Chapter VI - Aggregation of Income
Section 102
Section 102: unexplained credits
Section 102 taxes any sum credited in an assessee's books of account that the assessee cannot satisfactorily explain, as the assessee's income for that tax year. It sets a stricter standard for loans and borrowings, and an even stricter standard for share application money, share capital or premium credited to closely-held companies - in both cases requiring the person providing the money to also give a satisfactory explanation, unless that person is a specified venture capital fund or company.
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Need advice on Section 102?
This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(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).
Introduction
An unexplained credit in the assessee's books can become taxable income under Section 102. Loans and certain share-capital receipts carry additional source-explanation conditions, while the venture-capital exception has a narrow scope.
Key takeaways
Unexplained book credit
A sum credited in the taxpayer’s books may be taxed as that year’s income when its nature and source are unexplained or the Assessing Officer finds the explanation unsatisfactory.
Source-of-source conditions
Specified loans or borrowings and share-related credits to a closely held company require a satisfactory explanation from the named lender or resident investor, subject to the statutory venture-capital exception.
The basic rule
Where any sum is found credited in the books of account maintained by an assessee for any tax year, and the assessee either offers no explanation about the nature and source of that credit, or the explanation offered is not found satisfactory by the Assessing Officer, the credited sum is charged to income-tax as income of the assessee for that tax year.
Stricter standard for loans and borrowings
Where the credited sum consists of a loan, borrowing, or similar amount (by whatever name called), the assessee's explanation is deemed unsatisfactory unless the person in whose name the credit is recorded also offers an explanation about the nature and source of that sum, and the Assessing Officer finds that explanation satisfactory too.
Even stricter standard for share capital in closely-held companies
Where the assessee is a company in which the public are not substantially interested, and the credited sum is share application money, share capital, share premium, or a similar amount, the explanation is deemed unsatisfactory unless the resident person in whose name the credit is recorded also explains the nature and source of the sum, and that explanation is found satisfactory by the Assessing Officer.
Exception for venture capital funds
The stricter standards for loans/borrowings and for share capital in closely-held companies do not apply where the person in whose name the credit is recorded is a venture capital fund or venture capital company, as referred to in Schedule V (Table: Sl. No. 6).
Step-by-step flow for applying Section 102
- 1
Is a sum found credited in the assessee's books for the tax year?
- No: Section 102 does not apply (an investment outside the books is examined under Section 103).
- Yes: Go to the next step.
- 2
Has the assessee explained the nature and source of the credit to the Assessing Officer's satisfaction?
- No explanation, or not satisfactory: The sum is charged as income of that tax year.
- Explanation offered: Go to the next step if the credit is a loan or share money.
- 3
Is the credit a loan or borrowing?
The person in whose name it is recorded must also explain its nature and source, and that explanation must satisfy the AO; otherwise the assessee's explanation is deemed not satisfactory (Section 102(2)).
- 4
Is the assessee a company in which the public are not substantially interested, and is the credit share application money, share capital or share premium?
The resident person in whose name it is recorded must also give a satisfactory explanation (Section 102(3)).
- 5
Is the creditor or subscriber a venture capital fund or venture capital company (Schedule V, Sl. No. 6)?
If so, the extra requirements of Section 102(2) and (3) do not apply (Section 102(4)).
Practical checklist
Do
- Reconcile each book credit with bank evidence, counterparty identity and source explanation.
- For a loan or closely held company's share capital, check the additional explanation required from the credited person and the officer's satisfaction.
Avoid
- Do not apply the venture-capital exception to a counterparty outside its statutory category.
- Do not conclude that a bank transfer alone proves the nature and source of the credit.
Illustrative example
Worked example: a loan credit in a trader's books
Hypothetical facts (illustration only, not a real taxpayer): A trader's books for the tax year show a credit of ₹8,00,000 as a loan from Mr. Bhatt. The trader produces a loan confirmation, but Mr. Bhatt does not respond to the Assessing Officer's enquiry about where the money came from.
Credit in books
A sum of ₹8,00,000 is credited in books maintained for the tax year.
Loan rule
Because the credit is a loan, Section 102(2) requires Mr. Bhatt to explain its nature and source as well.
Deemed unsatisfactory
Mr. Bhatt gives no explanation, so the trader's explanation is deemed not satisfactory.
Outcome
- ₹8,00,000 is charged to income-tax as the trader's income of that tax year.
- Had Mr. Bhatt given an explanation that satisfied the AO, the deeming in Section 102(2) would not apply.
Glossary
- Book credit
- An amount recorded as a credit in books maintained for a tax year.
- Source explanation
- Evidence addressing where the credited sum came from, including the additional statutory tests for specified credits.
Frequently asked questions
What happens if I cannot explain a credit entry in my books?
The sum credited is charged to income-tax as your income for that tax year, whether you offer no explanation or your explanation is not found satisfactory by the Assessing Officer.
Is a loan credit treated the same as any other credit?
No - for loans or borrowings, your explanation is only accepted if the lender (the person in whose name the credit is recorded) also gives a satisfactory explanation about the nature and source of the sum.
Does the stricter share-capital rule apply to all companies?
No - it applies specifically to companies in which the public are not substantially interested (closely-held companies), for share application money, share capital or premium credited to them.
Is there any exception to the lender-explanation requirement?
Yes - it does not apply where the credit is in the name of a venture capital fund or venture capital company referred to in Schedule V (Table: Sl. No. 6).
Need help applying this provision to your situation?
Get help responding to an unexplained credit queryLast updated 9 October 2026