VIP Road CA’s Study Circle- EIRC of ICAI Cash Credits Unexplained Investments - Money & Expenditure Revision & Share Capital VIP Road CA’s Study Circle- EIRC of ICAI Saturday, 8th November , 2014 City Centre - 1 Royal Bengal Room Salt Lake City Kolkata Pradip N. Kapasi Chartered Accountant

Synopsis Cash Credits -s. 68 Unexplained Investments –s.69 Unexplained Cash, etc. –s.69A Investments Not fully disclosed – s. 69B Unexplained Expenditure – s. 69C Borrowing and Repayment on Hundi – s. 69D Revision & Share Capital – s. 147 & 263 Pradip N. Kapasi Chartered Accountant

Cash Credits Section 68 Pradip N. Kapasi Chartered Accountant

Essentials Charge ‘May’ be charged Income of the previous year ‘any sum’ - ’found’ - ’credited’ In the ‘books’ – ‘maintained’ for the previous year assessee offers no explanation About the nature and source thereof ‘Found’ to be ‘unsatisfactory’ by A.O. - in his ‘opinion’ ‘May’ be charged Income of the previous year Proviso 1 & 2 by FA 2012 w.e.f. 1.4.2013 for CHC Head of Income Deduction for expenses Rate of tax and S. 115BBE Pradip N. Kapasi Chartered Accountant

Nature & Source By assessee By AO Identification of creditor Genuineness of transaction By AO Credibility of creditor Consequences of dissatisfaction Opportunity to assessee Pradip N. Kapasi Chartered Accountant

Due discharge by Assessee Desired compliance Bank statement- Security Ledger account- confirmation Financial statements Interest- TDS Repayment Broker’s confirmation Income tax records Wealth tax records Affidavit Appearance Pradip N. Kapasi Chartered Accountant

Due discharge by Assessing Officer Ascertain credibility of creditor Examination of records produced Independent Inquiry AO of the creditor Third parties By Inspector Assessee’s examination Creditor’s examination Application of mind Form an opinion Confronting assessee Opportunity to be heard Pradip N. Kapasi Chartered Accountant

Important considerations Evidence to be paramount Apparent is real Source of source and share capital Preponderance of probability Good proof and no proof Pradip N. Kapasi Chartered Accountant

Irrelevant considerations Suspicion- Surmises - Conjectures Illegality of transactions Source of source and general credits Pradip N. Kapasi Chartered Accountant

Share Capital and S.68- Amendments -I Three Amendments of FA, 2012- w.e.f. A.Y. 2013-14 Law of cash credits up to A.Y. 2012-13 Provisions. Essentials. Rate . Case Laws S. Hastimal, 49 ITR 273 (Mad.) –Source of source Lovely Exports (P) Ltd., 216 CTR 195 (SC) Shareholders name & address Steller Investment Ltd., 115 Taxman 99 (SC) Non- genuine (Owners of Funds) Divine Leasing, 158 Taxman 440 (Del.) Onus shifted to AO to examine capacity Pradip N. Kapasi Chartered Accountant

Share Capital and S.68- Amendments-II Expanding and extending onus for certain receipts Share capital. Share premium. Like receipts From resident- VCC & VCF excluded Closely held company –CHC Onus on CHC to explain sources of source of receipt Payer to offer explanation- nature & source Satisfaction of AO On notice by AO to Payer Relevance of satisfaction of Payer’s AO Consequence Income of CHC – without deduction for expenses Tax at 30% u/s 115BBE Absence of discretion Pradip N. Kapasi Chartered Accountant

Non resident Assessees Receipts from outside India – In india Nature of income Place of accrual or receipt S. 4 & 5 of ITA DTAA Circular of CBDT Pradip N. Kapasi Chartered Accountant

Law of Onus Degree of burden Stages of discharge Manner of discharge Prima facie- assessee Shift to secondary- AO Conclusive- assessee Manner of discharge Cases of insufficient discharge When adequately discharged Dissatisfaction of AO and discharge of onus Varinder Rawlley, 36 ITR 232 (P&H) Y. M. Singla, 366 ITR 242 (P&H) Pradip N. Kapasi Chartered Accountant

Production of creditor & summons Position u/s 68 -Identity -Genuineness -Credibility Issue of summons by AO Request for issue Power to enforce attendance Pradip N. Kapasi Chartered Accountant

Law of witness Party seeking to substantiate case Onus of presenting witness Right of examination and cross examination Pradip N. Kapasi Chartered Accountant

Third Party Statement Application of mind by AO Furnishing copy to assessee Facilitating cross examination Inquiry with AO of third party Independent investigation Retraction by third party Opportunity of hearing to assessee Consideration of explanation of assessee Ascertaining credibility of third party Pradip N. Kapasi Chartered Accountant

Material gathered by AO Application of mind by AO & adverse inference Furnishing copy to assessee Ascertaining credibility of material Independent inquiry by AO Right of assessee to explain Consideration of explanation of assessee Form an opinion Pradip N. Kapasi Chartered Accountant

