Analysis of Section 68 and 69 of the Income Tax Act, 1961

STUDY OF:
- SECTION 68 / 69
- Relevant Case Laws
- Peak Credit Theory
and Concept of
Telescoping

CONTENTS
• BearActStudyof Section 68, 69, 69A, 69B, 69C and69D
• Meaningof Hundi
• Analysisof above-mentioned Sections
• Rateof Taxability
• Onus w.r.tIndianEvidence Act,1872
• Documentation tobe maintainedin order to satisfy thetest underSection 68/69
• Bogus Purchasesvis a vis Unproved Purchases
• CaseLawsw.r.t.Bogus Purchases
• CaseLawsw.r.t.Section 68 and69
• PeakCredit Theory
• Concept of Telescoping

SECTION 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 Assessing Officer,
satisfactory,thesumsocreditedmaybechargedtoincome-taxas theincomeof the assesseeofthat previousyear:
Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum
so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any
explanationofferedbysuchassessee-companyshallbe deemedtobenotsatisfactory,unless—
(a)theperson,beingaresident inwhose name suchcreditis recordedinthebooks of suchcompanyalsooffers anexplanationabout
the natureand sourceof suchsumsocredited;and
(b)suchexplanationintheopinionof theAssessingOfficeraforesaidhas beenfoundtobesatisfactory:
Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is
recorded,isa venturecapital fundoraventurecapital companyas referredtoinclause(23FB)of section10.

SECTION 69 : UNEXPLAINED INVESTMENTS
Where in the financial year immediately preceding the assessment year the assessee has made investments which are not
recordedin the books of account, ifany, maintained by him forany source of income,and theassesseeoffers no explanation
about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing
Officer, satisfactory, the value of the investments may bedeemedto bethe income of the assessee of such financial year.

SECTION 69A : UNEXPLAINED MONEY ETC.
Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article
and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for
any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money,
bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer,
satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of
the assessee for such financial year.

SECTION 69B : AMOUNT OF INVESTMENTS ETC.
NOT FULLY DISCLOSED IN BOOKS OF ACCOUNT
Where in any financial year the assessee has made investments or is found to be the owner of any bullion, jewellery or other
valuable article, and the Assessing Officer finds that the amount expended on making such investments or in acquiring such
bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by
the assessee for any source of income, and the assessee offers no explanation about such excess amount or the explanation
offered by him is not, in the opinion of the Assessing Officer, satisfactory, the excess amount may be deemed to be the
incomeof the assessee for such financial year.

SECTION 69C : UNEXPLAINED EXPENDITURE ETC.
Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such
expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer,
satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income
of the assessee for suchfinancial year :
Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which
is deemedto be the incomeof the assessee shall not beallowed as a deduction under any headof income.

SECTION 69D : AMOUNT BORROWED OR REPAID
ON HUNDI
Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to, any person otherwise than
through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of
the person borrowing or repaying the amount aforesaid for the previous year in which the amount was borrowed or repaid,
as the casemay be :
Provided that, if in any case any amount borrowed on a hundi has been deemed under the provisions of this section to be
the income of any person, such person shall not be liable to be assessed again in respect of such amount under the
provisions of this section on repayment of such amount.
Explanation.—For the purposes of this section, the amount repaid shall include the amount of interest paid on the amount
borrowed.

HUNDI - MEANING
Hundi refer to financial instruments evolved on the Indian sub-continent used in trade and credit transactions. They are
used as remittance instruments (to transfer funds from one place to another), as credit instruments (to borrow money) and
for trade transactions (as bills of exchange).
Technically, a Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money
to a person named in the order. (source:https://rbi.org.in/Scripts/ms_hundies.aspx)

ANALYSIS
 Section 68, 69, 69A, 69B, 69C and 69D –Known as Section 68 and69 Family
 Common Points
 Thewordusedin thefamilyis“may”,hence it isdiscretionaryin nature.
 Theseprovisionsoughtnottoleadtodoubletaxation
 Final failureisfornotspecifying sourceof income
 Deeming isfortheyearoffinding
 UncommonPoints
 In somesection “books”isusedsuchasSection68and69B,wherein in someit isnotusedi.e. Section69,69A,69Cand69D
 Burdenof Proof:InSection 68,theonusiswholly upon theassesseetoexplain thesourceof theentry.But in casesfalling underSection 69,
69A, 69B and 69C, the words used show that before any of these sections are invoked, the condition precedent as to existence of
investment,expenditureetc.mustbeconclusively establishedbymaterialonrecord/ evidence.

