1. Under Income Act Act,1961 (Act) taxation of income has ...€¦ · Under Income Act Act,1961...
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Implication of Sec. 115BBE with ref. to sec:68,69 & 69A to
69D Viz a Viz Related Penalty provisions
Paper by Kapil Goel (Advocate) 9910272806
1. Preface
Under Income Act Act,1961 (Act) taxation of income
has remained at the centre stage. The legislative
scheme and policy of the Act is to tax the income in
the manner provided therein. Before embarking on
chain and string of statutory provisions which deal
with income under the Act, it may be profitable to
make a survey of certain rudimentary principles of the
Act . First important principle which has significant
importance is the charge under the Act is created on
income element only and gross receipts are not
taxable under the Act. Recent Apex court decision in
case of Maxopp order dated 12/02/2018 wherein it is
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held that “It is well known that tax is leviable on the
net income. Net income is arrived at after deducting
the expenditures incurred in earning that income.
Therefore, from the gross income, expenditure
incurred to earn that income is allowed as a deduction
and thereafter tax is levied on the net income.” is
apposite. Second important principle is all receipts are
not income and all income are not taxable income
which is are well settled by Supreme Court in the case
of Parimisetti Seetharamamma v. CIT [1965] 57 ITR
532 and Delhi high court in case of Girish Bansal 289
CTR 514. Also it is held in before mentioned
authorities that burden to establish that income is
there and is taxable, lies on revenue shoulders. Then
next important principle which is to be borne in mind is
that income is taxable in hands of right person only
and mere fact that right person could not be taxed or
wrong person has already paid the tax is of little or no
consequence vide Apex court decision in 218 ITR 239.
Then next and fourth important principle to be borne in
mind is that law basically does not distinguish in moral
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or immoral income and between legal or illegal income,
and what is relevant is income is disclosed or
undisclosed and explained or unexplained then said
income shall be dealt in the manner provided under
the Act. If income is disclosed and explained then
same normally would be taxable in ordinary manner.
But if the same is undisclosed and unexplained then
only possibility to tax it at higher rate u/s 115BBE
may arise depending on overall facts.
Then next and most important principle is to find and
trace the “source” of income. To elaborate on this
aspect which is like of soul of the Act, and to
understand it minutely following jurisprudence may be
traversed:
Allahabad High Court
Seth Shiv Prasad vs Commissioner Of Income-Tax on 23
March, 1971
Equivalent citations: 1972 84 ITR 15 All
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What is a " source of income " ? The expression has been
used in several places in the Act. In Section 2(11) the
definition of " previous year" envisages a different
previous year in respect of each separate source of
income. Section 4, which is concerned with the
application of the Act, declares that the total income of
a person includes all profits and gains, from whatever
source derived, which falls within the categories set out
there. And so on. The first authoritative judicial
pronouncement appears in Rhodesia Metals Ltd.
(Liquidator) v. Commissioner of Taxes, [1941] 9 I.T.R.
(Suppl.) 45, 52 (P.C.) where the Privy Council approved
of the passage quoted by Mr. Justice de Villiers from Mr.
Ingram's work on Income-tax :
" Source means not a legal concept but something which
a practical man would regard as a real source of income
; the ascertaining of the actual source is a practical hard
matter of fact."
7. This quotation was referred to by a Full Bench of our
court in Rani Amrit Kunwar v. Commissioner of Income-
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tax, [1946] 14 I.T.R. 561 (All.) [F.B.]. In that case the
learned Judges considered that an agreement or an order
of the court requiring the payment of a periodical sum
could be regarded as a source of income. In the case of
income from business, which is a separate head
under Section 6, each business has been treated as a
distinct source of income. The decision of the Madras
High Court in Commissioner of Income-tax v. E.K.R.
Savimiamurthy, (3) [1946] 14 I.T.R. 185 (Mad.) proceeds
on that basis. In Commissioner of Income-tax v. Lady
Kanchanbai, [1962] 44 I.T.R. 242 (M.P.) the Madhya
Pradesh High Court observed that each branch of a
business could be described, as a distinct source of
income. A source of income, therefore, may be described
as the spring or fount from which a clearly defined
channel of income flows. It is that which by its nature
and incidents constitutes a distinct and separate origin of
income, capable of consideration as such in isolation
from other sources of income, and which by the manner
of dealing adopted by the assessee can be treated so.
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Kerala High Court
Commissioner Of Income-Tax vs India Sea Foods on 24
September, 1986
Author: T V Iyer
Bench: T K Thommen, T V Iye
23. This view of ours is fortified by the decision of the
Privy Council in CIT v. Chunilal B. Mehta, [1938] 6 ITR
521, where it was observed that the list of heads
(in Section 6 of the 1922 Act), was a list of " sources ".