Conflicting statements of assessee Admission and retraction Credibility of new statement Status of addition on the basis of first statement Onus on assessee Obligation of AO on retraction Pradip N. Kapasi Chartered Accountant

Issues u/s 68 (I) Charge or Computation Parallel provisions of S. 56(2) Head of income and charge Deductions Rate of tax Provisions of S. 269SS and S. 68 Mutually exclusive Sales/ receipts shown as income Advance against sales Pradip N. Kapasi Chartered Accountant

Issues u/s 68 (II) Receipt from related parties Partner - Shareholder Degree of burden Receipt by bank, NBFCs, etc Nature of income Eligibilty for exemption and deductions Rate of taxation Credits without cash flow Journal entries - Credit purchases Pandian Distributors, 259 ITR 428 (Mad.) VISP (P) Ltd., 265 ITR 202 (MP) Pradip N. Kapasi Chartered Accountant

Issues u/s 68 (III) Books of account Parallel books -Rough books -Passbook - Loose papers Credits on the first day of the business/ year Application where books are rejected Allowance of brokerage, interest etc. Immunity/ Amnesty and S. 68 Peak credit benefit Telescoping other additions Relevance of admission in investigations Penalty and prosecution where addition not contested Reopening & revision- basis thereof Pradip N. Kapasi Chartered Accountant

Revision u/s 263 Qua Share Capital Pradip N. Kapasi Chartered Accountant

Essentials -Prejudicial to interest of revenue Twin Conditions about order -Prejudicial to interest of revenue -Erroneous Time Limit – 2 years form end of financial year Order when erroneous -Malabar Industries, 243 ITR 83 (SC) -Max India, 295 ITR 282(SC) -Gabriel Ltd. 203 ITR 108(Bom.) Pradip N. Kapasi Chartered Accountant

Share Capital-I Nature of inquiry Case laws - Preliminary inquiry -Inquiry with shareholders -Failure to make inquiry Case laws -Active Traders (P.) Ltd, 214 ITR 583 (Cal.) -Sophia Finance Ltd, 36 ITD 369 (Del.) -Achal Investments Ltd, 268 ITR 211 (Del.) -Unique Autofelts, (P.) Ltd, 30 DTR 231 (P&H) Pradip N. Kapasi Chartered Accountant

Share Capital-II 143(1) -Anderson Marine & Sons (P.) Ltd, 266 ITR 694 (Bom.) -Hilltop Holdings India Ltd, 278 ITR 501 (Cal.) Pradip N. Kapasi Chartered Accountant

Unexplained Investments Section 69 Pradip N. Kapasi Chartered Accountant

Essentials Charge Option of AO Deemed income of the financial year ‘assessee’ ‘has made’ ‘investments’ In a ‘financial year’ Not ‘recorded’ in ‘books of accounts’ Maintained by him for any source of income No explanation or adequate explanation About nature and source of investments In the opinion of AO Option of AO Deemed income of the financial year Head of income Deduction for expenses Rate of tax and S. 115BBE Pradip N. Kapasi Chartered Accountant

Investments Not covered ; Covered ; Money Valuable articles Jewellery & ornaments Bullion Expenditures Covered ; Securities Properties Loans Receivables Stock Cost of construction Pradip N. Kapasi Chartered Accountant

Understandings Only where not recorded in the books of account Where undisclosed Benami investments Deduction for cost of investment on sale S & S, Survey, Third party statements with/ without evidence Burden of Proof Pradip N. Kapasi Chartered Accountant

Unexplained Money, etc. Section 69A Pradip N. Kapasi Chartered Accountant

Essentials Charge Opinion of AO Deemed income of the financial year ‘a’ found to be ‘owner’ Of money, bullion, jewellery, valuable article Not recorded in books of account Maintained for any source of income No explanation offered or unsatisfactory Of nature and source of acquisition Opinion of AO Deemed income of the financial year Head of income Deduction for expenditure Rate of tax and S. 155BBE Pradip N. Kapasi Chartered Accountant

Understandings Scope restricted to money, etc- not other assets Not recorded in books of account Year of finding of asset Source of deceased from whose estate legacy recd. Deduction for allowance or expenses not possible Owner only can be taxed Possession best proof- unless rebutted Storage of third party goods Possession is not ownership but presumption of ownership Third party ownership Saraf/ Aangadia/ Warehouse keeper/ Bank Pradip N. Kapasi Chartered Accountant

Understandings II Receipt from donors, estate, trusts, etc. Benami Deduction for cost of stock not accounted Streedhan Jewellery, ornaments - circular Transport cost DVO’s report Year of finding by authorities unless documents prove, earlier year ‘money’- cash equivalent Gifts including from NRI Pradip N. Kapasi Chartered Accountant

