Understanding Applicability of Section 115BBE

Ajay Kumar Srivastava
Pr. Commissioner,
Income Tax (Central), Lucknow

ajay.k.srivastava@incometax.gov.in

Sh. Ajay Kumar Srivastava is an Indian Revenue Service (IRS) officer of 1988 batch currently posted as Principal Commissioner of Income Tax (Central), Lucknow. He has done M.Sc (Biochemistry) and has worked in I.T. Deptt at various levels dealing with assessment, administration, I&CI, Investigation, ITAT, Intl. Tax, and Central etc. He has also worked in the field of International taxation for 5 years.

Executive Summary

Post-demonetization in FY 2016–17, there has been large scale cash deposits in bank accounts, out of which a substantial portion could be unexplained u/s 69A. Such income in nature of Ss. 68 to 69D has been made liable for being taxed at higher rate @ 60% u/s 115BBE from AY 2017–18, irrespective of whether such unexplained income is suo moto offered by an assessee as income in the return of income filed u/s 139(1) or in response to notice u/s 142(1)/ 148/ 153A/ 153C, etc. Same would be the case for unexplained bullion/ jewelry/ stock/ other investment in shares and property etc. found during search or survey and offered in statement u/s 132(4) or 133A. Prior to 01 April 2017, the question whether the undisclosed income sought to be taxed was in nature of income u/s 68 to 69D or not, or the question with regards to nature of activity from which such undisclosed income was derived, was not at all relevant as the rate of taxation was same in either case i.e. @30% only. But this issue now has assumed huge revenue implications from AY 2017–18 onwards, due to enormous data available with AOs indicating that the unexplained cash to the tune of several thousand crores has been deposited in banks during FY 2016–17, which are required to be taxed @60% if found to be from unexplained sources. However, once the provision of s 115BBE have been amended to tax income assessable u/s 68 to 69D at the higher rate @60%, fresh arguments are now being raised at various forums that once the undisclosed income has been subsequently disclosed for taxation, then in absence of any evidence to the contrary shown by AO, such unexplained income or asset will have to be considered as derived out the known business activity only, if any carried on by assessee and hence would be in nature of business income only, not liable for being taxed at higher rate @60% u/s 115BBE. Some appellate forums have already started accepting this plea while allowing the tax relief, which appears to be contrary to the provisions of the Act. The controversy will also have far-reaching consequence on the applications filed before ITSC also u/s 245C(1) for AY 2017–18 onwards, as the full taxes need to be paid @ 60 % on the income disclosed before ITSC tax in order to treat the applications valid u/s 245C. Yet, the ITSC is accepting the applications as valid even in cases where the taxes on additional income disclosed have been paid by assessee @30% only. Hence, this discussion is an attempt to analyze and understand the issue so as to take an informed and consistent view. In this context, the following questions require analysis and examination:

1. Whether the deemed income u/s 68 to 69D obliterates the classification of 5 heads of income u/s 14 in view of the saving clause u/s 14 and therefore deems these incomes in a classless manner irrespective of the fact that such deemed income could also possibly be in the nature of any one of 5 heads u/s 14?

2. When source of any item of cash/ asset/ entry, etc. remains unsubstantiated within the scope of provisions of ss 68 to 69D, can there be a presumption by piercing the veil created under the deeming fiction, obliterating the classification of heads of income u/s 14 and still attempt to classify the nature of unexplained income into any of the heads u/s 14, even though such income was not at all recorded or incorrectly recorded in books of accounts maintained for such known business activity, if any?

3. Whether the nature of deemed income assessable u/s 68 to 69D can be obliterated just because, in absence of any contrary evidence in possession of AO, the same has been claimed to be falling under any of 5 heads of sec 14 while offering the same for taxation by giving statement u/s 132(4) or filing ROI u/s 153A or application u/s 245C(1), even when the test of ‘nature and source’ as envisaged u/s 68 to 69D remains unsubstantiated on the touchstone of identity and creditworthiness and genuineness of the transaction?

4. Whether levy of higher tax rate u/s 115BBE is compensatory in nature so as to curb the mischief of not reporting incomes u/s 68 to 69D in the regular course itself at the first place and therefore, when subsequently detected by department as assessable u/s 68 to 69D, the purpose of 115BBE is to compensate by imposing higher rate of tax for the default committed earlier?

