Section 68 is a critical anti-evasion provision that targets unexplained sums credited in a taxpayer’s books of accounts. It ensures financial transparency by requiring taxpayers to justify the source and nature of cash credits, failing which the amount is treated as taxable income.
Key Features of Section 68
- Applicability
- Applies to all taxpayers(individuals, firms, companies, HUFs) maintaining books of accounts.
- Covers any sum credited, whether cash, cheque, or electronic transfer.
- Conditions for Invocation
- A sum is credited in the booksof the assessee.
- The assessee fails to explainits nature and source, or the explanation is unsatisfactory to the Assessing Officer (AO).
- Burden of Proof
- Lies on the assesseeto prove:
- Identity of the creditor(PAN, address, bank details).
- Creditworthiness(financial capacity to lend).
- Genuineness of the transaction(loan agreements, bank statements).
- Lies on the assesseeto prove:
- Special Provision for Companies
- Closely held companiesmust additionally prove:
- The investor’s identityand source of funds for share capital/premium.
- Exception: Venture capital fundsare exempt.
- Closely held companiesmust additionally prove:
Tax Treatment of Unexplained Cash Credits
| ASPECT | DETAILS |
| Tax Rate | 60% (flat) + 25% surcharge + 4% cess → Effective 78%. |
| No Deductions | No expenses, allowances, or loss set-offs allowed. |
| Penalty | 10% of tax (if undisclosed in ITR) → Total liability up to 84%. |
| ITR Disclosure | If declared and tax paid before year-end, no penalty applies. |
How to Avoid Section 68 Additions?
- Maintain Proper Books
- Ensure all credits are recorded with supporting documents.
- Verify Creditor Details
- Collect PAN, bank statements, and loan agreements.
- Prefer Banking Channels
- Use account payee cheques/draftsfor traceability .
- Explain Gifts/Advances
- Provide gift deeds, donor’s source proof(if applicable)
