Section 68 of the Income Tax Act was introduced and made effective on April 1, 1962. It allows the Income Tax Department to verify the unexplained cash transactions in taxpayers’ books. Under Section 68, the taxpayers need to provide details of all the transactions in their accounts and their source to the Income Tax Department.
Read on to know the provision, applicability, and other vital information about Section 68 of the Income Tax Act.
Every taxpayer needs to pay income tax, if not explicitly exempted from tax provisions. If one fails to do so, he or she will have to provide the department with an explanation, and further, an Assessing Officer (AO) will assess the individual’s transactions.
As per this section of the Income Tax Act, if any sum is found in the assessee’s book of accounts, he or she cannot explain the source and the nature, then the Income Tax department will charge the sum as the person’s previous year income tax. Additionally, if an Assessing Officer finds the assessee’s explanation unsatisfactory, the sum will be deducted.
As a result, individuals need to provide every detail explaining the source of every cash transaction in their accounts.
A company where the general public has little to no involvement will be allowed a few special provisions. The Income Tax Department has designed these special provisions for closely held corporate taxpayers who try to evade taxes in the name of their company.
Company owners do this in the name of a third party or non-existing shareholders. Unfortunately, it is a practice that most corporate company owners adopt to park their unaccounted money in the company’s name. Moreover, these companies were not under any stringent regulations imposed upon widely held companies.
Any explanation that these companies provide to the Assessing Officer with regards to the sum credited in the form of share application money, shares premium, and share capital will be considered unsatisfactory unless:
This section will apply in the following situations:
Also Read: Section 285BA of Income Tax Act: Overview, Aggression Rule, How To Submit And More
One needs to fulfil two conditions for applicability of section 68 of the Income Tax Act. These conditions are:
This section contains the following three key elements:
1. Existence of accounting books
An assessee needs to keep a book of his or her accounts, which is the most important requirement. These books of accounts can include ledgers, daybooks, cash books and other such things. However, these should not contain loose pages or unbound books that are not meant to be kept as permanent accounts.
2. Money credit in the assessee’s book of accounts
The second most important prerequisite is the cash credit in the assessee’s book of accounts. Since this is a comprehensive part of section 68, it includes other items like gold and valuable items. Hence, there is no restriction on cash or credit entries.
3. Assessee’s incapability to provide reasonable and sufficient reasons
Finally, an important part of this section is a sufficient and reasonable explanation for the nature and source of cash credit in an assessee’s account books. An Assessing Officer should be satisfied with the assessee’s explanations, and failure to do so will invoke section 68.
As stated earlier, the Income Tax department will treat unexplained cash credit as income for the previous financial year. Further, the Income Tax department will tax an individual at a flat rate of 60%, and no benefit of the basic exemption limit will be available. Additionally, a surcharge of 25% and a penalty of 6% will also be levied. As a result, the final tax rate will amount to 83.25%, including cess.
Also Read: Section 115BBE Of The Income Tax Act: Sub-Sections, Tax Amount And When Is It Not Applicable
Individuals should accept payments via demand draft or account payee cheque as it will enable an individual to prove the identity and source of a payer.
Taxpayers should maintain “books” of their accounts to invoke section 68. Further, the Assessing Officer will not consider any loose sheets or scraps as anyone can replace these easily.
The book of accounts which contains the unexplained cash credit should belong to a taxpayer.
An Assessing Officer can ask various questions to the assessor. These questions can range from details on the payment method, a bank account of the lender and the evidence of the transaction/cash flow statement from the lender, etc. Hence, an assessee should collect the address and PAN number of the lender.
Every taxpayer has to pay their taxes on time and disclose their income properly. Moreover, Section 68 of the Income Tax Act governs an assessee’s income. Further, an exchequer has the right to check, seize and find out the real income of an assessee if the Income Tax department finds any unexplained cash credit in the taxpayer’s accounts. As a result, taxpayers should maintain books of all their accounts and collate additional documents.
Ans: The Income Tax department has explained the penal provision for unexplained cash credit under section 115BBE of the income tax and not in section 68. Further, this section takes references from sections 68, 69A, 69B, 69C and 69D to determine the penalty on a taxpayer’s income.
Ans: Black’s Law Dictionary defines “books of accounts as a detailed statement like debits and credits between-person; an account or records of debits and credits kept in a book.” Hence, it is a book that maintains a detailed account of all of an individual’s transactions in the previous year. This also includes records of the sale of goods and rendering of services. Moreover, this comes in handy while proving the transactions before an Assessing Officer.
