SHRI SANDEEP S SHARMA ,MUMBAI vs. INCOME TAX OFFICER WARD 20(3)(5), MUMBAI

Briefly stated, the facts of the case are that the assessee filed his return of income on 12/11/2013 declaring total income of Rs.4,74,290/-. The return was processed u/s 143(1) of the Act and subsequently selected for scrutiny and accordingly statutory notices were issued and served upon the assessee. The assessee is a proprietor of M/s. Sapna Refrigeration Industries which is engaged in the business of manufacturing parts and spares of refrigerators and other cooling appliances. The assessee has also shown income from house property, income from business and other sources. During the course of the scrutiny assessment proceedings, the AO noticed some loan credit for which the assessee was asked to explain the identity, genuineness of the transactions and capacity of the lender. On receiving no plausible reply, the AO made addition of Rs.3 Crores u/s 68 of the Act which was confirmed by the ld. CIT(A).

Before us it was strongly contended that since the assessee has returned income u/s 44AD of the Act thereby opting for presumptive taxation, there is no question of making any addition u/s 68 of the Act. The ld. D/R strongly supported the findings of the AO.

We have given thoughtful consideration to the orders of the authorities below. It is an undisputed fact that the assessee returned its business income under presumptive taxation u/s 44AD of the Act by which he gets immunity from maintaining books of accounts. Addition u/s 68 of the Act has been made on the basis of the entries found in the passbook of the assessee. 6.1. The Hon’ble Jurisdictional High Court in the case of CIT vs. Bhaichand N. Gandhi [1983] 141 ITR 67 (Bom.), has held as under:- “When moneys are deposited in a bank, the relationship that is constituted between the hanker and the customer is one of debtor and creditor and not a trustee and beneficiary. Applying this principle, the pass book supplied by the bank to its constituent is only a copy of the constituent's account in the books maintained by the bank. It is not as if the pass book is maintained by the bank as an agent of the constituent, nor can it be said that the pass book is maintained by the bank under the instructions of the constituent. In view of this, the pass book supplied by the bank to the assessee cannot be regarded as a book maintained by the assessee or under his instructions. Accordingly, the Tribunal is justified in holding that a cash credit for the previous year shown in the assessee's bank pass book issued to him by the bank but not shown in the cash book maintained by him for that year, does not fall within the ambit of section 68.”

Before proceeding further to decide this issue it would be imperative to refer to the relevant provisions of section 68 of the Act. The same are reproduced herein under: "68 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:" A bare perusal of section 68 of the Act makes explicitly clear that the addition can be made under the section if, any sum is found credited in the books maintained by the assessee. That is the books should be that of the assessee.

The "books or books of account" have been defined in section 2(12A) of the Act. The same reads as under:- "2(12A) books or books of account" includes ledgers, day-books, cash books, account- books and other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device;" The definition of books under the Act is inclusive. A perusal of the definition shows that the same does not include bank passbook or bank statement. A conjoint reading of above provisions would thus lead to the (A.Y.2014- 15) conclusion that the addition u/s 68 can be made only where any amount is found credit in the books as defined u/s 2(12A) of the Act maintained by the assessee.

The Hon'ble Bombay High Court in the case of CIT vs. Bhaichand N. Gandhi (supra) upholding the decision of Tribunal concluded that bank passbook does not constitute books as envisaged under u/s 68 of the Act. The relevant extract of the judgement reads as under: "........... the pass book supplied by the bank to its constituent is only a copy of the constituent's account in the books maintained by the bank. It is not as if the pass book is maintained by the bank as the agent of the constituent, nor can it be said that the pass book is maintained by the bank under the instructions of the constituent. In view of this, the Tribunal was, with respect, justified in holding that the pass book supplied by the bank to the assessee in the present case could not be regarded as a book of the assessee, that is, a book maintained by the assessee or under his instructions. In our view, the Tribunal was justified in the conclusions at which it arrived."

Under the provisions of section 44AD of the Act, where the assessee is engaged in eligible business and has total turnover or gross receipts in the previous year not exceeding Rs.60,00,000/-, the assessee is eligible to file return of income on the basis of presumptive income @ 8% of total turnover or gross receipts. In the present case undisputedly the assessee has not maintained books and has offered his business income to tax on presumptive basis u/s 44AD of the Act. The same has been accepted by the Assessing Officer except for addition u/s.68 of the Act. It is not mandatory for the assessee to maintain books, if the return of income is filed under section 44AD of the Act.

As has been observed earlier that addition under section 68 can be made only if any sum is found credited in the books maintained by assessee for any previous year and the assessee fails to offer valid explanation for credit of such sum in the books or explanation offered is rejected by the Assessing Officer. In other words maintains of 5 books by the assessee is sine qua non for making addition u/s 68 of the Act. Since section 44AD does not obligates the assessee to maintain books, the provisions of section 68 cannot be invoked where the assessee has filed return of income under the provisions of section 44AD of the Act without maintaining books of account.

The Hon'ble High Court of Gauhati in the case of Anand Ram Raitani vs. CIT reported as 223 ITR 544 has held that existence of books of account is a condition precedent for invoking the provisions of section 68 by the Assessing Officer. The relevant extract of the judgement is as under: "We have gone through section 68 of the Act. The Assessing Officer before invoking the power under section 68 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 of the power. Discharging of burden is a subsequent condition. If the first point is not fulfilled the question of burden of proof does not arise. The Assessing Officer made the assessment by making addition of the amount for which disallowance was claimed Mr. Bhuyan very candidly admits that addition was made in exercise ofthe power under-section 68 of the Act, therefore, the first condition necessary for invocation of the power is the existence of the books of account." [Emphasised] 14. The Tribunal in the case of Madhu Raitani vs. ACIT (supra) following the decision rendered in the case of CIT vs. Bhaichand N. Gandhi (supra) and Anand Ram Raitani (supra) held that if books of account are not maintained by the assessee, the provisions of section 68 cannot be invoked. The Tribunal further held that bank passbook cannot be considered as books of account. Similar view has been taken by the coordinate Bench in the case of Manasi Mahendra Pitkar (supra).

The Co-ordinate Bench of the Tribunal in the case of Shri Kokarre Prabhakara vs. ITO(supra), in a similar situation where the assessee had declared income under section 44AD of the Act without maintaining books and the Assessing Officer had invoked the provisions of section 68 of the Act, the Tribunal deleted the addition by placing reliance of various decisions of the Tribunal holding that where the returns are filed on the basis of income declared under section 44A of the Act, there cannot be any application of section 68 of the Act.

Thus, in the back drop of the facts, relevant provisions of the Act and case laws discussed above, no addition under section 68 can be made in the instant case. We find merit in ground no.1 raised by the assessee in appeal.”