The same view was reiterated by the High Court of
Bombay in the decision in Kusumben D. Mahadevia v.
CIT, [1963] 47 ITR 214 in the following terms at page
221 :
"It thus appears that in the Act, the expression 'source '
and the expression ' heads of income' are used in one
and the same sense and it means property, movable or
immovable, belonging to an assessee or the activity of
an assessee that yields or brings income to him, within
the meaning of the Act. "
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Bombay High Court
Sheraton Apparels, Max ... vs Assistant Commissioner Of
... on 3 May, 2002
Equivalent citations: 2002 (5) BomCR 19, (2003) 1
BOMLR 888, 2002 256 ITR 20 Bom, 2003 (1) MhLj 302
The term "source of income" as understood in
the Income-tax Act is to identify or classify income so
as to determine under which head, out of the various
heads of income referred to in Section 14 of the Act, it
would fall for the purposes of computation of the total
income for charging income-tax thereon.
Bombay High Court
Kusumben D. Mahadevia vs Commissioner Of Income-
Tax, ... on 18 September, 1961
Equivalent citations: (1961) 63 BOMLR 1011, 1963 47
ITR 214 Bom
Author: Tambe
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Bench: V Desai, Y Tambe
It thus appears that in the Act, the expression "source"
and the expression "heads of income" are used in one
and the same sense and it means property, movable or
immovable, belonging to an assessee or the activity of
an assessee that yields or brings income to him, within
the meaning of the Act.
Further illuminating and guiding are sage words of
Apex court in 61 ITR 428 holding that “Whether an
income falls under one head or another has to be
decided according to the common notions of practical
men for the Act does not provide any guidance in the
matter.”
Further Hon’ble Apex court in 273 ITR Page 1 in
D.P.Sandhu Brothers has held that
“….But because we have held that Section 45 cannot be
applied, it is not open to the Department to impose tax
on such capital receipt by the assessee under any other
Section. This Court, as early as in 1957 had, in United
Commercial Bank Ltd. V. Commissioner of Income Tax
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Ltd., West Bengal (1957) 32 ITR 688, held that the
heads of income provided for in the Sections of the
Income Tax Act, 1922 are mutually exclusive and
where any item of income falls specifically under one
head, it has to be charged under that head and no other.
In other words, income derived from different sources
falling under a specific head has to be computed for the
purposes of taxation in the manner provided by the
appropriate Section and no other. It has been further
held by this Court in East India Housing and Land
Development Trust Ltd. V. Commissioner of Income
Tax, West Bengal (1961) 42 ITR 49 that if the income
from a source falls within a specific head, the fact that
it may indirectly be covered by an another head will not
make the income taxable under the latter head. (See
also: Commissioner of Income Tax Vs. Chugandas and
Co.(1964) 55 ITR 17)…. Therefore, if the income is
included under any one of the heads, it cannot be
brought to tax under the residuary provisions
of Section 56…”
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More recently this is succinctly explained by Apex
court in case of Raj Dadarkar & Associates vs. ACIT
[2017] 394 ITR 592 holding that “Before dealing with
the respective contentions, we may state, in a
summary form, scheme of the Act about the
computation of the total income. Section 4 of the Act is
the charging Section as per which the total income of
an assessee, subject to statutory exemptions, is
chargeable to tax. Section 14 of the Act enumerates
five heads of income for the purpose of charge of
income tax and computation of total income. These
are: Salaries, Income from house property, Profits and
gains of business or profession, Capital gains and
Income from other sources. A particular income,
therefore, has to be classified in one of the aforesaid
heads. It is on that basis rules for computing income
and permissible deductions which are contained in
different provisions of the Act for each of the
aforesaid heads, are to be applied. For example,
provisions for computing the income from house
property are contained in Sections 22 to 27 of the Act
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and profits and gains of business or profession are to
be computed as per the provisions contained in
Sections 28 to 44DB of the Act. It is also to be borne
in mind that income tax is only One Tax which is
levied on the sum total of the income classified and
chargeable under the various heads. It is not a
collection of distinct taxes levied separately on each
head of the income.”
