Section 68 of the Income-tax Act, 1961: Cash Credits Explained

Section 68 deals with amounts credited in a taxpayer's books where the nature and source of the credit are not satisfactorily explained. It is particularly important for loans, borrowings, share application money, share capital and share premium.

What does Section 68 mean?

Where a sum is found credited in the books of an assessee maintained for a previous year, and the assessee offers no explanation about its nature and source, or the Assessing Officer considers the explanation unsatisfactory, the sum may be taxed as the assessee's income for that previous year.

The provision does not automatically treat every bank deposit as unexplained income. Its statutory trigger concerns a credit in the books maintained by the assessee, and the facts and evidence must be examined.

Conditions for invoking Section 68

1. The assessee maintains books for the relevant previous year.
2. A sum is found credited in those books.
3. The assessee gives no explanation of its nature and source, or the Assessing Officer finds the explanation unsatisfactory.

How can a cash credit be explained?

Assessments commonly examine the identity of the creditor, the creditworthiness or financial capacity of the creditor, and the genuineness of the transaction. Depending on the facts, supporting evidence may include PAN and identification details, bank statements, income-tax returns, financial statements, loan agreements, confirmations and contemporaneous records. A bank transfer alone does not conclusively establish genuineness.

Loans and borrowings: additional source-of-funds requirement

With effect from assessment year 2023-24, the first proviso to Section 68 covers credits consisting of loans, borrowings or similar amounts. The assessee's explanation is deemed unsatisfactory unless the person in whose name the credit is recorded also explains the nature and source of the sum and the Assessing Officer finds that explanation satisfactory. This is often described as examination of the source of the source.

Share application money, share capital and share premium

For a company in which the public are not substantially interested, the second proviso imposes an additional requirement where the credit is share application money, share capital, share premium or a similar amount. A resident person in whose name the credit is recorded must also explain its nature and source, and that explanation must satisfy the Assessing Officer.

The statutory venture capital exception applies to the specified venture capital fund or venture capital company referred to in Section 10(23FB), subject to the statutory wording.

Practical example

A private company records a loan of Rs. 20 lakh from an individual. The company supplies the loan agreement and bank transfer record, but the lender cannot explain where the funds originated. Subject to the facts and applicable exceptions, the Assessing Officer may regard the explanation as unsatisfactory under Section 68, including its loan proviso. The amount is not automatically taxable merely because the loan is large.

Tax consequences and related provisions

For additions under Section 68 governed by the 1961 Act, Section 115BBE provides a special tax regime, generally at 60% basic tax, with applicable surcharge and cess. Restrictions on deductions and set-off of losses also apply under that provision. Penalty consequences, including Section 271AAC, depend on the statutory conditions and facts. Rates and provisions under the 2025 Act should be checked separately for tax years governed by that Act.

Section 68 compared with nearby provisions

Income-tax Act, 2025: transition

The Income-tax Act, 2025 came into force on 1 April 2026. The new legislation reorganises and renumbers provisions; for a tax year beginning on or after that date, consult the current enacted text rather than assuming that Section 68 retains the same number. Earlier-year assessments, appeals and liabilities can continue under the applicable transitional rules.

Frequently asked questions

Does Section 68 apply only to cash deposits?

No. It concerns unexplained credits in books and may cover loans, borrowings, share capital and other credits, not merely physical cash.

Is PAN sufficient to prove a loan?

No. PAN can help establish identity, but creditworthiness, genuineness and any applicable source-of-funds requirements also matter.

Can an unexplained credit be taxed even if money came through a bank?

Yes. Banking-channel receipt is relevant evidence but does not by itself settle the statutory enquiry.

Official law and guidance

• Income Tax Department - Section 68, Cash credits
• CBDT Circular 23/2022 - explanation of 2022 amendment
• Income Tax Department - official e-filing portal
• Income Tax Department - legislation and resources

This article is general legal information, not advice for a particular assessment. Verify the law applicable to the relevant tax year.