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, 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.

First Proviso:

Where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b)  such explanation in the opinion of the Assessing Officer has been found to be satisfactory.

Second Proviso:

Nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company.

Brief Analysis:

• According to Section 68 of Income Tax Act 1961, 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 of the same or the explanation offered by him is not satisfactory in the opinion of A.O., the sum so credited may be charged to income tax as the income of the assessee of that previous year.
• The basic precondition for the Section 68 is that the assessee should file a valid confirmation. Valid confirmation has no specific format but it must contain name, complete address of the lender. It is better if PAN of the lender is also obtained as, if no PAN given then ambit of doubt is far more for the AO. With the confirmation the AO must insist on some identity proof like copy of driving license, copy of passport, copy of ration card or election ID card etc.
• The confirmation so filed must indicate complete details of transactions (like mode- cash or cheque, with number date of cheque with bank details). The AO have right to demand the copy of bank account of the lender evidencing such transactions and the same needs to be filed. In case transaction is in cash then AO must demand cash flow statement of the lender, preferably containing details of opening balance and its source thereof.
• There must exist books of accounts before making addition under Section 68: The addition under Section 68 can be made on the basis of unexplained cash credit found in the books of the assessee, hence existence of books of an assessee is a condition precedent before an addition under Section 68 can be made.
• In Central Bureau of Investigation v. V.C. Shukla [1998] 3SCC 410, the Supreme Court has held that “Book” ordinarily means a collection of sheets of paper or other material, blank, written or printed, fastened or bound together so as to form a material whole. Loose sheets or scraps of paper cannot be termed as book for they can be easily detached and replaced.
• Additions in the Partner’s capital account-whether firm is liable to explain and whether addition can be made to firm’s income in such case under Section 68. In CIT v. Metachem Industries [2000] 245 ITR 160(MP), it has been held that where the assessee-firm had satisfactorily explained the credits standing in the name of its partners, the responsibility of the assessee stands discharged.
• Provision applies to all credit entries: In the cases where credit entry has been made in the books of the assessee, the ambit of Section 68 is wide and inclusive. Provision applies to all credit entries. The language of Section 68 shows that it is general in nature and applies to all credit entries in whomsoever name they may stand, that is, whether in the name of the assessee or a third party as held in the case of Gumani Ram Siri Ram v. CIT [1975] 98 ITR 337 (Punj. & Har.). The section has applicability even in the cases of search as Section 68 is a provision of general application and there is nothing either in Section 132 or Section 68 or elsewhere to exclude the application of this general provision to a case where the business premises or the residence of a person has been searched and the documents and other things seized under Section 132 of the Act. The presumption under Section 132(4A) does not override or exclude Section 68, that is, it does not obviate the necessity to establish by independent evidence the genuineness of the cash credits under Section 68, nor does it do away with the burden which is on the assessee to establish the requisites of cash credits as held in the cases of Pushkar Narain Sarraf v.CIT [1990] 183 ITR 388 (All.) and Daya Chand v. CIT [2001] 250 ITR 327 (Delhi).
• It is obvious by the above that the provision applies to non-commercial loans as well and it was precisely the same as held by the Hon. Calcutta High Court in the case of Kant & Co. v.CIT [1980] 126 ITR 63 (Cal.), observing that Section 68 does not make any distinction between commercial and non-commercial loans.
• Onus of proof:

Prima facie onus is always on the assessee to prove the cash credit entry found in the books of account of the assessee. In land mark cases like Kale Khan Mohammad Hanif v CIT [1963] 50 ITR 1 (SC), Roshan Di Hatti v CIT [1977] 107 ITR (SC) it has been held that the law is well settled that the onus of proving the source of a sum of money found to have been received by an assessee, is on him. Where the nature and source thereof cannot be explained satisfactorily, it is open to the revenue to hold that it is the income of the assessee and no further burden is on the revenue to show that the income is from any particular source. It may also be pointed out that the burden of proof is fluid for the purposes of Section 68. Once assessee has submitted basic documents relating to identity, genuineness of transaction and creditworthiness then AO must do some inquiry to call for more details to invoke Section 68.