Hon’ble Gujarat High Court in the case of J.K. Chokshi
vs. ACIT (T.A. No.149 of 2003) order dated 22/12/2014
held as under:-
“7. Once it is established that the assessee had no
other source of income at the relevant time or in the
past, it can be safely concluded that the assessee had
no other income other than income from business. Now,
when the business activity of the assessee has been
accepted and no other source of income is found, then
there was no justification for disallowing the salary paid
to Partners at Rs.4.50 Lacs. Therefore, the
disallowance of Rs.4.50 Lacs granted by the A.O and
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confirmed by the Tribunal is erroneous and deserves to
be quashed and set aside. Our view is buttressed by the
principle rendered by the Calcutta High Court in the
case of Md.Serajuddin & Bros.v.CIT [2012] 24
taxmann.com 46 (Cal.) In view of the above, the
question no. 1 as to whether the Tribunal is right in
confirming disallowance of Rs.4,50,000/- made by the
Assessing Officer under Section 40(b) of the Income-
tax Act, 1961 is answered in the negative in favour of
the assessee and against the Revenue.”
Further P&H high court in case of Dulari Digital Photo
Services ... vs Commissioner Of Income Tax on 10
September, 2013 reported at 219 Taxman 126 has held
that
“… The expression "income from other sources" would
come into play only where income is relatable to a
known source. Where the income is not relatable to
any known or any bona fide source, it would
necessarily be brought to tax or considered as income
of the assessee, under Section 68 of the Act. Section
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68 of the Act clearly provides that where a sum is
credited in the books of assessee and the assessee is
unable to offer any explanation about the nature and
source thereof, or the explanation offered is not
satisfactory, the sum so credited may be charged to
income tax as the income of the assessee of that
previous year. What is brought to tax under Chapter IV
of the Act is an income from a known source, i.e., a
particular source from which the income flows but the
source of a particular revenue receipt cannot be
pegged down to any particular source, provisions
of Section 14 of the Act, particularly "income from
other sources", would not apply and such income
would necessarily fall under Section 68 of the Act,
being unexplained cash receipts that do not fall within
the definition of "income from other sources".”
Amritsar ITAT in case of The Dy. Commissioner Of
Income ... vs Sh Inderjit Mehta, Bathinda on 30
November, 2017 has held that, while explaining Kim
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Pharma Punjab & Haryana high court revenue favoring
decision reported at 250 CTR 454:
“….To quote from 'Kim Pharma' 250 CTR 454 (supra)
itself, such amounts have been held to be assessable as
business income:
"In the facts of the present case, we find that assessee
during the course of survey had surrendered the income
as income from other sources, though a plea has been
raised by the assessee that the income was surrendered
as income from job work but no evidence to prove the
stand of the assessee has been brought on record. The
assessee had also surrendered additional income of
Rs.10 lacs in assessment year 2005-06 on account of
sundry credits, repairs to building and advances to staff,
which being relatable to business carried on by assessee
was included as income from business. However, in
respect of cash found during survey, which was not
reflected in the books of account, no source was
declared by the assessee and in the absence of nature of
source of cash being proved; the same is not assessable
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as income from business. In the circumstances, we hold
the order of the CIT(A) in including the additional income
as deemed income u/s 69A of the Act and not allowing
the benefit of the business losses determined against the
said deemed income. The grounds of appeal raised by
the assessee are dismissed." 12.1 From the above
finding, it is apparent that the surrender made on account
of sundry credits, repairs to building and advances to
staff have been held to be relatable to business, whereas
only in respect of cash, it was held to be not relatable to
business. Therefore, the surrender on account of stock
and unexplained investment related to business, whereas
the cash is not assessable as income from business.”
Refer case of J.C. Thakkar Vs. CIT [27 ITR 658 (Bom)]
and the decision of the High Court of Madras in the case
of H.C. Kothari and others Vs. CIT [20 ITR 579 (Mad)]
in support of the proposition that if an income falls under
more than one head, the assessee has the option of
choosing the head of income which makes the burden of
the assessee lighter.( Income Tax Appellate Tribunal –
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Mumbai Hansat Maneklal Savani, Mumbai vs Assessee
on 12 December, 2013)
Taking contra view from P&H high court, Hon'ble
Gujarat High Court in the case of CIT Vs. M/s Shilpa
Dyeing and Printing Mills (P) Ltd.(2014) 381 DTR 381
(Guj) has held that:
“We may further notice that the decision in case of Fakir
Mohmed Haji Hasan Vs. Commissioner of Income Tax
(supra) came-up for consideration in case of Deputy
Commissioner of Income Tax Vs. Radhe Developers
Incia Ltd. and anr (2010) 329 ITR 1 (Guj) (supra),it was
observed as under:
The decisions of this Court in the case of Fakir Mohmed
Haji Hasan (supra) and Krishna Textiles (supra) are
neither relevant nor germane to the issue considering
the fact that in none of the decisions the Legislative
Scheme emanating from conjoint reading of provisions
of sections 14 & 56 of the Act have been considered.
