Scope of Section 115BBE and applicability in survey U/S 133A

Section 115BBE was originally introduced by Finance Act 2012 w.e.f. 01.04.2013. Section 115BBE as enacted then is reproduced as under:-

“115BBE. Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D.—(1) Where the total income of an assessee includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, the income-tax payable shall be the aggregate of—

(a) the amount of income-tax calculated on income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of thirty per cent; and

(b)  the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a).

(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1).”

 The reason and purpose of the provision was explained by the explanatory memorandum to the Finance Bill 2012 as under:-

1) “Under the existing provisions of the Income-tax Act, certain unexplained amounts are deemed as income under section 68, section 69, section 69A, section 69B, section 69C and section 69D of the Act and are subject to tax as per the tax rate applicable to the assessee. In case of individuals, HUF, etc., no tax is levied up to the basic exemption limit. Therefore, in these cases, no tax can be levied on these deemed income if the amount of such deemed income is less than the amount of basic exemption limit and even if it is higher, it is levied at the lower slab rate.

2) In order to curb the practice of laundering of unaccounted money by taking advantage of basic exemption limit, it is proposed to tax the unexplained credits, money, investment, expenditure, etc.,which has been deemed as income under section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of 30% (plus surcharge and cess as applicable). It is also proposed to provide that no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of the Act in computing deemed income under the said sections. This amendment will take effect from 1st April,2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent assessment years.”

The real purpose of introducing this provision was to charge higher tax at the maximum marginal rate in respect of income/expenditure/investment on the assessee who fails to explain the nature and source of said income/expenditure/investment. The relevant sections which enable the AO to assess such income/expenditure/investment are contained in sections 68,69,69-A,69-B,69-C,69-D. These sections are reproduced as under:-

Cash credits.

68. 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 maybe charged to income-tax as the income of the assessee of that previous year :

Provided 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 further that nothing contained in the first 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.

Unexplained investments.

69. Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not,in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

Unexplained money, etc.

69A. Where in any financial year the assessee is found to be the owner of any money,bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.

Amount of investments, etc., not fully disclosed in books of account.

69B. Where in any financial year the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable article, and the Assessing Officer finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year.

Unexplained expenditure, etc.

69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year:

Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.

Amount borrowed or repaid on hundi.

69D. Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to, any person otherwise than through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the amount aforesaid for the previous year in which the amount was borrowed or repaid, as the case may be :

Provided that, if in any case any amount borrowed on a hundi has been deemed under the provisions of this section to be the income of any person, such person shall not be liable to be assessed again in respect of such amount under the provisions of this section on repayment of such amount.

Explanation.—For the purposes of this section, the amount repaid shall include the amount of interest paid on the amount borrowed.

Section 115BBE was amended vide Finance Act 2016 w.e.f. 01.04.2017 to the effect that no setting off of any loss shall be allowed against income of the nature referred to in the specified sections. This section was further amended vide Taxation Laws (Second Amendment) Act 2016 w.e.f. 01.04.2017 (A.Y 2017-18). The section as amended as on today reads as under:-

Section 115BBE

“(1) Where the total income of an assessee,—

(a) includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the Return of Income furnished under section 139; or

(b) determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (a), the income-tax payable shall be the aggregate of—

(i) the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty per cent.; and

(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i).”.

(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) 9[and clause (b)] of sub-section (1).

The purpose and object of the latest amendment was explained in the statements of objects and reasons

“Concerns have been raised that some of the existing provisions of the Income tax Act, 1961 could possibly be used for concealing black money. It is, therefore, important that the Government amends the Act to plug these loopholes as early as possible so as to prevent misuse of the provisions. The Taxation Laws (Second Amendment) Bill, 2016, proposes to make some changes in the Act to ensure that defaulting assessees are subjected to tax at a higher rate and stringent penalty provision.”

Relation to Demonetization:-

The amendment to section 115BBE is directly related to the demonetization announced on the night of 8^th of November, 2016. The professionals expressed their views that the undisclosed income held in the form of demonetization currency can be deposited in the banks and can be offered to taxation under specified sections (68 to 69-D) and tax thereon could be paid at the rate mentioned in section 115BBE (as stood before last amendment) i.e. 30% plus applicable surcharge and cess. No penal provisions were attracted if these amounts are declared in the respective returns of income. This amendment was brought to prevent such disclosures and to overcome the views expressed by the professionals.

