Issues in cash transactions under the Income Taxt Act, 1961

Prashanth G S, FCA
Chartered Accountant
Bangalore

Contents
 Topics Covered:
 Section 40A(3)
 Section 40A(3A)
 Section 68
 Section 69A
 Section 269SS
 Section 269T
2

Section 40A(3)
 Where the assessee incurs any expenditure in respect of
which a payment or aggregate of payments made to a
person in a day, otherwise than by an account payee
cheque drawn on a bank or account payee bank draft,
exceeds Rs.20,000/-, no deduction shall be allowed in
respect of such expenditure.
3

Section 40A(3A)
 Where an allowance has been made in the assessment for any
year in respect of any liability incurred by the assessee for
any expenditure and subsequently during any previous year
(hereinafter referred to as subsequent year) the assessee
makes payment in respect thereof, otherwise than by an
account payee cheque drawn on a bank or account payee
bank draft, the payment so made shall be deemed to be the
profits and gains of business or profession and accordingly
chargeable to income-tax as income of the subsequent year if
the payment or aggregate of payments made to a person in a
day, exceeds Rs.20,000/-
4

Proviso to Sections 40A(3) and 40A(3A)
 In case of payment made for plying, hiring or leasing
goods carriages, the limit stands enhanced to
Rs.35,000/-
5

Proviso to Sections 40A(3) & 40A(3A)
 No Disallowance under section 40A(3) and 40A(3A)
shall be made even when a payment or aggregate of
payments are made to a person in contravention to
section 40A(3) and 40A(3A), in such cases and under
such circumstances as prescribed under Rule 6DD of the
Income Tax Rules, 1962, having regard to the nature
and extent of banking facilities available, considerations
of business expediency and other relevant factors.
6

Issues under sections 40A(3) & 40A(3A)
 Cash payments in excess of Rs.20,000/- when made
under “exceptional” and “unavoidable”
circumstances
 Cash payments in excess of Rs.20,000/- in respect of
construction of building not for personal use but for
business or leasing
 Cash payments adjusted against sales made
7

 Effect of section 40A(3) in case of railway catering
contractor wherein the business income is primarily in
cash basis
 Payments made for purchase of agricultural land from
villagers
 Property purchased by making cash payments, each less
than or equal to Rs.20,000/- supported by self-made
Vouchers
8

 Disallowance under section 40A(3) when income is
assessed by estimation of profits after rejection of books
of accounts
 The word “expenditure” is not defined in the Act – it
has wide import and all outgoings could come under this
head
 Revenue Expenditures are only covered and not capital
expenditures. Purchases are also covered
9

 Whether the genuine payments can be disallowed?
 List given in the Rule 6DD is not exhaustive
- Harshila Chordia vs ITO 298 ITR 349 (Raj)
- Girdhari Lal Goenka vs CIT 179 ITR 122 (Cal)
 Whether cash payments can be made on bank holiday?
10

 Whether the donation in cash to charitable institutions
can be denied?
 Disallowance u/s 40A(3) when income is estimated on
the basis of G. P. Ratio ?
11

Important Points - Sections 40A(3) & 40A(3A)
 The section also covers payments made to employees
towards salaries
 The section also covers any liability incurred during the
accounting year and payment made in subsequent year
12

Section 68 – Substantive Provisions
 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, the
sum so credited may be charged to income-tax as the
income of the assessee of that previous year
13

Proviso to Section 68 – w.e.f 01.04.2013 –
Deeming Fiction
 Any explanation offered by assessee-company (not being a
company in which the public are substantially interested)
shall be deemed to be not satisfactory in respect of
following cash credits:
 share application money
 share capital
 share premium or any such amount by whatever name
called
14

Unexplained Cash Credits – Section 68
15
 Credits to which section 68 is commonly applied:
 Share Application Money / Share Capital
 Gifts
 Loans
 Deposits
 Contributions received by firms from partners
 Sundry Creditors

Conditions for Applicability – Section 68
 There has to be credit of amounts in the books maintained
16
by the assessee
 Such credit has to be a sum of money during the previous
year
 The assessee offers no explanation about the nature and
source of such credits found in the books or the
explanation offered by the assessee is not satisfactory

