By TIOL News Service

ALLAHABAD, JUNE 12, 2017: THE ISSUE BEFORE THE COURT IS - Whether 'non-encashment of cheques' would save the 'entries of credit' appearing in books of a/c for which no plausible explanation was furnished, from the rigours of Section 68. NO is the verdict.

Facts of the case:

The assessee has been a company engaged in manufacturing and trading of activated bleaching earth. The assessee, in the relevant year, had credited account of six persons in the books of accounts as having received advance by way of unsecured loans from those persons. The AO by applying sec 68 of the Act, treated the said amount as income of the assessee chargeable to tax. The appeal of the assessee before the CIT(A) and Tribunal failed. Counsel for the assessee argued that in view of the findings recorded by the authorities the payment of the aforesaid amount of Rs.15,00,000/- shown as unsecured loan was received by means of different cheques but these cheques were never presented and encashed and, as such, the entry in the books of accounts regarding the sum only shows hypothetical income which could not be subjected to tax.

On appeal, the HC held that,

++ in the case at hand, there is no dispute that the assessee had received cheques for a sum of Rs.15,00,000/- and entries in this regard were made in his books of accounts having received the said amount by way of unsecured loans from various persons. The assessee has also offered an explanation regarding the above entries but the explanation was not found to be satisfactory by the Assessing Officer and it was held that the aforesaid entries were in the nature of accommodation entries so as to raise bogus liabilities.The submission is that the entry of credit in the books of accounts may be relevant only when there is a cash transaction and not where the payment is through the cheques unless the cheques are cleared and encashed.Section 68 of the Act is clear enough as it uses the term "sum is found credited in the books of accounts of the assessee". It does not make any distinction between any cash or cheque transaction. The sum found credited in the books of accounts of the assessee includes within its fold, the entry either by way of cash or by cheque irrespective of the encashment of the cheques.In view of the above, both the essential conditions for applicability of Section 68 of the Act stands fulfilled. In view of the aforesaid facts and circumstances, we answer the question of law, as formulated above, in favour of the revenue and against the assessee and hold that despite non-encashment of the cheques by the assessee, the entries of credit appearing in his books of accounts for which no plausible explanation to the satisfaction of the Assessing Officer was furnished would attract Section 68 of the Act and the sum so credited by the entries would be deemed to be income of the assessee chargeable to tax.

(See 2017-TIOL-1086-HC-ALL-IT)