Date of the Judgment: 24 April 2020
Citation: Basir Ahmed Sisodiya v. The Income Tax Officer, Civil Appeal No. 6110 of 2009
Judges: A.M. Khanwilkar, J. and Dinesh Maheshwari, J.
Can an assessing officer add ‘cash credits’ to an assessee’s income under Section 68 of the Income Tax Act, 1961, even after rejecting the assessee’s books of accounts? The Supreme Court addressed this question in a case where the assessee was accused of showing bogus entries of purchases from unregistered dealers. The court ultimately ruled in favor of the assessee, setting aside the addition of income made by the assessing officer. This judgment clarifies the circumstances under which such additions can be made. The judgment was delivered by a two-judge bench comprising Justice A.M. Khanwilkar and Justice Dinesh Maheshwari, with Justice A.M. Khanwilkar authoring the opinion.
Case Background
The case involves Basir Ahmed Sisodiya (the appellant/assessee), who was served a notice under Section 143(2) of the Income Tax Act, 1961, by the Assessing Officer for the assessment year 1998-1999. The Assessing Officer, while reviewing the balance sheet and books of account, noted credits of Rs. 2,26,000 shown in the names of 15 individuals. These were treated as “cash credits” under Section 68 of the Income Tax Act, 1961, and added to the assessee’s declared income. The Assessing Officer stated that the assessee failed to prove the genuineness of these credits and the source of income of the creditors.
The Assessing Officer computed the income of the assessee as follows:
| Particulars | Amount (Rs.) |
|---|---|
| Income shown in the Returns | 87,500 |
| Disallowed deduction U/s.24(1) | 7,200 |
| Additions in gross profit | 10,000 |
| Additions on the basis of less Household expenses withdrawals | 18,000 |
| Unexplained credits as per discussions | 226,000 |
| Total Taxable Income | 348,700 |
Aggrieved by this, the assessee appealed to the Commissioner of Income Tax (Appeals), who partly allowed the appeal but upheld the addition of the credits. The Income Tax Appellate Tribunal (ITAT) also partly allowed the appeal but upheld the addition of Rs. 2,26,000. The assessee then appealed to the High Court of Judicature for Rajasthan at Jodhpur, which dismissed the appeal, stating that the credits were bogus entries.
Timeline:
| Date | Event |
|---|---|
| Assessment Year 1998-1999 | Relevant assessment year for the case. |
| 30.11.2000 | Assessment order passed by the Assessing Officer adding Rs. 2,26,000 as unexplained credits. |
| 9.1.2003 | Order by the Commissioner of Income Tax (Appeals) partly allowing the appeal but upholding the addition of credits. |
| 4.11.2004 | Order by the ITAT partly allowing the appeal but upholding the addition of credits. |
| 27.4.2006 | High Court admits the appeal on the substantial question of law. |
| 17.11.2006 | Income Tax Officer passes order under Section 271(1)(c) for penalty proceedings. |
| 21.8.2008 | High Court dismisses the appeal. |
| 13.1.2011 | CIT(A) sets aside the penalty order in appeal, accepting the assessee’s explanation. |
| 6.6.2011 | Criminal proceedings against the assessee are dropped, and he is acquitted. |
| 24.4.2020 | Supreme Court allows the appeal, setting aside the addition of Rs. 2,26,000. |
Course of Proceedings
The Assessing Officer (AO) initiated proceedings under Section 143(2) of the Income Tax Act, 1961, for the assessment year 1998-1999. The AO added Rs. 2,26,000 as unexplained cash credits under Section 68 of the Income Tax Act, 1961, after the assessee failed to prove the genuineness of the credits. The Commissioner of Income Tax (Appeals) partly allowed the appeal but upheld the addition of the credits. The Income Tax Appellate Tribunal (ITAT) also partly allowed the appeal but upheld the addition of Rs. 2,26,000. The High Court dismissed the assessee’s appeal, stating that the credits were bogus entries. The Supreme Court heard the appeal against the High Court’s decision.
Legal Framework
The relevant legal provisions include:
- Section 143 of the Income Tax Act, 1961: This section deals with assessment procedures. Sub-section (2) allows the Assessing Officer to issue a notice to the assessee if they consider it necessary to ensure that the assessee has not understated income or underpaid tax. Sub-section (3) allows the Assessing Officer to make an assessment of the total income or loss of the assessee after hearing the evidence.
- Section 144 of the Income Tax Act, 1961: This section provides for “best judgment assessment,” which is made when the assessee fails to comply with certain requirements, such as not filing a return or not complying with a notice.
