Various Mode of Cash Deposits under the Income Tax Act 1961

Topics covered in this Article are as follows:

1. Introduction
2. Case sales of stock in trade and cash receipt on rendering of services
   • For discharging the onus
   • The line of investigation by the AO
   • In following cases cash deposit in bank were held to be coming out of sales
3. Gift
   • Documentation necessary for proving the identity of the donor
   • Documentation necessary for proving the creditworthiness of the donor
   • Documentation necessary for proving the genuineness of the gift
4. Donations received by a trust

1. Introduction

Wherever, the Assessing Officer (AO) finds cash deposits in the bank or in the books of business entity, he is duty bound to ask for an explanation as to the nature and source of cash deposits which may be of the nature of gross business receipt, cash credits to be covered u/s 68, or of the nature of investment/deposit covered u/s 69, or may be simply money lying in the bank account of the assessee covered u/s 69A. Once, the primary conditions of invoking a particular section are fulfilled by the AO, the onus shifts on the assessee to explain the nature and source of the sum found credited in the books or found deposited in the bank or with a business entity. In this chapter, various modes of deposits in the books or in the bank are described along with necessary evidence required to be furnished by the assessee in support of his explanation. Various authorities rendering decisions on similar set of facts are also briefly referred.

2. Cash sales of stock in trade and cash receipt on rendering of services

It is generally claimed by the assessee that cash received and credited in the books or deposited in the bank are sale proceeds of stock. In support of this claim the AO requires the assessee to produce books of accounts and show the availability of stock for sale. Where assessee maintains books of accounts and sales in cash are duly recorded in the books and there is a direct correlation of cash outflow from the books with the deposit in the bank, then prima facie explanation of the assessee is acceptable. However, in order to strengthen his case, the assessee is required to produce stock register from where outflow of the stock against sales is reflected. There should not be any negative stock on any day i.e. there should not be more sales recorded as compared to availability of stock. The audit of books and audit report submitted to the AO further supports the claim of the assessee. In addition to this, it is desirable that the sales matches with the sales declared to the VAT or GST department and acceptance of the VAT return. When these four conditions are satisfied, i.e. (i) sales are recorded in the books (ii) books are audited (iii) the sales are reflected in the stock register and (iv) sales matches with the sales declared to the VAT department, the onus lying on the assessee is discharged.

2.1 For discharging the onus and for proving that cash deposit in the bank are sale proceed of stock, or are cash receipts on account of rendering services (Services like consultancy, brokerage or professional) following documentation may be required –

1. 1. 1. Sale bill book.
      2. Delivery challan or any other proof showing delivery.
      3. Sales are recorded in the books – Sample copies of the cash book and readiness to produce entire cash book on demand by the AO.
      4. If books are audited – Audit report u/s 44AB.
      5. The quantitative details of sales, which are reflected in the stock register – Copy of the stock register.
      6. Sales matches with the sales declared to the VAT Department/GST Department/Central Excise Department, or any other Department of central/state Government. Copy of the return submitted to either of them, or acknowledgement showing acceptance thereof.
      7. Outflow from cash book matches with the deposit in the bank – A chart showing date and amount of outflow from the books with the date and amount of deposit in the bank.

Once, onus lying on the assessee is discharged, it is shifted to the AO who is required to find defect in the explanation submitted by the assessee on the basis of credible evidence and thereafter only, he may infer that explanation submitted by the assessee is not satisfactory.

2.2 The line of investigation by the AO, in order to hold the explanation unsatisfactory, in cases where books are maintained, may be as under-

1. 1. 1. There are credible defects in the books of the assessee and therefore, they cannot be relied upon.
      2. The stock register is manipulated.
      3. The purchases are bogus.
      4. The sales declared to VAT department do not match with the sales recorded in the books.
      5. The outflow of cash from the books do not match with the cash deposited in the bank.
      6. The parties to whom sales are made are not identifiable.
      7. There are large sales on a single day or in small period not commensurate with sales in similar period in earlier years.
      8. The deposits are more than the sales shown.
      9. Cash is shown to be received prior to drawing of sale vouchers.
      10. The carry forward closing balance of cash in the bank account is more than income declared.
      11. The sales are bogus.