5. Whether provisions of 115BBE are applicable to application filed u/s 245C(1) before ITSC also disclosing incomes in nature of ss 68 to 69D which are liable for being taxed at higher rate of 60%?

Sections 68 to 69D are grouped under the chapter VI of the I-T Act whose heading is ‘Aggregation of Income and Set-off or Carry Forward of loss’. It implies that these deeming provisions are without any reference to incomes of any class, if the conditions therein are satisfied and therefore deemed income falling in these provisions will not be restricted or governed by any other provisions. Further, though the heads of income chargeable under the Act have been classified u/s 14 of the I-T Act but as the s 14 also starts with a saving clause, which implies that there, can be a class of income other than the classes of income u/s 14, if provided under any other part of the Act. It means that if any other provision provides for any other class of income to be assessed as deemed income, the provisions of such section shall override and not be restricted by operation of s 14. Therefore, reading s 14 with s 68 to 69D which are grouped in Chapter VI under the heading ‘Aggregation of Income and Set-off or Carry Forward of Loss’, clearly implies that when the income is assessable u/s 68 to 69D then the classification u/s 14 gets obliterated and irrespective of actual nature/ class of income, all such incomes are aggregated as single head of deemed income u/s 68 to 69D. To put it differently, the deemed income is itself a separate class carved out within the classes of income u/s 14. The provisions of ss 68 to 69D, therefore by statutory fiction, create a veil of ‘deeming income’ out of all classes of income by obliterating the actual nature/ class of income as defined u/s 14. Thus, the income u/s 68 to 69D though in nature of incomes as defined in section 14 but by way of deeming fiction they are aggregated and bundled into a single head of deemed income by creating a fictional veil, when the income is from unexplained sources. Sections 68 to 69D are like umbrella provisions which cover under its span all incomes falling u/s 14, though without making any distinction as to which of 5 heads such deemed income actually relate to. It is for this reason perhaps that the statute has also placed such unexplained deemed income under heading ‘Aggregation of Income in Chapter VI and not under Chapter IV, which deals with taxation of the remaining 5 heads of income only. Normally, the income is assessable u/s 68 to 69D when either the entry is recorded incorrectly in the books or not recorded at all; and the source is not explained. It is axiomatic that once the source of income itself has not been proved u/s 68 to 69D on the touchstone of identity of persons, their creditworthiness or genuineness of transaction, then it shall be futile to pierce through the veil of deeming fiction and still attempt to assign a source to such income for purpose of its classification into any of the 5 heads of income u/s 14, just because the ultimate source of such unexplained income could also possibly have some nexus to any of 5 heads u/s 14.

Further, s 115BBE is placed under Chapter XII, which is deals with determination of tax in special cases without referring to the regular provisions of the Act, which may also be applicable. Further, the manner of computation of tax payable u/s 115BBE itself suggests that it presupposes the existence of other items of income besides the income in nature of ss 68 to 69D and that is why the tax @60% is computed only on that portion of income which is referred u/s 68 to 69D and for remaining items of income, it prescribes a normal rate of tax. Hence, if the income u/s 68 to 69D were also required to be classified under any heads of income u/s 14, then there was no requirement of providing two different methods of tax computation u/s 115BBE and that s 115BBE would have become redundant as otherwise every kind of income can have a nexus to any of the 5 heads of income u/s 14 also.

The view that once the source of income being assessed u/s 68 to 69D itself is not explained, then it may not be possible to classify such deemed income under any of heads mentioned in s 14, is also upheld in Fakir Mohamad Haji Hasan v CIT 247 ITR 290(Guj). It has been held by Gujarat High Court that the expression ‘save as otherwise provided by this Act’ used in s 14, clearly leaves the scope for deemed income of nature covered under scheme of ss 69, 69A, 69B and 69C being treated separately, because such deemed income is not income from salary, house property, profit and gains of business or profession or capital gains, nor the income from other sources. Similarly, the Punjab and Haryana High Court in case of Kim Pharma Pvt Ltd v CIT 216 Taxman 153 (P&H) held that the unexplained money disclosed during survey, which was not reflected in books of accounts and no source from where it was derived was declared by the assessee, was assessable as deemed income u/s 69 A and not the business income. The ITAT Chandigarh, in case of Famina Knit Fab v ACIT 176 ITD 246 (Chandigarh Trib.) has also held that as far as the income surrendered and to be assessed u/s 69, 69A, 69B and 69C of the Act, as held above before us, the same is to be subjected to tax as per the provisions of s 115BBE of the Act.

