income tax
Undisclosed sources of income refer to earnings that have not been reported by the assessee in their income tax return and, consequently, taxes on these earnings have not been paid. The primary aim of the Income Tax Department is to ensure that all undisclosed income is subject to taxation.
Undisclosed income is taxable at a rate of 78%, which comprises 60% base tax, a 25% surcharge, and a 4% cess, as specified in Section 115BBE.
Cash Credit [Section 68]
If an assessee has any sums credited in their books of account for a previous year and fails to provide a satisfactory explanation regarding its nature and source, the Assessing Officer may treat that credited sum as income for that year.
Unexplained Loan or Borrowing: When the credited sum is a loan or borrowing, the explanation must thoroughly clarify the nature and source. If the explanation provided is deemed unsatisfactory by the Assessing Officer, it will not be accepted.
Unexplained Share Capital/Premium: For closely held companies, any credited sums related to share application money, share capital, or share premium require the resident individual in whose name the credit is recorded to explain the nature and source of the credited sum. This explanation must also satisfy the Assessing Officer.
Exemption for Venture Capital Funds: The above requirements do not apply if the individual is a registered Venture Capital Fund or Company with SEBI.
Unexplained Investments [Section 69]
If an assessee makes any investment during the financial year preceding the assessment year that is not recorded and does not provide a satisfactory explanation regarding its source and nature, the investment's value will be taxed as deemed income for that financial year.
Unexplained Money [Section 69A]
Should an assessee be found possessing money, bullion, jewellery, or other valuable articles not recorded in their books without a satisfactory explanation regarding the source of acquisition, such items may be deemed income for that financial year.
Amount of Investment Not Fully Disclosed in the Books [Section 69B]
For instance, if an assessee owns 500 grams of gold valued at ₹30,000 but has only recorded an expenditure of ₹20,000 for its acquisition, the Assessing Officer may add ₹10,000 (the difference) to the income if the assessee cannot provide a satisfactory explanation.
Unexplained Expenditure [Section 69C]
If any expenditure incurred in a financial year lacks an explanation regarding its source, or the explanation is deemed unsatisfactory by the Assessing Officer, then that unexplained expenditure may be treated as income of the assessee and will not be allowed as a deduction under any income head.
Amounts Borrowed or Repaid on Hundi [Section 69D]
A hundi is an unconditional order or contract ensuring a payment and is transferable through valid negotiation. If any amount is borrowed on a hundi or repaid without using an account payee cheque, the borrowed or repaid amount will be deemed income for the person borrowing or repaying in the previous year.
However, if an amount borrowed or repaid on a hundi has already been deemed income for any person, they will not be assessed again for that amount upon repayment, which includes any interest paid on the borrowed amount.
It is crucial for assessees to maintain accurate records of all income and expenditures and provide satisfactory explanations to the tax authorities to avoid the classification of income as undisclosed. Understanding these provisions helps in better tax compliance and minimizes the risk of potential tax liabilities.