Where assessee does not maintain books of account, income is generally declared under presumptive taxation, if turnover is less than prescribed limit.

2.3 In following cases cash deposit in the bank were held to be coming out of sales:

• • • Bills issued to the customers and entries in the bank passbook were verifiable from the cash book | Principal CIT Dilip Kumar Swami [2019] 106 taxmann.com 59/264 Taxman 33 (Rajasthan).
    • Cash-in-hand is recorded in books, assessee has been filing the income tax return along with the balance sheets | Nand Kumar Taneja ITO [TS-8479-ITAT-2019 (Delhi)-O] [ITA Nos. 4958 and 4959/Del/2018]
    • Cash sales were recorded in the books of the firm and linked to deposit in the bank | ITO Vinod Chadha [2016] 73 taxmann.com 118/160 ITD 558 (Delhi – Trib.).
    • AO had accepted the purchases, sales and trading result disclosed by the assessee | CIT Pancham Dass Jain [2006] 156 Taxman 507 (All.).
    • Sale transactions cannot be disbelieved only for the reason that the assessee could not give the identity of the purchasers | CIT Sudeep Goenka [2013] 29 taxmann.com 402/214 Taxman 418 (Allahabad).
    • There is no duty cast upon the seller to insist for the address of the purchaser | Kishore Jeram Bhai Khaniya ITO [ITA No. 1220/Del/2011, dated 13-05-2014].
    • Where credits in undisclosed bank account considered as cash sales, entire sales were not income but only profit embedded in it was income of assessee | Dineshbhai Dhansukhlal Mithaiwala ITO [2014] 49 taxmann.com 583/[2015] 152 ITD 874 (Ahmedabad – Trib.).
    • Assessee’s case was that credits in question represented amount received by him from his two employee sons out of proceeds of goods pilfered and sold outside books of account by them. Tribunal observing that once sale of goods pilfered was accepted, there was no justification to reject corresponding sales realization, concluded that identity of creditors, nature and source of credit stood explained | CIT K.C. Malhotra [2007] 164 Taxman 101 (Punj. & Har.).
    • Once assessed on presumptive basis u/s 44AD, separate addition of cash deposit in bank is not upheld | Thomas Eapen ITO [2020] 113 taxmann.com 268/180 ITD 741 (Cochin – Trib.); Nand Lal Popli v. Dy. CIT [2016] 71 taxmann.com 246/160 ITD 413 (Chandigarh – Trib.); CIT v. Surinder Pal Anand [2010] 192 Taxman 264 (Punj. & Har.).
    • Cash deposited in the bank can be set off against trading additions | CIT Megha Industries [2013] 29 taxmann.com 404/214 Taxman 404 (Gujarat).
    • Section 68 will not apply, if no real credit has come. Assessee had made only a journal entry by debiting ‘A’ and crediting assessee’s current account wrongly, and this wrong entry was rectified later on by both parties, same being not real credit | CIT v. Mahendra Kumar Agarwal [2012] 23 taxmann.com 285 (Jaipur – Trib.).
    • Under section 68, satisfaction of Assessing Officer has to be exercised qua each deposit as said section does not prescribe any ad hoc or estimated addition | Sahara India Financial Corpn. Ltd. Dy. CIT [2014] 41 taxmann.com 251/148 ITD 336 (Delhi – Trib.).
    • Where cash receipts were found in cash book, failure on part of assessee to make credit entry in respective accounts would not entitle assessee to claim that no amount was credited; addition could be made under section 68 on account of cash credits | Haji Nazir Hussain ITO [2004] 91 ITD 42 (Delhi-Trib.) (TM).
    • Where both AO and CIT(A) found that source of cash deposits was traceable to paddy sales which was not actually sold to ‘G’ but was actually milled by assessee and disposed of in open market, then addition of sale amount was unsustainable as actual deposit of this amount in books of account was not doubted. Even if said deposits were treated as on account of bogus sale no further addition could be made as sale proceeds already stood accounted for in assessee’s manufacturing, trading, and profit account | Bansal Rice Mills ITO [2001] 78 ITD 326/[2002] 120 Taxman 155 (Chd. – Trib.) (TM).

