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Tax Treatment of Cash Credits under Income Tax Act 1961

Any sum found credited in the books of the taxpayer, 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, is termed as cash credit. In this part, you can gain knowledge about various provisions relating to the tax treatment of cash credit.

Basic provisions

The provisions relating to the tax treatment of cash credit are given in section 68. As per section 68, any sum found credited in the books of a taxpayer, for which he offers no explanation about nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, may be charged to income-tax as the income of the taxpayer of that year.

In case of a taxpayer 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).

Conditions to be satisfied for applicability of section 68

From the reading of section 68, the following conditions can be stated to attract the applicability of section 68:

  • The assessee has maintained ‘books’
  • There has to be the credit of amounts in the books maintained by the taxpayer of a sum during the year.
  • The taxpayer offers no explanation about the 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 the 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, the sum so credited may be charged to tax as income of the taxpayer of that year.

Other provisions to be kept in mind

Apart from the provisions relating to the taxing of cash credit given under section 68, similar provisions are designed under section 69, 69A, 69B, 69C, and 69D in respect of certain other items. The provisions in this regard are as follows:

Section

Brief overview

69

Unexplained investments

Where in a year the taxpayer has made investments, which are not recorded in the books of account, if any, maintained by him for any source of income, and he offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, then the value of the investments may be deemed to be the income of the taxpayer of such year.

69A

Unexplained money, etc.

Where in any year the taxpayer is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewelry or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the taxpayer offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or another valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, then the money and the value of the bullion, jewellery or another valuable article may be deemed to be the income of the taxpayer for such year.

69B

Amount of investments, etc., not fully disclosed in books of account

Where in any year the taxpayer has made investments or is found to be the owner of any bullion, jewellery, or another valuable article, and the Assessing Officer finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the taxpayer for any source of income, and the taxpayer offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, then the excess amount may be deemed to be the income of the taxpayer for such year.

69C

Unexplained expenditure, etc.

Where in any year the taxpayer has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, then the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the taxpayer for such year.

Aforesaid unexplained expenditure which is deemed to be the income of the taxpayer by virtue of section 69C shall not be allowed as a deduction under any head of income.

69D

The amount borrowed or repaid on hundi

Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to, any person otherwise than through an account- payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying such amount. It will be treated as income for the year in which it was borrowed or repaid, as the case may be.

However, it should be noted that if any amount borrowed on a hundi has been treated as income of any person by virtue of section 69D then such person shall not be liable to be assessed again in respect of the same amount on repayment thereof.

The amount repaid shall include the amount of interest paid on the amount borrowed.

Tax rates applicable to amount charged to tax by virtue of sections 68, 69, 69A, 69B, 69C and 69D

As per Section 115BBE, income tax shall be calculated at 60% where the total income of an assessee includes the following income:

  1. 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
  2. Which is determined by the Assessing Officer and 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).

Such tax rate of 60% will be further increased by 25% surcharge, 6% penalty, i.e., the final tax rate comes out to be 83.25% (including cess). Provided that such 6% penalty shall not be levied when the income under Section 68, 69, etc., has been included in the return of income and tax has been paid on or before the end of the relevant previous year.

No deduction in respect of any expenditure or allowance [or set-off of any loss] shall be allowed to the assessee in computing his income referred to in clause (a) of sub-section (1) of Section 115BBE

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TaxClue Teamhttp://taxclue.in
Taxclue is an online news portal for reporting all news, articles, judgments, Circulars, orders, and notifications relating to various corporate and tax laws in India. We use the tagline ‘Simplifying Laws’. Our mission is to Simplify the Laws and make people aware of their rights and duties in relation to tax matters in order to equip them to participate in nation-building.

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