The maxim: nullus commodum capere potest de injuria sua propria (i.e. no man can take advantage of its omissions/ wrongs) is one of the salient tenets of equity and a judicially accepted principle. In case where a person claims to be deriving income from any known source say business or profession, the burden is already cast under the statute on the assessee to maintain the record of receipt and expenses pertaining to such activity under the provisions of 44AA and get the same audited u/s 44AB of the I-T Act, if applicable. If any receipt, or expenditure, or any asset claimed to be acquired out of known business activity, is either not at all recorded or recorded incorrectly in a camouflaged manner in books maintained for any business activity, then the assessee cannot be said to have fulfilled this statutory obligation. Hence, subsequent claim that even the undisclosed receipts are also presumed to be from his known business activity only, merely because the assessee is having that particular activity only as its known business activity, would tantamount to claiming benefit from its own wrong-doings, when the assessee itself does not record the receipt/ expenses in its books of accounts, for which it was under statutory obligation to do so. The assessee has no vested right to attribute such incomes/ expenses under any of the heads of income, as the same will be contrary to the above principle. On the other hand, deeming fiction deems such unrecorded incomes or expenses as a separate class of deemed income from unknown sources. Merely having a known business activity will not, per se, render any unexplained asset/ income as business/ profession income u/s 14, unless the burden of proving the source u/s 68 to 69D is also discharged. The onus of proving that such receipts are from an activity other than disclosed business activities is not upon the AO. Therefore, there can be no presumption against the deeming fiction u/s 68 to 69D to hold that income, whose source is not explained, will still be classified as income under any head u/s 14. It would be, therefore, impermissible to attempt and classify such incomes under any of specific heads, even if there is any activity which can be remotely/ indirectly linked to such deemed income.

Under the provisions of ss 68 to 69D, the concept of taxing real income appears to have been diluted to a limited extent only by providing a deeming fiction, which allows the taxation of even those receipts/ entries/ assets as deemed income, which would have been otherwise not taxable, either being categorized as capital receipt like gifts/ loans etc. or being incomes which apparently do not have direct nexus to any known activity/ transaction, so as to fall under any of the items of income u/s 2(24). Under deeming fiction, any receipt can be treated as income if the burden u/s 68 to 69D is not discharged. Once the requirement of proving the ‘nature & source’ is fulfilled, then only a receipt/ entry/ asset etc. representing income will pierce through the veil of deeming fiction, so as to enter into the domain of income as defined u/s 2(24) r/w s 14. In the case of G.K. Karthikeyan 201 ITR 866 (SC) the Supreme Court observed: it would be wrong approach to try to place a given receipt under one or the other sub-clauses of section 2(24) and if it does not fall under any of the sub-clauses, then to say that it does not constitute income. The idea behind inclusive definition is not to limit its meaning but to widen its net. Due to inclusive definition the word “income” would therefore encompass a receipt if it partakes the character of income, even if it does not fall within the ambit of any of the sub clauses u/s 2(24). This decision, by implication, shall mean that the deeming provisions can operate in different domain and the income assessable therein has overriding effect over the classification of any item of income u/s 2(24) r/w 14 of the I-T Act. Therefore, in my opinion, there would be no requirement of classification of such deemed income into any of the 5 heads of income u/s 14 or tracing the nexus of such income with the known activity/ transaction, which could have generated such incomes.

