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Unexplained Cash Credit


Unexplained Cash Credit – Section 68 of Income Tax

Unexplained cash credit is any money credited to a taxpayer for which the taxpayer cannot provide any explanation about the nature or source of the money. Under the Income Tax Act, any unexplained cash credit to a taxpayers account can be held as income to the taxpayer and taxable under Section 68 of the Income Tax Act. In this article, we discuss the concept of unexplained cash credit.

Section 68 of the Income Tax Act

Section 68 of the Income Tax Act states as under:

Where any sum is found credited in the books of an assessee maintained for any previous year, 
and the assessee 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, the sum so credited 
may be charged to income-tax as the income of the assessee of that previous year.
Provided that where the assessee is a company (not being a company in which the public are substantially interested), 
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 assessee-company shall be deemed to be not satisfactory, unless—
  • (a) 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
  • (b) such an explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory.
Provided further that nothing contained in the first proviso shall apply if the person, 
in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company 
as referred to in clause (23FB) of section 10.

Analysis of Section 68

Section 68 of the Income Tax Act was first introduced and made effective from 1st April 1962. By way of Section 68, the Income Tax department shifts the rule of evidence and the onus to prove the genuineness of transaction to the taxpayer. Thus, at all times, the taxpayer would be responsible under the Income Tax Act to provide details of the nature or source of money received in the account. If a taxpayer is unable to prove the nature and source of money received, the money would be taxable under the Income Tax Act.

Special Provisions for Company

In the case of a company, additional provisions are provided under Section 68 of the Income Tax Act. If a company accounts for money as share application money, then the person on whose name the credit is provided must also offer an explanation about the nature and source of the income. Share application money is money received by a company for shares, against which shares have not yet been issued. For example, if company ABC Limited get an amount of Rs.10 lakhs from XYZ Limited for purchase of shares, it would be accounted under Share Application Money. On the issue of shares, the amount would be transferred to the Share Capital account.

Proving Genuineness of Transaction

Often cases, unexplained cash credit in an account would relate to loan or credit obtained by the company from friends, family members and private money lenders. In such cases, the taxpayer is under the obligation to prove the following criteria in order to avoid application of the deeming provision:

  • Identity of his creditors;
  • The capacity of creditors to advance money; and
  • Genuineness of the transaction.

The above criteria have been laid down by the Hon’ble Calcutta High Court in the case of CIT vs. Precision Finance Private Limited.

Penalty for Unexplained Cash Credit

The penal provisions for unexplained cash credit are provided under Section 115BBE of the Income Tax Act. Section 115BBE is reproduced below for reference:

Where the total income of an assessee,
  • (a) includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or 
    section 69D and reflected in the Return of Income furnished under section 139; or
  • (b) determined by the Assessing Officer includes any income referred to in section 68, section 69, 
    section 69A, section 69B, section 69C or section 69D if such income is not covered under clause (a)
The income-tax payable shall be the aggregate of
  • (i) the amount of income-tax calculated on the income referred to in clause (a) and clause (b), 
    at the rate of sixty per cent.; and
  • (ii) the amount of income-tax with which the assessee would have been chargeable had his 
    total income been reduced by the amount of income referred to in clause (i).

Thus, under Section 115BB, if the total income of a person includes unexplained cash credits referred to under Section 68, then the income tax payable would be calculated at 60% rate. Also, no deduction in respect of any expenditure or allowance or set-off of any loss would be allowed to the taxpayer in computing his income referred in section 115BBE (1)(a).