Burden of Proof under section 68
 The onus of proving the source of a sum of credited is on
the assessee
 If he disputes liability for tax, it is for him to show either
that the receipt was not income or that if it was, exempt
from tax under the provisions of the Act
 In the absence of such proof, the AO is entitled to treat it
as taxable income
- Govindarajulu Mudaliar v. CIT, 34 ITR 807
- Kale Khan Mohammad Hanif vs. CIT, M. P. And Bhopal
50 ITR 1, (SC)
17

Unexplained Cash Credits – Section 68
18
 Section 68 is not restricted to Cash transactions
 The words used in section 68 are ‘any sum credited in
the books of an assessee’
- D C Rastogi (HUF) vs ACIT, 57 ITD 295 (Delhi)
 Such cash credit should be capable of being treated as
his capital or income.
- Ali Hussain Abdeali Lokhsndwala vs ITO, 36 ITD 247
(Indore)

Deposits in Banks
 Banks to ensure identification of the depositor
 Revenue to follow up the information available from
Bank
 If deposits are held benami, but where deposit is in the
name of identified person, it is for the revenue to
establish real ownership and tax such person
 Banks have no means to probe into the matter
19

Presumption Regarding Correctness of Books
Presumption regarding correctness of books u/s 132(4A)
not available u/s 68.
- Pushkar Narain Sarraf vs CIT, 50 Taxman 213(All)
20

Whether Pass Book is books of account of assessee ?
 A cash credit shown in assessee’s pass book but not
represented in the cash book maintained by the assessee does
21
not attract provisions of section 68 of the Act.
- CIT vs Bhaichand H Gandhi, 141 ITR 67 (Bom)
 Section 69 is applicable in the above circumstance as the
relationship between the banker and the customer is that of a
debtor and creditor

Issues under section 68
 Burden of Proof – Evidences provided by the assessee
disregarded by the Revenue authorities as ‘‘created
evidence’’
 Shares purchased in the name of some persons and the
22
money was contributed by others
 Discharge of onus of proof – Assessee furnished
confirmation from debtors, address proof, PAN, copies of
returns of income.

23
 Gifts from son subject to tax in U.S.A
 Transactions between creditors and sub-creditors
 Additions can be made solely based on oral statements
recorded ?

 Cash credits received by cheque – TDS done – Initial onus
24
discharged, can ad hoc additions be made ?
 Assessee could not prove the identity of creditors – Can sale
transactions of shares be disbelieved ?
 Can addition be made under section 68 for non-furnishing of
information under section 133(6) of the Act when a
confirmation for gift received was filed the assessee.

 Addition under section 68 in respect of sale proceeds
25
already offered as income ?
 Contribution of capital by partner - addition in the hands
of the firm as unexplained cash credits ?
 Confirmations of shareholders and tax returns sufficient
to discharge the burden of proving source of the share
application money ?

 Payments made to sub-contractors – When TDS is
26
acceptable, can payments be held unexplained ?
 Capital contribution prior to commencement of the
business – is the addition justified in case of the assessee
firm ?

27
 Is assesse required to prove the source of creditor ?
 Liability towards acquisition of asset cannot be added either
under section 68 or under section 69 unless liability is held to
be bogus.
 Additions made on the basis of valuation report of DVO when
Books of accounts are not rejected. Can the additions be
justified ?

 In the absence of the material evidence regarding
authenticity of seized document, addition made on mere
doubt was not held correct.
 Cash Credit Found on the very First Day of the
28
Accounting Year – Whether can be added?
 Cash credit pertaining to previous year can be added
during the current year ?

Assessee Bound to offer Satisfactory Explanation to
the Assessing Officer
 Assessee needs to explain – nature of the cash credit and
29
source of such credits
 The explanation should be ‘reasonable’, ‘factual’ and to the
satisfaction of a man of ordinary prudence.
 Assessee is required to provide prima facie evidence not just to
prove the identity of the depositor but also his capacity to
advance the sum of money.
 The onus shifts to the ITO who is required to prove that the
explanation is not up to his satisfaction.

