Section 115BBE needs Relook: Know Misuse, Consequences & Judicial Precedents

Section 115BBE of the Income Tax Act pertains to the taxation of certain incomes that are considered as unexplained. This article delves into the concerns surrounding the misuse of sections 68 to 69D, the significant tax burden imposed by section 115BBE and judicial precedents shedding light on its applicability.

Tax is being levied at the exorbitant rate of 60% in addition to cess @ 25% and penalty @10% which results in total tax burden of 83.25% under section 115BBE if the incomes are taxed under sections 68, 69, 69A, 69B, 69C and 69D. Now-a-days since these sections are used indiscriminately, the tax paying public are put to too much hardship and they are driven to courts to file writs for cancelling/staying the orders or file appeals with the CIT(Appeals) and for getting stay of collection of taxes, they are at the mercy of the jurisdictional officers, who have got power to grant stay of 80% and the balance 20% is to be paid before filing the appeal unless the assessee was able to get stay a higher percentage from the concerned Principal Commissioner of Income Tax.

In this article the contents of the sections and how they are mis used are discussed with relevant case laws.

Section 68 – Cash Credits:

• Any sum credited in the books of assessee and
• The Assessee offers no explanation or
• Explanation offered is not satisfactory
• Then, such credit may be charged to income tax as income of that year u/s. 68

Provisions of Section 68:

Section 68 applies not only to cash transaction but also to amounts received by cheque or draft:

• The words used are “Any sum credited in the books of assessee maintained”
• The sum of money is not restricted to cash transactions only.
• Head note to Sec.68 refers to cash credits is not sufficient to support the view.
• Sec.68 is unambiguous & the sum referred in the section would include “the sum of money by whatever mode received”

Source of Source also to be explained:

• Where the assessee is a company (not a company where public are substantially interested) & sum credited consists of share application money, share capital, share premium or any amount
• In addition to explanation offered by assessee-company, “explanation about nature & source also to be offered by the person in whose name such sum is recorded in the books of assessee”
• Such explanation should be found to be satisfactory in the opinion of AO.

Finance Act 2022 has inserted the following proviso u/s. 68 (applicable w.e.f. AY 2023-24):

• If the sum credited consists of “loan or borrowing”
• In addition to explanation offered by assessee, “explanation about nature & source to be explained by the person in whose name such sum is recorded in the books of assessee”
• Such explanation should be found to be satisfactory in the opinion of AO

Section 69 – Unexplained Investments:

• In any F.Y., the assessee had made investments which are not disclosed in the books, if any maintained
• No explanation about the nature & source or
• Explanation offered is not satisfactory
• Then, value of such investments shall be deemed to be income of that year u/s. 69

Section 69A – Unexplained Money, etc:

• In any F.Y., the assessee is found to be the owner of Money / Bullion / Jewellery / other valuable article
• Not recorded in Books of accounts, if any maintained and
• No explanation about nature or source of such acquisition or
• Explanation offered is not satisfactory
• Such money etc., may be deemed to be income of that year u/s. 69A.

Section 69B – Investments, etc., not fully disclosed in Books:

• The assessee had made investments or found to be the owner of Money / Bullion / Jewellery / other valuable article
• The A.O finds amount expended exceeds the amount recorded in Books maintained
• No explanation about such excess amount or
• Explanation offered is not satisfactory
• Such excess may be deemed to be income of that year u/s. 69B.

Section 69C – Unexplained Expenditure:

• In any year, the tax payer has incurred expenditure
• No explanation about source of expenditure or part thereof or
• Explanation offered is not satisfactory
• Such amount covered by expenditure or part thereof may be deemed as income of that year u/s. 69C.
• Such unexplained expenditure shall not be allowed as deduction under any head of income.

Section 69D – Amount borrowed or repaid on hundi:

• Any amount borrowed from / repaid to a person through hundi otherwise than by account-payee cheque.
• Such amt. shall be deemed to be income of the person borrowing / repaying the amount.
• Treated as income for the year in which it was borrowed / repaid.
• If amt borrowed is taxed u/s. 69D, the same cannot be taxed again while repayment.

Taxation under Section 69D of amount borrowed/repaid & Penalties under section 269SS and 269T.

In the case of acceptance in violation of section 269SS and if the transaction is proved to genuine penalty under section 271D will be levied which is equal to the loan/deposit accepted; but if the transaction is NOT proved to be genuine, then in addition to penalty, tax is also to be paid under section 68, which is 60% plus 25% cess.

