Section 68 catches sums credited in your books; ss.69 to 69D catch investments, money, understated investments, expenditure and hundi borrowings that are not in the books at all. Anything brought to tax under these sections is charged under s.115BBE at 60% plus a 25% surcharge and cess — roughly 78% — with no deduction, no allowance and no set-off of loss, and a further 10% penalty under s.271AAC if you did not offer it in your return.
Section 68 is the only one of the family that needs books. It applies "where any sum is found credited in the books of an assessee maintained for any previous year" and the assessee offers no explanation of the nature and source, or an explanation the Assessing Officer does not find satisfactory. The classic burden is to establish three things about the creditor: identity, creditworthiness and genuineness of the transaction.
The rest of the family deal with things outside the books. Section 69 covers investments not recorded in the books. Section 69A covers money, bullion, jewellery or other valuable articles found in your possession and not recorded. Section 69B covers the case where the books record an investment or article but at less than the amount actually spent — the excess is charged. Section 69C covers unexplained expenditure, and it also denies any deduction for the expenditure so treated. Section 69D covers amounts borrowed or repaid on a hundi otherwise than by account payee cheque.
Section 68 has two special provisos. For a company in which the public are not substantially interested, share application money, share capital and share premium credited in the books are treated as unexplained unless the resident shareholder in whose name the credit stands also explains the nature and source of his own funds and the Assessing Officer accepts it — the "source of source" test, applicable from AY 2013-14. Investment by a SEBI-registered venture capital fund or venture capital company is excepted. The Finance Act 2022 extended a similar source-of-source requirement to loans and borrowings.
Section 115BBE is what makes all of this severe. Income referred to in ss.68, 69, 69A, 69B, 69C and 69D is taxed at 60%, on which a 25% surcharge and cess apply, taking the effective rate to about 78%. The section allows no deduction for any expenditure or allowance and no set-off of any loss against that income. The 60% rate came in with the Taxation Laws (Second Amendment) Act, 2016 and applies from AY 2017-18.
Section 271AAC adds a penalty of 10% of the tax payable under s.115BBE where the income was not included in the return and the tax was not paid; where 271AAC applies, the underreporting penalty under s.270A is not also levied on the same income.
The practical consequence is that the label matters. Business income assessed at ordinary rates against which brought-forward losses can be set off is a completely different outcome from the same figure recharacterised under s.68 or s.69A, even though the quantum is identical.
The difference between an addition sustained as business income and the same addition sustained under s.68 or s.69A is roughly 48 percentage points of tax, plus the loss of every set-off, plus a 10% penalty. That makes the characterisation argument, not the quantum argument, the one worth fighting. It also means unexplained credits in a closely held company's share capital can wipe out the company.
The Assessing Officer rejected my explanation for cash credits. Must he then prove where the money actually came from before taxing it?
I made unexplained investments after the close of my accounting year. Which year can the officer tax them in, and can he reopen an earlier year to do it?
Valuables were found at my premises and I say they are not mine. Who has to prove ownership?
A fixed deposit stands in the name of a partner's son and my firm used it as security for its overdraft. The Assessing Officer says the money is really the firm's concealed income. Who has to prove what?
The officer rejected my books, estimated my profits at a flat rate, and then also added an unexplained cash credit. Can he do both, and must he say what source the credit came from?
You have a document that says so. Does that settle it?
If the department doubts my shareholders, can it add the money to my income?
I gave the lenders' names, addresses and PAN and filed their confirmations, but I cannot produce them and the summonses came back unserved. Can the loans still be added under section 68?
Every page in this library links to what it was written from, so you can check it rather than take our word for it.