[Opinion] The Theory of Telescoping in the Income Tax Assessment

Sombir Singh & Ivpreet Singh Nanda – [2025] 176 taxmann.com 645 (Article)

1. Introduction

In recent years, Sections 68 to 69C of the Income-tax Act have become potent tools in the hands of Assessing Officers, often invoked to tax unexplained credits, money, investments, and expenditures. The wide scope of these provisions, coupled with the harsh tax treatment under Section 115BBE, where a flat rate of 60% plus surcharge is levied without allowing any deductions or set-offs, has led to an aggressive approach in taxing such deemed incomes. This trend, though legally tenable, risks double taxation where both inflow and outflow of unaccounted money are taxed separately. To counter this, the theory of telescoping offers a vital safeguard.

The theory of telescoping in income tax assessment is based on the principle that the same income cannot be taxed twice. It states that if an assessee has undisclosed income and undisclosed investments, then the assessee can seek adjustment of undisclosed investment with undisclosed income. Therefore, tax should be levied either on the undisclosed income or on the undisclosed investment, but not on both separately. The objective of telescoping theory is to ensure that the real income of the assessee is taxed without overlapping additions. In another words, the assessee should not be taxed both for inflow and out flow of undisclosed money.

In the case of CIT v. K. S. M. Guruswamy Nadar & Sons [1984] 19 Taxman 533/149 ITR 127 (Mad.) it was held that in addition to the bogus cash credits, there was an addition towards the suppression of profit also. In such a case when there were two additions, it is open to the assessee to prove that the cash credits came from the suppressed profits towards which an addition has already been made, and, therefore, there should be telescoping of one with the other and that there should be only one addition.

2. Understanding Intangible Additions and their significance with telescoping theory

Intangible additions refer to additions made to the assessed income on an estimate basis. These additions are often made when the assessing officer believes that certain income exists outside the books of accounts. The revenue cannot argue that such additions do not represent real income because they were made for taxation purposes. Intangible additions are considered as part of the assessee’s real income, similar to the income disclosed in the account books. They have the same concrete existence and can be utilised by the assessee for various purposes.

The Hon’ble Supreme Court in case of Anantharam Veerasinghaiah & Co. v. CIT [1980] 123 ITR 457 has observed that when an “intangible” addition is made to the book profits during an assessment proceeding, it is on the basis that the amount represented by that addition constitutes the undisclosed income of the assessee. That income, although commonly described as “intangible”, is as much a part of his real income as that disclosed by his account books. It has the same concrete existence. It could be available to the assessee as the book profits could be. In Lagadapati Subba Ramaiah v. CIT [1956] 30 ITR 593 (AP), the Andhra Pradesh High Court adverted to this aspect of secret profits and their actual availability for application by the assessee. That view was affirmed by the Madras High Court in S. Kuppuswami Mudaliar v. CIT [1964] 51 ITR 757.

Intangible additions hold significant importance in the context of the telescoping theory. They allow the assessee to explain the source of cash credits and facilitate the set off of these credits against the intangible additions by utilising the principles of telescoping if there is a connection found between them. This set off helps in avoiding double taxation by ensuring that the same income is not taxed twice – once as intangible additions and again as cash credits. However, it is important to note that not all additions can be automatically set off against cash credits. The assessee must provide satisfactory explanations linking the cash credits to the intangible additions.

The Madras High Court in the case of S. Kuppuswami Mudaliar (supra) has held that additions are no doubt made very often on estimated basis. But it can never be said, or at any rate the department cannot contend, that the amount of the addition is not the real income but something which the assessee may not have earned. It is wholly illogical for the department to contend that the addition was only for purposes of taxation and that it should never be taken as true income of the assessee.

3. Utilising intangible additions to explain cash credits

If intangible additions were made assessee is entitled to use these additions to explain the source of cash credits. The law recognises that the intangible income added in earlier years can constitute a fund from which the assessee may draw subsequently for various purposes. Therefore, the assessee can attribute the cash credits to the intangible additions made in previous years.

The Punjab & Haryana High Court in case of CIT v. Ram Sanehi Gian Chand [1972] 86 ITR 724 has held that where the intangible additions while explaining the sum sought to include as income from undisclosed source, the assessee could take advantage of those additions as the income-tax authorities made additions to assessable income of the assessee in the previous year as income from undisclosed source. The assessee was entitled to take advantage of those added incomes to explain the source of what was considered by the income-tax department as income from undisclosed sources, because every other explanation tendered by the assessee was rejected. It was fair and equitable to allow him to do so because the assessee had already paid the necessary income tax on that amount.

Click Here To Read The Full Article