Unexplained Cash Credits, Investments, Money, Etc. [ Section 68 TO 69D]

1.  Unexplained Cash Credits [Section 68]

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.

Accordingly, section 68 has been held to be a charging provision insofar as the particular sum, which is the subject of legislation, is concerned.

It may be noted that if section 68 has been made applicable, the assessee shall, besides liable for income-tax, be liable to a penalty for concealment of income under section 271(1)(c), which shall not be less than and more than three times of the tax sought to be evaded.

Conditions to be satisfied for applicability of section 68

Section 68 comes into operation only when the following two conditions are satisfied:

(i)         the assessee maintains account books; and

(ii)        a credit entry occurs in such books.

(1) Section 68 of the Income Tax Act?

Section 68 of the Income Tax Act 1961 deals with unexplained cash credits. According to this section, if any sum is found credited in the books of a taxpayer, and the taxpayer is unable to provide a satisfactory explanation about the nature and source of the credit, then the sum may be deemed as the taxpayer’s income for that financial year.

It is important to note that this provision applies to both individuals and businesses. The purpose of Section 68 is to prevent tax evasion and ensure that all sources of income are properly accounted for.

Section 68 applies when the following conditions are met:

1. A sum of money is found credited in the books of the taxpayer.
2. The taxpayer is unable to provide a satisfactory explanation about the nature and source of the credit.

If these conditions are met, the sum of money will be treated as the taxpayer’s income for that financial year and will be subject to taxation as deemed income.

When a cash credit is deemed unexplained under Section 68, the burden of proof lies with the taxpayer. It is the taxpayer’s responsibility to provide a satisfactory explanation to the tax authorities regarding the nature and source of the credit.

The taxpayer must provide documentary evidence, such as bank statements, loan agreements, or any other relevant documents, to support their explanation. The explanation should be reasonable, logical, and supported by credible evidence.

If the tax authorities find the explanation provided by the taxpayer to be satisfactory, the cash credit will not be treated as income, and no further tax liability will arise. However, if the explanation is not considered satisfactory, the sum of money will be treated as the taxpayer’s income and taxed accordingly.

Penalties and consequences under section 68

Failure to provide a satisfactory explanation for a cash credit under Section 68 can have serious consequences. The sum of money will be treated as income and taxed at the applicable tax rate. Additionally, a penalty may be levied under Section 271(1)(c) of the Income Tax Act for concealing income.

The penalty for concealing income can range from 100% to 300% of the tax payable on the concealed income. It is important to note that the tax authorities have the power to reopen past assessments and impose penalties for non-compliance.

(2) ‘Books of the Assessee’ appearing in section 68

According to this section, if 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 of such sum or the explanation offered by the assessee is not satisfactory in the opinion of the Assessing Officer, then the sum so credited may be charged to income tax as the income of the assessee of that previous year.

It is important for the books of the assessee to be maintained accurately and transparently to avoid any discrepancies or unexplained cash credits. Here are some key points to consider regarding the books of the assessee appearing in section 68:

Accurate Record Keeping:

The books of the assessee should be maintained accurately and reflect the true financial position of the assessee. This includes recording all transactions, income, and expenses in a systematic manner.

Complete Documentation:

All transactions should be supported by proper documentation such as invoices, receipts, vouchers, bank statements, and other relevant documents. This documentation will help in providing a clear explanation of the nature and source of any cash credits.

Consistency:

The books of the assessee should be consistent with the other financial records and documents. Any discrepancies or inconsistencies may raise suspicions and lead to further scrutiny by the tax authorities.

Regular Reconciliation:

It is essential to regularly reconcile the books of the assessee with the bank statements, financial statements, and other relevant records. This will help in identifying any errors or discrepancies and rectifying them in a timely manner.

Auditing:

Getting the books of the assessee audited by a qualified professional can provide an additional layer of assurance and credibility. An audit report can help in establishing the accuracy and reliability of the financial records.

It is important to note that section 68 applies to cash credits appearing in the books of the assessee. Cash credits can include various types of transactions such as loans, gifts, share capital, share premium, etc. If the assessee fails to provide a satisfactory explanation for such cash credits, they may be treated as income and taxed accordingly.

(3) Whether Loose Sheets are Books or Not

Where loose sheets are found, there is the usual inference of the Assessing Office, that they represent concealed transactions. Such inference does not readily follow. Such inference can be positively made only after identification of the papers and after due verification. Figures therein could not be lightly inferred to represent unaccounted income, unless there is something more to it.

It further held that the said piece of paper did not represent Books of Account for the following reasons…

A books of account, as per the Black’s Law Dictionary means a record or document that contains a systematic and chronological account of financial transactions. These transactions can include purchases, sales, receipts, payments, and any other relevant financial activities.

Books of account play a crucial role in the field of accounting and are essential for maintaining accurate financial records. They provide a comprehensive overview of a company’s financial transactions, allowing businesses to track their income, expenses, assets, and liabilities.