ANALYSIS
Particulars Section 68 Section 69 Section 69A Section 69B Section 69C
Maintenanceof Books of Accounts Yes No No Yes No
Burden of Proof
Wholly upon
Assessee
Evidence of
investment by AO
Evidence of
ownership of money
by AO
Evidence of incomplete
disclosure by AO
Evidence of
expenditure
incurredby AO
Yearof TaxLiability
Yearin which
credited
Yearin which
invested
Yearin whichfound
as owner
Yearin which
invested/found as
owner
Yearin which
incurred
Opportunity of Being Heard Yes Yes Yes Yes Yes

RATE OF TAXABILITY
As perSection115BBE,Income taxshallbecalculatedat60%where thetotalincome ofassessee includes followingincome:
• Income referred to in Section 68, Section 69, Section 69A, Section 69B, Section 69C or Section 69D and reflected in the return of income
furnishedunderSection139;or
• Which is determined by the Assessing Officer and includes any income referred to in Section 68, Section 69, Section 69A, Section 69B,
Section69CorSection69D, ifsuch income is notcovered underclause(a).
Such taxrateof60%will befurtherincreased by25%surcharge,6%penalty,i.e.,thefinaltaxratecomes outtobe83.25%(includingcess).
Provided that such 6% penalty (10% of tax as per Section 271AAC) shall not be levied when the income under Section 68, 69, etc., has been
included inreturnof income andtaxhasbeen paidonorbeforetheendofrelevant previous year.
No deduction in respect of any expenditure or allowance [or set off of any loss] shall be allowed to the
assessee in computing his income referred to in clause (a) of sub-section (1) of Section 115BBE.

ONUS - Indian Evidence Act, 1872
Burdenof proof
101. Whoever desires any Court to give judgment as to any legal right or liability dependent on the existence of facts which
he asserts, must prove that those facts exist. When a person is bound to prove the existence of any fact, it is said that the
burden of proof lies on that person.
Illustration: A desires a Court to give judgment that B shall be punished for a crime which A says B has committed. Now, in this case, A must prove that B has
committed the crime.
Onwhom burdenof prooflies
102. The burden of proof in a suit or proceeding lies on that person who would fail if no evidence at all were given on either
side.
Illustration: A sues B for land of which B is in possession, and which, as A asserts, was left to A by the will of C, B’s father. If no evidence were given on either side, B
would beentitled to retain his possession. Therefore,the burdenof proof is on A.

Burdenof proofas to particular fact
103. The burden of proof as to any particular fact lies on that person who wishes the Court to believe in its existence, unless
it is provided by any law that the proof of that fact shall lie onany particular person.
Illustration: B wishes the Courtto believe that, at the time in question, hewas elsewhere. He must prove it.
Burdenof proving fact to beproved to make evidenceadmissible
104. The burden of proving any fact necessary to be proved in order to enable any person to give evidence of any other fact
is on the person who wishes to givesuch evidence.
Illustration: A wishes to prove a dying declaration byB. Amust prove B’s death.

Burdenof proving that caseof accusedcomeswithin exceptions.
105. Whena person is accused ofanyoffence, the burden of proving the existence ofcircumstances bringing the casewithin
any of the General Exceptions in the Indian Penal Code (45 of 1860), or within any special exception or proviso contained in
any other part of the same Code, or in any law defining the offence, is upon him, and the Court shall presume the absence of
such circumstances.
Illustration: A accused of murder, alleges that, byreason of unsoundness of mind, hedid not know the natureof the act. Theburden of proof is on A.
Burdenof proving fact especially within knowledge
106. When any fact is especially within the knowledge of any person, the burden of proving that fact is upon him.
Illustration: A accused of murder, alleges that, byreason of unsoundness of mind, hedid not know the natureof the act. Theburden of proof is on A.

Burdenof proofas to ownership
110. When the question is whether any person is owner of anything of which he is shown to be in possession, the burden of
proving that he is not the owner is on the person who affirms that he is not the owner.
Proofof good faithin transactionswhereoneparty is in relation of active confidence
111. Where there is a question as to the good faith of a transaction between parties, one of whom stands to the other in a
position of active confidence, the burden of proving the good faith of the transaction is on the party who is in a position of
active confidence.
Illustration: The good faith of a sale by a client to an attorney is in question in a suit brought by the client. The burden of proving the good faith of the transaction is
on attorney.

ONUS
Onus is lighter or heavier depending upon:
 AEvs NonAE
 CashvsNon-cash
 Auditvs Non-audit
 Public Co.vs. PrivateCo.
 PaperCo.vs. OperationalCo.
 Regulatorylaw existsvs. nosuch lawexists
 AccommodationorBogusentries
 Survey/ Search
 Affidavitof assesseeonbonafideetc.etc.
• Theother extremeof burden discharge process of “Satisfaction” of AO/ Authority
• Satisfaction is muchhigher than Suspicion, Opinion andReason to believe

INITIAL ONUS ON THE TAXPAYER
 To fall out of the rigors of deeming provisions of Section 68, the assessee has to prima facie prove [CIT
vs. Precision Finance Pvt. Ltd. 208 ITR 465 (Cal); Divine Leasing and Finance Ltd. & Ors 299 ITR 268
affirmed in CIT vs. Lovely Exports (P) Ltd. 319 ITR (st.) 5 (SC)
 the genuineness of the transaction: Encompasses bringing on record evidence about nature of the receipt, be it share application money,
loan,advanceetc.
 theidentityofthecreditor/lender:Envisagesestablishing theidentityofthesource/personfromwhomtheamountisreceived.
 the creditworthiness or financial strength of the creditor/subscriber/ lender: Envisages establishing the creditworthiness of the source/
personfromwhomthe amountisreceived.
 Oncethe taxpayer furnishes reasonable explanation qua the disputed transaction, the onus shifts to the Revenue.

