Which law applies?
Use section 68 of the Income-tax Act, 1961 for periods governed by that Act, including FY 2022–23 (AY 2023–24) in the examples. Section 102 of the Income-tax Act, 2025 is the counterpart for tax years beginning on or after 1 April 2026. A sum credited in the taxpayer’s books for the relevant year may be charged as that year’s income if the taxpayer provides no satisfactory explanation of its nature and source. Start with the actual ledger entry, date and counterparty.
What the evidence must show
| Issue | Useful evidence |
|---|---|
| Identity | PAN or overseas tax identification where available; incorporation or registration records, address and authorised signatory. Match the identifiers to the bank account and contract. |
| Financial capacity | Accounts, tax filings and contemporaneous balances, investment realisations, borrowings or collection records that explain the funds available when the credit was made. |
| Genuineness | Contemporaneous contracts, resolutions, share application and allotment records, bank trail from each side, repayment or interest records where applicable, and evidence of performance. A bank transfer by itself does not settle the issue. |
In Principal CIT v. NRA Iron & Steel (P.) Ltd., the Supreme Court examined whether the documents and surrounding facts actually established identity, creditworthiness and genuineness. Once credible evidence is placed on record, ask the Assessing Officer to identify and investigate the specific defect. A confirmation, PAN, registration or bank statement alone does not require acceptance of a doubtful transaction.
When the creditor or subscriber must explain its own source
| Credit | Additional requirement |
|---|---|
| Loan, borrowing or amount of that character | The first proviso to section 68 applies from AY 2023–24. The person in whose name the credit stands must also explain its nature and source, and the Assessing Officer must find the explanation satisfactory. There is no general residence restriction for this provision. Section 102(2) carries forward this requirement. |
| Share application money, capital, premium or similar amount | The second proviso to section 68 applies to companies in which the public are not substantially interested and to the credit in the name of a resident subscriber. Section 102(3) is the counterpart. The general evidentiary burden still applies to non-resident equity. |
| Statutory venture capital exception | The two additional deeming rules are subject to the specific venture capital fund or venture capital company exception: section 10(23FB) of the 1961 Act, or Schedule V (Table, serial no. 6) of the 2025 Act. Do not assume that every bank, NBFC, private equity investor or registered AIF qualifies. The main cash credit provision still applies. |
| Customer advance, trade payable or partner capital | Establish the real nature of the amount. A genuine trade or capital transaction still calls for a credible explanation under the main provision; an amount that in substance is borrowed should be reviewed under the borrowing rule. |
Valuation, adverse material and the tax consequence
- For the share issue in FY 2022–23, former section 56(2)(viib) was a separate inquiry into qualifying consideration above fair market value. Rule 11UA offered prescribed valuation methods, including a merchant banker’s DCF for the relevant unquoted equity. Support forecasts with verifiable inputs. A valuation does not establish the source of the investment. The share premium clause ceased to apply from AY 2025–26; retain reports for years in which it applied.
- If the department relies on an investigation report or third-party statement, request the relevant material and time to answer it. Address the transaction-specific allegation and request cross-examination where the statement is material and disputed. The effect of any procedural defect depends on what was relied on and the resulting prejudice.
- For the historical period illustrated, section 115BBE applied 60% to the specified income, with a 25% surcharge on that tax and 4% cess on tax plus surcharge: 78% of the addition. No expenditure, allowance or loss set-off is permitted in computing that specified income. Section 271AAC could add 10% of the specified base tax (6% of the addition), subject to its proviso for income included in the return and the specified tax paid by the end of the relevant previous year. An 84% total in that scenario is before interest and is not automatic. For tax years under the 2025 Act, Finance Act, 2026 reduced the section 195 base rate to 30%; check the applicable surcharge, cess and penalty provisions separately.
Six worked examples
The names and figures below illustrate the evidence to assemble. They do not describe adjudicated outcomes.
1. Technology company: ₹10 crore share subscription
CloudScale Infotech issues 1,00,000 shares to a resident corporate investor in FY 2022–23 at ₹1,000 each. Face value of ₹10 gives ₹10 lakh share capital, and the ₹990 premium gives ₹9.90 crore. A prescribed merchant banker’s DCF of ₹1,045 per share, if valid for the issue, exceeds the price by ₹45; the historical excess-over-FMV amount on those facts is nil. An ₹18.50 book value alone does not disprove the DCF. An assumed 85% recurring revenue CAGR is only one forecast input; substantiate it, the margins, discount rate and terminal value.
The ₹10 crore is 7.04% of assumed investor net worth of ₹142 crore. Audited accounts showing ₹38 crore of liquid mutual funds and a return showing ₹4.80 crore taxable income support the capacity analysis. Trace the actual payment to the 14 October 2022 redemption of funds held for over 18 months; reconcile investment records, bank statements and allotment. The immediate funding source is the redemption.
2. Vendor loan: ₹2.50 crore at 10.5%
Apex Auto Forgings borrows from its supplier in December 2022. The supplier has taxable income of ₹12.50 lakh, turnover of ₹68.40 crore, EBITDA of ₹6.80 crore and an assumed cash profit of ₹4.90 crore. Reconcile the accounts and depreciation with the actual source: ₹3.20 crore in identified trade collections on 12 December, of which ₹2.50 crore was advanced two days later, leaving ₹70 lakh before other movements.