Importance of Books of Account

Books of account serve as the foundation for financial reporting and analysis. They are essential for various reasons:

Legal Compliance: Maintaining proper books of account is a legal requirement in many jurisdictions. It helps businesses comply with tax regulations, company laws, and other statutory obligations.

Financial Decision Making: Accurate and up-to-date books of account provide valuable information for making informed financial decisions. They help businesses assess their financial health, identify trends, and plan for the future.

Transparency and Accountability: Books of account promote transparency and accountability within an organization. They enable stakeholders, such as shareholders, investors, and regulators, to evaluate the financial performance and integrity of a business.

Audit and Taxation: Properly maintained books of account simplify the audit process and facilitate tax compliance. They provide auditors and tax authorities with a clear trail of financial transactions, making it easier to verify the accuracy of financial statements and tax returns.

Legal Disputes: In the event of legal disputes, books of account serve as valuable evidence. They can help resolve issues related to financial transactions, contracts, and other financial matters.

Types of Books of Account

There are several types of books of account that businesses use to record their financial transactions. The choice of books depends on the nature and size of the business. Here are some common types:

Cash Book: A cash book records all cash receipts and payments made by a business. It helps track the flow of cash in and out of the organization.

General Ledger: The general ledger is a central repository that contains all financial transactions categorized into different accounts. It provides a comprehensive view of a company’s financial position.

Purchase Book: A purchase book records all purchases made by a business. It includes details such as the date of purchase, supplier name, quantity, and cost of goods purchased.

Sales Book: A sales book records all sales made by a business. It includes details such as the date of sale, customer name, quantity, and selling price of goods sold.

Journal: A journal is used to record transactions that cannot be recorded in other books. It serves as a preliminary record before entries are posted to the general ledger.

(4) Assessee to establish the genuineness of the sum found credited in the books of account

Section 68 plays a crucial role in determining the taxability of certain credited sums found in the books of account. This section requires the assessee to establish the genuineness of such sums to avoid any adverse tax consequences.

Section 68 of the Income Tax Act 1961 states that if any sum is found credited in the books of account of an assessee and the assessee offers no explanation about the nature and source of such sum or the explanation provided by the assessee is found to be unsatisfactory, then the sum may be deemed as the income of the assessee for that financial year.

It is important for the assessee to understand the requirements and implications of Section 68 to ensure compliance with the Income Tax Act. The genuineness of the credited sum needs to be established through proper documentation and evidence.

Here are some key points to consider when assessing the genuineness of a credited sum for the applicability of Section 68:

1. Proper Documentation

The assessee should maintain proper documentation to support the nature and source of the credited sum. This includes invoices, receipts, bank statements, contracts, agreements, and any other relevant documents. The documentation should be authentic, verifiable, and consistent with the nature of the transaction.

2. Bank Statements and Financial Records

The bank statements and financial records of the assessee should be in line with the credited sum. Any discrepancies or inconsistencies may raise concerns about the genuineness of the sum. It is crucial to ensure that the transactions are properly recorded and reflected in the books of account.

3. Independent Verification

Wherever possible, the assessee should obtain independent verification or certification of the credited sum. This can be done through third-party audits, valuations, or expert opinions. Independent verification adds credibility to the genuineness of the sum and strengthens the case of the assessee.

4. Explanation of the Source

The assessee should provide a clear and satisfactory explanation regarding the source of the credited sum. The source should be legitimate and lawful. Any unexplained or suspicious sources may lead to the sum being treated as undisclosed income.

5. Consistency with Previous Years

The assessee should ensure that the credited sum is consistent with the previous years’ financial records. Any significant deviations or abnormal transactions may require additional explanation and scrutiny. Consistency over time helps establish the genuineness of the sum.

(5)  Assessee to prove capacity of Creditor and Genuineness of Creditor for applicability of section 68

it is important to note that the burden of proof lies on the assessee to establish the capacity of the creditor and the genuineness of the transaction in order to avoid the application of section 68. In other words, the assessee must provide sufficient evidence to show that the creditor is capable of lending the amount and that the transaction is genuine.

Capacity of the Creditor

When it comes to proving the capacity of the creditor, the assessee needs to demonstrate that the creditor has the financial means to lend the amount in question. This can be done by providing documents such as bank statements, income tax returns, audited financial statements, or any other relevant evidence that shows the creditor’s financial position.

It is important to establish that the creditor has the necessary funds to lend and that the transaction is not a sham or a mere accommodation entry. The genuineness of the transaction is closely linked to the capacity of the creditor, as it helps determine whether the transaction is bonafide or a means to introduce unaccounted funds into the books.

Genuineness of the Transaction

Along with proving the capacity of the creditor, the assessee must also establish the genuineness of the transaction. This involves providing evidence that the transaction actually took place and that it was not a fictitious entry made to evade taxes or conceal income.

