Cash credits under section 68- Amendment proposed by Finance Bill 2022
Presently, section 68 of the Income Tax Act, provides that any sum 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 satisfactory, in the opinion of the A.O., then 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. However, certain judicial pronouncements have created doubts about the onus of proof and the requirements of this section in the cases where the sum which is credited is as loan or borrowing.
Finance Act 2012 had made an amendment in section 68 of the Act which provided 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 the 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.
However, Finance Bill 2022 proposes the following amendment in the section 68 w.e.f. 1-4-2023:
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In section 68 of the Income Tax Act, with effect from the 1st day of April 2023- (i) In the first proviso, for the words “Provided that”, the following shall be substituted, namely- “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 to 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 A.O. aforesaid has been found to be satisfactory: Provided further that” |
Analysis:
The proposed amendment has an effect that from A.Y. 2023-24 and onwards, the assessee not only needs to provide satisfactory explanation regarding the source & genuineness of loans or borrowings credited in his books of accounts but the A.O. may also ask explanation from the lender of funds to explain the source of such funds. If the lender fails to give satisfactory explanation about the source and genuineness of the funds, such loan or borrowings may be added as unexplained cash credits to the total income of the assessee in respect of whom the enquiry is made by the A.O.
Exception to the proposed amendment:
The additional onus of proof of satisfactorily explaining the source in the hands of the creditor (lender) would not apply if the creditor (lender) is a well-regulated entity i.e. it is a venture capital fund, venture capital company registered with SEBI.
About Author: The author of this article is CA Naveen Goyal. He is having an experience of more than 15 years in the field of Direct Taxation as well as Indirect Taxation. For further queries, Whatsapp or contact on 09660930417
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