Undisclosed Income and its Taxability – Section 68 to Section 69D

Explore the tax implications of undisclosed income from Section 68 to Section 69D. Learn about tax rates, explanations, and conditions to avoid penalties. A comprehensive guide for students.

The article covers all the aspects of undisclosed Income and its taxability

It will be specially helpful for Students revision :

Section 115BBE : Tax Rate on undisclosed Income

• The Rate of tax on undisclosed Income covered by Sec 68 to Sec 69D is 60% plus 25% surcharge plus 4% EC
• Effective Tax rate is 78%

Section 68 (Cash credits)

• The Section lays down that any credits in the bank otherwise than by account payee cheque which are not accounted in the books or for which no satisfactory explanation is given by the Assessee shall be deemed to be the income of the Assessee for the year in which such credits are found
• The Assessee has to prove 4 points to stay away from this section :
• Provide the nature of the credit
• Provide the nature of the credit
• Prove the creditworthiness of the creditor
• Provide the genuineness of the transaction:
• If above points are proved, then such credits in books will not attract Section 68
• To make an explanation satisfactory under Section 68 of the Income Tax Act, 1961, the taxpayer needs to fulfill the following conditions:

1. Provide the identity of the creditor: The taxpayer needs to provide the name, address, and other relevant details of the creditor from whom the cash credit has been received. The creditor must also be willing to provide a confirmation letter stating that he/she has provided the cash credit to the taxpayer.

2. Provide the nature of the credit: The taxpayer must be able to explain the nature of the cash credit, i.e., whether it is a loan, gift, advance, etc. The explanation provided must be supported by relevant documents such as loan agreement, gift deed, etc.

3. Prove the creditworthiness of the creditor: The taxpayer must establish the creditworthiness of the creditor. This can be done by providing the financial statements, tax returns, bank statements, etc. of the creditor. This is to ensure that the creditor has the financial capacity to provide the cash credit.

4. Provide the genuineness of the transaction: The taxpayer needs to establish that the transaction is genuine and not a sham transaction. This can be done by providing relevant documentary evidence such as bank statements, loan agreement, gift deed, etc.

Section 69 : Unexplained Investments

• Assessee has made investments which are not accounted in books of the Assessee and
• Assessee offers no explanation for the source of such Investments or explanation offered by Assessee is not satisfactory :
• The value of such investments will be considered as Income of the Assessee for that financial year

Section 69A : Unexplained Money etc

• Where Assessee is found to be owner of money, bullion, jewellery or other valuable article
• The above is not recorded in the books of account of the Assessee with a source of Income
• Assessee offers no explanation for the source of acquisition of such money etc. or the explanation given is not satisfactory :
• The money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.

Section 69B : Investment partly disclosed in books

• Assessee has made investments which are :
• Recorded in books at a lesser amount
• He offers on explanation about the source of income of such excess amount not recorded in books or
• The explanation offered is not satisfactory for the AO
• The excess amount will be deemed to be income of the Assessee for such Financial year
• For example, suppose a taxpayer purchases a property worth Rs. 50 lakhs, but only shows an investment of Rs. 20 lakhs in his books of account. In such a case, the remaining Rs. 30 lakhs could be treated as unexplained investment under Section 69 of the Income Tax Act.
• The assessing officer may ask the taxpayer to explain the source of the remaining Rs. 30 lakhs. If the taxpayer is unable to provide a satisfactory explanation for the same, then the amount may be treated as the taxpayer’s income and taxed accordingly.
• However, if the taxpayer is able to provide a satisfactory explanation for the source of the investment, such as a loan taken from a bank or a relative, then the amount will not be treated as income and no tax will be levied on it.

Section 69C (Unexplained Expenditure etc)

• Assessee has incurred any expenditure and
• He offers no explanation about the source of such expenditure or part thereof, or
• the explanation offered by him is not satisfactory,

the amount covered by such expenditure or part thereof may be deemed to be the income of the assessee for such financial year

Section 69D (Amount borrowed or repaid on hundi)

• If amount is borrowed on a hundi from any person or any amount due is repaid to any person
• Otherwise than through an account payee cheque drawn on a bank, the amount so borrowed or repaid
• Shall be deemed to be the income of the person borrowing or repaying for the previous year in which the amount was borrowed or repaid, as the case may be
• Note : If an amount is treated as income when it is borrowed, same amount cannot be treated as income again when it is repaid
• Amount repaid will include amount of interest paid on the amount borrowed

It is important to note that this section applies only to amounts borrowed or repaid on hundi. If the amount is borrowed or repaid through other financial instruments, then this section cannot be invoked. Also, if the taxpayer is able to provide a satisfactory explanation for the source of the amount, then no tax will be levied on the same.