[Opinion] Tax Treatment of Loans and Cash Credits Under Section 68

Narayan Jain & Dilip Loyalka – [2026] 187 taxmann.com 1040 (Article)

1. Introduction

According to section 68 (Corroborating to section 102 of the Income Tax Act 2025), where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not satisfactory in the opinion of the A.O., the sum so credited may be charged to income tax as the income of the assessee of that previous year. This chapter seeks to deal with the circumstances in which the A.O. may consider such sum as cash credit due to lack of sufficient explanation.

It is well known that the whole catena of sections starting from section 68 have been introduced into the taxing enactments step by step in order to plug loopholes. Even long prior to the introduction of section 68 in the statute book, courts had held that where any amounts were found credited in the books of the assessee in the previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was, in the opinion of the ITO, not satisfactory, the sums so credited could be charged to income-tax as income of the assessee of a relevant previous year. Section 68 was inserted into the I.T. Act, 1961, solely to provide statutory recognition to a principle that had clearly emerged in judicial decisions. The whole history and purpose of the introduction of sections 68 to 69D (corroborating sections 102, 103 to 106 of the Income Tax Act 2025) and the judicial decisions clearly establish the proposition that these sections are only clarificatory.

W.e.f. Asst. Year 2013-14, section 68 has been amended to provide that if a closely held company fails to explain the source of share capital, share premium or share application money received by it to the satisfaction of the A.O., the same shall be deemed to be the income of the company u/s 68. The Taxation Laws (Second Amendment) Act, 2016, has amended section 115BBE W.e.f. Asst. Year 2017-18, prescribing a higher rate of 60% as tax and on that 25% Surcharge. The tax is payable u/s 115BBE in respect of income deemed u/s 68, 69 , 69A , 69B , 69C , and 69D . In case the assessee himself does not declare in his return the said incomes under those sections and the A.O. makes the addition, then the A.O. may also impose a penalty u/s 271AAC of 10% of income tax payable u/s 115BBE. We have dealt the issue of Specified Bank Notes (SBN) permitted for certain purposes during demonetisation period vide Notification S.O. 3408E dated 8th November, 2016 and subsequent Notifications dated 9th November, 2016, 10th November, 2016, 11th November, 2016, 13th November, 2016, 14th November, 2016, 17th November, 2016, 18th November, 2016, 20th November, 2016, and 24th November, 2016.

The Finance Act, 2022 has made an amendment to sec. 68 and a proviso has been inserted w.e.f. asst. year 2023-24, which provides that in case of loans or borrowings or any such amount credited in the books of any assessee, any explanation offered by the assessee shall be deemed to be not satisfactory unless the person on whose name such credit is recorded in the books of the assessee also offers an explanation about the nature and source of such sum so credited and such explanation in the opinion of the AO has been found to be satisfactory. Now, the source in the hands of the creditor is also to be explained.
One needs to be very careful to properly explain the incomes u/s 68, 69, 69A, 69B, 69C, and 69D of the 1961 Act by discharging the onus to prima facie prove the identity, creditworthiness of the creditor and the genuineness of the transaction.

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