KEY POINTS
 Evidences in the form of third party confirmations are relevant.
 Self-serving documents to be avoided [Durga Prasad More: 82 ITR 540 (SC)].
 No response from third party – not conclusive for decision against the assessee [Refer Fancy
International 166 Taxmann183 / CIT v. NikunjEximEnterprises (P) Ltd.: IA No.5604/2010 (DHC)]
 Burden is on the Revenue to bring material on record to dislodge evidences produced by the assessee
andcannot make addition on suspicion / ipsidixit[Refer Daulat Mal RawatMal: 87 ITR 349 (SC)]
 While disregarding the evidences produced by the assessee the Revenue can apply the test of human
probability (Refer Sumati Dayal: 214 ITR 801).

DOCUMENTATION TO BE MAINTAINED IN ORDER
TO SATISFY THE TEST UNDER SECTION 68/69A
IDENTITYOF THECREDITOR/ LENDER
GENUINENESSOF THETRANSACTION
CREDITWORHTINESSOF THECREDITOR/
LENDER
Identity can be proved by themaintaininga recordof documents suchas name,address and PAN number
of the lender/creditor.
Genuinenessof thetransaction can be proved by maintaining a record of documents suchas
invoices/vouchers, purchaseorders, loan agreement (in case of loan borrowed), bank statement, etc.
Creditworthiness can proved by maintaining a recordof the documents suchas returnof income, wealth
tax returnand audited financial statement.

Bogus Purchases vis a vis Unproved Purchases
'Bogus Purchases' are entries made in the books of account for purchases made, where in fact, no purchases have been
made by the purchaser of goods. Bogus purchases invariably also gives rise to bogus sales as well in most of the cases. The
term 'bogus purchase' and 'bogus sales' implies recording of book entries for purchases and sales without there being
actual movement of goods either at the time of recording of purchases or sales.
The term 'bogus purchases' is often confused with unproved purchases, whereas there is a vital difference between the two
terms. In unproved purchases, goods/material is actually received by the buyer. The buyer in such cases procures goods
from grey market. The invoice for goods procured is received from a different person other than from whom goods are
purchased.

Bogus Purchases vis a vis Unproved Purchases
Whether a transaction of purchase is proved or not is a question of fact and the primary onus is on the assessee to prove the
genuineness of purchases? The assessee may have to furnish the below mentioned documentary evidences before the Assessing
Officerto establishthefactum of purchases:-
• Purchase Invoices;
• Confirmationfromthe sellerof goodsstatingthat thegoods aresoldby him;
• Bankaccount statementduly reflectingthepaymentto the seller;
• Bilty/GoodsReceipt Noteof the transporterof goods;
• Detailof Stock Registerreflectingthequantity of materialpurchased and subsequentlysold
• For manufacturing concerns, the assessee may have to furnish requisite production record to justify the consumption of raw-
material/consumablespurchased for achievingthe output/production.
• Tallyingthe PurchaseValue and Purchase Quantity asperbooks of account withthe GST returnsfiledwiththe authority.

Case laws w.r.t Bogus Purchases
The Bombay High Court in the case of Commissioner of Income-tax v. Nikunj Eximp Enterprises (P.) Ltd. [2013] 35
taxmann.com 384/216 Taxman 171 (Mag.)/[2015] 372 ITR 0619 (Bom) deleted the addition made by the Assessing Officer
for bogus purchase. The assessee had filed letter of confirmation of seven suppliers, copies of bank statement reflecting the
entries of payment through account payee cheques to suppliers, copies of invoices for purchase and detail of stock
inventory. The sales in the above case were not doubted since these had been made to a government department namely
Advance Research and Development Laboratory. The court held that merely because the suppliers had not appeared before
the Assessing Officer or CIT (Appeals), it could not be concluded that the purchases were not made and the addition made
was deleted.
The Bombay High Court in the case of Principal Commissioner of Income-tax v.Vaman International (P.) Ltd. [2020]
422 ITR 0520 (Bom) deleted the addition made by the Assessing Officer in the absence of any inquiry made by him to bring
on recordany evidenceto prove his allegation of bogus purchase.

The Bombay High Court in the above case held that the mere reliance by the Assessing Officer on the statement of two
persons made before the sale tax department to cross examine whom opportunity was not provided to the assessee was not
sufficient to make the addition. The court held that if the Assessing Officer doubted the purchases, the Assessing Officer was
required to make further enquiry, which he did not make. The High Court in the above case, referred to the judgment of
Gujarat High Court in the case of it Krishna Textiles v. CIT [2008] 174 Taxman 372/[2009] 310 ITR 227 to observe that in
that caseit was held that the onus was on the revenueto prove that the incomebelongs to the assessee.
The Assessing Officer in this case did not doubt the sales, stock record maintained by the assessee. The High Court in the
above case deleted the addition by observing that the Tribunal had given a finding of fact by analysing the various
documentary evidences filed by the assessee in support of its claim and in its view no substantial question of law arose
there.