3. Gift

The ordinary meaning of the gift is a transfer by one person to another of any existing movable or immovable property made voluntary or without consideration of money or money worth. One of the explanation submitted by the assessee to explain the cash deposit is the gift received from close relatives/friends. Such an explanation needed to be substantiated in the manner required by section 68.

The language of section 68 shows that it is general in nature and applies to all credit entries in whomsoever name they may stand, that is, whether in the name of the assessee or a third party as held in the case of Gumani Ram Siri Ram v. CIT  | [1975] 98 ITR 337 (Punj. & Har.). The presumption under any other section does not override or exclude Section 68, that is, it does not obviate the necessity to establish by independent evidence the genuineness of the cash credits under Section 68, nor does it do away with the burden which is on the assessee to establish the requisites of cash credits | Pushkar Narain Sarraf v. CIT [1990] 183 ITR 388/50 Taxman 213 (All.); Daya Chand v. CIT [2001] 117 Taxman 438/250 ITR 327 (Delhi). The provisions of section 68 applies to non-commercial loans as well and it was precisely the same as held by the Hon. Calcutta High Court in the case of C. Kant & Co. v. CIT | [1980] 126 ITR 63/[1981] 5 Taxman 64 (Cal.), observing that Section 68 does not make any distinction between commercial and non-commercial loans.

Therefore, the Assessing Officer is not precluded from making an enquiry as to the true nature and source gift.

In the cases of gifts, the assessee is required to prove three important conditions, namely,

1. 1. the identity of the donor,
   2. the capacity of the donor | CIT Precision Finance Pvt. Ltd. [1994] 208 ITR 465/[1995] 82 Taxman 31 (Cal). to gift the money, and
   3. the genuineness of the transaction.

What evidence would be sufficient to establish the said conditions, or what material would be relevant in a particular case, would depend on the facts of each case | Asstt. CIT v. Raghbir Singh [2005] 147 Taxman 52 (Chd.) (Mag.). The burden is on the assessee to prove the nature and source of cash receipts (by way of gifts) by establishing to the satisfaction of the AO, the identity of the donor, the creditworthiness of the donor and genuineness of the gift transaction. It is for the assessee to take alternative plea that, even if the explanation is not acceptable, the material and attending circumstances available on record do not justify the sum found credited in the books being treated as a receipt of income nature | CIT v. P. Mohanakala [2007] 291 ITR 278/161 Taxman 169 (SC).

