Section 68 of the Income Tax Act in India deals with unexplained cash credits in the books of an individual or a company. In simple terms, it addresses situations where there are entries of cash or other items in the financial records of a taxpayer, but the taxpayer cannot satisfactorily explain the source of these credits to the tax authorities.
Here’s a basic example to illustrate Section 68:
Example:
Suppose Mr. A, a businessman, shows an amount of INR 10 lakh as cash deposited in his bank account in his books of accounts. During the assessment, the Income Tax Officer asks Mr. A to explain the source of this cash deposit. Mr. A needs to provide evidence or a satisfactory explanation about where this money came from. This could be through documents like a loan agreement, gift deed, or any legitimate source of income.
- If Mr. A is able to provide a valid explanation (like showing it was a loan taken from a friend with proper documentation), the amount will be accepted as a legitimate credit.
- However, if Mr. A fails to provide a satisfactory explanation, the amount of INR 10 lakh will be treated as income from undisclosed sources and will be taxed accordingly under Section 68.
This section is primarily aimed at curbing the practice of money laundering and black money by ensuring that all cash credits are accounted for and explained.
Several key judicial decisions have been made concerning Section 68 of the Income Tax Act, 1961 in India. These decisions help clarify and interpret the application of this section in various circumstances. Here are a few important ones:
- CIT vs. P. Mohankala (2007) 291 ITR 278 (SC): This is a landmark decision by the Supreme Court of India. The court held that the onus is on the assessee to satisfactorily explain the nature and source of cash credits in the books. If the explanation is unconvincing, the amount can be taxed as income.
- CIT vs. Orissa Corporation Pvt. Ltd. (1986) 159 ITR 78 (SC): In this case, the Supreme Court opined that the identity of the creditor, the genuineness of the transaction, and the creditworthiness of the creditor are essential to be established by the assessee to explain the nature of the cash credit.
- CIT vs. Precision Finance Pvt. Ltd. (1994) 208 ITR 465 (Cal): The Calcutta High Court held that if the assessee offers an explanation about the nature and source of cash credits, and the same is not disproved by the Assessing Officer, the addition under Section 68 cannot be made merely on the basis of doubts.
- Yogendra Kumar Gupta vs. ITO (2011) 336 ITR 43 (All): The Allahabad High Court ruled that if transactions of loans or deposits are found to be genuine, then even if the creditors are not income tax assessees, the amount cannot be added as unexplained cash credit under Section 68.
- Commissioner of Income Tax vs. Stellar Investment Ltd. (2001) 251 ITR 263 (Delhi): The Delhi High Court in this case emphasized that mere return of income filed by the creditor is not sufficient to accept the genuineness of the loan transactions. Other supporting evidence must also be considered.
These decisions play a crucial role in the interpretation and application of Section 68. They highlight that while the initial burden of proof lies with the taxpayer to explain the cash credits, the Assessing Officer also needs to consider all the evidence provided and cannot make additions based solely on suspicion or doubt.
Here are 11 FAQs on Section 68 of the Income Tax Act, 1961, which deals with unexplained cash credits and its tax implications :-
1. What is Section 68 of the Income Tax Act, 1961?
Answer: Section 68 deals with unexplained cash credits in a taxpayer’s books of accounts. If any sum is found credited and the taxpayer cannot satisfactorily explain its source, it is taxed as income.
2. What constitutes a satisfactory explanation under Section 68?
Answer: A satisfactory explanation typically involves proving the identity of the creditor, the genuineness of the transaction, and the creditworthiness of the creditor, as established in CIT vs. Orissa Corporation Pvt. Ltd. (1986).
3. What happens if I fail to provide a satisfactory explanation for cash credits?
Answer: If you can’t satisfactorily explain the source of the cash credit, it will be taxed as your income for that financial year.
4. Can gifts be considered as unexplained cash credits?
Answer: Yes, if you can’t prove the genuineness of the gift or the capacity of the person giving the gift, it can be taxed under Section 68.
5. Are loan transactions scrutinized under Section 68?
Answer: Yes, loan transactions are scrutinized. As in the case of Precision Finance Pvt. Ltd. (1994), if the transactions are genuine and the lender’s identity and creditworthiness are proven, they won’t be treated as unexplained cash credits.
6. What if the creditor is not an income tax assessee?
Answer: As per the ruling in Yogendra Kumar Gupta vs. ITO (2011), if the loan transaction is genuine, it won’t be added as unexplained credit, even if the creditor is not an income tax assessee.
7. How important is the role of the Assessing Officer in Section 68 cases?
Answer: The Assessing Officer plays a critical role. They must not only assess the explanation provided by the taxpayer but also consider all relevant evidence before making a decision.
8. Can share capital be considered under Section 68?
Answer: Yes, share capital can be scrutinized under Section 68. In cases where the genuineness of the shareholders or the transaction is doubtful, it can be considered as unexplained credit.
9. Are there any penalties for unexplained cash credits?
Answer: Yes, besides the tax on the unexplained amount, there could be other penalties and interest under different sections of the Income Tax Act.
10. Can a company be held liable under Section 68?
Answer: Yes, both individuals and companies can be held liable under this section. The company must provide a satisfactory explanation for the source of the cash credits in its books.
11. Can the tax authorities’ decision be challenged?
Answer: Yes, taxpayers have the right to appeal against the tax authorities’ decision in appellate tribunals or courts.