In the case of repayment in violation of section 269T and if the transaction is proved to genuine penalty under section 271E will be levied which is equal to the loan/deposit repaid; but if the transaction is NOT proved to be genuine, then in addition to penalty, tax is also to be paid under section 69, which is 60% plus 25% cess.

  Section 115BBE:

• Introduced in the Finance Act, 2012 dealing with special rate of tax for sec 68 to 69D @30% w.e.f. 01.04.2013.
• Later amended by Taxation Laws (Second Amendment) Act, 2016 dt. 15.12.2016 w.e.f. A.Y. 2017-18:
  • Tax shall be calculated @ 60% on unexplained income u/s. 68 to 69D
  • Further increased by Surcharge @ 25% and Cess
  • No deduction in respect of expenditure / allowance / set off of any loss in computing income u/s. 68 to 69D

Penalty applicable to Income chargeable to tax u/s. 115BBE

Section 271AAC:

• Penalty @ 10% on tax payable u/s. 115BBE shall be imposed if such income is not reflected in Return of Income w.e.f. A.Y. 2017-18.
• In such a case the burden including penalty will come to 83.25%

Penalty u/s. 271AAA, 271AAB

Section 271AAB (1A):

• 30% of Undisclosed income, if
  • Assessee admitted undisclosed income
  • Paid tax before specified date
  • Filed ROI by declaring such undisclosed income
• 60% of Undisclosed income in any other case.

Once penalty u/s 271AAB applied, invoking 115BBE unjustified:

• Assessee filed ROI by including surrendered income accepted during search as penalty proceedings u/s. 271AAB(1)(A) have been initiated.
• Further AO passed order by adding Rs. 5,52,241/- as unexplained jewellery in addition to undisclosed income.
• ITAT held that assessee filed ROI in accordance with penal provisions of sec. 271AAB. “Invoking sec. 115BBE is against the law & also against principle of natural justice”.

[Sandeep Sethi Vs DCIT- ITA No.115/JP/2022]

No Addition u/s. 69 on excess stock found during search

• AO found excess stock in business premises during search conducted & made addition u/s. 69 towards unexplained investments.
• Assessee stated that excess stock got accumulated out of regular unaccounted business income only & “declared such income in ITR post search”.
• ITAT held that provisions of Sec. 115BBE is not applicable on the surrendered income on account of excess stock, hence the same cannot be treated as unexplained income.

[ACIT Vs Shri Anoop Neema- ITA No. 05/Ind/2020]

Additional Income cannot be treated as unexplained expenditure u/s. 69C to invoke Sec. 115BBE

• Certain loose sheets found & seized during search and seizure operation conducted, which represents cash payments around Rs. 5 Crores.
• Assessee accepted & declared such additional income under the head “Business & Profession” in ITR.
• AO rejected the arguments of assessee & treated the amount as unexplained expenditure u/s. 69C and brought to tax u/s. 115BBE.
• ITAT held that “AO should not have treated it as unexplained expenditure without making any further enquiry to disprove the evidence” & directed the AO to tax such income under normal provisions.

[Devender Rao Gaurkanti Vs. ACIT- ITA No. 439/Hyd/2022]

No Addition u/s. 68 if sales properly recorded in Books:

• Assessee made cash deposits after announcement of demonetization which were opening cash balance & cash sales.
• The AO on one hand accepted the books, on the other hand treated the sales as bogus.
• The Tribunal concluded that any addition by treating sales as bogus without rejecting books is unjust, unfair & bad in law.

[ACIT Vs Shri Nitin Sankhla- ITA No.98/RPR/2020]

Addition of presumptive income as undisclosed income u/s. 68 is not tenable

• The Assessee has not filed ROI for the A.Y. 2015-16, but as per Form 26AS the assessee is in receipt of income u/s. 194J.
• AO issued notice u/s. 148, later the assessee filed the return by computing income u/s. 44AD @ 8%
• AO was not satisfied with the explanations & offering of income u/s. 44AD, made addition as undisclosed income u/s. 68.
• ITAT held that adopting provisions of sec.44AD is permissible & addition as undisclosed income is not tenable and directed the AO to delete the addition.

[Mehjabeen Masood Khan Vs ITO- ITA No.766/MUM/2023]

No Addition u/s. 68 if depositors are proved:

• AO added Rs. 25 Lakhs as unexplained cash credits u/s. 68 by concluding that cash was deposited by a company to the bank account of assessee.
• Assessee proved that such money was interest bearing loan and received from that company through proper banking channel.
• ITAT Kolkata held that the assessee has proved the identity of the creditor & genuineness of the transaction. Hence deleted the addition made u/s. 68.

