Extend the scope of unexplained cash loans

The cash credit provisions under section 68 of the Income Tax Act 1961 will remain one of the most controversial, debated and ever-changing “rules” under the law. The main purposes are to curb the production and circulation of unaccounted money, the concealment of unaccounted money by showing it as lent or deposited with them by third parties, showing unaccounted money as their “own principal” or the loan presumed to be repaid and other illegal activities. practices.

The clarifying provision statutorily authorized an income tax assessment officer to “assess” “unexplained cash credits” as “income” and add them to that assessed person’s “total income” and to collect applicable taxes.

Similar provisions aimed at preventing the circulation of unrecorded money under the guise of “investments” in private companies, appropriate amendments were made to the Finance Act 2012, in which “any sum” credited as share capital or share premium on the books of privately owned companies should be treated as “satisfactorily explained” only if the “source of funds” has been truly explained and proven beyond reasonable doubt.


There are three key ingredients in Section 68 – the existence of books of account, the recording of credit, and the lack of a satisfactory explanation from the assessee.

What can be called account books? It means a collection of sheets of paper bound with the intention that this binding be permanent and the papers used collectively in one volume. In accordance with income tax provisions, books or books of account include ledgers, daybooks, cashbooks and other books, whether kept in written form or in the form of printouts of data.

Can bank books be considered account books? No, the Bombay High Court in CIT v Bhaichand H Gandhi, 141 ITR 67 held that the passbook provided by the bank to the assessee cannot be considered as the books of account.

Can drafts be considered account books? Yes, Delhi High Court in Hazi Nazir Hussain v ITO 271 ITR (AT) 14, held that where assessee failed to provide satisfactory explanation for cash credits recorded in gross books, it can be valued as the “income” of the valued.

Can a paper found during a search be considered as an account book? No, Majority of Supreme Court Justices in Shukla (VC) JT and LK Advani on Crl. Review Petition No. 265 of 1996 ruled that a piece of paper found in “research” does not fall within the meaning of “books of account”. The second ingredient is a “credit entry”, which is general and inclusive in nature, therefore it applies to all types of “credit entries”.

The third ingredient is “lack of satisfactory explanation”, if an assessee offers no reasonable explanation, with respect to monies found credited to the books of account, the credits will be construed as “income” from sources not disclosed. According to the wording of the provision, it is the appraised, the appraised alone, who must provide the explanation, whether initially or subsequently.

Valuation agent and his discretion

Since the word “may” used in Section 68, it can be interpreted as “provision” has provided discretion to an assessment officer whether or not to apply a particular credited sum as income. Nevertheless, even in the absence of a “satisfactory explanation”, it is not open or necessary to treat all cash credits as income in the hands of the assessee. Hon’ble Calcutta High Court in Hindustan Tea Trading Co. Limited v. CIT 263 ITR 289 held that an appraisal officer cannot act unreasonably and that his opinion must be based on relevant facts.

Burden of proof – On whom?

The golden rule of evidence requires the assessee to explain any sums found credited to their books of account. However, this does not absolve the appraiser of the responsibility to prove that the cash credit is part of the appraisee’s total income and his assertion must be substantiated. If the prima facie inference to the fact is that the assessee’s explanation is satisfactory, then responsibility shifts to the tax authorities.

Finance Bill 2022

Does Article 68 cover hidden lending or borrowing? To curb the pernicious practice of converting unaccounted money into crediting by a charade of lending or borrowing, it has been proposed to introduce a “clarifying amendment” to the law, so as to provide that the nature and the source of any monies, whether in the form of loans or borrowings credited to the books of an assessee are only considered “explained” if the “source of funds” is also explained in the hands of the creditor or input provider. The proposed amendment will come into force on April 1, 2023 and will therefore apply from tax year 2023-24.

Final remarks

Recently, a senior official assured that the proposed changes are only anti-avoidance measures targeting tax evaders and will not harass genuine taxpayers. Article 68 plays a crucial role with regard to “income”. In the days ahead, it will be extremely difficult for assessees and businesses to engage in malicious practices such as tax evasion. Before parting, it is worth recalling the words of Nani Palkhivala, the greatest jurist “If tax evasion is widespread, it may be wiser to seek the cause in the tax system than in the taxpayer”.

(The author is the founder and CEO of Shree Tax Chambers)

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