Understanding the tax treatment of unexplained cash credits under section 68 of the Income Tax act, 1961 vis-à-vis section 115BBE of the Income tax act, 1961.
Section 68 provides for charging tax on unexplained cash credits by virtue of section 115BBE of the Income tax act, 1961. First of all it is to be understood that what is “unexplained cash credit”, Unexplained Cash credit has not been specifically defined under the act, however it derives it meaning from the section 68 provisions, as any sum found credited in the books maintained for any previous year of a taxpayer/assesses for which he is unable to explain the nature and source thereof or his explanation in the opinion of tax authorities is not satisfactory shall be termed as unexplained cash credit.
It is to be borne in mind that cash credit does not mean only cash entries but also entries in bank, etc. If any such entry has been assessed as unexplained cash credit by the tax authorities then assesses has to pay tax as per section 115BBE of the Income tax act, 1961 @30.9% on unexplained cash credit amount in addition to the tax on other income i.e. income other than covered by section 68
Total tax = 30.9% (plus surcharge wherever applicable) on amount of unexplained cash credit
Income tax on other income at the rates applicable to such other income
Further being too specific for entries relating to issue of shares in private companies or closely held companies excluding the companies which are listed or companies in which public are substantially interested, etc., section 68 clearly provide a powerful hand to assessing officer to charge income tax at a flat rate of 30% by deeming the amount of share application money, share/securities premium, share capital, etc. as unexplained cash credit if no explanation is offered by the Company or explanation that has been offered is in the opinion of the assessing officer/tax authority as unsatisfactory for such credits. Also section provides that such explanation by the company shall be deemed to be not satisfactory, unless:
- The person [other than venture capital fund or a venture capital company as referred to in section 10(23FB) of the Income tax act, 1961] in whose name such credit has been recorded by the Company in the books or books of accounts offers an explanation about the nature as well as source of such sum so credited: and
- The explanation offered by such person is in the opinion of the assessing officer/tax authority is satisfactory.
Furthermore assessee cannot avail the benefit of basic exemption limit benefit if no taxable income is there and no deduction against the income deemed on account of amount of unexplained cash credit is allowed under any provision of the income tax act, 1961.
Therefore in nutshell following conditions shall exist for charging the amount of unexplained cash credit to income tax.
Conditions for applicability of an amount to be unexplained cash credit:
- Taxpayer has maintained books.
Section 2(12A) of the Income tax act, 1961 defines books as ““books or books of account”
includes ledgers, day-books, cash books, account-books and other books, whether kept in the
written form or as print-outs of data stored in a floppy, disc, tape or any other form of electro-
magnetic data storage device”.
- In such books or books of account there has to be credit of a sum during the year.
- Taxpayer is unable to explain the nature and source of such credit as found in books or books of accounts or taxpayer explanation is found unsatisfactory by assessing officer/ tax authorities
- In case of closely held companies if sum so credited is on account of share application money, share capital, share/securities premium or any such amount by whatever name called and the person in whose name such credit has been recorded in the books or books of accounts of such company offers no explanation or explanation as offered by such person about the nature & source of such credit is found to be unsatisfactory by the assessing officer/tax authorities,
Thus it has to be borne in mind that tax at a flat rate of 30% (thirty percent) is applicable even if assessee has no income chargeable to income tax or has declared loss in his return.