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Scheme of Taxation of Undisclosed Income: Published by Taxmann in Blog, Income Tax On April 28, 2021, 9:37 Am
Scheme of Taxation of Undisclosed Income: Published by Taxmann in Blog, Income Tax On April 28, 2021, 9:37 Am
Scheme of Taxation of Undisclosed Income: Published by Taxmann in Blog, Income Tax On April 28, 2021, 9:37 Am
Scheme of Taxation of
Undisclosed Income
1. Introduction
1.1 Taxation of unexplained amounts under sections 68 to 69D at flat rate without allowing any
1.1-2 Whether section 115BBE is applicable to business receipts/business turnover omitted from profit
1.1-3 Whether section 115BBE can be invoked on stock surrendered in survey for the first time in
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rectification order u/s 154?
If undisclosed income is covered under The Black Money (Undisclosed Income & Assets)
Imposition of Tax Act, 2015 (BM Act), the same will be taxed under that Act and not
Voluntary disclosure u/s 115BBE(1) and paying 78% tax will not provide immunity from
the Prohibition of Benami Property Transactions Act, 1988 (PBPT Act) or any other
Checkout Taxmann's Taxation of Loans Gifts & Cash Credits which provides a
money & movable/immovable property, along with relevant case laws. The relevant
provisions of the Black Money (Undisclosed Income & Assets) Imposition of Tax Act
2015 and the Prohibition of Benami Property Transactions Act 1988 are also
discussed.
1. Introduction
Tax evaders do not disclose their income to tax authorities. They tend to hold it in those forms which can
escape the notice of tax authorities. Secreting cash, jewellery, bullion, gold bars etc. in false ceilings, floors
etc. in one’s own premises is the obvious but a very crude method of evasion. Income thus concealed
cannot be brought to tax by scrutinizing books as these are kept off-books. These can be detected and
finding out investments, bullion, jewellery, cash etc. possessed by a tax evader or huge
then tallying these investments, expenditure etc. with disclosed/reported income to find out if
The tax authorities come to know of assets and expenditure through searches, surveys and other
mechanisms like Annual Information Returns and then tally/check with income/wealth reported to the
for the source of the excess assets/expenditure is forthcoming, the excess is taxed as undisclosed income.
Sections 69 to 69C deal with these measures of tallying assets and expenditure of tax evader with
reported/disclosed income and seeking explanation of the tax evader for discrepancies.
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Keeping money as bundles of cash in false ceilings or in idle assets like gold, bullion etc. is not without its
costs either not to mention the risks that go with it. As the Panchtantra rightly says : ‘Money, even if
hoarded in common place fashion, is likely to go in a flash, the hindrances being many. Money
unemployed when opportunities arise is the same as money unpossessed. Therefore, money once
acquired should be guarded, increased, employed.’ Moreover, however hard a citizen tries to conceal his
income, he cannot do so as he will make investments and incur expenditure. So, that is where the practice
of money laundering comes in to cloth unaccounted or black money with a legitimate tax-free colour.
The cleverer and sophisticated tax evaders realize that it is hard to conceal income for a long time and
concealment is an outright offence. Instead of outright concealment or suppression, they will try and
disclose their income as capital receipts such as loans, gifts, trade credits or deposits or capital
contributions even from persons who lack means or creditworthiness. Section 68 seeks to deal with this
book-keeping sophistry.
All these undisclosed incomes are taxed under section 115BBE at flat effective rate of 78%.
Then there is the issue of unaccounted/undisclosed money being invested the names of benamidars. This
issue is addressed by the Prohibition of Benami Prohibition Transactions Act,1988 which provides for
the Taxation Laws (Second Amendment) Act, 2016 with effect from assessment year 2017-18.
The Finance Act, 2012 inserted section 115BBE in the Act to tax unaccounted money represented
by the additions covered by sections 68, 69, 69A, 69B, 69C and 69D at flat 30% without any
Section 115BBE was enacted ‘In order to curb the practice of laundering of unaccounted money
Section 115BBE, as originally inserted in the Act had the following lacunae:
(i) The tax rate was ridiculously low rate of 30% given that the income was not offered to tax but had to
income can be declared by assessee in current ITR by paying flat tax. Also, the ITR forms had no provision
The Taxation Laws (Second Amendment) Act, 2017 has cured the above lacunae by putting in place a new
section 115BBE regime by substituting sub-section (1) of section 115BBE, inserting new section 271AAC
and by inserting new sub-section (1A) in section 271AAB. Section 115BBE(2) was amended retrospectively
Section 115BBE(1), as applicable w.e.f. assessment year 2017-18, provides that 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;
(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 reflected in Income-tax return as per (a)
above,
(i) the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate
(ii) the amount of income-tax with which the assessee would have been chargeable had his total income
A Surcharge of 25% and education cess of 4% are applicable on the 60% tax rate in section 115BBE taking
Section 115BBE(2), as amended by the Finance Act, 2018, provides that notwithstanding anything
contained in the Act, no deduction in respect of any expenditure or allowance or set-off of any loss shall
be allowed to the assessee under any provisions of the Act in computing income under section 115BBE(1).
