Any sum found credited in the books of the taxpayer(assessee), for which he offers no explanation about the nature and source thereof or the tax authorities are not satisfied by the explanation given or offered by the taxpayer, is termed as cash credit.
INDIAN LAW ON TAX TREATMENT OF CASH CREDIT.
The provisions relating to tax treatment of cash credit are given in section 68 of the Income tax Act 1961.
WHAT IS SECTION 68 ?
According to section 68, any sum found credited in the books of a taxpayer, for which he 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, may be charged to income-tax as the income of the taxpayer of that year.
In case of a taxpayer being a closely held company if 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 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.
LOAN& BORROWINGS
From the AY 2023-24 where any amount is found credited in the books of an assessee by way of loan or borrowing or any such amount, the explanation of the assessee cannot be deemed to be satisfactory unless:
(a) the person in whose name such credit is recorded in the books of such assessee 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 aforesaid has been found to be satisfactory.
WHAT IS CLOSELY HELD COMPANY?
A company not being a company in which the public are substantially interested.
The above discussed provisions shall not apply if the person, in whose name such sum is
recorded, is a venture capital fund or a venture capital company as referred to in section 10(23FB) of the Income tax Act 1961