[Poddar Realtors Vs ITO- ITA No.265/Kol/2023]

Section 68 inapplicable in the absence of maintenance of books of accounts

• The AO made addition of Rs.7,37,948/- u/s. 68 on account of cash deposited into bank account of the assessee who is an agriculturist.
• The assessee held that cash deposited were from agricultural income & opening bal. of cash and the ROI is not filed as the TI is below the statutory limit.
• Assessee confirmed that as an agriculturist he had not maintained books of accounts.
• The ITAT held that mere possession of passbook cannot be treated as books of accounts & addition u/s. 68 is unsustainable.

[Sh. Satbir Singh Bhullar Vs ITO- ITA No.258/Asr/2022]

Cash Sales already reflected in P&L made as addition u/s. 68

• During the demonetization period, the assessee made cash deposits to bank account which were already reflected in P&L as income.
• The AO passed the order to treat such deposits as unexplained cash credits u/s. 68.
• The ITAT Mumbai held that such addition would amount to double taxation once as sales & again as unexplained credit which is against the principles of taxation and hence the addition deleted.

[DCIT Vs M/s. Kundan Jewellers P.Ltd- ITA No.1035/Mum/2022]

No Addition u/s. 68 if genuineness, identity & creditworthiness of creditors proved:

• AO treated unsecured loans of Rs.4.63 Lakhs as unexplained credits u/s. 68 and passed order u/s. 143(2).
• Assessee submitted bank statements, ledgers, PAN & Confirmation from lenders.
• ITAT Delhi held that loans were clearly visible in bank statements and assessee proved the genuineness, identity & creditworthiness of the transaction, directed the AO to delete the addition.

[Vachitra Builders P.Ltd Vs ITO- ITA No. 8148/DEL/2019]

Addition u/s. 68 merely based on suspicion without cogent evidence

• Assessee claimed exemption u/s. 10(38) on Long Term Capital Gains from sale of equity shares for the A.Y. 2014-15. (not in effect now)
• AO held that assessee with the help of brokers, entry operators worked out an arrangement in which share prices were rigged and sold at a higher price to arrive at tax free LTCG u/s. 10(38).
• Thus AO made entire sale proceeds as unexplained taxable income u/s. 68.
• ITAT held that addition by AO merely on the basis of suspicion is unsustainable.

[Abhishek Doshi Vs ACIT- ITA No. 3122/MUM/2022]

Addition u/s. 68 unjustified as Trade payable duly explained:

• The AO has made addition towards trade payables u/s. 68 as there is an increase in Trade Payables compared to previous year.
• The Assessee received funds from one company and paid the same to other companies through banking channels which were properly accounted in the books.
• The ITAT Chennai held that additions u/s. 68 is unjustified and liable to be deleted, hence quashed the order passed by AO.

[ITO Vs Shri Mahalakshmi Metal- ITA No. 179/Chny/2020]

Addition u/s. 68 unsustainable as revenue failed to discharge its onus

• Assessee admitted loan of Rs.16.47 lacs which was received through banking channel & filed address of lender along with confirmation letter.
• There was cash deposits in lender’s bank account & immediately thereafter cheque was issued in favour of assessee.
• AO held that assessee’s own undisclosed cash brought in the guise of loan & also it is not possible for a company with turnover of Rs.3.95 lacs to advance huge loan, hence added as income of the assessee.
• ITAT held assessee discharged its primary onus, further onus was on the revenue to make further enquiry & turnover alone cannot be considered as source of loan
• Addition u/s. 68 couldn’t be sustained.

[Sasi Enterprises Vs DCIT- ITA No. 843/Chny/2018]

Addition u/s. 69 unjustified on Late demonetisation cash deposit

• AO made addition of Rs. 35 Lakhs u/s. 69 due to delay in depositing cash during demonetisation.
• Assessee submitted cash flows from FY 2011-12 to 2016-17 & month-wise cash deposits.
• ITAT found that AO & CIT failed to adequately respond to these submissions and the assessee is a farmer with no other significant sources of income.
• ITAT concluded that “delay in deposit cannot be a valid basis for addition” and directed the AO to delete such addition.

[Rajkumar Vs ACIT- ITA No. 378/DEL/2021]

Addition u/s. 69 untenable as source of investment duly explained

• The AO has made the entire credits in bank account as unexplained investment u/s. 69
• The Assessee engaged in the business of real estate & no other substantial income and the credits in bank account represents gross receipts of the assessee.
  • The ITAT Delhi concluded that addition u/s. 69 towards unexplained investment untenable as source of investment stands sufficiently explained.

