Unexplained money is any money credited to a taxpayer for which the taxpayer cannot provide any explanation or information about the nature or source of the money from where he did earn.
Under the IT Act, any unexplained Income to a taxpayer’s account can be held as income to the taxpayer and taxable under Section 68 of the Income Tax Act.
Section 68 of the IT Act
The Income Tax Act states as under:
Where any amount is observed charged in the books of an assessee maintained for any previous year, and the assessee gives no explanation about nature and source thereof or the explanation given by him is not, in the view of the assessing officer are not adequate, the amount so credited may be charged to the income of the assessee of that previous year.
Where the assessee is a company and the amount so credited consists of share application money, share capital, premium or any such amount by whatever name called,
any information offered by such assessee-company shall be deemed to be not adequate, unless—
- a resident person whose name before-mentioned credit is recorded in the books of such company
also explains the nature and source of such sum so credited; and
- such an explanation in the mind of the A/O above-mentioned is satisfactory.
Analysis of Section 68
Section 68 of the IT Act was first introduced and active from 1st April 1962.
By the way of Section 68, the Income Tax department changes the rule of evidence and the onus to prove the genuineness of transactions to the taxpayer.
Thus, the taxpayer would be liable under the Income Tax Act to provide the details of the nature or source of money received in the account.
If a taxpayer is unable to explain the nature and source of money received, the money would be taxable under the Income Tax Act.
Special Provisions for Company
If a company accounts for money as share application money, then the person on whose name the credit is provided must also explain the nature and source of the income. Share application money is money received by a company for shares, against which shares have not yet been issued.
For example, if company XYZ Limited gets an amount of Rs.20 lakhs from XYZ Limited for purchase of shares, it would be accounted under Share Application Money. On the issue of shares, the amount would be transferred to the Share Capital account.
Proving Genuineness of Transaction
In cases, unexplained money credit in an account would relate to loans or credit received by the company from friends, family members, and private money lenders.
In such cases, the taxpayer is under the responsibility to prove the following criteria to avoid application of the deeming provision:
- Identity of his creditors;
- The capacity of creditors to advance money; and
- Genuineness of the transaction.
Penalty for Unexplained Cash Credit
The penalty provisions for unexplained money are covered under Section 115BBE of the Income Tax Act.
Where the total income of an assessee,
- includes any income referred to in section 68, 69, 69A, 69B, 69C or 69D and same was reflected in the Return of Income furnished under sec 139; or
- the AO determined includes any income referred to in section 68, 69, 69A, 69B,69C or 69D if such income is not covered under clause (a)
The income-tax payable shall be the sum of
- the amount of tax calculated on the income mentioned to in clause (a) and clause (b), at the rate of 60%.; and
- the amount of tax by which the assessee has been chargeable his total income has been reduced by the amount of income referred to in clause (i).
Thus, under Section 115BB, if the total income of a person includes unexplained income mentioned under Section 68, then the income tax payable would be calculated at a 60% rate.
Also, there is no deduction in respect of any expenditure or allowance or set-off of any loss would be allowed to the taxpayer in calculating his income mentioned in section 115BBE (1)(a).