The Apex Court in the case of D.P.Sandu Bros.Chembur
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P. Ltd.,(supra) has dealt with this very issue while
deciding the treatment to be given to a transaction of
surrender of tenancy right. The earlier decisions of the
Apex Court commencing from case of United
Commercial Bank Ltd.Vs. CIT (1957) 32 ITR 688 (SC)
have been considered by the Apex Court and, hence, it
is not necessary to repeat the same. Suffice it to state
that the Act does not envisage taxing any income under
any head not specified in section 14 of the Act. In the
circumstances, there is no question of trying to read any
conflict in the two judgments of this Court as submitted
by the learned Counsel for the Revenue.”
(Also refer Gaurish Steels Pvt. Ltd. Vs. ACIT, 43 ITR
(Trib.) CHD-Trib)
Therefore in light of said principle if five heads
(sources of income)are discussed in juxtaposition to
section 68 to section 69D (dealing with unexplained
income in form of cash credit , investment , money and
expense etc) , one principle which may be inferred is
that five heads normally apply when source of income
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is existing/identified like business is there, capital
asset is there, house property is there , employment is
there etc , and when source is missing and is inchoate
and income remains anonymous in nature then
possibility to invoke section 68 to section 69D may be
applied . To put it simply if business income is
undisclosed then source of income being business ,
business head should continue to apply . For example
when in search and survey and other 26AS cases
suppressed receipts from business are detected and
thereafter when profit element which is deduced from
such suppressed receipts , said profit element could
not be taken u/s 68 to 69D and business head would
apply to said profit element as far as nature of income
is concerned. Whereas if no tangible source is
available to a person and still certain unexplained
income (asset) is found in hands of said person then
strict liability u/s 68 to section 69D may arise.
Circular No 37 of 2016 dated 2/11/2016 which states
that disallowances made while computing business
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income related to business activity shall enhance
profits of eligible business for purposes of deduction
under chapter VI-A may also apply in context of
section 115BBE to decide whether an income falls
under business head etc or under section 68 to section
69D.
2. Legislative intent behind section 115BBE may be
culled out from :
Budget speech of then Finance Minister Hon’ble Sh
Pranab Mukherjee(March 16, 2012) “…155. I propose
a series of measures to deter the generation and use
of unaccounted money….. Taxation of unexplained
money, credits, investments, expenditures etc., at the
highest rate of 30 per cent irrespective of the slab of
income..”
Further, the memorandum to the Finance Bill, 2012
on Section 115BBE reads as under :-
"Under the existing provisions of the Income-tax Act,
certain unexplained amounts are deemed as income
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under section 68, section 69, section 69A, section
69B, section 69C and section 69D of the Act and are
subject to tax as per the tax rate applicable to the
assessee. In case of individuals, HUF, etc., no tax is
levied up to the basic exemption limit. Therefore, in
these cases, no tax can be levied on these deemed
income if the amount of such deemed income is less than
the amount of basic exemption limit and even if it is
higher, it is levied at the lower slab rate. In order to curb
the practice of laundering of unaccounted money by
taking advantage of basic exemption limit, it is proposed
to tax the unexplained credits, money, investment,
expenditure, etc., which has been deemed as income
under section 68, section 69, section 69A, section
69B, section 69C or section 69D, at the rate of 30% (plus
surcharge and cess as applicable). It is also proposed to
provide that no deduction in respect of any expenditure
or allowance shall be allowed to the assessee under any
provision of the Act in computing deemed income under
the said sections.
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This amendment will take effect from 1st April, 2013 and
will, accordingly, apply in relation to the assessment
year 2013-14 and subsequent assessment years.
[Clause 45)."
The italicized words “…to curb the practice of laundering
of unaccounted money …” brings home the point that
laundering and unaccounted money must be there to
apply section 115BBE . So when laundering and
unaccounted money is not there then section 115BBE
may not apply on basis of purposive interpretation
principle. Laundering and unaccounted money have set
connotations in eyes of law and are not words of infinite
scope. Further the jurisdictional condition to invoke this
draconian provision (sec 115BBE) which needs to be
fulfilled at the outset is provisions of section 68 to
section 69D are applicable undoubtedly without which
section 115BBE would remain non-starter.
