Section 68 of The Income Tax Act, 1961

Section 68 of The Income Tax

All of us are very familiar with the fact that people always try to save taxes. In order to save taxes, they adopt tax evasion strategies which results in accumulation of Black money. Black money is the money which is earned by any person without giving tax to government. Any credit to the taxpayer requires to be taxed unless it is exempt under the provision of tax laws. If taxpayer received any kind of money it is required to be taxed unless it is exempt or he offers an explanation to why it should not be taxed. In order to save tax evasion, section 68 of the Income Tax Act, 1961 (“the Act”) empowers the Assessing officer to tax the any sum received by taxpayer which is not already offered to tax and taxpayer does not offer any satisfactory explanation.


 Let us read the provision of Section 68 of the Act-

 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 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.

 In Simple words, unexplained cash credits empower the Assessing officer, in case not satisfied with the explanation offered by assessee, to add such credit in the income of the assessee during the previous year and tax accordingly.However, the satisfaction of the assessing officer must have been derived from the relevant facts and evidences, and on the basis of proper enquiry of all material before him.



 Let us take an example, Mr. A is a businessman who has received an unsecured loan during the year from his son B amounting to Rs. 10,00,000. Now the assessing officer served the notice u/s 143(2) for scrutinizing the case of Mr. A and followed by a questionnaire u/s 142(1) asking why the unsecured loan should not be added to his income considering cash credits. In response to notice, Mr. A said that he has received the loan from his son which he will pay back in the future. Then AO asked to furnish the Copy of ITR of his son, so that he can verify that it is bona-fide loan, which Mr. A fail to furnish. Then AO added back the unsecured loan to the income of Mr. A considering unexplained cash credits.  

This section became a bone of contention between the assessee and the assessing officer. Due to difference in interpretation of section 68 and the manner of offering explanations by the assessees and the way the information was verified by AO. So, let us discuss some Judicial precedents in order to solve these issues.

Case Laws

 In the case of Mr. Gaurav Tyagi Singh Vs. The ITO (Mumbai), ITA no. 1750 of 2017, the Hon’ble High Court of Bombay decided the appeal in favor of the assessee.

The brief facts of the assessee were, the assessee has received Rs. 17,00,000 as a loan from his relative which was added back to his income by the assessing officer u/s 68 of the Act. During the assessment process, the AO asked the assessee to submit loan confirmation as well as bank statement and return of the loaner. The assessee submitted the required information but the AO was not satisfied, and took a view of genuineness of the loan was not established and further the creditworthiness of the loaner was found to be suspect. The action of the AO was completed by adding Rs. 17,00,000 to the returned income of the PY and taxed accordingly.

 Aggrieved by the order of AO, assessee decided to appeal before CIT(A). But the CIT(A) confirmed and upheld the order of AO. Aggrieved by the order the assessee filed an appeal before Hon’ble ITAT. The tribunal after verifying the facts of the case and explanation given by the assessee reduced the addition by Rs. 3,00,000 and allowed the addition of Rs. 14,00,000. The observation of the tribunal were that the said amount was full of doubts and explanation provided by the assessee could not be accepted.

 Aggrieved appellant filed an appeal before the Hon’ble High Court. The observation made by the court, after considering the facts, was that under section 68 “it is necessary for an assessee to prove prima facie the transaction which results in cash credit in his books of account. Such proof would include proof of the identity of the creditor, capacity of the such creditor to advance the money and lastly, genuineness of the transaction.

In the case of Principal of Commissioner of Tax Vs. Veedhata Towers Pvt. Ltd (2018) 403 ITR 415 (Bom), the court held that the assessee is only required to explain the source of credit. There is no requirement under the law to explain the source of the source. In the instant case, the assessee has discharged his duty by providing all the information required but the AO doubted the source of the source. To provide the genuineness of the source of the source is the duty of revenue and in this case, revenue could not prove or bring in any material to impeach. Thus, the appeal was decided in favor of the assessee.

From above case laws, we can simply derive the meaning of section 68 of the Act. for any cash credit appearing in the books of the assessee, the assessee is required to prove the following:

 1. Identity of the creditor 

   The assessee can easily prove the identity of the creditor by furnishing PAN of the person from whom cash received. 

 2. Credit-worthiness of the loaner 

     Provide bank statement and copy of ITR to prove the credit-worthiness of the party.

 3. Genuineness of the transaction

     Provide the source through which money has been received. 

  4.Source of the Source 

   As discussed above, to provide the genuineness of the source of the source is the duty of revenue than that of assessee. If any addition were made on the basis of this, the addition order passed need to be quashed. 

Taxability of Unexplained Cash Credit

 As per section 115BBE, Unexplained cash credit are taxed at flat 60% without providing any benefit of basic exemption limit and irrespective of the tax slab. No deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee in computing the income.








Section 68 of The Income Tax

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