There is another way to look at the issue. The credits of share capital, or share premium, or business loans, which the assessee itself records in its books as capital receipts, if subsequently found to be unexplained, it would have been difficult to tax the same as business income in absence of deeming provisions u/s 68. Hence such unexplained credits would not qualify to be taxed as business income merely because the assessee has the disclosed business activity as its only source of income. Similarly, in respect of credit of receipts likes LTCG on sale of shares, if the assessee fails to prove the genuineness of transaction of sale or the value for which the shares could have been expected to be sold, then such receipts do not get automatically classified as income from capital gains for being taxed at lower rates just because the assessee had claimed to have sold shares, which in any case were capital asset. On a similar analogy, if someone having salary income only, is subsequently found in possession of unexplained cash/ bullion, it cannot be said that the same would assessable as salary income just because he has no known source of income other than salary. They all are still liable to be taxed under deeming provisions u/s 68/ 69/ 69A only. In another situation, where the assessee incurs expenditure in relation to a business activity carried by him but does record the same in books, then even though a nexus of expenses with business activity is indicated in seized documents but still the same are not only deemed as income u/s 69C but also not allowed as business expenditure. Under all these situations, except for the specific deeming fiction on the statute, such credits/ expenses could not have been assessed as income at all and the least as business income. The onus is on the assessee to establish the source of the surrendered income so as to classify the same under any head u/s 14, failing which it has to be necessarily categorized as deemed income u/s 69/ 69A/B/C of the Act and establishing the source of income is a factual matter. The High Court in the case of Pr. CIT v. Khushi Ram & Sons Foods (P) Ltd in [IT Appeal No. 126 of 2015, dated 29 July 2016], wherein the assessee had set off unabsorbed losses u/ss. 70 & 71 against income surrendered on account of building renovation, office equipment and sundry receivable, to which, the Hon’ble High Court had held that it is for the assessee to establish that the source of the surrendered income was from business to claim it as such and set off business losses against the same. Hence, it is clear that once the source is not explained as required under deeming provisions, there shall be no need to assign any classification of such income under heads of income u/s 14.

The objective of s 68 to 69D is to tax the income as per deeming fiction in the year in which the entry/ asset representing the deemed income is found to be credited or invested or under possession, without identifying such income to the actual year in which it was generated, or acquired, or the actual transaction/ activity which could have possibly resulted in generation or acquisition of such income/ asset. For e.g. once unexplained bullion is found, the same is assessable as deemed income in the year of search, even when the date/ year of its acquisition is unknown. This again implies that the income assessable is delinked from the actual activity or actual year of acquisition in absence of its source being explained. Hence, it would be impermissible to try and attribute such unrecorded income to any particular year or particular activity which resulted in earning of such income or to any particular head of income u/s 14.

There is twin requirement to repel the provisions of deemed income u/s 68 to 69D, i.e. by explaining: (i) its nature, and (ii) the source. Following the rule that no word in any statute can be considered redundant, the implication of both the words i.e. ‘nature’ and ‘source’ must be understood in their respective contexts. The word ‘nature’ in context of ss 68 to 69D would normally refer to the nature of activity/ transaction which resulted in the generation of impugned income. The word ‘source’ in the same context would refer to nexus of such income generating activity/ transaction with name and identity, creditworthiness of person with whom such activity/ transaction was done along with proving the genuineness of transaction also. The requirement of proving these 3 essential ingredients to prove the source in order to escape the rigours of the deeming fiction has been upheld universally. The conjoint burden of proving the ‘nature and source’ is therefore, not restricted to merely claiming the nexus of any activity/ transaction to a particular credit/ income/ asset but also requires to establish with cogent evidence the nexus of such activity/ transaction with source also by providing the name and identity, creditworthiness of person with whom the activity/ transaction was done along with proving the genuineness of transaction. The burden of proving ‘nature’ and as well as ‘source’ though interlinked, but both need to be independently discharged. The courts have already held in various decisions that mere furnishing of particulars or the mere fact that the transactions have been made though banking channels would not discharge the burden u/s 68. Hence, merely providing the nature of activity/ transaction resulting in undisclosed income which has been disclosed subsequently without proving the source also, will render such income still being classified as income from unknown/ unexplained sources, under deeming provisions. For e.g. in case of a doctor by profession, any undisclosed cash/ other assets which in absence of any other income generating activity, might be remotely linked to his profession as doctor but the source of such receipts shall remain unexplained unless such receipts are recorded in books of accounts maintained for his medical profession and he also provides the details of such professional receipts with details of the patients etc. and the expenses incurred by him in treating those patients establishing the nexus as well as quantification of such receipts to his professional activity. Without this, it cannot be assumed that the resultant surplus in form of undisclosed cash/ other assets represented his professional income and not the unexplained income under deeming provisions. This is so, because even if nature of income generating activity is apparent but in absence of discharge of burden of proving the detailed source also, such income would still be unexplained u/s 68 to 69D and but for such deeming provisions, it would not have been possible to assess the same as professional income. Similarly, in case of a business where some unrecorded excess stock is found, there can be no presumption to treat the value representing such excess stock as application of business income in absence of the full details as to when, how and from whom such income was derived which has been invested in unexplained stock. Any receipt which is claimed as capital receipt or any application of receipt towards any asset, cannot be presumed to be from any particular activity unless the twin conditions of proving its nature as well as source, both are simultaneously satisfied. In short, the burden of proving nature as well as the source have to be independently established with cogent evidence and there can be no presumption with regards to nature and source of unexplained income under any circumstances.

