The Income Tax Appellate Tribunal’s ruling in Manackraj Kamaraj v. ITO clarifies a critical boundary in income tax assessment: credit card payments, being debits, cannot be reclassified as unexplained cash credits under Section 68. This decision reinforces procedural discipline in limited scrutiny cases and mandates proper evidentiary evaluation before invoking punitive tax provisions.
Background & Facts
The Dispute
The assessee, an individual running a chat and juice shop and earning commission from money lending, faced an addition of Rs.25,69,251/- in his assessment for AY 2017-18. The Assessing Officer treated credit card payments made by the assessee as unexplained cash credits under Section 68 of the Income Tax Act, 1961, and taxed them at the higher rate of 60% under Section 115BBE. The core contention was whether payments made via credit card - subsequently reimbursed by third parties - could be classified as income in the hands of the assessee.
Procedural History
- 2017-18: Assessee filed return declaring income of Rs.4,43,200/-
- Limited Scrutiny Initiated: Case selected under CASS for "Credit Card Payments" only
- Assessment Order: AO added Rs.25,69,251/- as unexplained cash credit under Section 68
- CIT(A) Confirmation: Upheld the addition, citing failure to substantiate source
- Appeal Filed: Assessee challenged the order before the Income Tax Appellate Tribunal
Relief Sought
The assessee sought deletion of the addition, arguing that credit card payments are debits, not credits, and thus outside the scope of Section 68. He further contended that the AO exceeded jurisdiction by converting a limited scrutiny into a full-fledged investigation without approval from the Principal CIT, and that corroborative evidence from relatives and bank records was ignored.
The Legal Issue
The central question was whether Section 68 of the Income Tax Act, 1961, can be invoked to treat credit card payments made by an assessee as "unexplained cash credits" when those payments are debits to the assessee’s account and not credits received by him.
Arguments Presented
For the Appellant
The authorised representative argued that Section 68 applies only when a sum is credited to the books of account, not when payments are made. Credit card transactions are outflows, not inflows, and therefore cannot constitute "sums credited" as required by the provision. He cited that confirmations from relatives, bank statements showing reimbursements, and non-claim of these payments as business expenditure were all furnished but not examined. He further contended that the AO violated the principle of limited scrutiny by expanding the scope without statutory authorization.
For the Respondent
The Departmental Representative relied on the findings of the lower authorities, asserting that the assessee failed to prove the source of the payments. They argued that the absence of clear documentation linking reimbursements to specific credit card transactions justified the addition under Section 68, regardless of whether the payments were debits or credits.
The Court's Analysis
The Tribunal emphasized that Section 68 is a provision designed to tax unexplained credits received by the assessee, not payments made by him. The language of the section - "any sum found credited in the books of account" - is unambiguous and does not extend to outflows. The Tribunal noted that treating credit card payments as credits was a fundamental misreading of accounting principles.
"The core issue involved is verification of the source of payments made towards credit card bills, which is a factual aspect requiring examination of supporting evidence such as reimbursements, confirmations, bank entries and nexus with personal or third-party expenditure."
The Tribunal further held that the Assessing Officer’s failure to examine the confirmations and bank records submitted by the assessee rendered the assessment arbitrary. The order was not a "speaking order" as required under natural justice. Additionally, the Tribunal underscored that limited scrutiny under CASS cannot be converted into a full scrutiny without prior approval from the Principal CIT, and the AO’s actions violated this procedural safeguard.
The Tribunal concluded that justice required restoration of the matter for a fresh, lawful examination - constrained strictly to the scope of limited scrutiny and based on actual evidence, not assumptions.
The Verdict
The assessee won. The Tribunal held that credit card payments cannot be treated as unexplained cash credits under Section 68, as they are debits, not credits. The addition was set aside and the matter remanded to the Assessing Officer for de novo consideration within the confines of limited scrutiny and with proper evidentiary evaluation.
What This Means For Similar Cases
Credit Card Outflows Are Not Section 68 Triggers
- Practitioners must challenge any assessment that treats credit card payments as "credits" under Section 68
- Argue that Section 68 applies only to sums received, not paid, by the assessee
- Cite this judgment to oppose arbitrary additions in cases involving personal credit card usage
Limited Scrutiny Cannot Be Expanded Without Authorization
- Any attempt to broaden the scope of limited scrutiny requires prior approval from the Principal CIT
- Failure to obtain such approval renders the assessment ultra vires
- Practitioners should raise jurisdictional objections at the first opportunity
Documentary Evidence Must Be Actively Evaluated
- Merely receiving documents is insufficient; the AO must record reasons for accepting or rejecting them
- Blanket rejections without analysis violate principles of natural justice
- Maintain a clear paper trail of reimbursements, third-party confirmations, and bank reconciliations