The genuineness of the transaction can be established through various means, such as producing documentary evidence like agreements, loan documents, promissory notes, correspondence, bank statements reflecting the transaction, or any other relevant documents that support the existence of the transaction.

In addition to documentary evidence, the assessee may also need to provide other forms of evidence, such as witness statements, affidavits, or any other relevant information that can help substantiate the genuineness of the transaction.

Assessee’s Responsibility

It is important for the assessee to understand that the burden of proof lies on them to establish both the capacity of the creditor and the genuineness of the transaction. The Income Tax Department may scrutinize the documents and evidence provided by the assessee and may also conduct further inquiries or investigations if necessary.

Therefore, it is crucial for the assessee to maintain proper documentation and records related to the transaction. This includes keeping copies of all relevant documents, maintaining a clear trail of funds, and ensuring that all transactions are properly recorded in the books of accounts.

(6)  Section 68 applicable even if cheques not presented for collection but credited in Books

In the realm of financial transactions, cheques play a vital role as a widely accepted form of payment. They provide a convenient and secure way to transfer funds between individuals and businesses. However, there are instances when cheques are not presented for collection but are still credited in the books of the recipient. This raises the question of whether Section 68 of the law is applicable in such cases.

Application of Section 68

While Section 68 specifically mentions cash credits, it is important to note that the section is not limited to cash transactions alone. The language used in the section is broad enough to encompass any unexplained credits, including those arising from cheque transactions.

Even if cheques are not physically presented for collection, the fact that they are credited in the books of the recipient is sufficient to trigger the application of Section 68. This is because the law focuses on the source and nature of the credit, rather than the mode of payment. As long as the recipient cannot provide a satisfactory explanation for the credit, it can be treated as income under Section 68.

Justification for Section 68

The inclusion of cheques in Section 68 aims to prevent tax evasion and undisclosed income. By requiring individuals and businesses to provide a valid explanation for any unexplained credits, the law ensures transparency and accountability in financial transactions. It discourages the practice of inflating income through undisclosed sources.

Furthermore, the inclusion of cheques in Section 68 aligns with the overall objective of the law to prevent tax evasion. It recognizes that individuals and businesses can manipulate their financial records by not presenting cheques for collection, but still recording them as credits. By treating such credits as income, the law ensures that the taxpayer is held accountable for any unexplained funds entering their books.

(7)  Section 68 is applicable in case of Share Application Money and therefore the Assessee must establish the identity, Creditworthiness and Genuineness

Section 68 of the Income Tax Act is a provision that deals with unexplained cash credits. It is applicable in cases where the Assessee receives share application money. In such cases, the Assessee is required to establish the identity, creditworthiness, and genuineness of the source of the funds.

When a company issues shares to raise capital, it may receive share application money from investors. This money is paid by the investors at the time of applying for shares, before the shares are actually allotted to them. Section 68 comes into play when the tax authorities question the source of this share application money.

The primary objective of Section 68 is to prevent the misuse of unexplained cash credits. It ensures that the funds brought in as share application money are legitimate and not a means to convert undisclosed income into white money.

According to Section 68, the Assessee must establish three key aspects to justify the receipt of share application money:

Identity:

The Assessee must provide evidence to establish the identity of the investor(s) who have contributed the share application money. This could be in the form of PAN (Permanent Account Number), KYC (Know Your Customer) documents, bank statements, or any other relevant documents.

Creditworthiness:

The Assessee must demonstrate the creditworthiness of the investor(s) by providing financial statements, bank statements, income tax returns, or any other relevant documents. This helps establish that the investor(s) have the financial capacity to invest the amount mentioned in the share application.

Genuineness:

The Assessee must prove the genuineness of the transaction by providing supporting documents such as share application forms, share allotment letters, board resolutions, bank statements showing the transfer of funds, and any other relevant documents.

It is essential for the Assessee to provide complete and accurate documentation to satisfy these requirements. Failure to do so may result in the share application money being treated as unexplained cash credits and added to the Assessee’s taxable income.

It is worth noting that Section 68 applies not only to share application money received from individual investors but also to funds received from corporate entities, partnership firms, or any other source. The Assessee must establish the identity, creditworthiness, and genuineness of the source in all cases.

It is advisable for the Assessee to maintain proper records and documentation related to share application money. This includes maintaining a register of shareholders, keeping copies of share application forms, share allotment letters, bank statements, and any other relevant documents. These records will help provide the necessary evidence when required by the tax authorities.

Additionally, it is important for the Assessee to ensure that the share application money is received through legitimate banking channels. Any cash transactions or transactions through unaccounted means may raise suspicions and invite scrutiny from the tax authorities.

(8)  Source of source also to be explained under section 68

The source of source refers to the origin or the original source of information that is used as evidence in a legal case. It is the primary source from which secondary sources derive their information. Section 68 of the legal code provides guidelines on how the source of source should be handled in legal proceedings.