The initial onus of proving that the income does not fall u/s 68 to 69D is upon the assessee and not on the AO. Unless this burden is discharged at the relevant point of time, it would be futile to assign any nexus of such credit/income to a particular activity or heads of income u/s 14. There can be no presumption with regards to the source of earning any income just because the impugned income has been offered for taxation. The two or more unexplained entries representing outflow or inflow of cash cannot be presumed to be from the same source and available at same point of time for being squared off with one another to work out the peak value of unexplained income/ investment etc., unless the source and destination of each inflow and outflow entry is identified and found to be common. This view is also supported from the decisions in case of Ananthram Veerasinghaiah & Co 123 ITR 457 (SC), Bhaiyalal Shyam Bihari 276 ITR 38 (Alld), JRD Stock Brokers 409 ITR 346 (Delhi) wherein while denying the benefit of peak credit for purpose of computing the unexplained income, the courts have held that unless the assessee provides the details of person from whom the money was received or paid and explains the details of transactions linking each outgoings and incomings, the benefit of peak credit cannot be given. The same principle if applied to the present issue also would suggest that unless the assessee identifies the transaction with complete details, the names and creditworthiness of person with whom transaction was executed as well as the genuineness of transaction, there should be no necessity to relate such undisclosed income to be derived from any particular activity, source or classify them under any of 5 heads u/s 14.

The provisions of section 115BBE are only consequential in nature, which are applicable only when the impugned income chargeable to tax is in the nature of income assessable u/s 68 to 69D. By the use of expression ‘…….in the nature of income assessable u/s 68 ….’ it is clear that for making the section 115BBE applicable, it is not mandatory that the AO must have by any order determined and assessed the income u/s 68 to 69D. It would be lawful to invoke 115BBE by virtue of sub-section (1) even where the income is already offered by assessee itself in the Return filed u/s 139(1) is in the nature of income assessable u/s 68 to 69D, though not actually assessed under these sections by way of any specific order of the AO. Therefore, while filing returns whether the income is disclosed or not is not at all the relevant factor to decide the applicability of section 115BBE; rather, it is the nature of assessable income, which determines the applicability of section 115BBE.

Under s 115BBE, it has been specifically provided that no benefit or deduction of any expenses or set off of any losses shall be allowed against the income in nature of ss 68 to 69D. This also reinforces the view that once any income falls under deeming provisions, such income loses its nexus or live link to the legitimate expenses or losses of the business/ profession which assessee might have been carrying. By implication it would mean that income in nature of incomes prescribed u/s 68 to 69D (even though not assessed as such by AO) shall be subject to higher tax rate @60% u/s 115BBE, irrespective of whether such income is otherwise in nature of business income or not.

The mere disclosure of nature of activity from which an undisclosed income is claimed to be derived and disclosed in the return of income filed u/s 139/ 148/ 153A or admitted u/s 132(4), u/s 245C(1), is not sufficient to take such undisclosed income out of the sweep of income referred to u/s 68 to 69D. The use of the expression “……. not recorded in books of accounts….” u/s 69/69A etc. clearly suggests that the point at which the disclosure of nature & source of income is to be tested, is the time at which such transactions was actually performed and required to be recorded in books of accounts, if any maintained for that business activity. This view is further strengthened by the explanation to section 276C which defines the meaning of willful attempt to evade any tax, penalty, interest etc. as under:

Explanation— For the purposes of this section, a wilful attempt to evade any tax, penalty or interest chargeable or imposable under this Act or the payment thereof shall include a case where any person—

1. has in his possession or control any books of account or other documents (being books of account or other documents relevant to any proceeding under this Act) containing a false entry or statement; or

2. makes or causes to be made any false entry or statement in such books of account or other documents; or

3. wilfully omits or causes to be omitted any relevant entry or statement in such books of account or other documents; or

4. causes any other circumstance to exist which will have the effect of enabling such person to evade any tax, penalty or interest chargeable or imposable under this Act or the payment thereof.]