In another judgment, the Delhi High Court deleted the entire addition made by lower authorities in the case of Commissioner of Income-tax
Act v. Odeon Builders (P.) Ltd. [2019] 110 taxmann.com 64/418 ITR 315/266 Taxman 461 (SC) on suspicion, conjectures and surmises by
the AssessingOfficer. Thejudgment ofDelhi High Courthassubsequentlybeenupheldbythe SupremeCourt.
In this case, the CIT (Appeals), ITAT and the Delhi High Court had deleted the addition made by the Assessing Officer by treating the purchase
amount as income from undisclosed sources. The Supreme Court in the above case held that disallowance made by the Assessing Officer
solely by relying on third party information gathered by Investigation Wing of the Department which had not been independently subjected to
furtherverificationby theAssessing Officerwhohadnotprovided copyofsuch statementtotheassessee wasnotjustified.
The Court observed that the initial onus of substantiating purchases through documentation including purchase bills, transportation bills,
confirmed copy ofaccount of the suppliers, the fact of payment through bank and furnishing of copies of VAT return and income tax returns of
thesuppliers, hadbeendischarged bytheassessee, theAssessing Officercouldnotmakeadditionwithoutfurtherscrutiny.

Cases where profit embedded in bogus purchase/unproved purchase: The income that is embedded in such bogus purchases or
alternatively what percentage of purchases can be treated as unexplained expenditure does involve guess work. The correct approach in such
cases is toestimate suppressedprofitelement embedded in theamountofsuchboguspurchases.
Refer the judgment of Mumbai Tribunal in the case of Deputy Commissioner of Income-tax v. Rajeev G. Kalathil [2014] 51 taxmann.com
514/[2015] 67 SOT 0052 (Mumbai) in which case the Assessing Officer disallowed the entire expenditure incurred by the assessee on
purchases as it was one of the beneficiaries of bogus hawala bills, as per information available with the Assessing Officer. The CIT (Appeals)
held that when sales were accepted, then corresponding purchases could not be disallowed. He held that profit element embedded in the
purchases only could be added and not the entire purchase amount and upheld the addition up to 2% of the purchase amount as profit
element embedded inpurchases anddeleted thebalanceaddition.
The ITAT, on revenue appeal, in the above case held that the assessee had been declaring gross profit between 5% to 8% and since purchases
were made from grey market the corresponding profit element would be higher and estimated further 3% of the purchases amount on traded
profit embedded in the purchase amount. The High Court in revenue's appeal declined to interfere in the order of the ITAT and upheld the
attributionof5%profitonsuch alleged boguspurchase.

CASE LAWS u/s 68
Whether anaddition can be made on account of cash credit u/s 68evenif no books of accounts aremaintained :
AnandRamRaitaniv.CIT[1997]223ITR544(Gauhati.)
It was heldthat theAssessing Officer before invoking thepower u/s68 of the Act must be satisfied that there are books of account maintained by the
assessee and the cash credit is recorded in the said books of account and if the assessee fails to satisfy the Assessing Officer, the said sum so credited
has to be charged to income-tax as the income of the assessee of that previous year. The existence of books of account is a condition precedent for
invoking thepower,dischargingtheburdenisasubsequentcondition.
Section 68 scopeconfined to actual money receipt ornot :
VISP(P)Ltd.vs.CIT(2004)265ITR202(MP).
Even though the heading of section 68of the Act refersto ‘Cash Credit’,the body of the section refers toany sum found credited and thus,the section
is not confined merely to credits in actual ‘cash’. Other credits by way of liabilities also require explanation as stipulated under section 68 so that
when theyarenotsatisfactorilyexplained,theyareboundtobeadded–VISP(P) Ltd.vs.CIT(2004)265ITR202(MP).

CASE LAWS u/s 68
Which is the right year of addition:
CITvs.PrameshwarBohra(2008)301 ITR 404(Raj)the HighCourt CITvs.UshaStudAgriculturalFarmsLtd( HCofDelhi)
The section provides that the sum so credited may be charged to income tax as the income of the assessee of that previous year. The chargeability to
tax in respect of unexplained credits would be only in the year in which the credit first appears in the books of account of the assessee. In above case
law CIT Vs Prameshwar Bohra, HC upload upheld the view of the Tribunal that since the credits did not relate to the impugned year in which the
additionwasmade, thesamewasliabletobedeleted onlyonthisground.
Whether roughcash-book = booksforsection 68:
HajiNazirHussain vs.ITO(2004)271 ITR (AT)14(Del)
It was held that where cash credits are recorded in the rough cash book of the assessee and there is no proper explanation, section 68 will apply and
the creditamountcanbeassessedasincomeofthe assessee.