Section 68 of the legal code outlines the rules and procedures for handling the source of source in legal proceedings. It provides guidelines for the admissibility of evidence derived from secondary sources and the requirements for establishing the authenticity and reliability of such evidence.

Under Section 68, the court may admit evidence derived from a secondary source if the following conditions are met:

• The original source is unavailable or cannot be reasonably obtained.
• The secondary source is reliable and accurately represents the original source.
• There is no reasonable doubt regarding the accuracy and authenticity of the evidence.

It is important to note that the court has the discretion to determine the admissibility of evidence derived from secondary sources based on the specific circumstances of each case.

Challenges in Establishing the Source of Source

Establishing the source of source can be challenging in some cases. The original source may be unavailable, or it may be difficult to trace back the chain of custody of the evidence. In such situations, it becomes crucial for the court to evaluate the reliability and accuracy of the secondary sources.

Technological advancements have also presented new challenges in establishing the source of source. With the rise of digital information and online sources, it can be more complex to determine the original source and verify its authenticity. Courts must adapt to these new challenges and develop appropriate procedures to handle digital evidence.

(9)  Section 68 applies not only to cash transaction but also to amount received by cheque or draft

While Section 68 is commonly associated with cash transactions, it is essential to understand that its scope extends to non-cash transactions as well. This means that if a taxpayer receives an amount by cheque, draft, or any other non-cash instrument, and fails to provide a satisfactory explanation for the same, the amount can be treated as undisclosed income under Section 68.

The rationale behind including non-cash transactions within the purview of Section 68 is to prevent taxpayers from exploiting loopholes and evading taxes through various means. By encompassing both cash and non-cash transactions, the provision aims to ensure that all sources of unexplained credits are thoroughly examined and accounted for.

Challenges and Documentation

One of the challenges faced by taxpayers when dealing with Section 68 is the burden of proof. To avoid adverse implications, taxpayers must maintain proper documentation and provide a satisfactory explanation for any unexplained credits. This includes keeping records of invoices, receipts, bank statements, and any other relevant documents that can support the legitimacy of the transaction.

It is important to note that while Section 68 places the onus on the taxpayer to provide an explanation, the assessing officer also has the responsibility to assess the evidence presented. The officer must objectively evaluate the facts and circumstances of the case before making a determination.

(10)      Gifts are required to be proved as bona fide Gifts to avoid the Provisions of Section 68

Gifts received by an individual or a company are exempt from taxation under certain conditions. To ensure that gifts are considered bona fide and not subject to the provisions of Section 68, it is important to provide proper documentation and evidence of the gift transaction.

i. Proper Documentation

When receiving a gift, it is crucial to maintain proper documentation to establish the genuineness of the transaction. This includes a gift deed or a letter of gift from the donor, clearly stating the intention to gift and the details of the gift. The gift deed should be executed on a stamp paper and registered, if required by law.

Additionally, it is advisable to maintain a record of any correspondence, such as emails or letters, between the donor and the recipient regarding the gift. These documents can serve as evidence of the intent and validity of the gift.

ii. Evidence of the Source of Funds

One of the key aspects to establish the genuineness of a gift is to provide evidence of the source of funds. The donor should be able to demonstrate that the funds used for the gift are from legitimate sources and have been properly accounted for.

This can be done by providing bank statements or other financial documents that show the source of the funds. If the donor has received the funds as a gift from someone else, they should be able to provide similar documentation to establish the chain of gifting.

iii. Timing and Frequency of Gifts

The timing and frequency of gifts can also play a role in establishing their genuineness. If a large sum of money is received as a gift shortly before or after a significant financial transaction, it may raise suspicion and attract the attention of tax authorities.

It is important to ensure that the timing and frequency of gifts are reasonable and consistent with the donor’s financial capacity. If there is a pattern of regular gifts, it is advisable to maintain a record of previous gift transactions to demonstrate a consistent gifting practice.

iv. Relationship between Donor and Recipient in determining the genuineness of a gift

The relationship between the donor and the recipient can also be a factor in determining the genuineness of a gift. If the donor is a close family member or a relative, it is generally considered more credible. However, if the donor is an unrelated individual or a distant acquaintance, it may raise questions about the motive behind the gift.

It is important to establish a genuine relationship between the donor and the recipient, and to provide any supporting documentation, such as photographs or affidavits, that can demonstrate the nature of the relationship.

v. Avoiding Suspicion or Scrutiny from Tax Authorities

To avoid any suspicion or scrutiny from tax authorities, it is advisable to ensure that the gift transaction is conducted in a transparent manner. This includes using proper banking channels for the transfer of funds, maintaining a record of the transaction, and complying with any legal requirements, such as stamp duty or registration.

It is also important to disclose the gift transaction in the income tax return and provide any supporting documents as required. This will help establish the legitimacy of the gift and avoid any potential issues with tax authorities.

(11)      Addition under Section 68 cannot be made if No Books of Accounts are maintained

it is important to note that this provision cannot be applied if the assessee is able to provide evidence that no books of accounts were maintained by them. In such cases, the addition under Section 68 cannot be made.

