“unexplained investment”
The decision most relied on for unexplained investment is Sumati Dayal v. CIT (214 ITR 801), cited in 1,967 judgments on BharatTax.
Leading authorities on unexplained investment
The Revenue is entitled to look behind the apparent form of a transaction to discover its true nature, applying the test of human probabilities and surrounding circumstances. If transactions defy logic or are unnatural, they can be treated as bogus, even if supported by some documentation, especially in cases of cash credits or unexplained investments.
An addition to income cannot be made merely on the basis of a difference in valuation of assets or a Valuation Officer's report without establishing actual understatement of consideration or the source of unexplained funds through proper enquiry. The Assessing Officer must conduct proper enquiry and satisfy the conditions for making such additions.
The expression 'income' under Section 69A of the Income-tax Act, 1961, has a wide meaning, encompassing anything that comes in or results in gain. Therefore, an assessee's unexplained investments, such as purchasing articles or depositing cash, can legitimately be inferred and deemed as income under this section.
When making an addition under section 68, the creditworthiness or financial strength of an investor contributing share capital or share application money can be proved by producing their bank statements showing sufficient balance for the investment. The Supreme Court dismissed the SLP against this decision.
An assessee cannot be asked to explain the source of the source for cash credits, particularly share capital or share application money, once they have discharged the initial onus regarding the identity, genuineness of the transaction, and creditworthiness of the immediate investor.
The Commissioner of Income-tax (Appeals) has an independent statutory obligation to conduct proper inquiries and verify facts, especially when the Assessing Officer has failed to do so. The CIT(A) must ensure effective inquiry is carried out before deleting additions or accepting additional evidence.
Under the Income-tax Act, 1961, the Assessing Officer must tax any taxable income in the hands of the correct assessee to whom it truly belongs, having no option to assess it in any other person's hands.
Once the identity of the shareholders is established, no addition can be made in the hands of the assessee company under Section 68 for share capital or share application money, as it cannot be treated as undisclosed income.
