Yes, in certain case even if assessee received money through proper banking channels still it may attract tax @ 82.50% if assessee could not explain its source, identity and creditworthiness etc of the lender/giver of the amount to the satisfaction of Assessing Officer (the “AO”). It is worth noting here that transaction through banking channels only is not sufficient to prove the genuineness of the transactions.
What is section 68 of the Income Tax Act 1961
The provisions relating to tax treatment of cash credit are given in section 68. As per section 68, any sum found credited in the books of a taxpayer, for which he 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, may be charged to income-tax as the income of the taxpayer for that year.
In case of a taxpayer being a closely held company (i.e., not being a company in which the public are substantially interested), if 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 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.
The proposed amendment to section 115BBE as reproduced below for better understanding:-
“(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).
From the above amendment, it is clear that once AO makes addition under section 68, section 69, section 69A, section 69B, section 69C or section 69D tax will be payable at 60% of the addition made without deduction of any expenditure or allowance. In addition to this surcharge at the rate 25% of such tax i:e 15% is leviable. This makes effective tax rate @ 75%. Further, new section 271AAC has been introduced as a penalty section which is reproduced 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:
It means penalty is automatic once AO determines income referred to in section 115BBE, penalty @ 10% of tax payable in addition to tax (including surcharged) of 75% i:e 7.50%. Hence, total tax works out to be 82.50% of addition made under aforesaid section.
Implication on Shares Application money received
In case assessee receive share application money from subscribers of shares, the assessee has to prove the genuineness of the transaction, the identity of the subscribers, and creditworthiness of the subscriber even if the amount is received through proper banking channels. In case the assessee is unable to prove subscribers’ identity or genuineness or creditworthiness to the satisfaction of AO such share application money received could be taxed @ 75% plus penalty.
Implication on Unsecured Loan received
Suppose Mr. A running a proprietor firm received interest bearing unsecured loan from any person that may be from relative, company, partnership firm, or from NBFC’s. Unsecured loan taken through proper banking channels still Mr, A has to prove the genuineness of the transaction, the identity of the subscribers, and creditworthiness of the lender. There are some genuine cases in which lender could not be traced, or was not able to give sufficient evidence in favor of the borrower in that case unsecured loan received could be taxed at 75% plus penalty.
Satisfaction of AO is very much subjective and at the discretion of AO. There are absolutely no guidelines given by the CBDT in this respect what will constitute satisfaction to the AO and what document is sufficient to prove transaction as genuine. However, various courts have held that no addition could be made on account of unexplained credit under section 68 if assessee proves the genuineness of the transaction, the identity of the subscribers, and creditworthiness of the subscriber. However, still, AO may exercise discretion and may not accept it. As stated above there is no guidelines given by the CBDT in this respect what will constitute satisfaction to AO.
There are many genuine cases where even if the amount is received through a proper banking channel, documents cannot be traced or produce due to lapse of time, loss of document and reason given while tabling the proposed amendment by Hon’ble Finance Minister Mr. Arun Jaitely has lost its sight completely. From the objective and reason given, it can be very well assumed that main reason for the introduction of proposed amendment is only to restrict cash deposited or converted in wake of announcement on demonetisation of high denomination currency notes in India by Hon’ble Prime Minister Shri Narendra Modi. But the proposed amendments does not restrict its scope only on cash deposited/ unaccounted money/black money that can be converted into white by legal means. However, proposed amendment has given wide power to taxman to levy tax as high as 82.50% on any addition made by taxman in course of assessment proceeding u/s 68, section 69, section 69A, section 69B, section 69C or section 69D of the Income Tax Act 1961.
The statement of object and reasons for such amendment to Taxation law (second amendment) bill, 2016 was as under:-
Evasion of taxes deprives the nation of critical resources which could enable the Government to undertake anti-poverty and development programs. It also puts a disproportionate burden on the honest taxpayers who have to bear the brunt of higher taxes to make up for the revenue leakage. As a step forward to curb black money, bank notes of existing series of the denomination of the value of five hundred rupees and one thousand rupees (hereinafter referred to as specified bank notes) issued by the Reserve Bank of India have been ceased to be legal tender with effect from the 9th November 2016.
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.
From the above statement, it is clear that amendment was introduced to curb the practice of unaccounted money into white. But the way amendment has been proposed it will cover any amount received by assessee even if it is received through proper banking channels which may attract tax @ 82.50 % in the certain case, as discussed above.
I support the bold step taken by the government for demonetisation of High Denomination currency notes but my only appeal to CBDT is to give some guideline so that subjective and wide power given to taxman under the aforesaid amendment is not misused to harass the honest tax payer.
The article is written by CA. Rahul Sureka, FCA, CS, LLB and can be reached at firstname.lastname@example.org
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