In the case of gifts following propositions are also relevant

• • The banking transaction only establishes that the money has been transferred from one person to the other | Vimladevi S. Garg v. ITO [2011] 44 SOT 97 (Mum. – Trib.) (URO), from donor to donee.
  • Though the Assessing Officers, often, acts on confirmatory letters as evidence, the onus does not get discharged merely by such confirmatory letters as found in CIT United Commercial and Industrial Co. (Pvt.) Ltd. | [1991] 187 ITR 596/56 Taxman 304 (Cal.), nor is the fact that the amount is received by account payee cheques is sacrosanct as was pointed out in CIT v. Precision Finance Pvt. Ltd. | [1994] 208 ITR 465/[1995] 82 Taxman 31 (Cal.). This view was further held in the case of Nemi Chand Kothari v. CIT | [2003] 264 ITR 254/[2004] 136 Taxman 213 (Gau.)., wherein it was held that it cannot be said that a transaction, which takes place by way of cheque, is invariably sacrosanct.
  • It is not sufficient to prove the genuineness of the gift and when the claim of the amount, having been received as a gift, is made by an assessee, onus lies on him not only to establish the identity of the donor but his capacity to make such a gift | CIT R.S. Sibal [2004] 135 Taxman 492 (Delhi).
  • There must be perfect knowledge in the mind of the person making the gift to the extent of the beneficial interest intended to be conferred on the donee | CIT v. Raghbir Singh [2005] 147 Taxman 52 (Chd.) (Mag.).
  • Degree of proof in the matter of gifts is heavier than that in the case of cash credits | CIT v. Raghbir Singh [2005] 147 Taxman 52 (Chd.) (Mag.). It is also held that in addition to identity and credit worthiness of the donors and genuineness of the gift transaction , the assessee has to further establish (i) occasion for the gift; (ii) relationship of the donor and donee and (iii) evidence of natural love and affection | Abhay Devilal Rathod v. Dy. CIT [2010] 40 SOT 354 (Ahmedabad – Trib.).
  • There should be some occasion, or particular reason to give the gift and such reasons should be discernible from the statement of the donor | CIT Y.M. Singla [2014] 50 taxmann.com 410/[2015] 228 Taxman 90 (Punjab & Haryana). Natural love and affection and personal relationship, if proved can be one of the reasons for giving gift. Where gifts are made by relatives for love and affection, then it does not necessarily require any particular occasion for giving gift | Dr. Vempala Bala Manohar v. ITO [2017] 88 taxmann.com 410 (Visakhapatnam – Trib.).
  • The gift from an NRE or non-resident’s account is not sacrosanct and unquestionable; the appellant must prove genuineness of the gift and the fact that it was made out of love and affection | Sarita Aggarwal ITO [2015] 56 taxmann.com 195/231 Taxman 600 (Delhi).
  • In the matter of gift, the human probability has to be considered as to why donor is prompted to give gift to the assessee. This question is required to be answered because as contrary to loan, in the case of gift, donor loses his hard-earned capital in favour of the donee forever whereas in the case of loan, the creditor retains the right to recover the money from the assessee.
  • The tests of human probability are, occasions when not only the donor but others also came up to give gifts to the assessee; there were ceremonies organized by the assessee on which he has spent money; he/she had invited people and some of those who were invited had deep bonded relations which prompted them to give gifts to the assessee. Thus, a kind of bondage between donor and donee needed to be demonstrated.
  • The bondage between the donor and the donee should be shown by frequent visits to each other; involvement of each other into each other’s family affairs; standing for each other in the hour of need; donee also giving gifts to the donors or his family members in the past or also in future; they are so closely-related that foregoing hard earned money is unlikely to pinch the donor; donor is standing on higher pedestal in terms of social status, in relation or in financial worth, or in any other rational criteria, which would make him feel to pass on his hard earned capital to the donee.
  • In case of loan, if identity of the creditor is known and creditworthiness of the creditor is established then onus is shifted to the revenue to show that credit is not genuine. But in the case of gift all the three ingredients are necessary to be established by the assessee and merely by giving evidence of identity and creditworthiness of donor, genuineness cannot be taken to be established automatically | Abhay Devilal Rathod Dy. CIT [2010] 40 SOT 354 (Ahmedabad – Trib..

Documentation necessary for proving the identity of the donor

• • Identity of the donor is established through various documents such as copies of PAN, Aadhaar card, passport, assessment particulars/orders, in case of NRI, citizenship identity card, passport, other particulars such as bank statement, and through personal presence. It will be a prudence on the part of the assessee to request the authorities to summon the donor in case the donor is reluctant to appear before the AO. Merely submission of the copy of PAN card alone will not prove the identity of donor.

Documentation necessary for proving the creditworthiness of the donor

• • The creditworthiness of the donor is established by submitting statement of assets and liabilities showing adequate income and worth, bank statements showing adequate balance before gift, assessment orders showing adequate earning of income to enable the donor to gift, past history of assets.