Thus under the I-T Act, when omission to record any entry has itself been defined to be deemed as an attempt to evade tax/penalty/interest, then non-recording or incorrect recording of any entry in books of accounts, for the purposes of section 68 to 69D, also needs to be understood in the same manner, as attempt to evade tax/penalty/ interest etc. Therefore the disclosure of income, which is otherwise not recorded in books of accounts or record incorrectly, would still be in the nature of income u/s 68 to 69D only, even if the same is disclosed subsequently in returns filed or statements u/s 132(4) or u/s 245C(1). Therefore, a conjoint reading of section 115BBE with section 68/69A and explanation to section 276C, would reveal that even in case where assessee discloses some unrecorded incomes subsequently in statements u/s 132(4)/ 131(1) or in ROI u/s 139/148/153A or application filed before ITSC u/s 245C(1), which otherwise was assessable under the deeming provisions as being nor recorded in books or incorrectly recorded, it does not take away such disclosed incomes from being in the nature of income assessable u/s 68 to 69D and consequently shall not escape the rigors of applicability of section 115BBE. In short, what was required to be reflected as income in books of accounts, would still retain its character as being not disclosed in books of accounts, even if the same is subsequently disclosed in returns filed u/s 139/148/153A or any statement made u/s 132(4) or disclosed before ITSC. Therefore, to contend that any particular receipt/ entry/asset is not in the nature of income assessable u/s 68 to 69D merely because such receipt/entry/asset has been subsequently disclosed in returns filed or u/s 132(4) or before ITSC, is legally untenable proposition.

The provisions of 115BBE appear to be in the nature of compensatory provisions applicable to incomes, which were not recorded or correctly recorded at the first place but disclosed subsequently in returns filed u/s 153A.But for provisions of 115BBE, such incomes though falling into offence of attempt to evade tax/penalty, would have suffered taxation without levy of any penalty because no penalty can be computed when returned and assessed income are same, even though the assessee failed to disclose the receipts earlier or establish the source of such receipt/incomes. The High court in Kirit Dahyabhai Patel v. Assistant Commissioner of Income Tax (2015) 280 CTR (Guj) 216 has held that the return filed u/s 153A would take place of return filed u/s 139 and hence no penalty was leviable u/s 271(1)(c). Similar view has been upheld by High Court in CIT vs Neeraj Jindal 393 ITR 1(Delhi). As no penalty is leviable on the difference of income declared in ROI filed u/s 153A vis a vis the return u/s 139(1) in view of the above decisions, the provisions of 155BBE levying higher tax rates can therefore only be compensatory in nature to compensate for the penalty u/s 271(1) (c), which was otherwise leviable as the impugned income was not disclosed u/s 139(1).

The provisions of 115BBE taxing certain types of income @60% were brought on statute by Fin. Act 2017 after demonization, after introduction of prevention of Black Money (Undisclosed foreign income & assets) Act, Prohibition of Benami Property Transactions Act etc., with a view to curb the mischief of subsequently disclosing the undisclosed cash/entries/assets of earlier years in return of income filed for current year in the garb of regular business income or income from other sources and paying much less taxes and that too without paying any penalty also. This was also intended to prevent such disclosures at normal rates as compared to the rate@45% applicable for disclosing such cash under PMGKY, which was also applicable during the same FY. Some individuals file their return of income, offering income in the nature of Tuition Fee, Commission, Brokerage, Embroidery, etc., and avail the benefit of exemption limit as well as benefit of tax slab. In the absence of requisite substance for proving nature and source in such transactions, one needs to be considered under amended Section 115BBE to prevent the claim of undue benefit of lower slab rates. The provisions of section 115BBE being anti-abuse provision, are therefore required to be interpreted and applied strictly by following the Hayden’s Rule of Mischief to avoid and prevent the mischief, which the section has sought to cure.If it is not interpreted in the manner as explained in above paragraphs, then it will lead to an absurd situation making the provision of 115BBE inapplicable in all cases. Because in each and every case of income being found falling in deeming fictions u/s 68 to 69D, the assessee will try to disclose the earlier undisclosed incomes in the returns and attribute such income to be derived from a particular disclosed activity only, merely on grounds that AO has not been able to suggest/prove any other income generating activity being carried by assessee, and thereby claiming that 115BBE r/w 68 to 69D is not applicable and rendering the provisions of 115BBE otiose. It is a judicially accepted principle a statute cannot be interpreted in a manner to make it redundant.

