The Hindu Business Line : Tax experts raise concern over loan, cash credit in scrutiny cases

DIRECT tax experts, debating the import ofSection 68 (which concerns circumstances under which the assessing officer may consider loan or cash credit as income of an assessee) at various fora have expressed concern over the areas of dispute that may crop up in scrutiny cases. It is felt that the matter has assumed importance, considering the different views of the high courts in the country, even as the litigation between the assessee and the department over the AO's powers has been on the upswing.

At a recent meet here organised by the Association of Corporate Advisers & Executives, tax experts said that the Finance Ministry, as part of the Union Budget exercise to minimise litigation in direct tax matters, should consider this aspect of "subjective approval" of the AO, which often leads to litigation.

Section 68 says: "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 AO satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year."

According to Mr Narayan Jain, tax lawyer and visiting faculty at WB National University of Juridical Science (NUJS), while it is appreciated that such sections are introduced in the Act essentially to plug loopholes in the system, some of the court decisions say that "inability of the department to verify the explanation offered by the assessee" is not sufficient for rejection of the explanation.

"The assessee cannot be presumed to have special knowledge about the source of source or origin of origin."

Mr Jain cited a Calcutta High Court decision (Shankar Industries vs CIT) on the issue of prima facie onus being on the assessee. It was held that it was necessary for the assessee to prove the transaction which results in a cash credit in his books of account. He said the three basic criteria, according to the court, for discharging the onus, were "proof of identity of creditor, capacity of such creditor to advance the money (his credit-worthiness) and the genuineness of the transaction." It was held that only after the assessee has adduced evidence to establish prima facie the three criteria that the onus shifts to the department.

According to the expert, in a recent case on burden of assessee to prove genuineness of transactions as well creditworthiness of creditor between assessee and creditor and/or creditor and sub creditor, the Gauhati High Court has held differently that "... if the creditor fails to satisfy as to how he had actually received the said amount and happened to keep it in the bank, the said amount cannot be treated as income of the assessee from undisclosed sources."

According to Mr Jain, it was not the assessee's business to find out source of money of his creditor or genuineness of transactions, as these may not be within the special knowledge of the assessee.

The Guwahati High Court has held that "a person may have funds from any source and as assessee, may take a loan from such a person. It is not the business of the assessee to find out whether the source from which the creditor has agreed to advance the amounts were genuine or not."

Mr Jain said, as held by the Calcutta court recently, the assessee may also seek assistance of Section 131 of the Act for the purpose of proving its own case. Section 131 empowers the AO to exercise the same power as vested in a civil court for compelling attendance of witnesses.

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