- Section 145 of the Income Tax Act, 1961: This section relates to the method of accounting. Sub-section (3) states that if the Assessing Officer is not satisfied with the correctness or completeness of the accounts, they may make an assessment under Section 144.
- Section 68 of the Income Tax Act, 1961: This section deals with cash credits. It states that if any sum is found credited in the books of an assessee and the assessee offers no explanation about the nature and source of the credit or the explanation is not satisfactory, the sum may be charged to income tax as the income of the assessee.
The Supreme Court considered these provisions to determine whether the assessing officer was correct in adding the cash credits to the assessee’s income.
Arguments
Appellant’s Arguments:
- The appellant argued that the Assessing Officer (AO) had rejected the books of account under Section 145(3) of the Income Tax Act, 1961, and therefore, the same books could not be relied upon to make additions under Section 68 of the Income Tax Act, 1961.
- The appellant contended that the assessment order incorrectly referred to Section 145(2) instead of Section 145(3) of the Income Tax Act, 1961. According to the appellant, Section 145(2) prior to 1.4.1997 is akin to Section 145(3) post 1.4.1997.
- The appellant argued that the assessment was made under Section 144 of the Income Tax Act, 1961, which mandates a “best judgment assessment,” meaning the AO must re-assess the entire accounts and cannot rely on the rejected books for subsequent additions.
- The appellant submitted that the approach adopted by the AO would result in taxing the same transaction twice.
Respondent’s Arguments:
- The respondent argued that the assessment was made under Section 143(3) of the Income Tax Act, 1961, and not under Section 145(3) of the Income Tax Act, 1961. Therefore, the AO was justified in relying upon the books of accounts for making additions.
- The respondent contended that the AO did not reject the books of accounts entirely but only that part which pertained to assessing the gross profit.
- The respondent argued that the amount shown under “Credits” in the balance sheet was incorrect and qualified as “Cash Credits” under Section 68 of the Income Tax Act, 1961.
- The respondent highlighted that the AO gave several opportunities to the assessee to prove the authenticity of the entries, but the assessee failed to do so. Summons were issued to the fifteen creditors, but no evidence or explanation was provided.
| Main Submission | Sub-Submissions (Appellant) | Sub-Submissions (Respondent) |
|---|---|---|
| Rejection of Books of Accounts |
|
|
| Addition of Cash Credits |
|
|
Issues Framed by the Supreme Court
The substantial question of law framed by the High Court was:
- “Whether claim to purchase of goods by the assessee could be dealt with under Section 68 of the Income Tax as a cash credit, by placing burden upon the assessee to explain that the purchase price does not represent his income from the disclosed sources?”
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether the purchase of goods could be treated as cash credit under Section 68 of the Income Tax Act, 1961? | The Supreme Court set aside the addition of Rs. 2,26,000 made under Section 68 of the Income Tax Act, 1961. | The court found that the factual basis of the addition was dispelled by subsequent evidence presented in the penalty proceedings, which established the genuineness of the transactions. |
Authorities
The following cases were cited by the appellant:
- Maddi Sudarsanam Oil Mills Co. v. Commissioner of Income-Tax, Hyderabad and Andhra [1959] 37 ITR 369 (AP): This case was cited to support the argument that if books of accounts are rejected, they cannot be relied upon for subsequent additions.
- Commissioner of Income Tax v. Aggarwal Engg. Co. (Jal.) (2006) 206 CTR (P&H) 648: This case was cited to argue that once books of accounts are rejected, they cannot be used to make additions.
- Commissioner of Income Tax vs. G.K. Contractors (2009) 19 DTR (Raj) 305: This case was cited to support the argument that once books of accounts are rejected, they cannot be used to make additions.