Investments Not Fully Disclosed Section 69B Pradip N. Kapasi Chartered Accountant

Essentials Charge Excess to be income of financial year Assessee is found by AO To have made Investments To be Owner of Bullion, J&O and Valuable article And that amount expended exceeds The amount recorded in books No explanation offered/unsatisfactory Excess to be income of financial year Discretion of AO Head of income Deduction for expenses Rate of tax and S. 115BBE Pradip N. Kapasi Chartered Accountant

Understandings I Investments Only where partly disclosed Stock (purchases) Property Construction Only where partly disclosed Accounts must have been maintained S. 50C not to apply for buyer Purchase at a price lower than FMV Pradip N. Kapasi Chartered Accountant

Understandings II Reference to DVO possible Reference to DVO without rejection of books Cost of construction Onus on AO Evidence DVO’s report Third party statements Seized/impounded material Pradip N. Kapasi Chartered Accountant

Unexplained Expenditures Section 69C Pradip N. Kapasi Chartered Accountant

Essentials Charge Deemed to be income of financial year Assessee has incurred expenditure Offers none or unsatisfactory explanation Source of such expenditure or part thereof Deemed to be income of financial year Discretion of AO No deduction for such expenditure Head of income Rate of taxation and S. 115BBE Pradip N. Kapasi Chartered Accountant

Understandings I Types of expenditures Any expenditure Household Personal or Business Revenue or Capital Household Tour & Travel Marriage, functions Medical Club Donations & gifts Production Purchases Insurance Lifestyle expenses Pradip N. Kapasi Chartered Accountant

Understandings II Source Not related to books Burden on AO Accounted source Unaccounted source No source or unexplained source Not related to books Burden on AO Evidence Third party statements Action by other government authority Loose papers, DVO reports Copy and examination Estimates and guess work Pradip N. Kapasi Chartered Accountant

No deduction – effect of Proviso I Business Purchases out of borrowed funds/credits Fact of purchase accepted Source not accepted Purchases not deductible at first instance –Proviso s. 69C On sale, deductible, 31 DTR 456 (Jaipur) Business Purchases out of unaccounted income Income taxed u/s 5 Source explained to be out of unaccounted income Purchases deductible against sales S. 69C not applicable Business Purchases on payments Source of payment explained- Genuineness of purchase not Purchases not deductible Pradip N. Kapasi Chartered Accountant

No deduction – effect of Proviso II Non Business Purchases Fact of purchase accepted Source not accepted S. 69 C applicable Purchases not deductible at first instance – Non business On sale not deductible under any head of income Debatable Possibility as Cost of Acquisition Pradip N. Kapasi Chartered Accountant

Hundis _ Borrowing & Repayment Section 69D Pradip N. Kapasi Chartered Accountant

Essentials Charge On borrowal on or repayment of ‘hundis’ Otherwise than through account payee cheques Deemed income of the previous year of borrowing/ repayment Of the borrower or repayer No double taxation on repayment Amount of interest included for taxation Bilateral transaction not a hundi -Drawer -Drawee -Payee Use of hundi paper Language of hundi Head of income Deduction for expenses Rate of taxation & S. 115BBE Pradip N. Kapasi Chartered Accountant

Other issues- S. 69 to S. 69D Rules of evidence & natural justice Burden of proof under different provisions Relevance of books of account ‘Found’ by the Assessing Officer Nature of finding Year of finding Basis for finding Presumption u/s. 132(4A) Discretion of Assessing Officer Expenditure - Unaccounted v. Unexplained Gift sans natural love and affection Hanuman Dass, 365 ITR 131 (P&H) Y.M.Singla, 366 ITR 242 (P&H) Pradip N. Kapasi Chartered Accountant

Special Rate of Taxation Section 115BBE Pradip N. Kapasi Chartered Accountant

S.115BBE Tax - I Inserted by FA, 2012 w.e.f. 01.04.2013 Tax @ 30% on income referred to in S. 68 to 69D SC + EC + SEC if applicable Tax at specified rates where DTAA apply No deduction for expenditure or allowance Position for Chapter VI-A deduction Position for set-off of losses Position for threshold exemption Regular income to be taxed at regular rates Computation of total income and S. 2(45) Pradip N. Kapasi Chartered Accountant

S.115BBE - II Tax rate on gross amount or net of taxable limit Set-off of losses Deduction for expenses Deduction under Chapter VI-A Effect on Computation of Book Profit Applicability to cash sales- ‘any sum’ Presumptive Income and S. 115BBE Double difficulty w.r.t. S. 43CA Applicability where included in total income B. C. Paul 6 Taxman 170 (Cal.) Avdhesh Kumar Jain, 48 Taxman 266 (All.) Applicable for s. 153A/C assessments Onus to pay taxes u/s. 115BBE Penalty where flat rate applicable Basis of tax for levy of penalty – s. 271(1)( c ) & 271AAB Pradip N. Kapasi Chartered Accountant

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