM-IT).
Now an important and relevant question arises, that is, whether the assessee is eligible for set off of loss under the head business or under any other head, with such income. On a careful reading of various provisions of set off, it would be found that there is no such provision in the Act for such set off. Sec.70 is for set off within same head of income. Sec.71 is for set off amongst different heads of income. There is no provision of set off where the income is outside all the heads of income. Therefore, the assessee is not eligible for any set off. (In practice the departmental officers usually give such set off without allowing a wrinkle on their foreheads!)
It may be noted that only the assessee knows as to how in reality he has earned that income. However, he is willfully not showing as to how he has earned the income, because he had introduced it as cash credit. In such situation, the AO can take a best judgment view, because the assessee is not coming forward with the truth. In absence of full facts only an adverse view is to be taken on the basis of material available. Suppose, if in reality, the income is from gambling or from lottery, then the assessee is not eligible for any deduction against such income under the provisions of Act. However, the assesse can claim various deductions if he conceals real source of income and offers it as unexplained cash credit? Obviously the AO must not give any deduction to the assessee so long as real source of income is not known. It is therefore proper to hold a view that the assessee cannot be permitted to avail benefit of set off of losses from income by way of unexplained cash credit. Therefore, benefit of set off is to be denied to the assessee so long as the assessee does not disclose true facts of the case and the true source of income. Therefore, set off is not permissible. Entire amount assessable as unexplained cash credit should be taxable as income u/s 68 without any set off from business loss and business loss should be allowed to be carried forward as it is.
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