Since the term ‘or set off of any loss’ was specifically inserted in section 115BBE(2) only vide the Finance
Act, 2016, w.e.f. 01.04.2017, an assessee is entitled to claim set-off of loss against income determined under
section 115BBE of the Act till the assessment year 2016-17.-CBDT Circular No.11/2019 dated 19.06.2019.
Sub-section (1A) of section 271AAB provides that Assessing Officer may, notwithstanding anything
contained in any other provisions of this Act, direct that, in a case where search has been initiated under
income and specifies the manner in which such income has been derived;
(ii) substantiates the manner in which the undisclosed income was derived; and
(A) pays the tax, together with interest, if any, in respect of the undisclosed income; and
(B) furnishes the return of income for the specified previous year declaring such undisclosed income
therein;
(b) a penalty at the rate of 60% of the undisclosed income of the specified previous year, if it is not
(i) The Assessing Officer may 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 10% of the tax payable under clause (i) of sub-section (1) of section 115BBE.
(ii) However, such penalty shall not be imposed in respect of income referred to in section 68, section 69,
section 69A, section 69B, section 69C or section 69D to the extent such income has been included by the
assessee in the return of income furnished under section 139 and the tax in accordance with the
provisions of clause (i) of sub-section (1) of section 115BBE has been paid on or before the end of the
(iii) No penalty under section 270A shall be leviable in respect of any income referred to in section 68,
section 69, section 69A, section 69B, section 69C or section 69D.
(iv) Provisions of sections 274 and 275 shall apply to penalty under section 271AAC.
(i) Voluntary disclosure of undisclosed income by assessee enabled by disclosure in a return filed under
section 139. All Income-Tax Return forms for AY2017-18 except ITR-1 and ITR-4 Sugam form envisage
disclosure of ‘Deemed income chargeable to tax u/s 115BBE’ in Schedule OS and its break-up as:
(ii) Tax rate increased from 30% to 60% w.e.f. AY 2017-18. Surcharge of 25% introduced. The effective tax
rate with effect from AY 2019-20 (inclusive of 25% surcharge and Health and Education Cess of 4%) shall
be 78%.
(iii) Voluntary disclosure scheme under section 115BBE has no expiry date. It will be ‘open on-tap’ from
AY 2017-18 unless in future section 115BBE is amended again to prohibit voluntary disclosure.
(iv) Voluntary disclosure must be accompanied by deposit of 77.25% (78% w.e.f. previous year 2018-19) of
the undisclosed income on or before the end of the relevant previous year. Relevant previous year means
(v) Voluntary disclosure should be made before any notice is issued by the Department or before any
search or seizure is carried out. This is important as disclosure has to be in a return filed under section
(vi) If voluntary disclosure not made and undisclosed income is detected in scrutiny assessment or
reassessment or through survey (i.e. any manner other than search), then 10% penalty will apply under
proposed new section 271AAC taking the effective burden to 84.975% (85.8% with effect from assessment
year 2019-20) of the undisclosed income. Filing of return in response to notice under section 142 or after
survey is conducted will not be regarded as voluntary disclosure. Nor will disclosure in any return filed
(vii) If undisclosed income is detected in any search which takes place on or after 15-12-2016, then in
addition to the 10% penalty under section 271AAC, further penalty of 30% or 60% will be levied under
In Fakir Mohmed Haji Hasan v. CIT [2002] 120 Taxman 11 (Guj.), the Gujarat High Court laid down the
following propositions:
The scheme of sections 69, 69A, 69B and 69C of the Act would show that in cases where the
nature and source of investments made by the assessee or the nature and source of
acquisition of money, bullion, etc., owned by the assessee or the source of expenditure
incurred by the assessee are not explained at all, or not satisfactorily explained, then the
value of such investments and money, or value of articles not recorded in the books of
account or the unexplained expenditure may be deemed to be the income of such assessee. ▾
It follows that the moment a satisfactory explanation is given about such nature and source
by the assessee, then the source would stand disclosed and will, therefore, be known and
the income would be treated under the appropriate head of income for assessment as per
However, when these provisions apply because no source is disclosed at all on the basis of
which the income can be classified under one of the heads of income under section 14 of the
Act, it would not be possible to classify such deemed income under any of these heads
including ‘Income from other sources’ which have to be sources known or explained.
When the income cannot be so classified under any one of the heads of income under
section 14, it follows that the question of giving any deductions under the provisions which
If it is possible to peg the income under any one of those heads by virtue of a satisfactory
explanation being given, then these provisions of sections 69, 69A, 69B and 69C will not
apply, in which event the provisions regarding deductions, etc., applicable to the relevant
head of income under which such income falls will automatically be attracted.
The opening words of section 14 ‘Save as otherwise provided by this Act’ clearly leave scope
for ‘deemed income’ of the nature covered under the scheme of sections 69, 69A, 69B and
69C being treated separately, because such deemed income is not income from salary, house
property, profits and gains of business or profession, or capital gains, nor is it income from
‘other sources’ because the provisions of sections 69, 69A, 69B, and 69C treat unexplained
income where the nature and source of investment, acquisition or expenditure, as the case
may be, have not been explained or satisfactorily explained. Therefore, in these cases, the
source not being known, such deemed income will not fall even under the head ‘Income
Therefore, the corresponding deductions, which are applicable to the incomes under any of
these various heads, will not be attracted in case of deemed incomes which are covered
under the provisions of sections 69, 69A, 69B and 69C in view of the scheme of those
provisions.
