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Published by Taxmann in Blog, Income Tax On April 28, 2021, 9:37 am

Scheme of Taxation of
Undisclosed Income

Table of the Content

1. Introduction

1.1 Taxation of unexplained amounts under sections 68 to 69D at flat rate without allowing any

deductions/threshold exemption limit – Section 115BBE

1.1-1 Features of section 115BBE regime

1.1-2 Whether section 115BBE is applicable to business receipts/business turnover omitted from profit

and loss account and not included in ITR?

1.1-3 Whether section 115BBE can be invoked on stock surrendered in survey for the first time in
▾
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

u/s 115BBE(1) and hence can’t be disclosed in ITR in Schedule OS

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

law such as Prevention of Corruption Act, 1988

Checkout Taxmann's Taxation of Loans Gifts & Cash Credits which provides a

comprehensive analysis of the provisions relating to undisclosed income, gifts of

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

taxed only by:

finding out investments, bullion, jewellery, cash etc. possessed by a tax evader or huge

expenditure incurred by him on education of children, marriage of family members etc.

then tallying these investments, expenditure etc. with disclosed/reported income to find out if

these are disproportionate to disclosed income.

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

tax authorities. If assets/expenditure exceed reported/disclosed income and no satisfactory explanation

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.

▾
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.

Section 69D targets borrowings/repayments on hundis.

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

confiscation of Benami properties.

1.1 Taxation of unexplained amounts under sections 68 to 69D at flat rate

without allowing any deductions/threshold exemption limit – Section
115BBE
Section 115BBE was first inserted into the Act by Finance Act, 2012. Section 115BBE(1) was substituted by

the Taxation Laws (Second Amendment) Act, 2016 with effect from assessment year 2017-18.

The following points are noteworthy :

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

deductions or basic threshold exemption limit.

Section 115BBE was enacted ‘In order to curb the practice of laundering of unaccounted money

by taking advantage of basic exemption limit’.

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

be detected and brought to tax. ▾

(ii) There was no penalty for amounts of income detected and brought to tax under this head.
(iii) Further, section 115BBE nowhere envisaged a voluntary disclosure scheme where past unaccounted

income can be declared by assessee in current ITR by paying flat tax. Also, the ITR forms had no provision

for such voluntary disclosure.

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

w.e.f. 2017-18 by the Finance Act, 2018.

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,

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).

A Surcharge of 25% and education cess of 4% are applicable on the 60% tax rate in section 115BBE taking

the effective tax rate to 78%.

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

section 132 on or after 15-12-2016, the assessee shall pay: ▾

(a) a penalty at the rate of 30% of the undisclosed income of the specified previous year, if the assessee—
(i) in the course of the search, in a statement under sub-section (4) of section 132, admits the undisclosed

income and specifies the manner in which such income has been derived;

(ii) substantiates the manner in which the undisclosed income was derived; and

(iii) on or before the specified date—

(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

covered under the provisions of clause (a);

The above penalty shall be in addition to tax, if any, payable by him.

Section 271AAC provides that:

(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

relevant previous year.

(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.

1.1-1 Features of section 115BBE regime

Thus, the features of the section 115BBE regime applicable from AY 2017-18, are as under:

(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:

Cash credits u/s 68

Unexplained investments u/s 69 ▾

Unexplained money etc. u/s 69A
 Undisclosed investments etc. u/s 69B

Unexplained expenditure etc. u/s 69C

Amount borrowed or repaid on hundi etc. u/s 69D

(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

previous year in return of which voluntary disclosure is intended to be made.

(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

139-be it original return or revised return or belated return.

(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

under section 148 be regarded as voluntary disclosure.

(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

new sub-section (1A) of section 271AAB.

(viii) No penalty is imposable under section 270A.

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

the provisions of the Act.

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

correspond to such heads of income will not arise.

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

investments, unexplained money, bullion, etc., and unexplained expenditure as deemed

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

from other sources’.

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.

1.1-2 Whether section 115BBE is applicable to business receipts/business turnover omitted

from profit and loss account and not included in ITR?
In the case of ACT Central Circle-13 Mumbai v. Rahil Agencies, order dated 23 November, 2016 the
▾
Tribunal held that section 115BBE does not apply to business receipts/business turnover. The Tribunal
observed as under:

“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

accordingly section 115BBE has no application in case.”

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 [Link] 986 (Gauhati – Trib.)]

In Principal Commissioner of Income Tax, 20, Delhi v. Akshit Kumar [2021] 124 [Link] 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

be treated as unexplained income to be taxed as ‘income from other sources’.

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
▾
have been treated as ‘undisclosed investment’ under section 69 of the Act. [PCIT v. Deccan Jewellers (P.)

Ltd. [2021] 132 [Link] 73 (AP)]

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

[Link] 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 [Link] 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

[Link] 142 (Mum. – Trib.)]

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

satisfaction of requirements of section 69 could not be independently applied by invoking provisions of

section 154 [Assistant Commissioner of Income-tax, Circle-2 v. Sudesh Kumar Gupta [2020] 117

[Link] 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