Documentation necessary for proving the genuineness of the gift

• • Genuineness of the gift is explained through personal relationship, the donor is placed at equal or higher level of relationship (gifts from minors to elders do not inspire confidence in the genuineness) occasion of giving gift, transfer of gift through banking channels , gift deeds, and after giving gift, the donor is not reduced to pauper and there is no doubtful transactions in account of the donor such as deposit of cash immediately before transaction of gift. The donors should not be persons of small means as compared to assessee. Further, there should not be any evidence that gift was a case of money laundering.
  • Daughters of assessee received gift by way of bank deposit from their uncle, on confirmation of gift by uncle. No addition in assessee’s hands | CIT v. Justice P.D. Dinakaran [2015] 55 taxmann.com 374/68 SOT 76 (Chennai – Trib.).
  • No evidence that gifts received by the son had flown from the assessee | Yogiraj Sharma v. Asstt. CIT [2016] 69 taxmann.com 366 (Indore – Trib.).
  • Bare assertion of an occasional stay of donor with assessee in Nepal turning intimacy into friendship of degree which prompted J to donate substantial amount at no auspicious occasion got no corroborative support even from assessee’s own affidavit, circumstances attending on alleged transaction, as also conduct and behaviour of parties did not support genuineness of gift | Shyam Sunder Gupta ITO [1995] 82 Taxman 148 (Jp.) (Mag.).
  • Assessee had deposited cash amount in bank account which she had not reflected in her return. She claimed that she had received cash gifts from four different persons, but she could not give confirmation of each donor along with name, address, PAN and copies of ledger accounts as appearing in her books of account. It was held that cash gifts were not backed by any supporting documents of donors | Truptiben Bakulbhai Patel ITO [2017] 87 taxmann.com 41 (Gujarat).
  • There were deposits in the recurring account of minor children. It was explained by the assessee that his mother made contribution out of her agriculture income and the children received gift. But no evidence of mother having agriculture land or agriculture operations were found or there was no evidence of any gift | Shyam Sunder Gupta ITO [1995] 82 Taxman 148 (Jp.) (Mag.).
  • Cash deposited in bank account of assessee was explained as gifts received from different relatives, but creditworthiness of the relatives could not be proved | Raman v. Dy. CIT [2017] 80 taxmann.com 363/247 Taxman 406 (Madras).
  • Assessee claimed to have received gift from his mother as per last wish of his father which was not found false and father had sufficient wet and drylands to earn agriculture income | Anandasayanam P. Pillai CIT [2017] 88 taxmann.com 730 (Mumbai – Trib.).
  • Assessee had deposited certain amount in bank which, as claimed, represented gifts received from various parties. However, the assessee failed to prove capacity of concerned persons who alleged to have given unsecured loan and/or gifts | Sitaram Ramchanddas Patel ITO [2018] 95 taxmann.com 290 (Gujarat).
  • The assessee was a partnership firm, in which ‘K’ and ‘Z’ were partners, who had deposited amounts in their capital accounts in the firm. The partners are income tax payees. They have explained the source as having received gift from various persons, who have also filed their Income-tax returns and have been assessed accordingly. It is held that the burden by the firm is discharged | Zafa Ahmad & Co. CIT [2013] 30 taxmann.com 267/214 Taxman 440 (Allahabad).
  • No confirmation of cash gift was filed along with return and assessee also failed to produce donor for examination | Rawal Das Jaswani Asstt. CIT [2015] 61 taxmann.com 343 (Raipur – Trib.).
  • Where (a) the identity of the donor was not in doubt; (b) gift was given by a declaration deed; (c) donor had given an affidavit affirming the making of the gift; (d) there was a confirmation through post of gift per demand draft; (e) affirmation of the assessee in examination on oath recorded by the Assessing Officer; (f) affirmation of the donor in examination on oath recorded; (g) direct reply of the donor to the Assessing Officer confirming the gift; (h) donor was stated to be a friend of the assessee’s father; (i) donor was doing some finance business; then source of the gift was proved | Avnish Kumar Singh ITO [2010] 126 ITD 145 (Agra – Trib.) (TM).
  • Donors giving gifts of 5 lakhs and ` 7 lakhs respectively, they never made any investment worth ` One lakh or more, meagre returned income, meagre cash in hand, books not maintained, gifts were given in cash, very grim financial background, Gifts were held non-genuine | Pankaj Sumatilal Shah ITO [2016] 71 taxmann.com 340 (Pune – Trib.). So also in a case where donors were petty persons | Pandit Vijay Kant Sharma v. CIT [2017] 88 taxmann.com 219 (Allahabad), or where donors were not related to assessee, there was no occasion to give sizeable gifts, resources available to said donors were meagre, source of credit before gift was not explained, then merely because gifts were given through banking channels, gifts were held non-genuine | Kaushal H. Patel v. ITO [2014] 50 taxmann.com 136/226 Taxman 175 (Mag.) (Gujarat). Similarly, where donors, not financially sound, were not related to donee, gifts were of huge amount, there was no occasion to make gift, addition of gift amount was confirmed | CIT v. Y.M. Singla [2014] 50 taxmann.com 410/[2015] 228 Taxman 90 (Mag.) (Punjab & Haryana).