CASE LAWS u/s 68
WhetherLooseSheet=Books
Hon’ble SupremeCourtinMohd.Yusuf&Anr.vs.D& Anr.AIR1968 Bom.
The 112 hasobserved that the contentcontained in document is hearsay evidence unless the writer thereof is examinedbeforethe Court. The piece of
paper seized during search if considered in light of section 32 of the Indian Evidence Act and General Clauses Act defining the word ‘document’, the
pieceofpaper containsjottings of certain figures and doesnot described or express the substanceof anytransaction and thereforethe saidpaperdoes
not come within the compass of definition of the word ‘document’ to be used as evidence. It further held that the piece of paper did not represent
booksof accountforthereasonthatasperBlack’sLawDictionary,booksof account means:
“A detailed statement, in the nature of debits and credits between persons; an account or record of debits and credits kept in a book; a book in
which a detailed history of business transaction is entered; a record of goods sold or services rendered; statement in detail of the transactions
between the parties.”
CBIvs.V.C.Shukla(1998)3 SCC410(SC),Goyal(S.P.)vs.DCIT(2004)269 ITR(AT)59 (Bom.)
The piece of paper seized in search not been proved to be written by the assessee relating to various business transactions in the normal course of
business and therefore the said paper does not fall within the campus of the meaning of the books of account having credibility of its acceptance
without supportofcorroborativeevidence.

CASE LAWS u/s 68
Whetherbank statements/ pass book =books?
CITvs.BhaichandH.Gandhi(1983)141ITR 67(Bom.)
The pass book supplied by a bank to an assessee-constituent could not be regarded as a book of the assessee which expression means a book
maintained bythe assessee or under hisinstructions. It wassoruled on the principlethat when moneysaredeposited in a bank the relationshipthat is
constituted between the bankers and the customers is one of debtor and creditor and not that of trustee and beneficiary. The pass book supplied is
merelythecopyof the constituent’saccountin thebooksmaintainedbythe bank.
If primaryonus discharged, departmentshould disprove theobjection
CITvs.Orissa CorporationP.Ltd.(1986)159 ITR 78(SC)
Whenassessee has given names andaddresses of creditorsand the said creditorsare incometaxassessee whose indexnumbersarewith the revenue,
the initial burden lay on the assessee gets discharged. Where an assessee gives the correct name and address of the alleged creditors, their PAN
numbers, it could be said that he has discharged his onus to prove the genuineness of credits in his accounts and unless the revenue authority issues
noticetotestthegenuinenessof the transactionorthecapacityofthe creditortopay,theamountcannotbeassessedinthehandsofthe assessee

CASE LAWS u/s 68
Telescoping benefittobegranted:
CITvs.TyaryamalBalchand(1987)165 ITR453(Raj)
Additions were made to the trading results as also amounts representing cash credits were added as income from undisclosed sources. The Tribunal
found that the additions in trading results would cover the amount of cash credits as also substantial additions had been made in earlier years, it was
heldthattheTribunalwasjustifiedindeletingtheadditionon accountof cash credits.
CanAssessee seekaid of section 131toprovethe genuinenessoftransactions:
CITv.KamdhenuVyaparCo.Ltd.[2003]263ITR692(Cal.),
It has been observed that simple disclosure of certain materials will not help the assessee to discharge the burden of proving the credits u/s. 68 of the
Income-tax Act, 1961. Until the onus is prima facie discharged by the assessee, it never shifts on the Department. But in order to ascertain whether
prima facie onus has or has not been discharged, the A.O. has a duty to enquire into the materials so disclosed. The assessee may seek assistance of
section131 oftheAct forthe purposeofprovingitsowncase.

CASE LAWS u/s 68
Ifbooksofaccountsrejectedandtax isleviedonestimatedincome,canAOmakeadditionforcashcreditu/s68:
CITv.MaduriRajaiahgariKistaiah[1979]120ITR294(AP).
Where a particular business income of the assessee has been estimated and determined, and in such a case certain cash credits are found, the
Assessing Officer may be precluded from adding the said unexplained cash credit as undisclosed income from the business, the income of which was
determined on estimate basis. But where the unexplained cash credits are not referable to the business income of the assessee which was estimated,
the AssessingOfficerisnotprecludedfromtreatingtheunexplainedcashcreditasincomefromanyothersource
RamcharitarRamHariharPrasadv.CIT[1953]23ITR301(Pat.)
It was held that adding up extra estimated profits as well as the amounts of cash credits was open to authorities only when there was material to show
thatassesseecarriedonanindependentbusinessapartfromthe businessforwhichassessment wasbeingmade.

CASE LAWS u/s 69
• In Mad HC in 241 ITR 363,158 Taxman 363, 236 ITR 340, J&K HC in 201 CTR 178, it was held that when there was
inflated stock to avail higher credit facility from bank (only amount inflated but quantity remained same), the books of
the Assessee were duly audited and no trading outside the books were detected, the addition of difference in stock value
could not be made asundisclosed income.
• In Delhi ITAT Kanta Dua, a husband made investment in Units of Mutual fund from Joint Bank Account in the name of
himself and wife (second holder), the AO based on AIR information, made assessment in the hands of wife as
unexplained investment, which was held as invalid by higher Tax authorities.
• In Mad HC in N Swamy 241 ITR 363 relied by Chennai ITAT in Omega Estates and Chd ITAT in Dr. R.L.Narang, it was
held that the burden of showing that the assessee had undisclosed income is on the revenue. That burden cannot be said
to be discharged by merely referring to the statement given by the assessee to a third party in connection with a
transaction which was not directly related to the assessment and making that the sole foundation for a finding that the
assessee had deliberately suppressed his income.

