Landmark Cases on Cash Credits and Unexplained Money

The mere filing of income tax file numbers of creditors is insufficient to establish the genuineness of credits. The assessee must prove both the genuineness of the transactions and the creditworthiness of the creditors.

Section 68 of the Income-tax Act, 1961, does not permit additions in a subsequent assessment year for sums that were credited in earlier years and brought forward as liabilities in the balance sheet.

When an assessee provides evidence of genuine shareholders and their income tax returns, the Revenue must prove that the investment did not originate from the shareholder, rather than inferring the assessee's lack of creditworthiness.

If an assessee proves the source of cash withdrawals and the department fails to demonstrate that the amount was used elsewhere, no addition can be made to income solely because the amount was retained for a long period.

Deemed income under sections 69, 69A, 69B, and 69C is treated separately from other heads of income due to special provisions, overriding general provisions and allowing taxation irrespective of the year of earning.

An addition under Section 68 for share application money cannot be made solely on the basis that the money deposited in the bank account of a third party was the assessee's money, if there is no material to link the assessee with the deposit.

Where an assessee encashes high denomination currency notes after a demonetisation ordinance and provides an explanation for their source, the assessing officer must disbelieve the explanation with material evidence before treating the amount as income from an undisclosed source.

Additions made on account of alleged on-money payments for property purchases are invalid if not supported by adequate material, especially when based on seized electronic data without corroboration.

The Assessing Officer is justified in adding back amounts under section 68 when the directors of the assessee company do not appear for examination and the company's financials are weak. The onus required under section 68 is not discharged in such circumstances.

A firm is not required to explain the source of income of its partners concerning their capital contribution to the firm. Such contributions form the substratum of the firm's business and cannot be added to the firm's income.

An Assessing Officer can make additions for both unexplained cash credits under section 68 and estimated business income under section 44AD, even if the books of account are rejected. Unexplained sundry creditors can be treated as income from undisclosed sources.

If an assessee provides evidence of the identity, creditworthiness, and genuineness of share applicants, including bank details and IT returns, then additions under Section 68 for cash credits are to be deleted as the initial burden has been discharged.

Where the Assessing Officer rejects the books of accounts under section 145(3) and makes an addition on an estimated basis, no separate addition can be made for unexplained cash credits under section 68. However, it is incumbent upon the assessee to prove that any cash credit, even if it represents income, is from a source that has already been taxed.

The court considers whether an addition made by the Assessing Officer under Section 68, relating to share application money, is justified.

Share applicants' ability to invest in a company is not solely determined by the income they declare or taxes they pay; the Assessing Officer must conduct a deeper analysis of their substantial means.

Taxation of credit as income is justified, even if the loan transaction is squared off in the next financial year. Repayment of a loan does not necessarily establish the genuineness of the transaction for the purpose of addition under section 68.

Section 68 of the Income Tax Act does not apply to amounts representing purchases made on credit, including trade and sundry creditors, as these represent liabilities, not unexplained cash credits.

Merely routing a gift through a banking channel does not, by itself, establish the genuineness of the gift; other evidence is required to prove its genuineness.

When the purchase of shares has been accepted as genuine in earlier assessment years, the sale of such shares in subsequent years cannot be subjected to addition under Section 68 by treating the transaction as bogus.

If the identity of the creditor is established, the creditor has confirmed the loan, and the creditor is assessed to tax, the assessee is not required to prove the source of the source for the purpose of section 68 additions.

Unsecured loans accepted by the assessee are scrutinized to determine if the lender is a shell company, potentially leading to reassessment under Section 153A.

Where the Assessing Officer estimates business income after rejecting books of account, and unexplained sundry creditors are not referable to that estimated business income, the AO can treat such sundry creditors as income from other sources.

Decisions relied upon by the revenue may not be followed if the facts and circumstances of the assessee's case are factually distinguishable, especially when the earlier decision concerned a failure to prove the genuineness of transactions and creditworthiness for share capital and premium receipts.