4. Donations received by a trust

A trust may receive donations/contributions either for the corpus of the trust, or donation simpliciter.

Where a trust is registered u/s 12A, then voluntary contribution made with a specific direction that they shall form part of the corpus of the trust or institution, then such contribution shall not be included in the total income of the trust for the previous year as provided in section 11(1)(d). Where there is no such direction, then as per section 12(1), such voluntary contribution received by the trust shall for the purposes of section 11 be deemed to be income derived from property held under trust, wholly for charitable or religious purposes, and the provisions of that section and section 13 shall apply accordingly. However, where trust has applied 85% of such contribution to charitable purpose and balance 15% is accumulated for being used in future, then entire receipt will be exempt as per section 11(1)(a).

From the above provisions it may be inferred that if the trust has received contribution in cash (in SBNs) before the date of demonetisation, with specific direction that they shall form part of the corpus of the trust, then such contribution (of SBNs) will not be chargeable to tax as income. The only onus which lie on the trust is to provide, to the AO, identity of the contributors and their confirmations. Otherwise, donation/contribution will be anonymous and will be deemed as income u/s 115BBC(1). Where identity of the contributors is not proved, the AO may consider the contributions simply cash credits taxable u/s 68. The trust may thereafter deposit the cash contributions in the bank account and furnish explanation accordingly.

Where there is no specific direction from the contributors to the effect that the contributions will form part of the corpus of the trust, then such contributions will be deemed income (derived from property held under trust only for charitable and religious purposes) by virtue of section 12(1). Once, cash contributions (SBNs) are treated as deemed income no further onus lies on the trust to prove identity/creditworthiness of the contributors or genuineness of the transaction. Under these circumstances section 68 or 69 or 69A will not be applicable. In order to save itself from taxation, the trust may apply 85% of such contributions to charitable purposes.

As per section 115BBC(1), if any institution, trust, university covered u/s 10(23C)(iiiad), or 10(23C)(vi), or 10(23C)(iiiae), or 10(23C)(via), or 10(23C)(iv), or 10(23C)(v) receives any anonymous donations, then they will have to pay income tax @ 30% on aggregate amount of donations exceeding ` 1 lakh or 5% of total donation (whichever is higher).

The provisions of section 115BBC(1) will not apply to receipt of anonymous donations by any trust or institution created or established wholly for religious purposes. Thus, anonymous donations received by a trust running a temple will be exempt u/s 10(23C)(v) provided the trust/institution is running (i) wholly for public religious purposes or (ii) wholly for public religious and charitable purposes (iii) Which may be approved by the prescribed authority.

The provisions of section 115BBC(1) will also not apply to receipt of anonymous donations by any trust or institutions created or established “wholly for religious and charitable purposes” where such donations are for a specific direction that such donation is for any university or other educational institution or any hospital or other medical institutions run by such trust or institution.