This interpretation principle is in accordance with well
settled interpretation principle that legislative intent has
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crucial role to interpret the statute as held by Hon’ble
supreme Court decision in case of “
CRIMINAL APPEAL NOS.12171219 OF 2017
[Arising out of S.L.P. (Crl.) Nos. 26402642 of 2016]
Ms. Eera Thro
ugh Dr. Manjula Krippendorf ... Appellant(s)
Versus
State (Govt. of NCT of Delhi) & Anr. …Respondent
(s)
In its order dated July 21, 2017 has observed as under:
“24. It is thus clear on a reading of English, U.S.,
Australian and our own Supreme Court judgments that
the ‘Lakshman Rekha’ has in fact been extended to move
away from the strictly literal rule of interpretation back
to the rule of the old English case of Heydon, where the
Court must have recourse to the purpose, object, text,
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and context of a particular provision before arriving at a
judicial result. In fact, the wheel has turned full circle. It
started out by the rule as stated in 1584 in Heydon’s
case, which was then waylaid by the literal interpretation
rule laid down by the Privy Council and the House of
Lords in the mid 1800s, and has come back to restate the
rule somewhat in terms of what was most felicitously put
over 400 years ago in Heydon’s case.”
While so holding the Hon’ble Supreme Court has
emphasised that “Interpretation must depend on the text
and the context. They are the basis of interpretation. One
may well say if the text is the texture, context is what
gives the colour. Neither can be ignored. Both are
important. That interpretation is best which makes the
textual interpretation match the contextual”. .
In Commissioner of Income Tax, Bangalore Vs. J.H. Gotla
Yadagiri AIR 1985 SC 1698 Hon’ble Apex Court
propounded that though equity and taxation are often
strangers, attempts should be made that these do not
remain always so and if a construction results in equity
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rather than injustice, then such construction should be
preferred to the literal construction. In Oxford
University Press v. Commissioner of Income Tax (2001)
3 SCC 359, Mohapatra, J. has opined that interpretation
should serve the intent and purpose of the statutory
provision. . In that context, the learned Judge has
referred to the authority in State of T.N. v. Kodaikanal
Motor Union (P) Ltd. (1986) 3 SCC 91 wherein this Court
after referring to K.P. Varghese v. ITO[ (1981) 4 SCC
173 and Luke v. IRC (1964) 54 ITR 692 has observed:-
“The courts must always seek to find out the intention of
the legislature. Though the courts must find out the
intention of the statute from the language used, but
language more often than not is an imperfect instrument
of expression of human thought. As Lord Denning said it
would be idle to expect every statutory provision to be
drafted with divine prescience and perfect clarity. As
Judge Learned Hand said, we must not make a fortress
out of dictionary but remember that statutes must have
some purpose or object, whose imaginative discovery is
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judicial craftsmanship. We need not always cling to
literalness and should seek to endeavour to avoid an
unjust or absurd result. We should not make a mockery
of legislation. To make sense out of an unhappily worded
provision, where the purpose is apparent to the judicial
eye ‘some’ violence to language is permissible.”
In Seaford Court Estates Ltd. vs. Asker [1949] 2 All ER
155 hallowed by time, outlining the duty of the Court to
iron out the creases, it was enunciated, that whenever a
statute comes up for consideration, it must be
remembered that it is not within human powers to
foresee the manifold sets of facts which may arise and
even if it were, it is not possible to provide for them in
terms free from all ambiguity, the caveat being that the
English language is not an instrument of mathematical
precision. It was held that in an eventuality where a
Judge, believing himself to be fettered by the supposed
rule that he must look to the language and nothing else,
laments that the draftsmen have not provided for this or
that or have been guilty of some or other ambiguity, he
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ought to set to work on the constructive task of finding
the intention of the Parliament and that he must do this
not only from the language of the statute, but also from
a consideration of the social conditions which gave rise
to it and of the mischief which it was passed to remedy
and then he must supplement the written word so as to
give “force and life” to the intention of the legislature.
The Supreme Court, in the case of CIT v. Amarchand N.
Shroff , administered a caution that a fiction should not
be stretched beyond the purpose for which it was
enacted. The said caution was also noticed by the
Supreme Court in the case of CIT v. Ajax Products Ltd.
[19651 55 ITR 741.
3. The major change in section 115BBE was brought by
Taxation Laws (Second Amendment) Bill, 2016
(26/11/2016) (received assent of the President on
15/12/2016) subsequent to demonetization
announcement of high denomination notes (HDN’s)
,wherein under statement of objects and reasons it was
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stated that “…Evasion of taxes deprives the nation of
critical resources which could enable the Government
to undertake anti-poverty and development
programmes. 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 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. 2.
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
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provision….” In the press release dated 1/12/2016 it
was clarified by CBDT that “…It is hereby clarified that
the above Bill has not introduced any new provision
regarding chargeability of tax on jewellery. The Bill
only seeks to enhance the applicable tax rate under
section 115BBE of the Income-tax Act, 1961 (the Act)
from existing 30% to 60% plus surcharge of 25% and
cess thereon.This section only provides rate of tax to
be charged in case of unexplained investment in assets.