The requirement of maintaining books of accounts is governed by Section 44AA of the Income Tax Act. According to this section, certain categories of taxpayers are required to maintain books of accounts if their total income exceeds the specified threshold. These categories include individuals carrying on a profession, individuals carrying on a business, and certain other specified persons.

If an assessee falls under any of these categories and their total income exceeds the specified threshold, they are required to maintain books of accounts. These books of accounts should contain details of all transactions and should be capable of providing necessary information for the computation of income under the Income Tax Act.

However, if the assessee is not required to maintain books of accounts as per the provisions of Section 44AA, then the addition under Section 68 cannot be made solely on the ground that no books of accounts are maintained by the assessee.

It is important to understand that the burden of proof lies on the assessee to provide evidence that no books of accounts were maintained. This can be done by submitting a declaration stating the same or by providing any other documentary evidence that supports the claim.

In cases where the assessee is able to provide evidence that no books of accounts were maintained, the assessing officer cannot make any addition under Section 68. This is because the provision specifically applies to sums found credited in the books of the assessee. If no books of accounts are maintained, there can be no question of any sum being credited in such books.

However, it is important to note that even if no addition is made under Section 68, the assessing officer may still proceed to make additions under other relevant provisions of the Income Tax Act if there are other unexplained cash credits or if the assessee is unable to provide a satisfactory explanation for any other income or expenditure.

(12)      Addition under Section 68 cannot be made on estimated basis

It is important to note that the addition under Section 68 cannot be made on an estimated basis. The provision clearly states that the sum must be found credited in the books of the taxpayer. This means that there must be actual evidence of the sum being credited, such as bank statements or other relevant documents.

The Supreme Court of India, in various judgments, has emphasized the importance of actual evidence in making additions under Section 68. The court has held that the burden of proof lies on the taxpayer to explain the nature and source of the sum, but the burden of proof does not extend to proving the exact source of every rupee credited in the books of accounts.

While the tax authorities have the power to make additions under Section 68 if the explanation offered by the taxpayer is unsatisfactory, they cannot make additions based on mere estimates or assumptions. The provision requires concrete evidence of the sum being credited, and the tax authorities must rely on such evidence to make any additions.

It is also important to consider the principle of natural justice. The taxpayer should be given a fair opportunity to explain the nature and source of the sum before any addition is made under Section 68. This ensures that the taxpayer’s rights are protected and that the tax authorities do not make arbitrary additions based on assumptions.

Furthermore, the tax authorities must also consider the overall facts and circumstances of the case before making any additions under Section 68. They should not solely rely on the fact that the taxpayer has failed to provide a satisfactory explanation. The tax authorities must evaluate all the available evidence and consider whether there are any other plausible explanations for the sum being credited.

(13)      Liability to tax under section 68 if the capital of the partner in the books of account of firm could not be explained by the firm

Section 68 of the Income Tax Act deals with the tax liability that may arise when the capital of a partner in a firm’s books of account cannot be explained by the firm. This provision is aimed at ensuring transparency and preventing the misuse of funds in partnership firms.

Under normal circumstances, a partnership firm maintains its books of account, which include details of the capital contributed by each partner. However, there may be instances where the firm is unable to provide a satisfactory explanation for the capital reflected in its books of account. In such cases, Section 68 comes into play.

Section 68 states that if any sum is found credited in the books of a firm and the explanation offered by the firm about the nature and source of the sum is not satisfactory to the assessing officer, then the sum may be treated as the firm’s income. This means that the firm may be liable to pay tax on the unexplained capital of its partners.

The burden of proof lies on the firm to explain the source and nature of the capital. The firm must provide all relevant documents and evidence to support its explanation. If the assessing officer finds the explanation to be genuine and verifiable, then the firm will not be liable to tax under Section 68.

However, if the assessing officer is not satisfied with the explanation provided by the firm, he may treat the unexplained capital as the firm’s income. The amount will be added to the firm’s total income and taxed accordingly.

2.  Unexplained Investments [Section 69]

Section 69 of the Income Tax Act, 1961, deals with unexplained investments. It states that if a taxpayer is found to have made investments that are not adequately explained, the value of such investments will be treated as the taxpayer’s income for the year in question. This means that the taxpayer will be liable to pay tax on the unexplained investments.

It is important to note that Section 69 applies to both individuals and businesses. Any unexplained investments made by a taxpayer, whether in the form of cash, property, or any other asset, can come under the purview of this section.

Section 69 applies in the following situations:

1. The assessee has made investments in the financial year immediately preceding the assessment year.
2. The investments are not recorded in the books of account, if any, maintained by the assessee for any source of income.
3. The assessee offers no explanation about the nature and source of the investments.
4. The explanation offered by the assessee is not, in the opinion of the ITO, satisfactory.