CASE LAWS u/s 69
• In Mum ITAT in Rupee Finance 119 TTJ 643, it was held that merely because assessee purchased certain shares at value
muchless than market price, difference in purchase cost andmarket pricecannot be addedu/s 69.
• In ITO vs. Mrs. Deepali Sehgal (ITAT Delhi), ITA No. 5660/Del/2012, the AO noted that assessee had withdrawn huge
cash from bank account and the same amount had been deposited to the same account after lapse of substantial time.
The AO rejected the explanation and held that the assessee had cash deposit of Rs.24,38,000/- as unexplained money
and the assessee found to be the owner of the money as he had not offered any acceptable and cogent explanation. AO,
in his remand report could not bring out any fact that the cash withdrawn from Saving Bank Account and partnership
overdraft account was used for other purpose anywhere else then, merely because there was a time gap between
withdrawal of cash and its further deposit to the bank account, the amount cannot be treated as income from
undisclosed sources u/s 69 of the Act in the hands of the assessee. Hence, the addition made by AO without any legal
and justified reasonwas rightly deleted by the CIT (A).

CASE LAWS u/s 69A
• In P&H HC in 294 ITR 78, the assessee was found to be in possession of loose slips and not any valuable article or things.
Neither the possession nor the ownership of any jewellery mentioned in the slips was proved. Therefore, the Tribunal
had rightly held that the provisions of section 69A of the Act were not applicable. The Tribunal also held that if the
assessee failed to explain the contents of the slips, it was for the Revenue to prove on the basis of material on record that
they represented transactions of sales or stock in trade before making any addition on this score. The assessee had duly
explained that these were rough calculations and the assessee’s explanation had not been rebutted by any material
evidence.
• Commissioner of Income-tax vs. Meghjibhai Popatbhai Virani – Where assessee in support of certain amount received
from his family members on account of sale of property, produced family settlement agreement and sale agreement,
there being no defect in said agreements, amount so received by assessee could not be added to his taxable income as
unexplained money.

CASE LAWS u/s 69A
• Ownership is one of the Considerations – The material difference between Section 68 and 69A is that Section 68 does not requirethat the
amount is to be owned by the Assessee. It only deals with any amount shown in the books of accounts of the assessee whereas Section
69A deals with money, etc., owned by the assessee and found in his possession. – Durga Kamal Rice Mills v. CIT [2003] 130 Taxman 553
(Cal.).
• Possession of cash is evidence of ownership – Where cash was found in possession of assessee-politician during search and his claim that
it belonged to a political party was denied by President and Treasurer of said party, addition of such cash to assessee’s income was rightly
sustainedbytribunal– SukhRam v. Asstt.CIT [2006]285ITR 256(Delhi).
• Date of possession of money, etc. will determine year of Assessment – The relevant would be the date on which the assessee is physically
found to be in possession of the money, etc. and not the date on which the finding about ownership is recorded. – Patoa Bros. v. CIT
[1982]133ITR 672(Gau.).
• Where assessee was managing a firm which collected deposits from public, but there was no evidence regarding registration and
genuineness of firm and assessee could not explain source of deposits, nor could assessee establish that such deposits did not belong to
him, addition of such deposits as asseesee’s unexplained investments was justified – CIT v. K. Chinnathamban [2007] 162 Taxman
459/292ITR 682(SC).

CASE LAWS u/s 69B
• In Smt. Amar Kumari Surana v. CIT [1996] 89 Taxman 544 (Raj.), it was held that the burden is on the revenue to prove
thatreal investmentexceeded theinvestment shown inaccount books of theassessee. Merely on the basis of fairmarket
value no addition can be made under section 69B, but if on the basis of sufficient material on record some reasonable
inference can be drawn that the assessee has invested more amount in purchase of plot than that shown in account
books, then only the addition under section 69B can bemade.
• In CIT v. Daya Chand Jain Vaidya, the Allahabad Court shifted the onus on to the department saying that if the assessee’s
explanation that the investments were in fact held by his wife and sons is not sustainable, then the department has to
prove with material evidences that the investments were owned only by the assessee himself. Having said this, it is
noteworthy that sec.69B per se uses the phrases like “is found to be the owner of any bullion, jewellery or other
valuable article, and the Assessing Officer finds that the amount expended on making such investments or in
acquiring such bullion, jewellery or other valuable article……” (as opposed to the word ‘reasons to believe’) which is
very conclusive that there is no roomfor any taxation based on a meresuspicion.