| Authority | Court | How it was Considered |
|---|---|---|
| Maddi Sudarsanam Oil Mills Co. v. Commissioner of Income-Tax, Hyderabad and Andhra [1959] 37 ITR 369 | Andhra Pradesh High Court | Cited by the appellant to argue that rejected books of accounts cannot be used for subsequent additions. |
| Commissioner of Income Tax v. Aggarwal Engg. Co. (Jal.) (2006) 206 CTR (P&H) 648 | Punjab and Haryana High Court | Cited by the appellant to argue that rejected books of accounts cannot be used for subsequent additions. |
| Commissioner of Income Tax vs. G.K. Contractors (2009) 19 DTR (Raj) 305 | Rajasthan High Court | Cited by the appellant to argue that rejected books of accounts cannot be used for subsequent additions. |
Judgment
| Submission | How it was treated by the Court |
|---|---|
| The Assessing Officer (AO) had rejected the books of account under Section 145(3) of the Income Tax Act, 1961, and therefore, the same books could not be relied upon to make additions under Section 68 of the Income Tax Act, 1961. | The court did not explicitly address this argument, but the judgment implies that the initial rejection of books was not the primary reason for setting aside the addition. |
| The assessment order incorrectly referred to Section 145(2) instead of Section 145(3) of the Income Tax Act, 1961. | The court did not directly address this technicality, focusing instead on the subsequent evidence produced by the assessee. |
| The assessment was made under Section 144 of the Income Tax Act, 1961, which mandates a “best judgment assessment,” meaning the AO must re-assess the entire accounts and cannot rely on the rejected books for subsequent additions. | The court did not explicitly rule on this argument, but its decision to set aside the addition suggests that it found merit in the overall principle. |
| The approach adopted by the AO would result in taxing the same transaction twice. | The court did not directly address this argument, but its decision to set aside the addition suggests that it found merit in the overall principle. |
| The assessment was made under Section 143(3) of the Income Tax Act, 1961, and not under Section 145(3) of the Income Tax Act, 1961. Therefore, the AO was justified in relying upon the books of accounts for making additions. | The court did not accept this argument, as it set aside the addition of cash credit. |
| The AO did not reject the books of accounts entirely but only that part which pertained to assessing the gross profit. | The court did not accept this argument, as it set aside the addition of cash credit. |
| The amount shown under “Credits” in the balance sheet was incorrect and qualified as “Cash Credits” under Section 68 of the Income Tax Act, 1961. | The court did not accept this argument, as it set aside the addition of cash credit. |
| The AO gave several opportunities to the assessee to prove the authenticity of the entries, but the assessee failed to do so. Summons were issued to the fifteen creditors, but no evidence or explanation was provided. | The court acknowledged that initially, the assessee failed to provide evidence. However, subsequent evidence provided in penalty proceedings changed the factual basis. |
How each authority was viewed by the Court?
- The cases cited by the appellant, including Maddi Sudarsanam Oil Mills Co. v. Commissioner of Income-Tax, Hyderabad and Andhra [1959] 37 ITR 369 (AP), Commissioner of Income Tax v. Aggarwal Engg. Co. (Jal.) (2006) 206 CTR (P&H) 648 and Commissioner of Income Tax vs. G.K. Contractors (2009) 19 DTR (Raj) 305, were not directly discussed in the context of whether the books of accounts were rejected. However, the court’s decision to set aside the addition suggests that it agreed with the underlying principle that once books of accounts are rejected, they cannot be relied upon for making additions.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the subsequent evidence produced by the assessee during penalty proceedings. This evidence included affidavits and statements from the unregistered dealers, which the appellate authority accepted, establishing the genuineness of the transactions. The court emphasized that the factual basis on which the Assessing Officer had made the addition of Rs. 2,26,000 was dispelled by the new evidence. The court also noted that the appellate authority in penalty proceedings had concluded that there was no concealment of income or furnishing of inaccurate particulars of income by the assessee.
| Sentiment | Percentage |
|---|---|
| Factual Evidence of Purchases | 60% |
| Acceptance of Explanation in Penalty Proceedings | 30% |
| Lack of Concealment of Income | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 70% |
| Law | 30% |
Logical Reasoning:
The court did not discuss any alternative interpretations or rejected any specific legal points. The decision was primarily based on the acceptance of new factual evidence that emerged during the penalty proceedings, which contradicted the initial findings of the Assessing Officer.
The Supreme Court’s decision was based on the following reasons:
- The factual basis of the addition of Rs. 2,26,000 was dispelled by the affidavits and statements of the unregistered dealers produced in the penalty proceedings.
- The appellate authority in the penalty proceedings accepted the assessee’s explanation and found no concealment of income or furnishing of inaccurate particulars of income.
- The court noted that the penalty proceedings were an outcome of the assessment order, and the findings in the penalty proceedings should be considered.
“The appellate authority thus found that without purchases of marbles, there could be no sale and disclosure of closing stock in the trading account.”
“The explanation given by the appellant in respect of purchases from the unregistered dealer and their genuineness are substantiated by filing of affidavits, producing before the Assessing Officer in the course of remand report and the Assessing Officer did not find any objectionable in respect identity of the unregistered dealers and claim made for sale of marble slabs to the appellant in the Financial Year relevant to AY 98-99.”
