Section 68 of the Income Tax Act, 1961: Verbatim Text, Interpretation & Penal Consequences
Verbatim Text of Section 68
"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."
Interpretation of Section 68
Section 68 is designed to curb tax evasion by ensuring that any unexplained cash credit in the books of accounts is taxed as income. The assessee must prove:
Identity of the Creditor: Providing details like name, PAN, and address.
Genuineness of the Transaction: Demonstrating that the transaction is real and not a sham.
Creditworthiness of the Creditor: Establishing that the lender or investor had the financial means to provide the credited amount.
If these conditions are not met, the amount is treated as unexplained income and taxed accordingly.
Draconian Penal Consequences of Section 68
The unexplained sum is added to taxable income, leading to a higher tax burden.
Penalty under Section 271AAC: A penalty of 60% of the addition is imposed if the income is not declared in the return.
Prosecution under Section 276C: If willful attempt to evade tax is proven, imprisonment ranging from 6 months to 7 years, along with fines, can be levied.
If the credit pertains to share capital or share premium, Section 115BBE applies, resulting in taxation at a flat 78% rate (60% tax + 25% surcharge + 4% cess).
Section 68 Additions: Legal Nuances, Case Differentiation & Deletion Grounds
Introduction
Section 68 of the Income Tax Act, 1961, pertains to unexplained cash credits. When an assessee receives any sum in their books of accounts for which they cannot satisfactorily explain the source, the assessing officer (AO) may treat it as undisclosed income. However, judicial pronouncements and practical interpretations have laid down factors determining the legitimacy of such additions.
Factors Governing Section 68 Additions
Identity of the Creditor: The assessee must establish the identity of the person/entity from whom the credit is received.
Genuineness of the Transaction: The nature and legitimacy of the transaction must be established with proper documentation.
Creditworthiness of the Creditor: The financial standing and capability of the lender/investor to provide such credit must be evident.
Mode of Payment: Banking channels, cheques, or digital transactions enhance legitimacy, while cash transactions are scrutinized rigorously.
Documentary Evidence: Bank statements, ITR filings of the lender, agreements, affidavits, and confirmation letters strengthen the claim.
Nature of Business and Industry Practice: The AO considers whether such cash credits are common in the particular line of business.
Repetition and Pattern of Transactions: Regular or occasional nature of similar transactions affects assessment.
Decision-Making Criteria for Assessing Officers
If all three conditions—identity, genuineness, and creditworthiness—are established, no addition should be made.
If identity is proven but genuineness is doubtful, the burden shifts to the assessee.
If identity and genuineness are proven but creditworthiness is missing, the AO may still make an addition.
Unsecured loans from individuals without income proof are more likely to be added under Section 68.
Mere filing of PAN and bank statements is not always sufficient; the transaction must be satisfactorily explained.
Judicial Precedents and Case Differentiation
Case 1: Cash Deposits from Agricultural Income – CIT v. Smt. P.K. Noorjahan
Facts: Assessee claimed a large cash deposit as agricultural income. Decision: The Supreme Court held that if the explanation given is plausible but not conclusive, the AO has the discretion to not make additions. Key Learning: Mere declaration of income is not enough; consistency and supporting documentation are required.
Case 2: Unsecured Loan from Corporate Entity – CIT v. Lovely Exports Pvt. Ltd.
Facts: Assessee received share capital and premium from multiple investors; AO alleged these were bogus entries. Decision: The Supreme Court ruled that if share application money is received from identifiable parties whose PAN and bank details are provided, no addition should be made under Section 68. Key Learning: The onus shifts to the department to investigate the identity of shareholders rather than making additions blindly.
Case 3: High-Value Cash Deposits without Income Proof – Roshan Di Hatti v. CIT
Facts: Assessee had substantial cash credits in bank accounts without explaining their source. Decision: The Supreme Court upheld the addition, as the assessee failed to provide legitimate income proof. Key Learning: A mere declaration of deposits is not enough without an income trail.
Case 4: Loan Received via Banking Channels – CIT v. Orissa Corporation Pvt. Ltd.
Facts: Assessee received a loan through proper banking channels but AO doubted genuineness. Decision: Supreme Court ruled that once identity and banking details are provided, the AO cannot arbitrarily reject the claim without further inquiry. Key Learning: If documentary evidence is in place, the AO must make reasonable efforts to disprove the assessee’s claim rather than making blanket additions.
Common Reasons for Defaults & Basis for Deletion of Additions
| Default Reason | Basis for Deletion |
|---|---|
| Unexplained cash credits in books | If the source is satisfactorily explained with financial records, additions can be deleted. |
| Loan from individual without documented income proof | If identity and repayment ability are later established, addition can be reversed. |
| Share capital additions without shareholder verification | If PAN, address, and banking details of investors are furnished, addition should be deleted. |
| Cash deposits without any prior source declaration | If the assessee can establish that cash was accumulated over time or came from disclosed sources, addition can be removed. |
Conclusion
Section 68 is a powerful tool against tax evasion but requires careful application. The burden of proof initially lies with the assessee, but once primary conditions are met, the responsibility shifts to the tax authorities. Proper documentation, financial transparency, and legal precedents play a crucial role in mitigating unnecessary additions.