CASE LAWS u/s 69B
• In case of doubt, Assessing Officer can make reference to Valuation Cell – If the assessee maintained books of accounts in the regular
course of business and necessary entries relating to the expenditure towards cost of construction are entered in the books of accounts,
which are open to verification, and its correctness is not doubted, it should be accepted. In case of doubt, Assessing Authority can refer the
matter to the valuation cell for determination of cost of construction and rely upon such report as an evidence, but it is open to the
assessee to challenge the correctness of such valuation report and in case if it establishes that such report is not correct and reliable,
expenditure shown in the construction as per the books of accounts is liable to be accepted. – CIT v. Meerut Cement Co. Pvt. Ltd. [2006]
15-0Taxman 7(All.).
• Section50Cprovisions cannotbeappliedforsection 69B addition–GayatriEnterpriseVs ITO (Gujarat HighCourt)
• Additionu/s 69Bjustified in respectof unaccountedmoney paidin cashtosellers of land– VinayGuptav. ACIT (ITAT Delhi)
• Section 69B cannot be invoked on mere assumption that there was understatement of investment – DCIT Vs M/s Riar Builders Pvt. Ltd.
(ITAT Amritsar)
• Mere valuation report not sufficient to conclude unexplained investment by Assessee – ACIT Vs. Shri Jayantilal T. Jariwala (ITAT
Ahmedabad)

CASE LAWS u/s 69C
• As per proviso to Section 69C, when expenditure is deemed to be the income of the assessee, no allowance of the same
can beclaimed as business expenditure.
• The Jaipur Bench of ITAT ruling in 31 DTR 456 - Nisraj Real Estate held that unverified purchases made by assessee
could not be treated as unexplained expense u/s 69C and no addition can be made thereof u/s 69C proviso there under
–as oncesales weremadeby assessee, purchases wereobviously made.
• Question of Addition depends on satisfactory explanation of source – Section 69C deals with unexplained source of
expenditure. If from documents it appears that there was expenditure, unless its source is satisfactorily explained, the
same would also be deemed to be the income of the assessee for such financial year. The question depends on the
satisfactory explanation of the source. –CIT v.Bhagwati Developers Pvt. Ltd. [2003] 261ITR 658 (Cal.).
• Invocation of Powers under Section 142A – For purpose of getting himself satisfied about purported unexplained
expenditure under section 69C, powers under section 142A could not be invoked by Assessing Officer – CIT v. Aar Pee
Apartments Pvt. Ltd. [2009] 319 ITR 276/[2010] 188Taxman 39(Delhi).

CASE LAWS u/s 69C
• Estimation of household expenditure in a particular year cannot be made on the basis of income of subsequent years – Where the search
discloses that any expenditure is found to be false, appropriate additions can be made but what is relevant is that the addition can be
made only in regard to the income related to false claim of expenditure disclosed by material unearthed during the search. There is
absolutely no basis for assuming that the expenditure incurred during a particular month/year should be the expenditure during the ten
years also. The monthly household expenditure may depend on various circumstances, one factor being the income/earning. Estimating
the household expenditure in a particular year with reference to the income of a future year (that too 5 to 10 years later) in absence of any
otherevidence wouldbearbitraryand illegal– CIT v. C.L.Khatri[2005]147Taxman 652(MP).
• Addition u/s 69C on basis of statement of third party without providing opportunity of cross-examination to assessee was invalid – Bhatia
Diamonds Pvt.Ltd.VsITO (ITAT Delhi)
• Addition of bogus share capital u/s 68 and bogus purchases u/s 69 cannot be made in absence of incriminating material with AO – Agson
GlobalPvt.LtdVsACIT (ITAT Delhi)
• Additiononlyfordifference ofGP onNormal &Bogus Purchase– HemantM MehtaHUF VsA.C.I.T.(ITAT Mumbai)
• Forsome boguspurchases Entirepurchases can’tbe addedtoincome – SonalParekhVsITO (ITAT Ahmedabad)

PEAK CREDIT THEORY
 The principle of peak credit comes into play where there are several credit and debit entries in one bank account. The
funds operated from such account is taken to be one and the same and only the highest or peak of the amounts in that
account is taxed asunexplained cash credit.
 The basic idea behind the peak credit theory is to avoid double addition and to bring only the actual income of the
assessee to suffer tax, wherethere arelarge numberof unexplained cashcredit and debit entries.
 Peak credit theory can be applied in a case where there is only rotation of funds whereby the funds withdrawn on earlier
dates were deposited back subsequently and there wereno fresh deposits.
 Theaforesaid principle has beenupheld in the following decisions:
 CIT v Tirupati Construction Company: 230 Taxman 198 (Guj.), CIT v Purushottam Jhawar: 220 Taxman 74 (AP), CIT v
Fertilizer Traders:222 Taxman 162 (All.), ITOvPawan Kumar:153 ITD 448 (Delhi Trib.)

