Cash Credits Section 68: Deemed Income, Taxability & Tax Rate Explained | CA Sandeep Rawat”

Cash Credits – Deemed Income and Taxability

Any sum found credited in the books of the taxpayer, for which he offers no explanation about the nature and source thereof or the tax authorities are not satisfied by the explanation offered, is termed as cash credit. This article explains the provisions relating to the tax treatment of cash credit under Section 68 of the Income Tax Act.

Basic Provisions of Section 68

As per Section 68, any sum credited in the books of a taxpayer for which no satisfactory explanation about its nature or source is provided may be charged to income-tax as the income of that year.

For a closely held company (not publicly held), if the credited sum consists of share application money, share capital, or share premium, the explanation is deemed unsatisfactory unless:

1. The person in whose name the credit is recorded offers an explanation of its nature and source.
2. The Assessing Officer finds the explanation satisfactory.

Note: These provisions do not apply if the person is a venture capital fund or venture capital company as referred in Section 10(23FB).

Conditions for Applicability of Section 68

• The assessee has maintained books of accounts.
• There is a credit of amounts in the books during the year.
• No satisfactory explanation about the nature/source of the credit is offered.
• In case of a closely held company, share-related credits require satisfactory explanation as mentioned above.

If all these conditions exist, the sum credited may be charged as income of the taxpayer.

Tax Rates Applicable on Cash Credits (Section 115BBE)

Income-tax on cash credits as per Section 115BBE is calculated at 60% of such income, further increased by:

• 25% surcharge
• 6% penalty

The effective tax rate comes out to 83.25% (including cess). The 6% penalty is not levied if the income under Section 68 is included in the return of income and tax is paid before the end of the relevant previous year.

No deductions, allowances, or loss set-offs are allowed for income taxed under Section 115BBE.

Professional Assistance

For further clarification and professional assistance, contact SRTConsultancy & Co. at sandeeprawatca@gmail.com.

Mr. Sandeep Rawat has vast experience & knowledge in Direct and Indirect Taxation. He is Cofounder & Managing Partner at SRTConsultancy & Co.