Satisfactory Explanation under section 68
30
 Satisfactory Explanation :
 Identity of Creditor
 Financial Capacity of the Creditor
 Genuineness of Transaction
 Filing of mere confirmation is not sufficient
- Shiv Cable & Wire industries (India) vs ACIT,
99 TTJ 106, 113 (Del)

 Estimation of income after rejection of books under
31
section 145 – Can cash credits be held unexplained ?
 Where an item of credit is treated as income from
undisclosed sources – Can the assessee claim deductions/set
off of losses ?

 Provisions of section 68 - Applicable to amounts
32
representing purchases made on credit ?
 The assessee could not produce alleged creditors – Can
addition be made on this count alone ?
 Assessee cannot be asked to prove impossible. It is settled
law that the ‘source of source’ and ‘origin of origin’ need
not be proved by the assessee.

Important Decisions
 Brought forward liability to ex-partner – Unexplained
33
cash credit under section 68 ?
 The amounts standing credited in the name of the wife –
Can it be presumed to be belonging to Husband ?

Important Decisions
 Where addition is made to the income of the assessee on
estimate basis, such addition must be regarded as the
assessee’s real income and cash credits in subsequent year can
be taken as made out of the additions of the earlier year.
34
- CIT vs Prem Chand Jain, 189 ITR 320 (P&H)
Contra:
 The assessee has to prove that cash credits were from a source
from which income has already been estimated. Without
proving so it cannot be presumed that cash credits are covered
by intangible additions made to the assessee’s income.
- Import Export Sales Corporation vs CIT, 149 ITR 318 (Del)

Important Decisions
 Submission of Statement of Affairs implies that
35
assessee maintains Books ?
 Held that “in case the assessee was maintaining books of
accounts, there was no need for the assessee to have
prepared the statement of affairs”.
- ITO vs Chikkalingaiah, 9 SOT 786 (Bang.)
 Whether Diary is Books of accounts ? When intension was
to keep a record of transactions, the diary containing such
transactions shall be “Books” for the purpose of section 68 of
the Act- Sheraton Apparels vs ACIT, 256 ITR 20 (Bom.)

Important Points – Section 68
 Assessing Officer has to act reasonably. Application of
36
mind is sine qua non for forming an opinion
 Evidence produced by the assessee cannot be brushed
aside in a casual manner
 Confirmatory letters or A/c payee cheques do not prove
that the amount in question is explained for the purpose
of section 68. Identity and creditworthiness of the
creditor needs to be established

Important Points
37
 Limited Applicability to Non-Residents :
 Provisions of section 68 is applicable only with respect
to those amounts whose origin of source can be located
in India

Section 69A
 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.
38

Section 69A contd …
 The word income in section 69A has wide meaning.
 Income means anything which came in or resulted in gain.
- Chuharmul vs CIT 172 ITR 250 (SC)
- Mahendra D Jain vs ITO 323 ITR 644 (Bom)
39

Necessary Conditions to attract section 69A
 The assessee is found to be the owner of any money, bullion,
jewellery or other valuable articles; and
 Such money, bullion, jewellery or other valuable articles
when not recorded in the books of account, if any maintained
by the assessee for any source of income.
40

Issues under section 69A
 Entire on-money received by builder selling properties
cannot be taxed and only profit element of on-money
41
received can be taxed
 Can undisclosed income be set off of against trade
addition ?

Presumption regarding ownership
 There is prima facie presumption that one who is found in
possession of an article or thing is the owner unless that
presumption is rebutted by cogent evidence.
 Possession is evidence of ownership and strength of the
presumption of ownership depends on the nature of property
involved.
 Whether the provisions of the Indian Evidence Act, 1872 are
applicable to Income tax matters?
42

Appropriate year for addition
 Unexplained money with the assessee will be added and taxed
in the year in which the assessee was found in possession of it
and not in which the finding of ownership is recorded.
- Patoa Brothers vs CIT 133 ITR 672 [Gauhati]
 When the AO rejected the explanation regarding money,
bullion, etc., the assessee can submit that the amount should
not be wholly added as income from undisclosed source for a
particular year.
43

Section 69A vs Section 132
 A warrant of authorization under section 132 can be
issued against the assessee by invoking the provisions of
section 69A.
- Ganga Prasad Maheshwari vs CIT, 139 ITR 1043 (All)
44

