Basic Provision
As per section 68, any sum found credited in the books of a taxpayer, for which he 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, may be charged to income-tax as the income of the taxpayer of that year. In case of a taxpayer being a closely held company (i.e., not being a company in which the public are substantially interested), if 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 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 has been found to be satisfactory. Further, where any amount is found credited in the books of an assessee by way of loan or borrowing or any such amount, the explanation of the assessee cannot be deemed to be 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. [Applicable w.e.f. Assessment Year 2023-24] The above discussed provisions shall not apply if the person, in whose name such sum is recorded, is a venture capital fund or a venture capital company as referred to in section 10(23FB).
Conditions to be satisfied for applicability of Section 68
From the reading of section 68, the following conditions can be stated to attract the applicability of section 68 :
Assessee has maintained 'books' There has to be credit of amounts in the books maintained by the taxpayer of a sum during the year. The taxpayer offers no explanation about the nature and source of such credit [As amended by Finance Act, 2022] found in the books or the explanation offered by the taxpayer in the opinion of the Assessing Officer is not satisfactory. If all the above conditions exist, sum so credited may be charged to tax as income of the taxpayer of that year.
Section 68 relevant case laws in case of firm
Books of accounts must be of assessee himself and not of any other assessee. In Smt Shanta Devi v. CIT [1998] 171 ITR 532 (P&H), it was held that a perusal of Section 68 would show that the expression books has been used with reference to the word assessee. In other words, such books of account have to be books of the assessee himself and not of any other assessee. Thus books of account of a partnership firm cannot be considered to be the books of account of the partner. Any cash credit shown therein cannot be brought to tax as income under Section 68 in the hands of the partners
CIT v. Kishorilal Santoshilal [1995] 216 ITR 9 (Raj.), where in it was held that In the case of cash credits in accounts of firm, the following points need be noted:
(i) there is no distinction between the cash credit existing in the books of the firm, whether it is of a partner or of a third party;
(ii) the burden to prove the identity, capacity and genuineness has to be on the assessee;
(iii) if the cash credit is not satisfactorily explained, the ITO will be justified to treat it as income from undisclosed sources;
(iv) the firm has to establish that the amount was actually given by the lender;
(v) the genuineness and regularity in the maintenance of the account has to be taken into consideration by the taxing authorities;
(vi) if the explanation is not supported by any documentary or other evidence, then the deeming fiction created by Section 68 can be invoked;
(vii) simply because the amount is credited in the books of the firm in the partner’s capital account, it cannot be said that it is not the undisclosed income of the firm and that in all cases it has to be assessed as an undisclosed income of the partner alone.
CAclubindia
