Section 115BBE and Section 68 – Taxing the unexplained!

This Article aims at highlighting the unsung provisions of Section 115BBE of the Income-tax Act, 1961 (Act), applicable from AY 2013-14 onwards and surfacing some practical concerns surrounding its applicability and further amendments made to this section.

Background

Certain unexplained cash credit, investment, expenditure, etc., are deemed as income under Section 68, Section 69, Section 69A, Section 69B, Section 69C and Section 69D of the Act and were earlier subject to tax as per the tax rate applicable to the taxpayer. As a consequence, in case of individuals, HUF, etc., no tax was levied up to the basic exemption limit and even if such income was higher than basic exemption limit, it could be levied at the lower slab rate.

Present framework

Section 115BBE of the Act now specifically levies tax on such unexplained items deemed as income at the flat rate of 30 per cent (plus surcharge and cess, as applicable), irrespective of the slab of income. Moreover, no deduction is available for any expenditure or allowance while computing such deemed income.

Illustration:

Further this section was amended by Finance Act 2018.However this amendment was made effective retrospectively from A.y 2017-18

 Before amendment the provision was:

Sub-section (2) of said section provides that 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 the Act in computing his income referred to in clause (a) of sub-section (1).

After amendment the provision is:

Sub-section (2) of said section provides that, 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) [and clause (b)] of sub-section (1).

For better understanding the section is re-produced below:

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) 65[and clause (b)] of sub-section (1).

Brief Analysis:

Let us now ponder on the applicability of Section 115BBE of the Act with reference to the provisions of Section 68 of the Act dealing with unexplained cash credit.

Section 68 of the Act provides inter alia that if any sum is found credited in the books of a taxpayer and he either does not offer any explanation about nature and source of such sum, or  the explanation offered by him is not satisfactory in the opinion of Assessing Officer, then such sum can be taxed as his income.

Consider a scenario where an individual files his return of income, declaring income from Tuition fees and avails the tax slab benefit. However, such individual is unable to demonstrate / substantiate the source of such income (as regards the payer, etc.) and the Assessing Officer rejects the explanation, being not properly explained to his satisfaction.

Under such circumstances, it appears that the Assessing Officer may now be tempted to trigger the provisions of Section 115BBE of the Act read with Section 68 of the Act. This means that such income, though already offered to tax by the taxpayer, would be taxable at flat rate of 60 per cent on gross basis (i.e., without any deduction / allowance).

Does this means that the Assessing Officer is vested with unfettered powers to reject any explanation, being not to his satisfaction?  No – the Assessing Officer is bound under law to act reasonable and just while framing any satisfactory opinion surrounding the explanation offered by the taxpayer. The taxpayer is nevertheless saddled with the primary obligation to demonstrate the nature and source of any sum credited in books.

It is seen that many individuals file their return of income, offering income in the nature of Commission, Brokerage, Embroidery charges, etc., and avail the tax slab benefit. In the absence of requisite substance in such transactions, one may possibly need to now evaluate the income-tax implications under Section 115BBE of the Act, if any.

Extract of Section 68 is re-produced below:

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 may be 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.

Some Posers – Food for thought!

• While Section 68 of the Act traditionally applies to unexplained ‘cash credit’ like loans, deposits, advances, share capital, etc., the moot point is whether it will also apply to ‘income’ which is already offered to tax?
• If an Assessing Officer rejects taxpayer’s explanation surrounding the head of taxation (say, House Property v. Business Income, Business Income v. Capital Gain), being not to his satisfaction, whether Section 115BBE of the Act can still be triggered, empowering the Assessing Officer to inter aliadeny all legitimate expenses / allowances?

Perhaps, it may be possible to argue that Section 115BBE of the Act is a machinery provision to levy tax on income and it should not enlarge the ambit of Section 68 of the Act to create a deeming fiction to tax any sum already credited / offered as income. Such recourse is unwarranted, keeping in mind the objective to introduce Section 115BBE of the Act was to only curb the practice of laundering of unaccounted money by taking advantage of basic exemption limit.

Conclusion and key takeaways

Nobody can predict destiny, but one can take adequate measures to safeguard / insulate him from the foreseeable hindrances that may surface down the line. In the present context, some key takeaways are as under:

• Endeavour to demonstrate substance over form;
• Maintain robust documentation, evidencing the nature and source of income;
• Prefer transactions routed through normal banking channel, which will lend due credence.