The chargeability of these assets as income is governed
by the provisions of section 69, 69A & 69B which are
part of the Act since 1960s. The Bill does not seek to
amend the provisions of these sections. Tax rate under
section 115BBE is proposed to be increased only for
unexplained income as there were reports that the tax
evaders are trying to include their undisclosed income
in the return of income as business income or income
from other sources. The provisions of section 115BBE
apply mainly in those cases where assets or cash etc.
are sought to be declared as ‘unexplained cash or asset’
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or where it is hidden as unsubstantiated business
income, and the Assessing Officer detects it as such….”
Above press release makes it amply clear that aforesaid
change made in 2016 has no where changed the basic corpus
of the provision (Sec 115BBE) which is attracted only when
section 68 to section 69D are applicable ,and no change is
made in provisions of section 68 to section 69D either by
amendment bill of 2016 nor by section 115BBE. So sans
section 68 to section 69D , section 115BBE can not be
invoked. Further it clarifies that amendment bill only
increases the tax rate without anything more. Moreover, it
notably clarifies that section 115BBE has restricted
applicability to “unexplained investment in asset” or
“unexplained cash or asset”. The fear and apprehension in
minds of assesses carrying real business gets addressed by
press release when it says that only hidden “unsubstantiated”
business income as “detected” by AO shall come under
purview of section 115BBE . Therefore when business
income is substantiated by surrounding circumstances and
material available on record (like assessee is regularly and
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consistently showing business income and is maintaining
books of account etc for business, and is registered with
other govt agencies like VAT and Service tax , running
infrastructure etc) then no adverse inference u/s 115BBE
may be possible.
4. Some real life and practical case studies which may
help us to understand this lethal provision in more better
way are taken up in this section of the Article:
4.1 An assessee is there who is carrying on business of
sale of diamonds. He is surveyed by income tax
department u/s 133A of the Act. During survey he
surrenders explicitly that out of business he has
earned excess stock of Rs 10 lacs and excess
investment of Rs 10 lacs. Total surrender made is
Rs 20 lacs. Following questions can arise from this:
i) Whether such surrender of excess stock or
investment from business activity can fall u/s
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68 to 69D read with section 115BBE or it shall
be treated as business nature income ?
ii) If assessee surrenders it in return of income
u/s 139(1) whether penalty u/s 270A or
(section 271(1)(c)) can be levied ?
Apropos first part of the case study (i) above, direct
answer to this can be found from:
Income Tax Appellate Tribunal - Mumbai
Acit Cen Cir 13, Mumbai vs Rahil Agencies, Mumbai
on 23 November, 2016
“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
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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.”
Further as discussed in preceding portion of the
paper, when income can fall under more than one
head (here business head or section 68 to section
69D/115BBE) then assessee may opt for the
provision which keeps his burden lighter (business
head). Further if there are two views whether
section 115BBE can be applied or not, as settled,
view favoring assessee/taxpayer would be adopted.
Here there can be myriad of surrenders made by
assessee qua business activity. For example
surrender made on basis of loose slip which is like
jotting/scribbling /rough noting treating it as
unexplained advances etc whether section 68 to
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section 69D can be applied r.w.s 115BBE? Answer
should be no when one keeps in mind the ratio of
Apex court ruling in Common cause case reported
at 394 ITR 220 . That is if addition per se on basis
of loose documents stands on weaker footing, and
its tenability can be seriously contested, then to
apply draconian provision of section 115BBE by
casually and routinely taking recourse to section 68
to section 69D, to such doubtful and debatable
inchoate income would lead to absurd and
anomalous results. Therefore in authors opinion,
even when assessee accepts certain addition to
income loosely assessed u/s 68 to section 69D, to
honor the surrender made u/s 133A etc, then also
AO has got all rights to see whether conditions to
apply section 115BBE are scrupulously satisfied or
not. If slightest of doubt exist as to the applicability
of the conditions which are sine qua
non/indispensable to attract section 115BBE, then
section 115BBE may not be applied.
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Further, regarding approach to be adopted by revenue authorities u/s 68, it maybe
useful to make reference to full bench decision of P&H high court reported at 382
ITR 453:
The Hon'ble Punjab & Haryana High Court in a recent judgement in the case of
CIT vs Jawaharlal Oswal and Others (I.T.A. No. 49 of 1999, Judgment delivered
on 29.01.2016) dismissed the Department’s appeal by holding that suspicion and
doubt may be the starting point of an investigation but cannot, at the final stage of
assessment, take the place of relevant facts, particularly when deeming provision is
sought to be invoked. The Hon’ble Court has observed ,
“...The principle that governs a deeming provision is that the initial
onus
lies upon the revenue to raise a prima facie doubt on the basis of
credible material. The onus, thereafter, shifts to the assessee to
prove that the gift is genuine and if the assessee is unable to
proffer a credible explanation, the Assessing Officer may
legitimately raise an inference against the assessee. If, however,
the assessee furnishes all relevant facts within his knowledge and
offers a credible explanation, the onus reverts to the revenue to
prove that these facts are not correct. The revenue cannot draw an
inference based upon suspicion or doubt or perceptions of
culpability or on the quantum of the amount, involved particularly
when the question is one of taxation, under a deeming provision.