[DCIT Vs Sukhbir Shokeen- ITA No. 1477/DEL/2020]

No Addition u/s. 69 on account of unexplained investments on Bank Account

• The AO has made addition u/s. 69 on account of credit of Rs. 10 Lakhs reflected in the bank a/c of assessee.
• The Assessee was staying in a village and she had never been in a taxpayer category
• Assessee held that whatever saved from agricultural activity and husband’s salary throughout life had been deposited.
• The ITAT Kolkata concluded that she had not made any unexplained investment and investments out of past savings or loans taken from relatives cannot be made as addition u/s. 69.

[Anjali Roy Vs ITO- ITA No. 516/KOL/2022]

Addition made u/s. 69A due to non-filing of ROI

• AO added cash deposits of Rs. 10,00,000/- to the income of Assessee as unexplained money u/s. 69A due to non-filing of ROI for the A.Y. 2017-18.
• The firm was dissolved on 31.03.2003 itself. But due to inadvertent mistake PAN of Partnership firm still exists in Bank Account after necessary application was made to change the PAN.
• Assessee was carrying on business in the same name as a proprietorship concern & the deposits were duly declared in its ROI.
• The AO rejected the contention of Assessee that cash deposits were made out of cash withdrawals from same bank account.
• The Assessee appealed against the order passed by AO.
• Looking into the facts that order passed against the non-existing entity & also rejecting the responses of assessee, the ITAT New Delhi directed the AO to delete the impugned addition.

[M/s. Kishan Singh & Associates Vs ITO- ITA No.1688/DEL/2021]

Calculating Tax u/s. 115BBE the sums which are not taxable under Sections 68 to 69D:

• The AO has taxed u/s. 115BBE the delayed deposits of employee’s contribution to PF & ESI to the total income of assessee.
• The Assessee appealed & contended that Sec. 115BBE applies only when sections 68 to 69A are invoked.
• The ITAT Mumbai directed the AO to delete the addition as the case does not come under the mandate of Sec. 115BBE.

[M/s. Apcer Life Sciences India P.Ltd Vs. NFAC Delhi- ITA No. 2882/Mum/2022]

115BBE Amendment cannot be applied to search conducted prior to effective date (01.04.2017)

• Assessee treated excess stock found during search conducted on 16.08.2016 as “Business Income” and paid tax at normal rates.
• AO treated such stock as “Unexplained Investments” u/s. 69B and applied amended provisions of sec. 115BBE tax @ 60%
• ITAT held that addition made by AO by invoking sec 115BBE is unsustainable as it came into force only on 01.04.2017 & allowed the appeal.

[Samir Shantilal Mehta Vs ACIT- ITA No.42/SRT/2022]

Set off of loss denied to invoke section 115BBE:

• The AO disallowed set of carry forward losses by way of invoking the provisions of section 115BBE.
• AO did not make any addition u/s. 68 to 69D, therefore there was no question of disallowance of set off of losses.
• AO did not disallow in the assessment order u/s. 143(3) but added in subsequent proceedings u/s. 154.
• The A.Y. involved was 2013-14 & the provisions of denial of set off of losses in respect of income u/s. 68 to 69D introduced vide Finance Act, 2016.
• Based on these grounds, the ITAT Chandigarh directed the AO to allow set off of losses.

[M/s. Mahaluxmi Food Industries Vs. ITO- ITA Nos.711/CHD/2022]

Additional Income once accepted cannot be later rectified & taxed u/s. 115BBE:

• There was a survey in business premises of the assessee on 19.02.2015, later assessee filed ROI on 30.12.2015 incorporating additional income of Rs. 20 Lakhs offered during survey.
• AO passed notice u/s. 143(2) and considered the documents & accepted the return and concluded proceedings u/s. 143(3).
• Subsequently, AO passed rectification order u/s. 154 that additional income should be taxed u/s. 115BBE instead of slab rates.
• ITAT held that provisions of sec. 115BBE cannot be invoked via rectification as per sec. 154.

[Anjanee Vijetha Kasturi Vs. ACIT- ITA No. 196/Hyd/2023]

Conclusion:

From the foregoing judgements given above it is clear that these sections are not used properly. Since there is no meaning in creating artificial demands by passing high pitched assessments, by which the tax paying public are put to untold miseries, it is prayed that these draconian sections are removed from the statute itself and if not at least restore the rate of tax to 30% in order not only to reduce the litigation but also to have a congenial atmosphere between the tax gatherers and tax payers.