Unlock the intricacies of Section 68 of the Income Tax Act, unraveling the nuances of unexplained cash credits. Delve into its amendments, practical implications, and the onus it places on individuals, firms, and closely-held companies. Gain a comprehensive understanding to navigate the complexities of this crucial taxation aspect effectively.
Understanding the nuances of taxation is essential for both individuals and firms. One such critical aspect is Section 68 of the Income Tax Act, 1961, which deals with unexplained cash credits. It holds significant implications for firms, individuals, and even closely-held companies. In this article, we will delve deep into Section 68, its amendments, and practical implications to provide you with a comprehensive understanding of this essential topic.
What Does Section 68 Say?
Section 68 of the Income Tax Act, 1961 speaks about Cash Credits. In the case of an assessee, where any sum is found credited in the books, maintained for any previous year, as loan or borrowings and assesse offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of assessing officer, satisfactory, the sum credited may be charged to income tax as the income of the assesse of that previous year, as unexplained cash credit.
Example: Firm has credited Rs. 50,000 in the name of Mr. ’A’. During the course of assessment, the firm is not able to explain the source of Mr. ‘A’ loan. The officer may issue notice to Mr. ‘A’ and ask to explain the source from where he get Rs. 50,000 given to firm. If Mr. ’A’ is not able to explain source, or the assessing officer is not satisfied with the explanation given, he may add Rs. 50,000 in the case of firm, as unexplained cash credit, u/s 68 of the Act.
Please remember that any amount credited in the books of account of assesse either by cash or by cheque or draft is to be considered as loan or deposit.
As per the amendment made from assessment year 2013-14, this section will apply to closely held Companies also. Where source of income of any shareholder, is to be explained by the company, so this is the responsibility of the company. If company is not able to explain the source of shareholders share capital or share premium, the amount of such investment will considered as unexplained income of the company under section 68 of the Act. In this case one option has been given that if the shareholder is Venture Capital Company, which is registered with SEBI, this section dose not applied.
Can the department ask for the source of the source?
In the above example, an officer can ask to explain source of loan or deposit to the firm. Fine, but can they ask Mr. “A” for his source? In this regards different courts have given their judgments. Following are few instances.
- In the books of account of an assesse credit amount is in the name of his wife, children or close relatives or his employees, the burden of proof to explain this cash credit on an assesse.
- If the amount of cash credit in the books of account is in the name of any other person mentioned above, the duty of an assesse is to prove the existent of the person or party and the entry in books is genuine and not bogus. The officer is satisfied with the explanations and proofs given to him, the question of unexplained cash credit does not arise and nothing is to be added the income of the firm.
- When an assesse has given all the details about the creditors i.e. full name, full address, Permanent Account Number(PAN) etc,. If the officer is not satisfied with this details he may issue summons u/s 131 or u/s 133(6) to the creditor, but it will not considered as income of an assesse.
To overruled the decision of high court, in Finance Bill 2022, with effect from 1st April, 2023 following proviso added,
Provided that where the sum so credited consisting of loan or borrowings or any such amount, by whatever named called, any explanation offered by such assesse shall be deemed to be satisfactory, unless:
(a) the person in whose name such credit is recorded in the books of such assesse also offers an explanation about the nature and source of such sum so credited; and
(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory;
Provided further that, where the assesse is a company not a public limited, and the sum so credited consist of share application money, share capital, share premium or any such amount by whatever named called, any explanation offered by such assesse company shall be deemed to be not satisfactory, unless-
(a) The person in whose name such credit is recorded in the books of such assesse also offers an explanation about the nature and source of such sum so credited; and
(b) Such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory;
Responsibility u/s 115BBE:
From assessment year 2017-18, the tax rate of 30% is considered as 60% on Unexplained Cash Credits, Income, Investments, and Expenditure. Over and above, 25% of surcharge, and 4% of Education Cess which makes 78% tax rate:
| Income Tax | 60% |
| Surcharge @ 25% | 15% |
| Education Cess 4% | 03% |
| Total rate of Tax | 78% |
Over and above this 6% penalty is to be levied under section 115BBE, that makes total tax payable will be 84%
Conclusion: Section 68 of the Income Tax Act plays a vital role in curbing money laundering and ensuring transparency in financial transactions. With the new amendments effective from April 2023, the law has become even stricter, emphasizing the importance of being extremely careful while maintaining books of accounts and taking loans or deposits. Failure to comply can result in hefty penalties and can significantly affect the financial health of both individuals and corporations. Therefore, a thorough understanding and compliance with Section 68 are more crucial now than ever.
Be careful while taking any kind of Loan or deposit.
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Great article Sir. Thanks a lot for sharing information.