Section 68 – Statutory Provision

When any sum is credited in the books of an assessee: The assessee must explain the nature and source of such sum.
If no satisfactory explanation is provided, the sum may be treated as undisclosed income.

Classic Conditions under Section 68

To discharge the onus under Section 68, the assessee must prove:

• Identity of the creditor1.
• Creditworthiness of the creditor2.
• Genuineness of the transaction

Judicial Interpretation (Pre-Finance Act, 2022)

• Orissa Corporation Pvt. Ltd. (SC, 1986): Once the three pillars are proved, the burden shifts to the department.
• NRA Iron & Steel (SC, 2019): If initial explanation lacks credibility, deeper inquiry (including source of source) is permissible.

Finance Act, 2022 – Key Amendment

– Applicable from AY 2023-24 onwards
– Expanded scope of Section 68:
– Loans/borrowings now explicitly covered
– Introduced mandatory source of source requirement

Revised Provision Post-Finance Act, 2022

– For loans or borrowings:

• Assessee must explain nature and source
• Creditor must also explain their own source
• Failure results in addition as unexplained income

Exclusion

– The expanded requirement does NOT apply to creditors who are:

• SEBI-registered Venture Capital Funds (VCF)
• Venture Capital Companies (VCC)

Practical Implications

• Increased burden of proof on assessee
• Due diligence required not just on creditors but their fund sources
• Documentary evidence becomes crucial (bank statements, ITRs of creditors, fund trail, etc.)