Ever wondered what happens when the tax department notices an unexpected credit in your account and you don’t have a solid explanation for it? That’s where Section 68 of the Income Tax Act steps in. It’s one of those key provisions used by tax authorities to plug tax evasion loopholes, especially in cases where income is concealed as “loans”, “gifts”, or even “capital”.
If you’re a business owner, startup founder, salaried professional, or even someone who just received a hefty loan or gift, Section 68 can apply to you. The consequences? A tax at 60% plus an additional surcharge and cess, with no deductions allowed, and often, a legal headache.
Let’s decode this provision in a way that’s easy to understand, actionable, and keeps you on the right side of the taxman.
What Is Section 68 of the Income Tax Act?
Section 68 is all about unexplained credits found in your books of accounts. If any sum is found credited and you either
- Don’t explain the nature and source of the credit, or
- Give an explanation that the Assessing Officer (AO) finds unsatisfactory.
Then the entire amount is treated as your income and taxed accordingly.
Applies to
- Individuals
- Hindu Undivided Families (HUFs)
- Partnership Firms
- LLPs and Companies
Even if you think it’s just a friendly loan from your cousin or a gift from your uncle abroad, without proper documentation and explanation proving the source and genuineness, it can become taxable under Section 68.
When Does Section 68 Apply?
Let’s look at some situations where this section comes into play.
- Unsecured loans that don’t have proper lender details
- Gifts received without valid documentation
- Share capital and premium in private companies without proof of source
- Credits in books during tax scrutiny with no justifiable source
- Sudden deposits in bank accounts that don’t match declared income
It’s not just about money received, but also about proving where it came from and that the source itself had the capacity to give it to you.
Burden of Proof: Who Has to Justify the Cash Credit?
The onus is on you, the assessee, to prove:
- Identity of the creditor or donor
(E.g., PAN, Aadhaar, or Passport)
- Genuineness of the transaction
(Bank statement showing the transaction)
- Creditworthiness of the lender/donor
(ITR, salary proof, or financials)
If you fail to prove any of these three, the AO is well within their rights to treat the amount as your income under Section 68.
However, for share application money/share capital/share premium in private companies, not only the company but also the person in whose name such credit is recorded must satisfactorily explain the source, except in cases involving registered venture capital funds or companies.
Key Judicial Interpretations of Section 68
1. CIT v. Orissa Corporation Pvt. Ltd.
If the assessee provides basic information and the creditor doesn’t respond to summons, the assessee cannot be penalized.
2. CIT v. Precision Finance Pvt. Ltd.
The creditor’s identity and capacity must be proven, not just the fact that money came in.
3. CIT v. Divine Leasing & Finance Ltd.
In the case of share capital in closely held companies, the company must establish the identity, genuineness, and creditworthiness of shareholders.
Recent cases reaffirm that documentation and substantial evidence are essential for additions under Section 68. The Supreme Court and High Courts have held that simply filing documents is not enough if transactions lack substance or genuineness. Additions solely based on investigation reports without substantive evidence have been set aside.
Tax Implications Under Section 68
Once the AO invokes Section 68, the sum is treated as income for the year. But here’s the real sting:
Taxation under Section 115BBE
- Flat Tax Rate: 60%
- Surcharge: 25% of tax
- Health & Education Cess: 4% on total of above
- Total Effective Tax Rate: up to 78%
- No deduction for any expenditure, allowance, or loss is allowed against this income.
- If the undisclosed income is found during search/assessment and not disclosed voluntarily, an additional penalty of 10% under Section 271AAC may be levied, raising the total liability to as much as 84%–137% in certain cases.
- For all intents and purposes, it’s treated as black money.
How to Avoid Section 68 Notices
If you’re receiving money—be it loans, gifts, or capital—you need to:
- Maintain all supporting documents (bank statements, gift deeds, affidavits)
- Verify the identity and capacity of the person providing funds
- Use legal and banking channels (avoid cash)
- Ensure all records are available during scrutiny
- File disclosures proactively in your ITR where needed
In short, don’t just receive money. Be ready to explain it.
Documents Required to Justify a Cash Credit
| Type of Credit | Required Documents |
| Loan from individual | PAN, Aadhaar, ITR, Bank statement, Loan agreement |
| Gift from relative | Gift deed, PAN of donor, occasion of gift |
| Share capital | Investor KYC, ITR, source of investment, Bank statement, Share certificate, Board Resolution & Allotment Letter, PAS 3 filed with ROC, Share valuation report if applicable |
| Deposits in business books | Source proof, invoice (if sales), bank entries |
Section 68 vs Related Sections: 69, 69A, 69B, 69C
| Section | Nature of Income | When It Applies |
| 68 | Unexplained cash credit in books | Found during scrutiny of accounts |
| 69 | Unexplained investments | Not recorded in books |
| 69A | Unexplained money/assets | Found during raids/search |
| 69B | Investment amount understated | AO believes it cost more than declared |
| 69C | Unexplained expenses | Expenses not justified with source |
All above sections (68 to 69C) attract tax at 60% + 25% surcharge + 4% cess if the income is deemed under these sections, with no deductions or set-off allowed.
Common Mistakes That Lead to Section 68 Scrutiny
| Mistake | Impact |
| Accepting large cash without documentation | Treated as income under 68 |
| Not verifying PAN or financials of lenders | Burden of proof fails |
| Mixing personal and business accounts | Creates confusion in source tracing |
| Failing to respond to AO notices | Leads to automatic addition to income |
| Ignoring KYC of share investors | Can attract Section 68 even if money is received in bank |
DOs and DON’Ts to Stay Compliant
| DOs | DON’Ts |
| Use banking channels for loans and gifts | Accept or lend cash beyond ₹20,000 |
| Keep documentation for all credits | Enter oral agreements or keep undocumented receipts |
| Respond to AO notices on time | Ignore small discrepancies; they add up |
| Conduct investor/lender due diligence | Assume PAN is enough. Verify ITR too |
Conclusion: Transparency is Your Best Friend
Section 68 may sound harsh, but it’s not meant to penalize honest taxpayers. It targets those trying to hide income under the guise of loans, gifts, or investments. In an age of digital banking and real-time scrutiny, staying transparent isn’t just good practice—it’s essential.
Whether you’re a startup raising funds, a salaried person receiving a large gift, or a business accepting capital—have your paperwork ready, stay honest, and file smart.
A little caution today could save you a tax nightmare tomorrow.
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