Section 115BBE and Section 68 – Taxing the unexplained!

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 onwardsand surfacing some practical concerns surrounding its applicability.

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 exemptionlimit 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:

Sr. No.	Particulars	Tax impact
		Erstwhile provisions	Present framework
a.	Unexplained items deemed as income under Section 68, etc.	1,00,000	1,00,000
b.	Other income	50,000	50,000
c.	Total income (a + b)	1,50,000	1,50,000
d.	Tax on unexplained income (30% of a)	Not Applicable	30,000
e.	Tax on other income	Nil	Nil
f.	Tax on total income(d + e)	Nil	30,000

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 30 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.

Some Posers – Food for thought!

o    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?

o    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 alia deny 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:

o    Endeavour to demonstrate substance over form;

o    Maintain robust documentation, evidencing the nature and source of income;

o    Prefer transactions routed through normal banking channel, which will lend due credence