Implications and Effects

When the tax authorities invoke Section 69, they have the power to scrutinize the unexplained investments and determine their source. If the taxpayer fails to provide a satisfactory explanation, the value of the investments will be treated as their income, and tax will be levied accordingly.

In addition to the tax liability, there are other consequences of being subject to Section 69. The taxpayer may also face penalties and interest charges on the undisclosed income. The penalties can range from 50% to 200% of the tax amount, depending on the circumstances. Moreover, the taxpayer’s credibility may be questioned, and their financial affairs may be subjected to further scrutiny in subsequent years.

Defending Against Section 69

To avoid being subject to Section 69, it is crucial for taxpayers to maintain proper documentation and provide adequate explanations for their investments. Here are some steps that can help in defending against Section 69:

Maintain proper records:

Keep all relevant documents, such as receipts, bank statements, and property ownership proofs, to substantiate the source of investments.

Provide explanations:

When questioned by the tax authorities, provide detailed explanations about the source of funds used for investments. It is essential to establish a clear and legitimate trail of the investment funds.

Seek professional assistance:

If you find yourself facing scrutiny under Section 69, it is advisable to seek professional help from a tax consultant or chartered accountant. They can guide you through the process and help you present a strong defense.

Penalties and consequences

Failure to provide a satisfactory explanation for unexplained investments under Section 69 can lead to various penalties and consequences:

• The tax authorities may impose a penalty of 30% of the undisclosed investment amount, in addition to the tax levied.
• Interest may be charged on the tax amount from the date of the unexplained investment.
• The taxpayer may face further scrutiny and investigation by the income tax department.
• In extreme cases, criminal proceedings may be initiated against the taxpayer.

3.  Unexplained Money, etc. [Section 69A]

Section 69A of the Income Tax Act, 1961 deals with unexplained money, bullion, jewellery, or other valuable articles. It empowers the Income Tax Officer (ITO) to deem such assets as the income of the assessee for the relevant financial year if the assessee fails to provide a satisfactory explanation about their source of acquisition.

Applicability of Section 69A

Section 69A is applicable in the following scenarios:

1. Unexplained money found during a search operation: If any unexplained money, investment, expenditure, or acquisition of assets is discovered during a search operation conducted by the income tax authorities, it can be treated as the taxpayer’s income under Section 69A.
2. Unexplained money offered for taxation: If a taxpayer voluntarily offers any unexplained money, investment, expenditure, or acquisition of assets for taxation, it can be taxed under Section 69A.
3. Such money, bullion, jewellery, or other valuable article is not recorded in the assessee’s books of account, if any, maintained for any source of income.
4. The assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery, or other valuable article.
5. The explanation offered by the assessee is not, in the opinion of the ITO, satisfactory.

Procedure for Taxation

When unexplained money or assets are taxed under Section 69A, the following procedure is followed:

1. The Assessing Officer issues a notice to the taxpayer, requiring him to explain the source of the money or assets.
2. The taxpayer must provide a satisfactory explanation for the source of the unexplained money or assets. If the explanation is found to be genuine, the Assessing Officer cannot treat it as the taxpayer’s income.
3. If the taxpayer fails to provide a satisfactory explanation or fails to respond to the notice, the Assessing Officer may treat the unexplained money or assets as the taxpayer’s income.
4. The unexplained money or assets are then taxed at the maximum marginal rate applicable to the taxpayer.

Penalties and Consequences

If unexplained money or assets are taxed under Section 69A, the taxpayer may face the following penalties and consequences:

1. Taxation at maximum marginal rate: The unexplained money or assets are taxed at the maximum marginal rate applicable to the taxpayer, which can result in a significant tax liability.
2. Penalty under Section 271AAA: In addition to the tax liability, the taxpayer may also be liable to pay a penalty under Section 271AAA of the Income Tax Act. The penalty is equal to 10% of the undisclosed income.
3. Scrutiny and investigation: Taxation under Section 69A may lead to further scrutiny and investigation by the income tax authorities into the taxpayer’s financial affairs.

4.  Amount of Investments, not fully disclosed in Books of Account [Section 69B]

Section 69B of the Income Tax Act is applicable when an individual or business fails to disclose the full value of investments made in the books of account. This section empowers the assessing officer to determine the fair market value of such investments and treat the undisclosed amount as income. The undisclosed investments can include tangible assets like property, shares, or any other form of investment.

Section 69B applies in the following situations:

1. The assessee has made investments or is found to be the owner of any bullion, jewellery, or other valuable article in any financial year.
2. The amount expended on making such investments or in acquiring such bullion, jewellery, or other valuable article exceeds the amount recorded in the books of account maintained by the assessee for any source of income.
3. The assessee offers no explanation about the excess amount.
4. The explanation offered by the assessee is not, in the opinion of the ITO, satisfactory.