PEAK CREDIT THEORY
Salient features:
• The assessee has to admit, for getting the benefit of peak, that borrowings made by the assessee from cash creditors are borrowings from non-genuine creditors,
the payments or outgo was only to himself in theform of withdrawals and the payees were also bogus.
• Where the assessee claims that all the deposits are genuine, the benefit of peak will not be available. [refer- Bhaiyalal Shyam Behari v. CIT [2005] 276 ITR 38
(All.)]
• Also, whereRevenueis able to prove the particular withdrawal is not available for redeposit/ recycling, the benefit of peak will not be available.
• Unaccounted cash may beintroduced in the books either as cash credit or as trade credit. Both of them can be assessed as deemed income. Both can beassessee's
own money.Therefore,concept of peak would apply to trade credit also provided it is non-genuine.
• Where books of account are rejected, and profits are estimated then it will not be correct on the part of the AO to work out peak on the basis of such rejected
book of account and makeseparate addition. [refer-CITv. K.M.NNaidu [1996]221ITR451(Mad.)]
• Where peak credit theory was applied in preceding year, and there was no change of circumstances in the subsequent year, then theory of peak credit could be
applied insubsequent yearalso. refer-ITOv. NiteshkumarRDalwadi [ITAppeal No. 53(Ahd.) of 2013,dated 11-2-2014]

PEAK CREDIT THEORY
DeterminationofPeak:
• All the cash deposits and withdrawals, owned up by the assessee as undisclosed, are placed in chronological order. The balances are drawn
against each deposit and withdrawal. The deposit in the first entry becomes closing balance against that first entry. This closing balance of first
entry becomes opening balance for second entry. Deposit or withdrawal of the second entry is adjusted to the opening balance. Then closing
balance against the second entry is drawn. This closing balance of second entry becomes opening balance of the third entry and so on. Highest
closing balance against any entry in the accounting period, arising after such adjustment of deposit/withdrawal becomes the peak in the
accountingperiod.

CONCEPT of TELESCOPING
Where there is an addition on account of suppression of profit and there is also a bogus cash credit in the books then
assessee can seek adjustment of suppression of profit against cash credit on the ground that suppressed profit during the
year has been brought in as cash credit. Such adjustment is called telescoping. CIT v. K. S. M. Guruswamy Nadar &
Sons[1984] 149 ITR 127/19 Taxman 533 (Mad.)
Wherever assessee is successful in getting the benefit of telescoping, his income may be reduced but case of the Revenue for
levying penalty is strengthened. Penalty in such cases is levied by the AO by invoking Explanation 2to section 271(1)(c).

CONCEPT of TELESCOPING
Following are salient features of telescoping-
• Source of deposit, or of cash inflow, is explained through gross profit additions. [refer- CIT v. Aggarwal Engg. Co. (Jal.) [2008] 302 ITR 246/156 Taxman 40 (Punj.
&Har.)]
• Investment in later years is explained by intangible additions of earlier years, unless it is proved by the Revenue that such additions were not available for
investment in subsequent years. [refer- S.Kuppuswami Mudaliar v. CIT [1964] 51 ITR 757 (Mad.); CIT v. Guruswamy Nadar&Sons (KSM) [1984]149 ITR127/19
Taxman 533(Mad.)]
• Whereassessee disputes both the additions, the benefit of telescoping may not be available.
• Where inflated expenses had been introduced in the books as bogus cash credits, the benefit of telescoping would not be available against addition on account of
investment, as such inflated expenses arealreadyneutralized. [refer-CITv.K.N.Satyapalan [2001]247ITR105/[2000]110Taxman 151(Ker.)]
• Thebenefit of telescoping would be available whenboth the additions are reasonably relatable to the material on record.
• Where trading additions were done for assessment year 2009-10 and were sustained, then the assessee was entitled to telescoping benefit in assessment year
2010-11 against the cash and other assets found as the result of search and such telescoping benefit. [refer- Vishnu Prasad Maharwal v. Dy. CIT [2014] 50
taxmann.com90(Jaipur-Trib.)]

Common features between Telescoping & Peak Credit
Some authors opine that peak is a kind of telescoping. It is because at the root of both concepts, the principle of adjustment
of inflow against outflow, or explanation of outflow from inflow is involved. In telescoping, generation of income, whether
in the current year or in the earlier year, is considered as inflow and investment in assets, or cash credits in the books are
considered as outflows.
In peak, money from earlier withdrawal is considered as inflow and cash credit is considered as outflow and, hence, both are
sought to be adjusted oroutflow is sought to be explained from the inflow.

Conclusion
There is a distinction between telescoping and peak. Telescoping is adjustment of one income against other, so that same income is not taxed twice.
In peak, the withdrawal of cash, if not utilized elsewhere, is considered as available for making deposits. The highest unexplained cash deposit is
considered as peak. The determination of peak reduces the taxable income. However, where withdrawals are through cheques and it is not proved
that such withdrawals have come back to the pocket of the assessee, then benefit of those withdrawals will not be available to explain the deposits.
The crux in applying peak credit theory is a reasonable certainty that withdrawals have not gone elsewhere, either as investment in some assets, or
meeting some expenditure, or to the pocket of other person. Even in cases where deposits and withdrawals are in several accounts (in the name of
different persons), and assessee owns all these accounts as his own and transactions therein as non-genuine and there is no evidence that outflow
has gone to any other person or any other purpose, then cumulative account of all the accounts put together can be drawn and peak thereunder be
determined.

Analysis of Section 68 and 69 of the Income Tax Act, 1961

Analysis of Section 68 and 69 of the Income Tax Act, 1961

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