A Section 68 notice is an allegation to answer, not a finding that a credit is bogus. Respond by identifying the law and deadline stated in the actual notice, then explaining each questioned credit with a transaction-level account of its nature, source and supporting records. If the notice concerns a loan, address the lender’s explanation of the nature and source too.
Start with the notice, not its heading
Read the full notice and note what it asks you to explain. A notice’s actual wording, the proceeding stage and its deadline control your immediate response; a generic description of a “Section 68 notice” does not.
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- The Act and provision named, and the relevant assessment year or tax year.
- The proceeding type and each credit or transaction questioned, including the amount.
- The information, documents or third-party material cited as the basis for the query.
- The questions you must answer, the submission channel and the due date.
There is a numbering change to check. Section 68 is the unexplained-credit provision in the Income-tax Act, 1961. The Income-tax Act, 2025 labels the corresponding provision section 102, “Unexplained credits.” Department materials list the 2025 Act with 2026 rules and transition guidance. Which law applies depends on the relevant tax year and procedural history. Do not simply replace “68” with “102” in a live response: check the Act named in the notice and the official transition rules.
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| Question | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Provision identified in the Department materials | Section 68: unexplained credits. | Section 102: “Unexplained credits.” |
| Which one should you address? | Depends on the tax year and procedural history; check the notice and applicable transition rules. | Depends on the tax year and procedural history; check the notice and applicable transition rules. |
What the allegation means
Under section 68 of the 1961 Act, a sum credited in books maintained for a previous year may be assessed as income if the taxpayer offers no explanation of its nature and source, or the Assessing Officer considers the explanation unsatisfactory. The provision states: “Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee 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, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.”
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For a loan or borrowing under section 68, the statutory proviso also requires the person in whose name the credit is recorded to explain its nature and source, to the Assessing Officer’s satisfaction. The Act has distinct conditions for certain share credits in closely held companies.
The Income Tax Department’s 2026 tutorial describes the section 68 threshold as books maintained, a credit during the year, and no explanation or an unsatisfactory one. The label “accommodation entry” does not itself resolve the question: the notice’s factual basis and the evidence supporting your explanation matter. Section 69 and sections 69A–69D address other kinds of unexplained items; a credit recorded in books under section 68 is not automatically the same issue as money or an asset that was not recorded in books.
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Build a separate explanation for each credit
Prepare a working reconciliation for every questioned entry. This is a practical way to organize a response, not a prescribed statutory form.
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- Date, amount and ledger account.
- Payer or payee and the relevant bank reference or transfer identifier.
- The asserted nature of the credit, such as a loan, share capital, sale proceeds, refund or another type of receipt.
- The business or personal context and purpose, where relevant.
- The supporting attachment and page number for each part of the explanation.
Explain the source and context in plain language, then reconcile the book entry to the bank trail on both sides where records are available. If amounts, dates, account names or transfer references do not match, identify the discrepancy and explain it rather than ignoring it.
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Records that may help support the account
Select records that actually relate to the credit and the question asked. Depending on the transaction, these may include:
- Relevant-year books and ledger entries.
- Bank statements and transfer references.
- Agreements, invoices, correspondence or board approvals, where relevant.
- Counterparty identity particulars and a confirmation.
- Records bearing on the counterparty’s financial capacity and source of funds.
A PAN or confirmation alone may not answer every factual question, and no document checklist automatically establishes that a transaction is genuine. In Udayan Grover, the ITAT discussed creditor identity, creditworthiness or capacity, and transaction genuineness, and considered lender financial statements, bank statements, ledgers and confirmations in the record before it. That case-specific discussion is not a guarantee that the same bundle will satisfy an Assessing Officer or court in another matter.
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If the credit is a loan or borrowing
Address both your own records and the lender’s explanation of the nature and source of the funds. The section 68 proviso expressly calls for the person in whose name the credit is recorded to explain those matters too. A bank transfer shows movement of money, but by itself does not establish its source or the full nature of the transaction.
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Draft and submit a focused response
Organize the reply in the same order as the notice. For each credit, state what it was, explain its source and context, connect the explanation to the records, and answer each specific question. Identify attachments clearly. If a requested record is unavailable, say so and explain why; do not present an altered or reconstructed document as if it were contemporaneous, or rely on a blanket assertion that the counterparty alone is responsible.
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- Prepare the reconciliation: match each questioned amount to the relevant ledger and available bank records.
- Answer the notice’s questions: explain the transaction and point to the attachment that supports each material fact.
- Address gaps: disclose discrepancies or missing records and give a factual explanation.
- File through the stated channel by the stated deadline: the Income Tax Department describes faceless communications and electronic responses, but the individual notice controls the requested channel and due date.
- Keep proof of filing: save the final response, uploaded files and acknowledgement.
If the notice relies on third-party material or a different provision
Material you have not been given
If a proposed addition relies on an investigation statement or other third-party material that was not supplied to you, identify the material, request a copy and explain why you need it to answer the case. Where appropriate, request an opportunity to rebut the material or cross-examine its maker. In Blue Circle Organics, the ITAT discussed reliance on a statement that had not been provided to the assessee and the opportunity to test it. The result in that case does not mean every undisclosed statement automatically invalidates an addition; the procedural argument depends on the record and circumstances.
A changed legal basis
Check whether the proposed basis changes. For example, a credit recorded in books under section 68 is distinct from money not recorded in books that may be addressed under section 69A. In Vishal Jhajharia, the tribunal distinguished the provisions and discussed the opportunity to respond to a changed basis in the circumstances before it. If the basis changes, identify the new factual and legal questions rather than assuming your earlier explanation answers them all.
Understand the possible tax consequence without assuming a final bill
The Income Tax Department’s 2026 tutorial describes section 115BBE as providing a 60% tax rate for specified income under section 68 and related provisions. The same tutorial discusses a 25% surcharge and 6% penalty, and gives an 84% final rate including cess under its stated calculation and conditions. These are figures from the Department’s explanation, not a calculation of any particular taxpayer’s liability. Applicability, tax year, surcharge and cess calculations, penalty conditions and later amendments require case-specific verification; the tutorial advises checking the Acts, Rules and notifications.
When to get individual tax advice
Consider consulting a chartered accountant or Indian tax lawyer if the amount is substantial, the deadline is short, the funding trail is complex, an alleged entry operator is involved, important third-party material is missing, or the proposed statutory provision has changed. The applicable Act, evidence needed, available objections, possible deadline extension, tax and penalty exposure, and any appeal steps depend on the notice, records and procedural history.
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