The other important amendment brought was by way of insertion of section 271AAC which provides as under:-

271AAC. (1) The Assessing Officer may, notwithstanding anything contained in this Act other than the provisions of section 271AAB, direct that, in a case where the income determined includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D for any previous year, the assessee shall pay by way of penalty, in addition to tax payable under section 115BBE, a sum computed at the rate of ten per cent of the tax payable under clause (i) of sub-section (1) of section 115BBE:

Provided that no penalty shall be levied in respect of income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D to the extent such income has been included by the assessee in the return of income furnished under section 139 and the tax in accordance with the provisions of clause (i) of sub-section (1) of section 115BBE has been paid on or before the end of the relevant previous year.

(2) No penalty under the provisions of section 270A shall be imposed upon the assessee in respect of the income referred to in sub-section (1).

(3) The provisions of sections 274 and 275 shall, as far as may be, apply in relation to the penalty referred to in this section.]

Further a surcharge of 25% on such tax was also imposed by amending sub section (a) in section 2 of chapter II of Finance Act 2016.

To sumup the total tax in the cases covered U/s 115BBE is worked out as under:-

This is further subject to normal cess and higher education cess as applicable.

Clause (b) of sub-section (1) of section 115BBE deals with income referred to in specified sections and which is determined by the AO if such income is not covered under clause (a)

Irrespective of whether the case of the assessee falls under clause (a) or clause (b), the rate of tax is 60% plus surcharge plus cess. However, the levy of penalty depends on whether the case of an assessee falls under clause (a) or clause (b) of 115BE(1).

Sub-section (2) of section 115BBE begins with a non-obstante clause and provides that nodeduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1).

It was debatable and continues to be a debatable question as to whether deductions under Chapter VI-A are allowable against such income.

The other important relevant points in relation to Section 115BBE are discussed as under:-

1. The last amendment to section 115BBE was made through Taxation Laws (2^nd amendment Act 2016) which received the assent of the President on 15.12.2016 and was published vide gazette dt. 15.12.2016. The law is well settled that the Income Tax Act as it stands amended on the 1^st day of April of any FY must apply to the assessments of that year. Any amendments in the Act which come into force after the 1^st day of April of FY would not apply to the assessment to that year, even if the assessment is actually made after the amendments came into force.

Kasimtharuvi Tea Estate Ltd. Vs. State of Kerala (1966) 60 ITR 262 (S.C)

C.I.T. Vs. Scindia Steam Navigation Co. Ltd S.C. (1961) 42 ITR 589

In view of these judgments, the amendment to Section 115BBE should come into force w.e.f. A/y 18-19

2. Section 115BBE imposes tax at a flat rate of 60% (w.e.f.. A/Y 17-18) without making any deduction in respect of any expenditure or allowance as may be admissible to an assessee under any provision of the Act. Sub section 2 starts with Non- Obstante clause “Notwithstanding anything contained in this Act” which supports the view that no deduction in respect of any expenditure or allowance or set off of any loss is admissible.

3. This Section is applicable where assessee’s income is recorded in books but has not been offered to tax and the assessee fails to prove the nature and source to the satisfaction of the A.O.

4. This section is also applicable to the assessee who are not required to maintain books of accounts but is found to have made unexplained investment, unexplained expenditure or he is found to be in possession of money, bullion, jewellery or other valuable articles.

5. Where an assessee voluntarily shows income in his return but he is unable to prove the source of such income to the satisfaction of the A.O., such income could be held to be liable under section 115BBE.

6. The provision of section 115BBE can be applied in the following circumstances:-

a. Claiming exempt income from any source which the assessee fails to substantiate to the satisfaction of the A.O.

b. Claiming income from agricultural operations which the assessee fails to substantiate to the satisfaction of the A.O.

7. It is apprehended that the provision of section 68 will be attracted to the credits in the books of account on account of cash sales. Such cash sales may be treated as unexplained income chargeable to tax under section 68 read with section 115BBE, if the names and addresses of the buyers are not mentioned in the cash memo.

8. A professional will have also to prove the nature and source of his receipts in a definite manner probably maintaining the record on the basis of KYC norms; otherwise there are chances that the AO may treat such receipts as unexplained under section 68 read with section 115BBE.

9. If any case is the subject of survey U/S133A of the Income Tax Act, the department invariably insists the assessee to deposit advance tax, surcharge, and cess etc applying the provisions of section 115BBE. A statement of the assessee is extracted to the fact that advance tax will be paid @ 77.25% and applicable cess and higher education cess. The variability of applying the provisions of section 115BBE in survey cases is still subject to judicial review.

(Author is President, Patiala Tax Bar Association and Vice President, Punjab Tax Bar Association)

(Republished with Amendments)