Consequences of Non-Disclosure

The consequences of non-disclosure of investments under Section 69B can be severe. If the assessing officer determines that the taxpayer has undisclosed investments, the undisclosed amount will be treated as income in the year in which the investments were made. This means that the taxpayer will be liable to pay tax on the undisclosed amount at the applicable tax rate. In addition to the tax liability, the taxpayer may also be subject to penalties and interest. The assessing officer has the power to impose a penalty of up to 100% of the tax payable on the undisclosed amount. Furthermore, interest may be charged on the tax liability from the date it was due until the date of payment.

Disclosure and Compliance

To avoid any issues under Section 69B, it is crucial for individuals and businesses to maintain accurate and complete books of account. All investments, whether made in cash or kind, should be properly recorded and disclosed. It is advisable to seek professional help to ensure compliance with the provisions of the Income Tax Act. In case of any undisclosed investments, it is recommended to rectify the situation by voluntarily disclosing the same to the assessing officer. The Income Tax Act provides a mechanism for taxpayers to make voluntary disclosures and pay the tax due along with applicable penalties and interest. By doing so, taxpayers can avoid potential litigation and penalties that may arise from non-compliance.

Penalties and Consequences

If the assessing officer concludes that the undisclosed investments are indeed the taxpayer’s income, the consequences can be severe. The taxpayer will be liable to pay taxes on the undisclosed investments at the applicable tax rate. Additionally, a penalty of 30% of the undisclosed income may be levied under Section 271AAB of the Income Tax Act. Moreover, the taxpayer may also face prosecution under Section 276C of the Income Tax Act, which deals with wilful attempts to evade tax. If convicted, the taxpayer may be subject to imprisonment for a term ranging from three months to seven years, along with a fine.

Defending Against Section 69B Assessments

If a taxpayer receives a notice under Section 69B, it is crucial to respond promptly and provide the necessary explanations and documentation. It is advisable to seek professional assistance from a tax consultant or chartered accountant who can guide the taxpayer through the assessment process and help prepare a robust defense. To defend against Section 69B assessments, the taxpayer should provide plausible explanations for the undisclosed investments. This could include demonstrating the source of funds used for the investments, providing supporting documents such as bank statements or loan agreements, or proving that the investments were made by someone else and not the taxpayer.

Inapplicability of Section 50C for Making Additions under Section 69B

It is important to note that the provisions of Section 50C cannot be applied for making additions under Section 69B. This means that even if the stamp duty value of a property is higher than the actual consideration received by the taxpayer, the Assessing Officer cannot make an addition to the taxpayer’s income under Section 69B based solely on the difference between the two values.

The rationale behind this is that Section 50C is specific to the computation of capital gains and is not intended to address issues related to unexplained investments. Section 69B, on the other hand, specifically deals with unexplained investments and provides the Assessing Officer with the power to make additions to the taxpayer’s income in such cases.

Therefore, if the Assessing Officer suspects that a taxpayer has made unexplained investments, they must rely on the provisions of Section 69B to make additions to the taxpayer’s income. They cannot use the higher stamp duty value of a property, as determined under Section 50C, as a basis for making such additions.

5.  Unexplained Expenditure, etc. [Section 69C]

Section 69C of the Income Tax Act, 1961, deals with unexplained expenditures incurred by an assessee in a financial year. It empowers the Income Tax Officer (ITO) to deem such expenditures as the income of the assessee if the assessee fails to provide a satisfactory explanation about the source of the funds used for the expenditures.

This provision is particularly important in cases where the taxpayer’s income does not match the expenditure or investment made. It acts as a deterrent against tax evasion and ensures that taxpayers are accountable for their financial transactions.

Applicability of Section 69C

Section 69C applies in the following scenarios:

Unexplained Expenditure:

If a taxpayer incurs any expenditure that is not supported by proper documentation or evidence, the assessing officer can treat it as unexplained expenditure under Section 69C. This includes any cash payments made without proper receipts or any expenses that cannot be substantiated.

Unexplained Investments:

If a taxpayer holds any investments, including shares, securities, or immovable properties, that are not adequately explained or supported by legitimate sources of income, such investments can be deemed as unexplained investments under Section 69C.

Unexplained Assets:

If a taxpayer possesses any assets, such as jewelry, bullion, or valuable items, that are not accounted for or explained satisfactorily, those assets can be treated as unexplained assets under Section 69C.

It is essential to note that the Assessing Officer has the authority to treat the unexplained expenditure, investment, or asset as the taxpayer’s income, and accordingly, it will be taxed at the applicable rates.

Consequences of Section 69C

When the Income Tax Department invokes Section 69C, the taxpayer may face the following consequences:

Addition to Total Income:

The unexplained expenditure, investment, or asset will be added to the taxpayer’s total income for the relevant assessment year. This means that the taxpayer will have to pay tax on the unexplained amount at the applicable tax rate.

Penalty:

In addition to the tax liability, the taxpayer may also be liable to pay a penalty under Section 271(1)(c) of the Income Tax Act. The penalty amount can range from 100% to 300% of the tax payable, depending on the circumstances.

