Section 68 explained is one of the most litigated provisions under the Income-tax Act. Whenever unexplained cash credits, share capital, or loans appear in the books of an assessee, the Assessing Officer frequently invokes section 68, leading to additions during scrutiny or reassessment.
Section 68 Explained – Cash Credits, Share Capital and Loans
Section 68 of the Income-tax Act, 1961 empowers the Assessing Officer to treat any unexplained credit appearing in the books of an assessee as income of that year. In simple terms, if money is found credited in the books and the assessee is unable to satisfactorily explain its nature and source, the amount so credited may be deemed to be the income of the assessee for that previous year and subjected to tax.
When does Section 68 get triggered?
Section 68 gets triggered when a credit entry appears in the books of account of the assessee during a previous year. The trigger point is not the receipt of money alone, but the presence of a credit in the books maintained by the assessee.
Additions under section 68 commonly arise during scrutiny or reassessment proceedings. The Assessing Officer typically invokes section 68 in scrutiny assessments, reassessment proceedings, or faceless assessments where the identity of the creditor, creditworthiness, or genuineness of the transaction is found to be unsatisfactory or inadequately explained.
Common situations covered under Section 68
In practice, Section 68 is invoked in a wide range of factual situations. Some of the most common scenarios include:
- Cash credits in bank accounts
- Share capital and share premium
- Unsecured loans
- Advances and deposits
Cash credits in bank accounts
Where unexplained cash is deposited in bank accounts and reflected in the books of the assessee.
Share capital and share premium
Frequently seen in the case of closely held companies, where the identity, creditworthiness, or genuineness of shareholders is questioned.
Unsecured loans
Loans received from individuals or entities where confirmations, bank statements, or financial capacity are not satisfactorily established.
Advances and deposits
Amounts received as advances or deposits which the assessee is unable to properly explain or substantiate.
What the Assessing Officer usually alleges
In most Section 68 cases, the Assessing Officer alleges that the assessee has failed to discharge the burden cast under law. The common allegations typically include lack of proper identity of the creditor, absence of creditworthiness, and failure to establish the genuineness of the transaction.
In cases involving companies, especially private limited companies, the allegation is often that the share applicants or lenders are paper entities or accommodation entry providers. In cash credit cases, the Assessing Officer frequently treats the explanation as unsatisfactory due to absence of contemporaneous evidence.
Legal position under Section 68 (law + burden of proof)
The settled legal position under Section 68 is that the initial burden lies on the assessee to explain the nature and source of the credit. This burden is generally discharged by establishing three key elements: identity of the creditor, creditworthiness of the creditor, and genuineness of the transaction.
Once the assessee places primary evidence on record in support of these three elements, the onus shifts to the Assessing Officer to rebut the same with cogent material. The Assessing Officer cannot reject the explanation on mere suspicion, conjectures, or general observations without carrying out further enquiry.
Important judicial precedents on Section 68
Courts have consistently held that Section 68 cannot be applied mechanically and that the explanation offered by the assessee must be examined objectively. Judicial precedents have clarified that once the assessee establishes identity, creditworthiness, and genuineness through primary evidence, the burden shifts to the Revenue.
It has also been held that additions under Section 68 cannot be sustained merely on the basis of general investigation reports or third-party statements without providing opportunity of cross-examination or bringing specific adverse material on record.
How to respond to a Section 68 notice (practical steps)
A response to a Section 68 notice must be factual, structured, and supported by documentary evidence. The first step is to identify the exact credit questioned by the Assessing Officer and the nature of the allegation raised.
The assessee should then place on record documents establishing the identity of the creditor, financial capacity, and the genuineness of the transaction. A clear written explanation addressing each allegation in the notice should be filed, avoiding vague or generic submissions.
Where the explanation and evidence are already on record, it is advisable to specifically refer to the documents filed and request the Assessing Officer to carry out independent verification instead of drawing adverse inference.
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Documents typically required to defend Section 68 addition
The documents required to defend an addition under Section 68 depend on the nature of the credit. However, in most cases, the Assessing Officer expects primary evidence such as confirmations from the creditor, bank statements reflecting the transaction, and financial statements demonstrating creditworthiness.
In cases involving share capital or loans, supporting documents like PAN details, income-tax returns of the creditor, audited financials, and relevant agreements are generally required. Proper collation and presentation of these documents plays a critical role in the outcome of the proceedings.
Common mistakes taxpayers make
One of the most common mistakes taxpayers make is filing a casual or incomplete reply to a Section 68 notice without properly understanding the allegation. Another frequent error is relying solely on explanations without supporting documentary evidence.
Taxpayers also tend to ignore procedural safeguards, such as seeking cross-examination where additions are based on third-party material, or failing to specifically rebut adverse observations made by the Assessing Officer. These lapses often weaken an otherwise defensible case.
Frequently asked questions (FAQs)
Can Section 68 be applied to bank passbook entries?
Courts have held that a bank passbook by itself is not the books of account of the assessee. However, where such entries are reflected in the assessee’s books, Section 68 may be examined.
Is Section 68 applicable to share capital received by companies?
Yes, Section 68 applies to share capital and share premium, especially in the case of closely held companies, subject to the assessee establishing identity, creditworthiness, and genuineness.
Can addition under Section 68 be made without enquiry?
No. Once the assessee furnishes primary evidence, the Assessing Officer is required to conduct further enquiry and cannot make additions on mere suspicion.
For statutory reference, taxpayers may also refer to the Income-tax Act provisions available on the official Income-tax Department website.
Related Reading
- Section 69 & 69A Explained: Unexplained Investments, Money and Cash Deposits
- 143(2) Notice – When It Is Valid and When It Can Be Challenged
- 142(1) Notice – How to Respond Without Creating Problems
- Received a 148A Notice? What to Do Within 48 Hours
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