Section 68 for unexplained credit before and after amendment by FA 2022

[Vivek Jalan]

Section 68 of the Act provides that where any sum is found to be 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, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

The onus of satisfactorily explaining such credits remains on the person in whose books such sum is credited. If such person fails to offer an explanation or the explanation is not found to be satisfactory then the sum is added to the total income of the person.

Vide Finance Act, 2012, it was provided that the nature and source of any sum, in the nature of share application money, share capital, share premium or any such amount by whatever name called, credited in the books of a closely held company shall be treated as explained only if the source of funds is also explained in the hands of the shareholder. However, in case of loan or borrowing, courts have held that only identity and creditworthiness of creditor and genuineness of transactions for explaining the credit in the books of account is sufficient, and the onus does not extend to explaining the source of funds in the hands of the creditor. This was considered to have led to the provision becoming ineffective in handling evasion when routed through a layered credit claim. Therefore, the provisions of Section 68 of the Act had been amended by FA 2022 so as to provide that the nature and source of any sum, whether in the form of loan or borrowing, or any other liability credited in the books of an assessee shall be treated as explained only if the source of funds is also explained in the hands of the creditor. However, this additional onus of proof of satisfactorily explaining the source in the hands of the creditor, would not apply if the creditor is a Venture Capital Fund, Venture Capital Company registered with SEBI.

However even before this amendment, to escape from rigors of Section 68 of the Act, onus was always on shoulders of assessee to explain source of share application money received by it from investor companies. Where Assessee did not furnish  details and particulars showing identity of investor companies, their capacity and credit worthiness and genuineness of transaction and main contention of assessee was only that assessee is a conduit company which received amount from 40 investors and further invested same to its main group company and impugned amount has already been taxed in hands of the main group company, the same was rejected. In the case of DHANWAN LEASING AND FINANCE COMPANY LTD. VERSUS ITO, WARD 2 (2) , INDORE - 2023 (2) TMI 698 - ITAT INDORE it was held that for establishing a factum of conduit company, the assessee is duty bound to establish that source companies are also group companies and assessee after receiving the amount further invested same by making investments in group company. Investor companies, who invested amount in assessee company as share application money, are not part of main group company. Assessee had also onus to prove that it is a conduit company and also establish identity, capacity and credit worthiness of investor companies and genuineness of transaction.

Hence, now after amendment of Section 68, the onus is on the assessee to establish the following –

1. The source of funds is also explained in the hands of the creditor.
2. Identity, capacity and credit worthiness of the creditor