“Under the above facts and circumstances, I am of the view that there was no either concealment of income or furnishing any inaccurate particulars of income and accordingly, the penalty order dated 17.11.2006 passed by the Assessing Officer is cancelled.”
There were no dissenting opinions. The judgment was delivered by a two-judge bench comprising Justice A.M. Khanwilkar and Justice Dinesh Maheshwari, with Justice A.M. Khanwilkar authoring the opinion.
The court did not introduce any new doctrines or legal principles. The decision was based on the specific facts of the case and the subsequent evidence that emerged during the penalty proceedings. The court’s analysis focused on the factual matrix and the acceptance of the new evidence by the appellate authority.
Key Takeaways
- Subsequent evidence produced in penalty proceedings can overturn the factual basis of an assessment order.
- If an appellate authority accepts the assessee’s explanation and finds no concealment of income in penalty proceedings, this can impact the assessment order.
- The genuineness of transactions should be assessed based on the totality of evidence, including subsequent evidence produced during penalty proceedings.
The judgment clarifies that while assessing officers have the power to add cash credits under Section 68 of the Income Tax Act, 1961, this power is not absolute. If the assessee can provide satisfactory evidence at a later stage to prove the genuineness of the transactions, such additions can be set aside.
Directions
The Supreme Court set aside the addition of Rs. 2,26,000 made by the Assessing Officer under Section 68 of the Income Tax Act, 1961. The rest of the assessment order, as modified by the Commissioner of Income Tax (Appeals), was to remain undisturbed.
Development of Law
The ratio decidendi of this case is that the factual basis of an assessment order can be overturned by subsequent evidence produced in penalty proceedings, particularly when such evidence establishes the genuineness of transactions initially deemed bogus. This case clarifies that the addition of cash credits under Section 68 of the Income Tax Act, 1961, is not final and can be challenged by producing satisfactory evidence at a later stage.
Conclusion
The Supreme Court’s judgment in Basir Ahmed Sisodiya vs. The Income Tax Officer is a significant ruling that highlights the importance of considering all available evidence, including subsequent evidence produced during penalty proceedings. The court set aside the addition of Rs. 2,26,000, ruling in favor of the assessee because the factual basis of the addition was dispelled by subsequent evidence, thereby clarifying that the initial assessment can be challenged by producing satisfactory evidence at a later stage. This case reinforces the principle that tax assessments should be based on a comprehensive evaluation of the facts and evidence, not just on initial findings.
Category
Parent Category: Income Tax Act, 1961
Child Categories: Section 68, Income Tax Act, 1961; Section 143, Income Tax Act, 1961; Section 144, Income Tax Act, 1961; Section 145, Income Tax Act, 1961; Cash Credits; Assessment; Best Judgment Assessment; Penalty Proceedings; Unexplained Credits; Bogus Entries; Income Tax; Tax Assessment
FAQ
Q: What is Section 68 of the Income Tax Act, 1961?
A: Section 68 of the Income Tax Act, 1961, deals with cash credits. If any sum is found credited in the books of an assessee and the assessee offers no explanation about the nature and source of the credit or the explanation is not satisfactory, the sum may be charged to income tax as the income of the assessee.
Q: What happened in the Basir Ahmed Sisodiya case?
A: In this case, the Assessing Officer added Rs. 2,26,000 as cash credits to the assessee’s income under Section 68 because the assessee could not initially explain the source of these credits. However, the Supreme Court later set aside this addition after the assessee provided evidence during penalty proceedings to prove the genuineness of the transactions.
Q: What does it mean when an Assessing Officer rejects the books of accounts?
A: When an Assessing Officer rejects the books of accounts, it means they are not satisfied with the correctness or completeness of the accounts. In such cases, the officer may make an assessment under Section 144, which is a “best judgment assessment.”
Q: Can an Assessing Officer rely on rejected books of accounts to make additions?
A: The Supreme Court’s decision suggests that if the books of accounts are rejected, they cannot be relied upon to make subsequent additions. However, this was not the primary reason for setting aside the addition in this case. The court focused on the new evidence produced by the assessee during penalty proceedings.
Q: What is the significance of this judgment?
A: This judgment highlights that the factual basis of an assessment order can be overturned by subsequent evidence produced in penalty proceedings. It also emphasizes that tax assessments should be based on a comprehensive evaluation of all available evidence. It also clarifies that the addition of cash credits under Section 68 of the Income Tax Act, 1961, is not final and can be challenged by producing satisfactory evidence at a later stage.