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2020

Treatment of Unexplained Transactions under the Income Tax Act, 1961

Treatment of Unexplained Transactions under the Income Tax Act 1961

This Article discusses Tax Treatment of Cash Credit, Unexplained investments, Unexplained money, Amount of investments not fully disclosed in books of account, Unexplained expenditure and Amount borrowed or repaid on hundi in cash under section 68, Section 69, Section 69A, Section 69B, Section 69C and Section 69D respectively of the Income Tax Act, 1961.

Tax Treatment of Cash Credits:

  • The provisions relating to tax treatment of cash credit are given in section 68.
  • As per section 68, any sum credited in the books during the financial year of a taxpayer, for which he offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, may be charged to income-tax as the income of the taxpayer of that year.
  • In case of a taxpayer being a closely held company (i.e., not being a company in which the public are substantially interested), if the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such company shall be deemed to be not satisfactory, unless:
    • The person, being a resident in whose name such credit is recorded in the books of such company, also offers an explanation about the nature and source of such sum so credited; and
    • Such explanation in the opinion of the Assessing Officer has been found to be satisfactory.
  • The above discussed provisions of share application money, share capital, etc., shall not apply if the person, in whose name such sum is recorded, is a venture capital fund or a venture capital company as referred to in section 10(23FB).

Key Points to be Noted:

  • It is advisable to accept payments through account payee cheque or demand draft which enables the taxpayer to know the identity of payer
  • Assessing officer may ask for various details such as mode of payment, bank account of the lender evidencing the transaction/cash flow statement of the lender etc. It is advisable to collect address /PAN of the depositor in order to collate necessary documents as and when the need arises.
  • Existence of ‘books’ is necessary to invoke Section 68. Loose sheets or scraps of paper cannot be termed as book as they can be easily detached and replaced.
  • Books of accounts in which unexplained cash credit is found must be of the taxpayer


Other Provisions to be kept in Mind:

Apart from the provisions relating to taxing of cash credit given under section 68, similar provisions are designed under section 69, 69A, 69B, 69C and 69D in respect of certain other items. The provisions in this regard are as follows:

Unexplained Investments (Section 69):

  • Where in a year the taxpayer has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and he offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, than the value of the investments may be deemed to be the income of the taxpayer of such year.

Unexplained Money, etc. (Section 69A):

  • Where in any year the taxpayer is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the taxpayer offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, than the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the taxpayer for such year.

Amount of Investments, etc., not fully disclosed in Books of Account (Section 69B):

  • Where in any year the taxpayer has made investments or is found to be the owner of any bullion, jewellery or other valuable article, and the Assessing Officer finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the taxpayer for any source of income, and the taxpayer offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, than the excess amount may be deemed to be the income of the taxpayer for such year.

Unexplained Expenditure, etc. (Section 69C):

  • Where in any year the taxpayer has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, then the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the taxpayer for such year.
  • Aforesaid unexplained expenditure which is deemed to be the income of the taxpayer by virtue of section 69C shall not be allowed as a deduction under any head of income.

Amount borrowed or repaid on Hundi (Section 69D):

  • Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to, any person otherwise than through an account-payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the such amount. It will be treated as income for the year in which it was borrowed or repaid, as the case may be.
  • However it should be noted that if any amount borrowed on a hundi has been treated as income of any person by virtue of section 69D, than such person shall not be liable to be assessed again in respect of the same amount on repayment thereof.
  • Amount repaid shall include the amount of interest paid on the amount borrowed.

Tax Rates Applicable to Amount charged to Tax by virtue of Sections 68, 69, 69A, 69B, 69C and 69D:

  • As per Section 11 5BBE, income tax shall be calculated at 60% where the total income of assessee includes following income:
    • Income referred to in Section 68, Section 69, Section 69A, Section 69B, Section 69C or Section 69D and reflected in the return of income furnished under Section 139; or
    • Which is determined by the Assessing Officer and includes any income referred to in Section 68, Section 69, Section 69A, Section 69B, Section 69C or Section 69D, if such income is not covered under clause (a).
  • Such tax rate of 60% will be further increased by 25% surcharge, 6% penalty, i.e., the final tax rate comes out to be 83.25% (including cess). Provided that such 6% penalty shall not be levied when the income under Section 68, 69, etc., has been included in return of income and tax has been paid on or before the end of relevant previous year.
  • No deduction in respect of any expenditure or allowance [or set off of any loss] shall be allowed to the assessee in computing his income referred to in clause (a) of sub-section (1) of Section 115BBE.
 

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