[Opinion] Interplay Between Section 5(2) and Unexplained Credits

Mukesh Kohli – [2026] 185 taxmann.com 895 (Article)

1. Introduction

Sometimes we professionals face a situation when the AO makes addition under section 68 or section 69 of Income Tax Act, 1961/ under section 102 or 103 of Income tax Act, 2025 to the Income of a non-resident without Considering the provision of section 5(2) of Income Tax Act, 1961/2025. Can an AO do this? Let us see the various provisions of section 5, 68 and 69 of Income Tax Act, 1961 as well as sections 5, 102, and 103 of Income Tax Act, 2025

2. Section – 68, Income-tax Act, 1961

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:

Provided that where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any 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 aforesaid has been found to be satisfactory:

Provided further that where 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, any 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 aforesaid has been found to be satisfactory:

Provided also that nothing contained in the first proviso [or second proviso] shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.

3. Section – 102, Income-tax Act, 2025

1. Where any sum is found credited in the books of an assessee maintained for any tax year, and:

(a) the assessee offers no explanation about the nature and source of such credit; or

(b) the explanation offered about the nature and source of such credit 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.

2. For the purposes of sub-section (1), where 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 has been found to be satisfactory.

3. For the purposes of sub-section (1), where 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 has been found to be satisfactory.

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).