The issue has implications on the applications filed u/s 245C before ITSC also. The eligibility of application u/s 245C (1) has also to be tested by fulfilling not only on the manner of earning the income, full & true disclosure of material facts but also the condition that the due tax has been fully paid on the additional income admitted before ITSC. On filing of application before ITSC, the jurisdiction to compute the total income in pending proceedings gets transferred from AO and vests with the ITSC. As a result, the undisclosed income is determined by ITSC instead of AO. As the process of determination of undisclosed income in nature of 68 to 69D of those pending proceedings still happens though before the ITSC, with only difference that these proceedings get vested in proceedings before ITSC, the provisions of 115BBE shall still be applicable to proceedings before ITSC also. Even otherwise also, once the disclosure of such income by assessee itself falls under sweep of 68 to 69D, then there is no provision authorizing the ITSC to repel the applicability of section 115BBE to the income in nature of 68 to 69D disclosed by assessee before ITSC.

Once the provisions of 68 to 69D are applicable to incomes disclosed in applications filed u/s 245C(1) in a proceeding which was pending before the AO, the tax still needs to be paid @ 60% because had the same proceedings continued before the AO, the same would be subject to tax @60% u/s 115BBE. Hence the mere fact that the income which as was assessable by AO due to pendency before him, is now being quantified by ITSC, does not in any way alter the nature of income nor repel the applicability of 115BBE.

Claims are often made by assessee that 115BBE would not apply to applications filed before ITSC as the ITSC quantifies the income in the spirit of settlement. It is also being claimed that once the applicant states the ‘manner’ of earning the undisclosed income by admitting the same before ITSC to be derived during the business activity carried by it, the ITSC is mandated to quantify the business income based on spirit of settlement for the real income only which could have been derived by assessee. This argument appears to be misplaced. The ITSC being creation of the Act, cannot overlook the implication of any statutory provisions of ss 68 to 69C read with 115BBE while settling the income, nor can change the nature of income, which is otherwise is assessable under any of deeming provisions. Once the source is not proved in respect of undisclosed income offered before ITSC, such income cannot be classified into business income by ITSC. The ITSC has to  assess the income taxable as per the Act only, which includes the income taxable under deeming provisions too. Hence, the tax payment has to be made @60% on the admitted additional income before ITSC in order to make the application eligible for being proceeded with as not invalid u/s 245C(2C) of the I T Act.

Further, the eligibility of valid application u/s 245C(1) is based not only on the disclosure of manner of earning the income but also on full & true disclosure of material facts. Therefore, mere disclosure that income was derived during business activity without giving evidences/ details with regards of the person as to from whom it was received of income does not discharge the burden of full & true disclosure. Further, the requirement of stating ‘manner’ of earning undisclosed income u/s 245C(1) has different connotation than the requirement of proving the ‘nature & source’ of income u/s 68 to 69C, wherein the onus is much heavier in the latter section. The disclosure of manner before ITSC therefore, is not synonymous with explaining the nature and source as envisaged u/s 68 to 69D. Therefore, by identifying any activity/ transaction to a particular credit/income disclosed before ITSC, even if the condition of stating the manner of earning u/s 245C(1) is presumed to be fulfilled, yet the onus of proving ‘source’ remains to be proved, making such undisclosed income still in the nature of income assessable u/s 69 to 69D.

Source- Taxaloguue – Volume 1- Issue 2- OCT-Dec 2019 Issued by Directorate of Legal & Research -Central Board of Direct Taxes