Thus, neither suspicion/doubt, nor the quantum shall determine
the exercise of jurisdiction by the Assessing Officer….Further a
deeming provision requires the Assessing Officer to collect relevant
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facts and then confront the assessee, who is thereafter, required to
explain incriminating facts and in case he fails to proffer a credible
information, the Assessing Officer may validly raise an inference of
deemed income under section 69-A. As already held, if the
assessee proffers an explanation and discloses all relevant facts
within his knowledge, the onus reverts to the revenue to adduce
evidence and only thereafter, may an inference be raised, based
upon relevant facts, by invoking the deeming provisions of Section
69-A of the Act. It is true that inferences and presumptions are
integral to an adjudicatory process but cannot by themselves be
raised to the status of substantial evidence or evidence sufficient
to raise an inference. A deeming provision, thus, enables the revenue
to raise an inference against an assessee on the basis of
tangible material and not on mere suspicion, conjectures or
perceptions”
Apropos second part of the case study (ii) above, in
author opinion, as per various precedents like Delhi
high court in Neeraj Jindal 393 ITR Page 1 and SAS
Pharmaceuticals etc , normal penalty u/s 270A (or
section 271(1)(c)) etc may not be leviable once
surrendered amount during survey is voluntarily
reflected in return u/s 139(1).
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4.2 An assessee is filing return on presumptive basis of
his business/profession u/s 44AD/Sec 44ADA .
Cash sales and receipts are declared on which profit
is offered as per applicable rates prescribed under
resp. provisions of sec 44AD/44ADA. During
assessment , Assessing officer is not satisfied on
genuineness of cash sales etc and assess them
accordingly in section 68 to section 69 read with
section 115BBE . Whether AO’s action is correct.
Firstly, receipts and sales even though cash,
directly cannot be bodily lifted to section 68 as
assessee has already offered profit on the same in
presumptive income provision by which receipts
stand offered for taxation and therefore section 68
applicability stands ruled out as it would amount to
double taxation etc.(refer Gujarat high court in
Vishal exports (3/07/2012) in Tax Appeal no
2471/2009).
Otherwise also , in worst case scenario, since sales
and receipts per se are not income u/s 4 which is
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charging provision under the Act and only income
can be considered , at best AO could make best
judgment assessment u/s 144 read with section 145
and then also he is to make the assessment
considering material on records whereby he can
assess only income earned by assessee. By this
route also, he would be required to make
reasonable assessment. If assessee has already
shown reasonable income, scope of further
additions gets mitigated. It is settled law that under
best judgment assessment it is not necessary that
some additions are made. Here also by simply
making best judgment assessment nature and
character of income would not get altered.
To say that entire cash sales and receipts are
income of assessee u/s 68 of the Act dehors section
44AD/44ADA, would come in the teeth of
observations of Apex court in Maxopp case (supra)
which says only net income can be considered
under the Act.
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4.3 If an assessee has earned income from trading of
commodity derivative on recognized commodity
exchange , which is established by documentary
evidences like broker contract note etc can said
income be treated as unexplained income u/s 68 to
69d so as to trigger section 115BBE? Since
documentary evidences are of impeccable
character, to lightheartedly apply section 68 etc
r.w.s 115BBE to such income which is fully
substantiated , may not pass muster of law.
Answer: Refer: T&AP high court decision in case of Pendurthi
Chandrashekhar (order dated 23/02/2018) “…. Despite the
availability of overwhelming and unimpeachable
documentary evidence, the AO was not prepared to accept
the same, as his approach appeared to be loaded with
prejudice, suspicion and pre-determined mind and
preconceived notions. The whole approach of the AO
appears to be some how reject the every explanation of the
assessee and the evidence produced in support of such
explanation, by assigning reasons which are wholly
imaginary and perverse. ….While the authorities are
entitled to examine each transaction minutely, they cannot
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approach every transaction with undue suspicion by
wearing coloured glasses. The approach of the AO reminds
us of somebody describing a lamb as a dog and trying to
make everyone to believe it to be so….”
Jaipur ITAT , ITA No. 431 & 432/JP/2016 , M/s Choice
Buildestate Pvt. Ltd., Jaipur vs. ITO, Jaipur
Order dated 28/03/2018
“… If the Assessing Officer harbours any doubts of the
legitimacy of any subscription he is empowered, nay duty-
bound, to carry out thorough investigations. But if the
Assessing Officer fails to unearth any wrong or illegal
dealings, he cannot obdurately adhere to his suspicions
and treat the subscribed capital as the undisclosed income
of the Company. We therefore agree with the contentions
of the ld AR that in absence of any falsity which have been
found in the documents so submitted by the assessee
company to prove the identity, creditworthiness and
genuineness of the share transaction, these documents
cannot be summarily rejected as has been done by the AO
in the instant case. ..”
4.4 If an assessee is filing return showing tuition income from
past many years which is never disturbed and contradicted
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and post section 115BBE , ld AO tries to apply section 68
to 69D to said tuition income alleging it to be laundering of
unaccounted money to get basic exemption benefit etc
whether such attempt is lawful? As per legislative intent
burden to apply section 115BBE and section 68 to section
69D rest on revenue shoulder. That burden cannot be
discharged on basis of assumption and presumption only.
For that cogent material is to be brought on records by
necessary enquiry and examination. Sans cogent material,
suggested straight application of section 115BBE and sec
68 to sec 69D treating tuition income as unexplained in
nature may be defeated by consistency principle:
a. 394 ITR 449 SC Godrej case Sec.14A
b. 388 ITR 1 SC (first year relevance u/s 35D)
c. 358 ITR 295 (SC) Excel Indsutries case
d. 106 ITR 1 (SC) Parshuram Potteries
e. 193 ITR 321 (Radhaswami Satsang) SC
4.5 Can section 115BBE be applied in summary manner u/s
143(1) processing? Answer is emphatic no because it is
highly contentious and moot issue.
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4.6 To apply section 115BBE whether CIT can initiate revision
proceedings u/s 263 which is missed by AO? Since section
263 uses the expression erroneous and prejudicial to
interest of revenue, if on applicability of section 115BBE
two views are possible, revision u/s 263 by CIT may not
sustain in law.
5. Conclusion of the paper
From aforesaid discussion following principles emerge:
i) Since section 68 to section 69D are discretionary
in nature and section 115BBE is dependent on
section 68 to section 69D said discretion has be
exercised with extreme care and caution;
ii) “Laundering” of “unaccounted money” is to be seen
as per legislative intent;
iii) Benefit of doubt should go to favor of taxpayer;
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iv) “Source” of income must be seen pragmatically
and not pedantically;
v) Section 115BBE can not be applied in routine and
ordinary manner unless exceptional facts are there;
vi) Sales and receipts which are already offered for
taxation under presumptive scheme etc by offering
profit element therein, it may not be available for
assessment u/s 68 as unexplained cash credit;
vii) Section 115BBE cannot be viewed as a tool to
generate more revenue and is in nature of deterrent
provision
viii) All surrendered income during survey and search
cannot be domiciled ipso facto in section 68 to
section 69D read with section 115BBE without
making holistic consideration of obtaining factual
position specially business activity related income
may not ordinarily get placed u/s 68 to section 69D
Closing Note
Hon'ble Supreme Court in the case of Krishena Kumar & Ors. V/s. Union of India
& Ors., AIR 1990 SC 1782.
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“29. The argument of Mr. Shanti Bhushan is that the State's obligation
towards pension retirees is the same as that towards P.F. retirees. That
may be morally so. But that was not the ratio decidendi of Nakara.
Legislation has not said so. To say so legally would amount to legislation
by enlarging the circumference of the obligation and converting a moral
obligation into a legal obligation. It reminds us of the distinction between
law and morality and limits which separate morals from legislation.
Bentham in his Theory of Legislation, Chapter XII, page 60 said:
“Morality in general is the art of directing the actions of men
in such a way as to produce the greatest possible sum of good.
Legislation ought to have precisely the same object. But although these
two arts, or rather sciences, have the same end, they differ greatly in
extent. All actions, whether public or private, fall under the jurisdiction of
morals. It is a guide which leads the individual, as it were, by the hand
through all the details of his life, all his relations with his fellows.
Legislation cannot do this; and, if it could, it ought not to exercise a
continual interference and dictation over theconduct of men. Morality
commands each individual to do all that is advantageous to the community,
his own personal advantage included. But there are many acts useful to
the
community which legislation ought not to command. There
are also many injurious actions which it ought not to forbid, although
morality does so. In a word legislation has the same center with morals,
but it has not the same circumference.”
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