Burden of proof regarding ownership
 Onus is on the department to establish that the assessee is the
owner of the articles or things.
- CIT vs Lalchand Bhabuthmal Jain, 151 ITR 360 [Bom]
 When an assessee is found in possession of currency, it is for him to
prove that he is not the owner of the currency.
- Sukh Ram vs ACIT, 285 ITR 256 [Del]
 Acquisition of assets by deceased - onus of proof on legal heir.
- Gopaldas T Agarwal vs CIT 113 ITR 447 [Bom]
45

Section 269SS and 269T - Definition of “Loans or
Deposit”
46
 Loans or Deposit - Section 269SS:
 Loans or Deposit means loans or deposit of money
 Loans or Deposit - Section 269T :
 Any loan or deposit of money which is repayable after
notice or repayable after a period and in the case of a
person other than a company, includes loan or deposit
of any nature

Section 269SS – Mode of Taking and Accepting
Certain Loans and Deposits
 No person shall take or accept any loan or deposit in excess
of Rs.20,000/- from any other person otherwise than by an
account payee cheque or account payee bank draft.
47
 Section 269SS – Applicability:
a) The amount of loan or deposit or the aggregate of such
loan and deposit exceeds Rs.20,000/-
b) The aggregate amount of loan or deposit remaining
unpaid as on the date of taking any fresh loan or deposit
from the same person, exceeds Rs.20,000/-
c) Points (a) and (b) put together if exceeds Rs.20,000/-

Section 269T – Mode of Repayment of Certain
Loans or Deposits
 No repayment of any loan or deposit in excess of
Rs.20,000/- otherwise than by an account payee cheque or
account payee bank draft drawn in the name of the person
which has made the loan or deposit.
48
 Section 269T is applicable to :
 Any branch of a Banking Company or a Co-operative Bank
 Any other company or Co-operative Society
 Any Firm
 Any other person

Section 269T – Mode of Repayment of Certain
Loans or Deposits
49
 Section 269T – Applicable under following situations:
a) The amount of loan together with interest payable
thereon exceeding Rs.20,000/-
b) The aggregate amount of loans or deposits, held by
such person either in his own name or jointly with
other person, along with interest payable as on the
date of such repayment exceeds Rs.20,000/-

Persons Exempt from Section 269SS and 269T of the
Act
50
 Government
 Any Banking Company, Post Office Savings Bank or Co-operative
Bank
 Any Corporation Established by a Central, State or Provincial
Act
 Other Notified Institutions and
 In a case, where the depositor and the acceptor, both are
having agricultural income, and neither have any taxable
income
 Persons giving and accepting loans having agricultural
income and having no income chargeable to tax under the Act

Deposits can be Accepted from “Relatives”
 An individual can accept deposit from his relatives and a
51
firm can accept deposit from the relatives of its partners.
 Meaning of Relative:
 Members of Hindu Undivided Family; or
 Husband and Wife; or
 Related in any manner as specified

Issues under section 269T
 Effect of section 269T in case of repayments of loans and
52
deposits made through journal entries
 Effect of section 269SS and 269T in case of agency
transactions

Share Application Money – Section 68 and 269SS
53
 Applicability of Section 68 :
 The assessing officer is entitled to enquire whether the
shareholders do in fact exist or not. In case the
shareholders do not exist, the officer can invoke section
68.
- CIT vs Sophia Finance Ltd, 205 ITR 98 (Del)
- CIT vs Active Traders (P) Ltd, 115 CTR 69 (Cal)

Share Application Money – Section 68 and 269SS
54
 Applicability of Section 269SS :
 The receipt of application money for allotment of shares is
not a deposit as at the time of taking/accepting the amount
there is no obligation or liability to return the amount
which is the essence of a “deposit”
- Jagvijay Auto Finance Pvt Ltd vs ACIT, 52 ITD 504 (JP)

Section Conditions Penalty
271D
Acceptance of loans/deposits
in contravention to section
269SS
Shall be liable for penalty at
the rate of 100% of such
loans / deposits that are
accepted/repaid.
It shall be imposed by the
Joint Commissioner.
271E
Repayment of loans/deposits
in contravention to section
269T
55
Failure to comply with the provisions of section 269SS and
269T - Section 271D and 271E
 No Penalty as per section 273B of the Act if reasonable cause of
failure can be proved

Thank You
prashanth@gspconsulting.co.in
+91-98454-80269
56

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