A full year’s interest on an unchanged principal is ₹26.25 lakh. At an assumed applicable 10% TDS rate, tax withheld on that year’s interest is ₹2.625 lakh. For quarterly payments and actual repayment after 14 months, reconcile the dated accruals and payments under the agreement; check section 194A eligibility and rate for that period, and match withholding records. The creditor should provide its own source explanation.
3. Jewellery sales: ₹1.80 crore in festival cash receipts
Turnover increased from ₹14.20 crore to ₹18.50 crore (30.28%). Festival cash sales increased from ₹1.45 crore to ₹1.80 crore (24.14%). A claim that both years had a 62% cash share requires independent proof of total festival sales. Match each October–November 2022 bank deposit to cash on hand and dated invoices, cash registers and GST records; verify the assumed 24–48 hour lag. Reconcile gold weights using opening stock plus purchases less sales and other supported movements, and compare the records with any applicable Form 3CD reporting.
Explain whether the deposit merely moved already recorded cash into the bank. A credit in the books, a bank deposit and a sale are distinct accounting events; demonstrate when the same receipts have already been included in turnover. Reconcile the facts before contesting any proposed addition or rejection of books under section 145(3).
4. Four customer advances outstanding for over 36 months
Sterling Heavy Engineering carries ₹3.20 crore received from four customers for custom turbines. Reconcile the total to the four individual balances without assuming equal shares. Obtain customer confirmations, original contracts, design revisions, dates of receipt and continued delivery or refund obligations. An opening balance is not a fresh credit of the later year. Section 41(1) is a separate inquiry that generally requires a prior deduction or allowance and a qualifying later benefit, remission or cessation.
A signed acknowledgment before expiry can start a fresh limitation period under section 18 of the Limitation Act, 1963. As the Supreme Court explained in Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal, read the balance sheet with any qualifications and the facts. Age alone does not prove that an advance has ceased.
5. Overseas promoter loan: USD 500,000
At an illustrative ₹83 per USD the credit is ₹4.15 crore. Match the lender’s bank debit, wire advice and authorised dealer evidence to the recipient’s books. Historical US tax returns may corroborate assumed annual income above USD 750,000; verify assumed liquid assets of USD 4.20 million from independent custody or bank records. Review lender eligibility, the agreement, the loan registration and periodic reporting under the RBI regime applicable at the time. An ECB filing does not prove tax creditworthiness. Offer reliable documentary evidence and a practical way for the overseas creditor to respond if the officer requests verification.
6. Incoming partner contributes ₹75 lakh
Dynamic Logistics should match the ₹75 lakh receipt to the partner’s capital account, partnership deed, transfer advice and the partner’s underlying financial evidence. Identify whether it is capital or a loan in substance. The result in the firm’s or partner’s assessment depends on the evidence and applicable law; a partner’s name does not, by itself, rule out an addition in the firm’s assessment.
Evidence to retain
- Ledger and reconciliation by credit, bank records and receipt date; corporate or personal identity records and signed confirmations.
- Relevant tax filings, financial statements and evidence tracing funds to the actual source.
- Contracts, loan and repayment schedules, board and allotment records, PAS-3 where applicable, and a valuation report when relevant.
- A response tied to the notice, with supporting documents, explanations of discrepancies and a request for adverse material where needed.
Frequently asked questions
1. Can a lender’s failure to attend a summons prove the credit is unexplained?
Non-attendance is one fact. Explain any inability to attend, furnish usable contact details and credible evidence, and offer another means of verification. The officer must evaluate the evidence as a whole.
2. Does historical section 115BBE apply to all additions?
It covers income specified in sections 68, 69, 69A, 69B, 69C and 69D. Ordinary business disallowances are not by themselves income under those provisions.
3. Can an expense or loss reduce historical section 115BBE income?
Section 115BBE(2) bars deductions for expenditure or allowances and set-off of losses in computing that income. Apply the special rate to the amount that is properly assessed under the covered provisions.
4. How do NAV and DCF differ?
The prescribed NAV method uses balance sheet inputs with rule-specific adjustments; DCF uses supported projections discounted to present value. Apply the version of Rule 11UA in force for the historical transaction.
5. Can the officer reopen every case for ten years?
Under the 1961 Act’s regime effective from 1 September 2024, the ordinary outer limits are three years for a section 148A show-cause notice and three years and three months for a section 148 notice, measured from the end of the relevant AY. The longer limits are five years and five years and three months respectively, subject to the statutory ₹50 lakh and evidence conditions. Check savings, exclusions and transition rules before calculating a particular deadline.
6. Does the resident subscriber rule cover non-resident equity?
The share subscription deeming rule specifies resident subscribers. The main rule still applies to non-resident equity; keep capacity and bank evidence and comply with applicable FEMA rules. Loans from non-residents must separately be tested under the borrowing provision.
Sources
- Income-tax Act, 1961 as amended (sections 68, 115BBE, 271AAC and 41)
- Income-tax Act, 2025 (sections 102 and 195)
- Finance Act, 2026 (enacted amendments and rates)
- Finance (No. 2) Act, 2024 (share premium and reassessment amendments)
- Supreme Court: Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal
- Supreme Court: Principal CIT v. NRA Iron & Steel (P.) Ltd.
- Income Tax Department: Rule 11UA valuation methods
- RBI: Foreign Exchange Management (Borrowing and Lending) (First Amendment) Regulations, 2026