vUnexplained credits.

102(1)

Where any sum is found credited in the books of account maintained by the assessee for any tax year, and––

• (a) the assessee offers no explanation about the nature and source of such credit; or
• (b) the explanation offered by assessee is not satisfactory in the opinion of the Assessing Officer, then, the sum so credited shall be charged to income-tax as income of the assessee of that tax year.

102(2)

If the sum so credited consists of loan or borrowing, or any such amount, by whatever name called, the explanation offered by such assessee shall be deemed to be not 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 referred to in sub-section (1), has been found to be satisfactory.

102(3)

If the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium, or any such amount, by whatever name called, the explanation offered by such assessee 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 referred to in sub-section (1), has been found to be satisfactory.

102(4)

Nothing contained in sub-section (2) or (3) shall apply if the person, in whose name the sum referred to in those sub-sections is recorded, is a venture capital fund or a venture capital company as referred to in Schedule V (Table: Sl. No. 6).

Explanation

Section Summary:

Section 102 of the new income tax law deals with unexplained credits found in the books of account of a taxpayer. If a taxpayer cannot satisfactorily explain the nature and source of such credits, the amount will be treated as taxable income for that year. This section applies to individuals, businesses, and companies, with specific provisions for loans, borrowings, and share-related transactions.

Key Changes:

1. Stricter Scrutiny for Loans and Borrowings: Under Section 102(2), if the unexplained credit is a loan or borrowing, the taxpayer’s explanation will be deemed unsatisfactory unless the lender or borrower also provides a satisfactory explanation to the Assessing Officer.
2. Enhanced Provisions for Companies: Section 102(3) introduces stricter rules for companies (excluding publicly listed companies) regarding share application money, share capital, or share premium. The company’s explanation will be deemed unsatisfactory unless the resident investor provides a satisfactory explanation.
3. Exemption for Venture Capital Funds/Companies: Section 102(4) exempts venture capital funds or companies from the provisions of Sections 102(2) and 102(3).

Practical Implications:

1. For Individuals and Businesses: Taxpayers must ensure that all credits in their books are properly documented and explained. Unexplained credits will be treated as taxable income, leading to higher tax liability.
2. For Companies: Companies must maintain detailed records of share-related transactions and ensure that resident investors can provide satisfactory explanations for their contributions.
3. For Lenders and Borrowers: Parties involved in loans or borrowings must be prepared to substantiate the nature and source of the funds if questioned by tax authorities.

Critical Concepts:

1. Deemed Unsatisfactory Explanation: In cases of loans, borrowings, or share-related transactions, the taxpayer’s explanation is automatically considered unsatisfactory unless the other party (lender, borrower, or investor) also provides a satisfactory explanation.
2. Venture Capital Exemption: Venture capital funds or companies are exempt from the stricter scrutiny under Sections 102(2) and 102(3), recognizing their role in funding startups and innovative businesses.

Compliance Steps:

1. Maintain Detailed Records: Ensure all credits in the books of account are supported by proper documentation, such as loan agreements, share application forms, or investment proofs.
2. Verify Counterparty Details: For loans, borrowings, or share-related transactions, verify that the other party can provide a satisfactory explanation if required.
3. Prepare for Scrutiny: Be ready to provide explanations and supporting documents to the Assessing Officer during tax assessments.

Examples:

1. Unexplained Loan: A taxpayer records a loan of ₹10 lakh in their books but cannot provide details of the lender. The Assessing Officer deems the explanation unsatisfactory, and the ₹10 lakh is treated as taxable income.
2. Share Application Money: A private company receives ₹50 lakh as share application money from a resident investor. The investor cannot explain the source of the funds. The company’s explanation is deemed unsatisfactory, and the ₹50 lakh is taxed as income.
3. Venture Capital Exemption: A startup receives ₹1 crore from a registered venture capital fund. Since the fund is exempt under Section 102(4), the startup does not need to provide additional explanations for this credit.