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:
- Previously onus to prove that lender does not have the capacity to grant funds was on the AO, but now the onus has shifted to the taxpayer prove that lender has capacity to grant funds
- It is now expected from the taxpayer that in addition to PAN and the Bank Account details of the lender, he should also do Due Diligence in whatever way he can to eliminate any angle of illicit nature in the funds which he is receiving, that would help.
- Documents can be copies of their income tax acknowledgment, PAN, MOA / AOA, copies of bank statement, and also showing sufficient funds in bank statement before making an investment, form for application of equity shares, director report, auditor report, balance sheet and board resolutions which clearly establishes there identity and creditworthiness which all stand accepted and no defect/shortcoming is pointed out.
Treatment of unexplained Cash Credit:
- Unexplained cash credit is treated as income in the year in which it is received and taxed at a flat rate of 60% without providing any benefit of the basic exemption limit, irrespective of the tax slab. There is a 25% surcharge and 6% penalty.
- No deduction/allowance is allowed, and no loss can be set off against such unexplained cash credit which is considered as income. The penalty is not levied if unexplained cash credit is already included in the return of income and tax on the same is paid on or before the end of the financial year
Conclusion:
Therefore taxpayer should take utmost care that the required documents are in place to satisfy the AO in relation to loans and borrowing transactions.
Please guide, whether a borrower which is a private limited or anyone can ask/force lender to give his ITR /all type of secrecy related to financial matter to borrower? Can borrower ask/force to lender to go to Income Tax Department? Are these lawful rights of borrower? Suppose after repaying loan, lender refuse to cooperate,, what a borrower has legal rights against such lender? Suppose, there is enquiry u/s 68,though loan was not paid, lender does not want cooperate and demands to repay debts. Can borrower refuse to pay lender legally,? If due to non cooperation of lender, Income tax officer being remained unsatisfied, and add the loan amount to income of the borrower, Can borrower legally file a suit for recovery of that amount against lender?