68(2) Finance Act - Managing Finances

Section 68 of the Finance Act, 1968

Section 68 of the Finance Act, 1968, in India, introduced significant amendments to the Income Tax Act, 1961, primarily aimed at curbing tax evasion and addressing the issue of unexplained credits in the books of account of taxpayers. This section has been the subject of numerous interpretations and legal challenges over the years, making it a crucial aspect of Indian tax law.

The core of Section 68 stipulates that if any sum is found credited in the books of an assessee for any previous year, and the assessee offers no explanation about the nature and source thereof, or the explanation offered by them is not, in the opinion of the Assessing Officer (AO), satisfactory, then the sum so credited may be charged to income tax as the income of the assessee for that financial year. Essentially, it casts a burden on the taxpayer to prove the genuineness and source of any unexplained credit appearing in their books.

This provision is particularly relevant in cases involving shell companies, bogus share capital, and undisclosed income. Before Section 68 was enacted, it was often challenging for tax authorities to tax these unexplained credits because taxpayers could easily claim them as gifts or loans without providing credible evidence. The amendment shifted the onus of proof to the assessee.

Several key elements are crucial to understanding the application of Section 68:

Credit in Books: The section applies only if there is a credit entry in the books of account of the assessee. It does not apply to cash found during search operations, unless that cash is recorded in the books.
Assessee’s Explanation: The assessee must provide a satisfactory explanation about the nature and source of the credit. The AO will evaluate the credibility and genuineness of the explanation. This may involve the assessee producing documents, witnesses, or other evidence.
Assessing Officer’s Satisfaction: The AO has the discretion to determine whether the explanation offered by the assessee is satisfactory. This determination must be based on valid and objective reasons. If the AO is not satisfied, they can treat the credit as the assessee’s income.
Burden of Proof: The primary burden of proof lies on the assessee to prove the source and genuineness of the credit. However, once the assessee provides some evidence, the burden may shift to the AO to disprove the assessee’s claim.

Over the years, judicial precedents have clarified certain aspects of Section 68. For example, the courts have emphasized that the AO’s dissatisfaction with the assessee’s explanation should be based on tangible material and not merely suspicion. The courts have also addressed the issue of share application money, particularly where the genuineness of the shareholder is questioned. The assessee is generally required to prove the identity of the shareholder, the creditworthiness of the shareholder, and the genuineness of the transaction.

Section 68 remains a powerful tool in the hands of tax authorities to combat tax evasion. While it places a significant burden on taxpayers, it is considered necessary to ensure that all income is properly accounted for and taxed according to the law. Taxpayers need to maintain proper records and documentation to substantiate any credits in their books to avoid adverse consequences under this provision.