Further Investigation:

The invoking of Section 69C may trigger a deeper investigation into the taxpayer’s financial affairs, including their sources of income, investments, and assets. This can lead to additional scrutiny and potential legal consequences if any discrepancies are found.

Defending Against Section 69C

To avoid any problems related to Section 69C, taxpayers should:

Maintain Proper Documentation:

It is crucial to maintain all relevant documents, receipts, and bills for expenses, investments, and assets. Proper documentation helps in establishing the legitimacy of transactions and avoids any doubts or disputes.

Declare All Income:

Ensure that all sources of income are properly declared in the income tax return. Any undisclosed income can raise suspicion and lead to scrutiny under Section 69C.

Seek Professional Advice:

When in doubt about any financial transaction or investment, it is advisable to consult a tax professional or chartered accountant who can provide guidance and ensure compliance with tax laws.

6.  Amount Borrowed or Repaid on Hundi [Section 69D]

Section 69D of the Income Tax Act, 1961 deals with the borrowing or repayment of amounts through hundis, which are traditional promissory notes used in India. It stipulates that any amount borrowed or repaid on a hundi, otherwise than through an account payee cheque drawn on a bank, shall be deemed to be the income of the person borrowing or repaying the amount for the previous year in which the amount was borrowed or repaid.

It is important to note that the term “Hundi” refers to an informal financial instrument prevalent in certain parts of India. It is essentially a promissory note that facilitates borrowing and lending without the involvement of banks or other financial institutions. Hundi transactions are often conducted on trust and are prevalent in traditional businesses.

Section 69D applies in the following situations:

1. An assessee borrows any amount on a hundi.
2. An assessee repays any amount due on a hundi.
3. The borrowing or repayment occurs otherwise than through an account payee cheque drawn on a bank.

Implications on Income Tax

Section 69D is applicable when the taxpayer is unable to provide a satisfactory explanation for the source of funds related to Hundi transactions. In such cases, the amount borrowed or repaid on Hundi is treated as income and taxed under the provisions of the Income Tax Act.

It is important for individuals and entities involved in Hundi transactions to maintain proper records and documentation to establish the source of funds. This documentation can include loan agreements, promissory notes, receipts, and other relevant evidence. By maintaining proper records, taxpayers can provide a satisfactory explanation to the tax authorities, thereby avoiding any adverse consequences.

It is worth mentioning that Section 69D applies not only to the amount borrowed on Hundi but also to the amount repaid. This means that if a taxpayer repays an amount borrowed on Hundi without being able to explain the source of funds, the repayment will be considered as income and taxed accordingly.

Penalties and Consequences

Failure to provide a satisfactory explanation for the amount borrowed or repaid on Hundi can result in adverse consequences for taxpayers. In such cases, the amount will be treated as income from undisclosed sources, leading to taxation at the highest marginal rate applicable to the taxpayer.

In addition to the tax liability, taxpayers may also be subject to penalties under the Income Tax Act. Section 271(1)(c) of the Act imposes a penalty of 100% to 300% of the tax amount evaded or sought to be evaded. The specific penalty amount depends on the circumstances and the severity of the non-compliance.

Key Points to Note

Here are some key points to note regarding Section 69D:

• Section 69D applies to both individuals and entities.
• The burden of proof lies on the taxpayer to satisfactorily explain the source of the borrowed or repaid amount.
• If the taxpayer fails to provide a satisfactory explanation, the amount may be treated as taxable income.
• It is important to maintain proper documentation and records to support the source of funds in case of any scrutiny by the income tax department.
• Section 69D is aimed at curbing and discouraging unaccounted or undisclosed income.

7.  Taxation of cash credits, unexplained money, unexplained investments etc. covered under sections 68, 69, 69A, 69B, 69C & 69D [Section 115BBE]

(1) Cash credits, unexplained money, unexplained investments etc. to be taxed 60% [Section-115BBE (1)]:

Where the total income of an assessee,—

(a)        includes any 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

(b)        determined by the Assessing Officer 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),

the income-tax payable shall be the aggregate of—

(i)         the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate of 60%; and

(ii)        the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i).

(2) Expenditure or allowance or set off of any loss not to be allowed from above said incomes [Section 115BBE (2)]:

Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the Assessee under any provision of this Act in computing his income referred to in clause (a) or clause (b) of section 115BBE(1).

Since the term ‘or set off of any loss’ was specifically inserted only vide the Finance Act, 2016, w.e.f. 1.4.2017, an Assessee is entitled to claim set-off of loss against income determined under section 11 SBBE of the Act till the assessment year 2016-17. [Circular No. 11/2019, dated 19.6.2019]

(3)  Surcharge on income-tax in the above case

In respect of any income chargeable to tax under clause (1) of section 115BBE (1) of the Income- tax Act (‘see above,), the “advance tax” or the income-tax payable, as the case may be, shall be increased by a surcharge, for the purposes of the Union, calculated @ 25% of such advance tax or income-tax payable.