1. Source of the funds or any other sum provided by the lender to the borrower and credited in hooks of the assessee also to be explained
[ First proviso inserted under Section 68 and existing proviso under Section 68 to be treated as second proviso, applicable w.e.f. AY 2023-24]
(A) Reason for making Amendment
Section 68 of the Act provides that where any sum is found to be 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.
The onus of satisfactorily explaining such credits remains on the person in whose books such sum is credited, If such person fails to offer an explanation or the explanation is not found to be satisfactory then the sum is added to the total income of the person. Certain judicial pronouncements have created doubts about the onus of proof and the requirements of this section, particularly, in cases where the sum which is credited as loan or borrowing.
It is noticed that there is a pernicious practice of conversion of unaccounted money by crediting it to the books of assesses through a masquerade of loan or borrowing.
Vide Finance Act. 2012, a proviso was inserted to provide that the nature and source of any sum. in the nature of share application money, share capital, share premium or any such amount by whatever name called, credited in the books of a closely held company shall be treated as explained only if the source of funds is also explained in the hands of the shareholder. However, in case of loan or borrowing, the judicial decisions have held that only identity and creditworthiness of creditor and genuineness of transactions for explaining the credit in the books of account is sufficient, and the onus does not extend to explaining the source of funds in the hands of the creditor.
(B) Amendments made
(i) The above proviso is to be now read as second proviso.
(ii) Further the Finance Bill, 2022 has inserted the following first proviso under section 68.
“Provided that where the sum so credited consists of loan or borrowing or any such amount. by whatever name called, any explanation offered by such assessee shall be deemed in be not satisfactory, unless—
(a) the person in whose name such credit is recorded in the books of such assessee 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:
However, like share application money, share capital and share premium this additional onus of proof of satisfactorily explaining the source in the hands of the creditor, would not apply if the creditor is a well regulated entity, i.e., it is a Venture Capital Fund, Venture Capital Company registered with SEBI.
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