Ans: Assessee is a term used to define an individual liable to pay taxes to the government on any income earned or losses incurred during a particular assessment year. Every year individuals need to pay their taxes to the government based on their previous financial year’s income. Hence, the IT department treats every taxpayer as an assessee.
Ans: IT department has proposed that there will be an amendment in provisions of Section 68 of the Income Tax Act. Further, this amendment will take effect from April 1, 2023, applicable from 2023-24 assessment years.
Ans: Under Section 68 of the Income Tax Act an Assessing Officer has the right to take decisions according to his/her best judgement if an assessor’s explanation is unsatisfactory. To avoid this, taxpayers should provide a detailed history of all transactions on their book of accounts.
How to Claim Leave Travel Allowance? – Benefits, Documents Required and ExemptionsWhat is Leave Travel Allowance? Leave Travel Allowance or LTA, also known as Leave Travel Conces... Read More »
Section 194B – TDS on Lottery, Games, Betting and Game ShowsWhat is Section 194B of Income Tax Act? Section 194B of Income Tax Act, 1961 states that winning... Read More »
What are the Sources of Public Revenue for Government? – Major Tax and Non-tax SourcesThe government undertakes many initiatives and projects aimed at economic growth and progress. This... Read More »
PF Withdrawal Rules 2023 – Rules, Documents Required and TypesEPF/PF Withdrawal Employees’ Provident Fund (abbreviated as EPF) is a popular retirement... Read More »
How to Withdraw PF Amount? – Steps, Eligibility, and Status CheckEmployees Provident Fund (EPF) is a government-backed retirement savings scheme. It falls under the... Read More »
Cess on Income Tax: Overview, Types and CalculationWhat is Cess on Income Tax? Cess is an additional tax on taxes imposed by the central government... Read More »
Short-Term Capital Gains Tax Under Section 111A of the Income Tax ActWhat is Section 111A of the Income Tax Act? Section 111A of the Income Tax Act deals with taxati... Read More »
Old vs New Tax Regime – Which One is More Beneficial in 2023?The government introduced a new tax regime in FY 20-21 in addition to the existing regime and revis... Read More »
Form 26AS – How to View and Download Form 26AS Online?What is Form 26AS? Form 26AS is a consolidated tax statement issued by the Income Tax Department... Read More »
Deductions on Salary Under Section 16 of the Income Tax Act, 1961Section 16 of Income Tax Act, 1961 Section 16 of the Income Tax Act, 1961 mentions allowances an... Read More »
Section 192A of Income Tax Act : TDS on EPF WithdrawalSection 192A of Income Tax Act Section 192A of the Income Tax Act is related to TDS or Tax Deduc... Read More »
Income Tax Deduction Under Section 80EE on Home Loan InterestWhat is Section 80EE of the Income Tax Act? Section 80EE of the Income Tax Act, 1961 was formula... Read More »
Top 10 Chit Fund Schemes in India in 2023Chit funds are one of the most popular return-generating saving schemes in India. It is a financial... Read More »
10 Best Gold ETFs in India to Invest in March 2023Gold ETFs or Gold Exchange Traded Funds are passively managed funds that track the price of physica... Read More »
10 Best Demat Accounts in India for Beginners in 2023Creation of Demat accounts revolutionised the way trades were conducted at the stock exchanges.&nbs... Read More »
20 Best Index Funds to Invest in India in March 2023What is an Index Fund? An index fund is a type of mutual fund or exchange-traded fund (ETF) that... Read More »
Best Arbitrage Mutual Funds to Invest in India in March 2023Arbitrage funds are hybrid mutual fund schemes that aim to make low-risk profits by buying and sell... Read More »
10 Best SIP Plans in India to Invest in March 2023What is SIP? SIP or Systematic Investment Plan is a method of investing a fixed amount in ... Read More »
10 Best Corporate Bond Funds in India to Invest in March 2023Corporate bond funds are debt funds that invest at least 80% of the investment corpus in companies ... Read More »
10 Best Bank for Savings Account in India 2023 – With Interest RatesSavings account is a type of financial instrument offered by several banks. It lets you safely depo... Read More »
All information is subject to specific conditions | © 2023 Navi Technologies Ltd. All rights are reserved.
Start Small. Dream Big.
Start your Investment Journey with just ₹10