Cash deposits made post-demonetization out of cash sales, when supported by stock availability and previous year's sales patterns, cannot be treated as undisclosed income under Section 68.

The High Court affirms that additions under Section 68 require the Revenue to establish that the assessee failed to prove the existence and creditworthiness of the subscriber and the genuineness of the transaction, including the source of funds. Failure to do so justifies additions.

The case addresses the taxability of cash withdrawn from sub-contractors' bank accounts by employees of a civil contractor engaged in infrastructure development. The revenue observed these withdrawals during search proceedings, indicating potential issues with the assessee's tax compliance.

When the nature and source of a sum of money received by an assessee cannot be explained satisfactorily, the revenue can treat it as the assessee's income. Merely providing the identity of the creditor is insufficient if their creditworthiness is not proven.

Additions made by invoking Section 2(22)(e) of the Income-tax Act are deleted when the facts and circumstances are similar to prior judicial precedents and Board circulars.

In the case of an 'entry provider', the taxable income is limited to the premium, brokerage, or commission received, not the entire cash deposited. The rate of commission cannot exceed 1%.

The distinction between a loan and a deposit lies in the duty of repayment: in a loan, the debtor must seek out the creditor, while in a deposit, the depositor must demand the return of funds.

An assessee fails to establish the genuineness of transactions and the creditworthiness of creditors when directors who advanced huge unsecured loans are not men of means and the transaction involves no interest, supporting addition under Section 68.

The case is authority for the proposition that where an assessee is aware of facts, the subsequent omission to disclose them in a return is significant. The court noted that the assessee was aware of having three bank accounts and depositing cash.

When an assessee fails to discharge the burden of proving the source of an investment, the investment in property is considered unexplained and can be added to the assessee's income.

The peak credit theory can be applied to determine unexplained income arising from a series of transactions, even when exact quantum is difficult to ascertain. However, it may not be applicable to singular unexplained credits.

The entire receipts on account of on-money or premium charged by an assessee on booking of flats are not to be treated as undisclosed income for the block period; only a net profit rate can be applied on unaccounted sales/receipts for making additions.

Unexplained cash credits, accommodation entries, and share application monies from shell companies can be added to income under Section 68 if the assessee fails to prove the genuineness and bonafides of the transactions. The genuineness of a transaction is a matter of perception based on facts and ground realities.

The Supreme Court affirms that merely suspecting a company to be a shell company is insufficient to disregard evidence establishing the creditworthiness and identity of the investor, particularly when the assessing officer fails to provide specific evidence beyond suspicion.

The genuineness of share capital or share premium is to be examined based on the creditworthiness of the creditor and a live link to the source of funds.

Only the profit element embedded in cash or on-money receipts can be brought to tax in the hands of the assessee.

A fabricated bank entry indicating accommodation entries can be a valid basis for reopening assessment under Section 147 if the Assessing Officer has material suggesting the transaction lacks genuineness. The onus is on the assessee to prove the genuineness of such transactions.

The issue of 'Penny Stocks' is a subject of numerous High Court and Tribunal decisions, with some rulings favouring the revenue.

When an assessee provides documentary evidence to establish the identity, creditworthiness, and genuineness of share application money, the primary focus shifts to the source and availability of funds. If these are satisfactorily explained, an addition under section 68 may be deleted.

The Assessing Officer's opinion for not accepting an assessee's explanation regarding cash credits under Section 68 must be formed objectively based on available material and human probabilities.

Section 68 applies to all credit entries, regardless of who they are in the name of, and the assessing officer can add such sums as income if they are found to be not genuine after inquiry.

The High Court of Madras held that when an assessee provides the names and addresses of creditors for unsecured loans, and these creditors confirm the loans and the source of funds through banking channels, the addition under Section 68 is not warranted, even if PAN cards of creditors are not provided.

An addition under section 69A is justified when an assessee fails to discharge the burden of proving the source of funds, even if the Assessing Officer initially mentioned section 68.