Section 68 – Cash Credits Under Income Tax Act

Cash credits are a significant concern under the Income Tax Act, especially for businesses and individuals who receive unexplained sums of money in their financial accounts. Section 68 of the Income Tax Act deals with the taxation of such unexplained cash credits, ensuring that income is properly accounted for and taxed. In this blog, we will delve into the provisions of Section 68, its implications, and how businesses and individuals can ensure compliance.

What is Section 68 of the Income Tax Act?

Section 68 states that if any sum is found credited in the books of an assessee during a financial year and the assessee fails to explain the nature and source of the credit to the satisfaction of the Assessing Officer (AO), such an amount shall be deemed to be taxable income.

Key Provisions of Section 68:

1. Unexplained Cash Credits: If an assessee does not provide a satisfactory explanation regarding the source of the credited amount, it will be treated as taxable income.

2. Loans and Borrowings: If the credit entry consists of loans or borrowings, the explanation by the assessee must be supported by the lender’s explanation regarding the nature and source of the sum.

3. Share Application Money: If a private company receives share application money, share capital, or share premium, the explanation must be backed by a resident investor’s disclosure of the nature and source of funds.

4. Exemption for Venture Capital Funds: If the credited amount is received from a venture capital fund or a venture capital company as per Section 10(23FB), Section 68 will not be applicable.

Implications of Section 68 for Businesses and Individuals

• For Businesses: Companies must maintain clear records of transactions, especially those related to share capital, loans, and investments.

• For Individuals: Individuals receiving unexplained deposits in their bank accounts may face scrutiny from income tax authorities.

• For Startups: Startups raising funds from angel investors or venture capitalists must ensure compliance with documentation and financial disclosures.

How to Avoid Taxation Under Section 68?

To prevent the addition of unexplained cash credits to taxable income, businesses and individuals should:

1. Maintain Proper Documentation: Ensure that all transactions have valid supporting documents such as bank statements, loan agreements, and investor declarations.

2. Establish the Identity of the Creditor: The assessee must provide proof of the identity of the person from whom the sum is received.

3. Prove Creditworthiness of the Lender: The lender or investor should provide evidence of their financial capacity to advance the funds.

4. Ensure a Valid Business Transaction: The transaction should be legitimate and supported by agreements and receipts.

Case Laws on Section 68

Several judicial pronouncements have clarified the scope of Section 68:

• CIT v. Orissa Corporation Pvt. Ltd. (1986): If the assessee provides the name, address, and PAN of the creditor, and the revenue fails to disprove the claim, no addition can be made under Section 68.

• Sumati Dayal v. CIT (1995): The Supreme Court emphasized the importance of examining the surrounding circumstances and human probabilities while determining the genuineness of a transaction.

Conclusion

Section 68 of the Income Tax Act plays a crucial role in curbing tax evasion by ensuring that all unexplained cash credits are accounted for and taxed appropriately. Businesses and individuals should maintain proper financial records and ensure transparency in transactions to avoid complications. Seeking professional guidance from a Chartered Accountant can help in ensuring compliance and avoiding unnecessary tax liabilities.