Unexplained Cash Credits – Section 68

Cash Credits

Any sum found credited in the books of the assessee, for which he offers no explanation about nature and source thereof or the tax authorities are not satisfied by the explanation offered by the taxpayer, are termed as cash credits. In this article, we will discuss various provisions relating to tax treatment of cash credits.

Basic Provisions of Cash Credits

The provisions relating to tax treatment of cash credits are given in section 68 of the Income Tax Act 1961. According to section 68, where any sum is found credited in the books of the assessee, and the assessee offers no explanation about nature and source of the same or the explanation offered by him is not satisfactory in the opinion of Assessing Officer, the sum so credited may be charged to income-tax as the income of the assessee for that year.

In case of assessee being a closely held company (i.e., not being a company in which the public are substantially interested), if the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such company shall be deemed to be not satisfactory, unless:

  • the person, being a resident in whose name such credit is recorded in the books of such company, also offers an explanation about the nature and source of such sum so credited; and
  • such explanation in the opinion of the Assessing Officer has been found to be satisfactory.

The above-discussed provisions of share application money, share capital, etc., shall not apply if the person, in whose name such sum is recorded, is a venture capital fund or a venture capital company as referred to in section 10 (23FB).

Income Tax Slabs and Rates for AY 2017-18/FY 2016-17

Conditions to be satisfied for applicability of Section 68

Following conditions can be stated to attract the applicability of section 68.

  • The assessee has maintained ‘books’.
  • There has to be a credit of amounts in the books maintained by the taxpayer of a sum during the year.
  • The taxpayer offers no explanation about nature and source of such credit found in the books or the explanation offered by the taxpayer in the opinion of the Assessing Officer is not satisfactory.
  • If the taxpayer is a closely held company and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such company shall be deemed to be not satisfactory, unless:
    1. the person, being a resident in whose name such credit is recorded in the books of such company, also offers an explanation about nature and source of such sum so credited; and
    2.  such explanation in the opinion of the Assessing Officer has been found to be satisfactory.

If all the above conditions exist, sum so credited may be charged to tax as income of the taxpayer for that year.

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