Section 68 — Unexplained Cash Credits and Tax Treatment

Section 68 of the Income Tax Act deals with "unexplained cash credits" — any amount credited in the books of a taxpayer for which the taxpayer cannot satisfactorily explain the nature and source. Such unexplained credits are added to the taxpayer's income and taxed at a punitive rate. Here is the complete guide.

What Is an Unexplained Cash Credit?

• Any amount found credited in the books of account that the taxpayer cannot explain to the satisfaction of the Assessing Officer
• Common scenarios: Loans received from unknown parties; share capital or share premium received from suspicious investors; unexplained bank deposits; accommodation entries from shell companies
• The credit can be in any form — cash, cheque, bank transfer, book entry

Burden of Proof — Three Conditions to Establish

To avoid Section 68 addition, the taxpayer must establish all three aspects of any credit:

• 1. Identity of the creditor: Who is the person who gave the money? Name, address, PAN must be established.
• 2. Genuineness of the transaction: Was it a real transaction? Bank transfer, actual movement of funds — not a circular entry
• 3. Creditworthiness of the creditor: Did the creditor have the capacity to lend/invest? Income tax returns, bank statements of the creditor showing they had the funds

Tax Rate on Section 68 Income — Section 115BBE

• Unexplained cash credits (and other unexplained investments/expenditure) are taxed at 60% flat rate under Section 115BBE
• Plus 25% surcharge on the tax = Effective rate of 78% (60% + 25% of 60% = 15% + 4% cess)
• No basic exemption limit, no deduction, no set-off against losses
• Plus penalty under Section 271AAC: 10% of tax on unexplained income

Common Situations Attracting Section 68

• Loans from persons who have no income to lend — often used in accommodation entries
• Share application money received from shell companies (penny stocks)
• Cash deposits in bank accounts during demonetisation (November 2016) — scrutinised by AO
• Unsecured loans from family/friends without proper documentation of their financial capacity

Conclusion

Section 68 unexplained cash credits attract a near-confiscatory 78% tax rate — making it essential to maintain complete documentation for every credit entry in the books. SPOTON provides income tax advisory, response to Section 68 notices and appeal support for businesses and individuals in Kerala. Contact us for expert tax litigation services.