“19. We have considered rival contentions and found that by applying provisions of section 115BBE
the AO has declined set off of business loss against income declared during the course of
survey/search. The provisions of section 115BE are applicable on the income taxable under section
68, 69, 69A, 69B, 69C or 69D of the Act. The income declared by the assessee is unrecorded stock of
diamond found during the course of search. The assessee is in the business of diamond trade and
such stock was part of the business affair of the company. Therefore, since income declared is in
the nature of business income, the same is not taxable under any of the section referred above and
Section 115BBE does not apply to business receipts/business turnover. Where AO had accepted after
confronting the assessee with facts that undisclosed amount of assessee in his bank account was
undisclosed business receipts/turnover and made additions applying @ 4% net profit margin on the
amount, section 115BBE would not be attracted and revisionary order under section 263 directing AO to
apply section 115BBE cannot be sustained. Only probability and likelihood to find error in assessment
order is not permitted under section 263, Commissioner ought to find out specific error in assessment
order [Abdul Hamid v. Income-tax Officer [2020] 117 taxmann.com 986 (Gauhati – Trib.)]
In Principal Commissioner of Income Tax, 20, Delhi v. Akshit Kumar [2021] 124 taxmann.com 123 (Delhi),
it was held that where quantum figure and opening stock was accepted in previous years during scrutiny
assessments, receipt from sales made by assessee proprietary concern out of its opening stock could not
Where nature and source of excess stock found during search was not specifically identifiable from
profits which had accumulated from earlier years, AO was justified in holding that said excess stock was
not undisclosed investment of assessee and no case of perversity or lack of enquiry on part of Assessing
Officer was made out so as to render his decision erroneous under Explanation 2 to section 263. In the
present cases, explanations have been offered by the assessees that excess stock was a result of
suppression of profits from business over the years and is a part of the overall stock found. In ITA Nos. 9
& 14 of 2021, the assessees concerned gave further clarification that the excess stock had been admitted
in Schedule ‘L’ under the heading, ‘other operating income’ under the head “Profits and Gains of the
Business” in Part A of the Return filed for the relevant Assessment Year. Hence, the excess stock could not
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have been treated as ‘undisclosed investment’ under section 69 of the Act. [PCIT v. Deccan Jewellers (P.)
AO can’t make additions u/s 69A on a hypothetical basis without carrying out enquiry to find out more
details. Where assessee sold several flats during year and pursuant to search, a letter addressed to one DS
showed that DS paid Rs. 57.73 lakhs towards purchase of flat, whereas agreement value with reference to
same was Rs. 49.18 lakhs and Assessing Officer multiplied difference in sale price to number of flats sold
and made additions under section 69A, Tribunal having accepted assessee’s explanation that initially said
flat was negotiated for a sum of Rs. 59.34 lakhs, however, later booking was cancelled and thereafter it
was sold at Rs. 49.18 lakhs to DS, entire additions having been made by Assessing Officer without enquiry
on hypothetical basis, Tribunal had not committed any perversity or applied incorrect principles to given
facts to set aside additions so made [PCIT v. Nexus Builders and Developers (P.) Ltd. [2022] 134
taxmann.com 82 (Bom.)]
Where AO made addition under section 68 on account of huge cash amount deposited by assessee-
jeweller in its bank account post demone-tization, since assessee had explained source of said cash
deposits as sales of jewellery, produced sale bills and admitted same as revenue receipt as well as offered
it to tax and assessee also represented outgo of stocks which was matching with sales, impugned addition
was to be deleted [ACIT v. Hirapanna Jewellers [2021] 128 taxmann.com 291 (Visakhapatnam – Trib.)]
Where assessee-builder received certain on-money receipts from buyers of flats, since nature and source
of same being duly accepted by Assessing Officer in remand report, same would construe only as business
receipt and not as cash credit under section 68 [Dy. CIT v. Adarsh Industrial Estate (P.) Ltd. [2021] 130
1.1-3 Whether section 115BBE can be invoked on stock surrendered in survey for the first time
in rectification order u/s 154?
Where while completing assessment under section 143(3), Assessing Officer did not invoke provisions of
section 69 as regards stock surrendered by assessee during survey as undisclosed investment and
completed assessment by applying slab rate to it, provisions of section 115BBE which were contingent on
section 154 [Assistant Commissioner of Income-tax, Circle-2 v. Sudesh Kumar Gupta [2020] 117
taxmann.com 178 (Jaipur – Trib.)]. It would be different matter if AO had called explanation as regards
source and nature of undisclosed investment in stock under section 69 but had overlooked it and
inadvertently omitted to apply section 115BBE though he was not convinced with the explanation. ▾
This post was last modified on June 29, 2022 10:56 am