Beware from Taxman while taking an unsecured loan

CA Darshak Shah 

Provision before Budget 2022:

♦ Cash Credit is any sum found credited in the books of the taxpayer either by cash or bank deposit, for which he offers no explanation about the nature and source of funds or the tax authorities are not satisfied by the explanation offered by the taxpayer.

♦ The government has introduced several measures to curb Black Money in India and Section 68 is also one of the measures for detecting and diverting black money with the intention of evading taxes.

♦ As per section 68, any sum found credited in the books of a taxpayer, for which he offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, may be charged to income-tax as the income of the taxpayer of that year.

♦ Before Budget 2022, where money was received as Share Application/ Share Premium only in such cases the source and credibility of the investor were questioned. A similar provision was not applicable to loans and borrowings.

Provisions after Budget 2022:

• The Finance Bill, 2022 has proposed a change to this provision to say if a taxpayer raises a loan or borrowing, then the credit amount will be deemed to be unexplained, unless:

√ The source of funds of the creditor is explained.

√ The explanation is to the satisfaction of the assessing officer.

• Borrowings from SEBI-registered funds are exempt from this requirement.
• This is a significant amendment which states that under section 68, if there is a credit that is, if there is a loan or a borrowing or a receipt, or an amount, in the name of somebody else in your books that means, you have received the amount from him, whether by way of loan or borrowing or a normal receipt, then only the taxpayer who maintains Books of Accounts has to explain where the money is coming from. He has to identify the source of income of the person giving him such credit.
• So now the source-to-source verification has been extended from Share Application money or Share Premium to Loans and Borrowings. If the loan or the borrowing is untainted, it is coming from the right source with credibility and creditworthiness, is identifiable— there’s no problem or worries for those kinds of investments.

Documentation to prove onus: