Section 115BBE and 68: Taxation of unexplained income

Here in this blog, we try to highlight the unrecognized Section 115BBE of the Income-tax Act, which was applicable from the assessment year 2013-14.

Unexplained investment, cash credit, expenditure, etc., are considered as income as per Section 68, Section 69, Section 69A, Section 69B, Section 69C and Section 69D of the Act and was subject to tax earlier according to the applicable tax rate to the taxpayers. Consequently, for individuals, HUF, etc., tax was not imposed till the exemption limit and in case such income which was more than the exemption limit, it could be imposed at lower slab rate.

Current Scenario

As per Section 115BBE of the Income Tax Act, tax on the unexplained and assets which is deemed as income is levied at a flat rate of 30 %, notwithstanding the income slab. Furthermore, no deduction is allowed for any allowance or expenditure while calculating the deemed income.

Analyzing the Provisions

As per Section 68 of the Act, any sum which is found to be credited in the taxpayer books and he has no explanation regarding the source and nature of the sum, or explanation which the taxpayer offers is not acceptable by the Assessing Officer, in that case such the amount could be charged to tax.

Considering the scenario where the individual files the return of income, stating the income is derived from Tuition fees and receives tax slab benefit. But, the individual is incapable in substantiating from where such income is derived and the A.O discards such explanation on the grounds that the source has not been explained properly.

Here it seems that A.O may trigger Section 115BBE and its provisions together with Section 68. It means that the income, however, offered already by the taxpayer, will be liable to tax at flat rate of 30% on gross basis.

Here, the A.O is bound by law to be just and reasonable in framing satisfactory opinion with respect to the explanation which is provided by the taxpayer.

However, it has been observed that individuals are filing the return of income, providing source of income is from Brokerage, Commission, Embroidery charges, etc., and receive tax slab benefits. In absence of the required substance in the transactions, one might need to assess the implications of income-tax under Section 115BBE.

The Bottom Line

No one could foresee destiny, but can take apt measures for safeguarding themselves from foreseeable interferences which might come across. Some key takeaways:

• Endeavour in demonstrating substance over form;
• Keep strong documentation, proving the source and nature of the income;
• Choose transactions to be routed via proper banking channel