Overview of provisions of s. 68, 69, 69A,

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1 Overview of provisions of s. 68, 69, 69A, 115BBE and 271AAC General Background of Sections 68 to 69D Chapter VI of the Income-tax Act, 1961 ( the Act ) titled Aggregation of Income has sections 68 to 69D (these sections are hereinafter referred to as Specified Sections ). These sections deal with charging to income-tax (i) amounts credited in the books of accounts of the assessee, the nature and source whereof is not satisfactorily explained by the assessee; (ii) amount of investments made by the assessee, which are not recorded in the books of account, and source whereof is not satisfactorily explained; (iii) money and the value of the bullion, jewellery or other valuable article of which assessee is found to be the owner and which is not recorded in his books of account and the assessee offers no explanation about the nature and source of such money, bullion, jewellery or other valuable article or the explanation offered by the assessee is not in the opinion of the AO satisfactory; (iv) amount of investments, bullion, jewellery or other valuable article not fully recorded in the books of account; (v) amount of expenditure incurred for which source is not explained satisfactorily; (vi) amount borrowed or repaid on a hundi. 2

2 What do Sections 68 to 69D ( specified sections ) deal with? Sections 68, 69, 69A, 69B, 69C and 69D of the Act (hereinafter for brevity referred to as specified sections ) deal with Section Heading of the Section 68 Cash Credits 69 Unexplained investments 69A Unexplained money, etc. 69B Amount of investments, etc., not fully disclosed in books of account 69C Unexplained, expenditure, etc. 69D Amount borrowed or repaid on hundi 3 Text of section 68 Cash credits Cash credits. 68. Where any sum is found credited d in the books of an assessee maintained i for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year : Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB)of section 10. 4

3 Text of section 69 - Unexplained investments and section 69A - Unexplained money, etc. Unexplained investments. 69. Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year. Unexplained money, etc. 69A. Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year. 5 Text of section 69B - Amount of investments, etc., not fully disclosed in books of account and section 69C - Unexplained expenditure, etc. Amount of investments, etc., not fully disclosed in books of account. 69B. Where in any financial year the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable article, and the Assessing Officer finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the excess amount may be deemedd to be the income of the assessee for such financiali year. Unexplained expenditure, etc. 69C. Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the Assessing Officer, satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year : Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income. 6

4 Text of section 69D - Amount borrowed or repaid on hundi Amount borrowed or repaid on hundi. 69D. Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to, any person otherwise than through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the amount aforesaid for the previous year in which the amount was borrowed or repaid, as the case may be : Provided d that, t if in any case any amount borrowed on a hundi has been deemedd under the provisions of this section to be the income of any person, such person shall not be liable to be assessed again in respect of such amount under the provisions of this section on repayment of such amount. Explanation. For the purposes of this section, the amount repaid shall include the amount of interest paid on the amount borrowed. 7 Ingredients of section 68 cash credits Ingredients of section 68 there is an assessee; assessee has maintained books for any previous year; any sum is found credited in the books of the assessee; assessee offers no explanation about the source; OR the explanation offered by the assessee is not, in the opinion of the AO, satisfactory, upon all the abovementioned conditions being cumulatively satisfied, the sum so credited may be charged to income-tax as income of the assessee of that previous year. Prior to the enactment of the Amendment Act, 2016 there could have been a question as to whether an assessee, on his own, could offer certain amounts for taxation under the provisions of sections 68, 69, 69A, 69B, 69C and 69D ( specified (specifiedsections sections ) ). It is now clear that items which could have been taxed by the provisions of sections 68, 69, 69A, 69B, 69C and 69D ( specified sections ) can also be offered for taxation by the assessee in his return of income by paying tax, on or before the end of the previous year, at the rates mentioned in section 115BBE. 8

5 Background and scope of section 68 The section has been introduced in the 1961 Act w.e.f In the 1922 Act, there was no provision corresponding to section 68. The principle in section 68 is a statutory recognition of what was always understood to be the law based upon the rules of evidence, that it is for the taxpayer to prove the genuineness of the borrowings or other credits in his books, since the relevant facts are exclusively within his knowledge. Precedents indicate that the law was no different earlier to this provision. Section 68 incorporates only a rule of evidence, placing the onus of proof on the assessee. There have been hardly any amendments in this section since its introduction. The major amendment was by the FA, 2012 which introduced the two provisos to this section. 9 Ingredients of section 69 - Unexplained investments Ingredients of section 69 there is an assessee; the assessee has in the financial year immediately preceding the assessment year ( previous year ) made investments; such investments made by the assessee are not recorded in the books of account, if any, maintained by the assessee; assessee offers no explanation about the nature and source of the investments; OR the explanation offered by the assessee is not, in the opinion of the AO, satisfactory, upon all the abovementioned conditions being cumulatively satisfied, the value of the investments may be deemed to be the income of the assessee of such previous year. 10

6 Ingredients of section 69A Unexplained money, etc Ingredients of section 69A there is an assessee; in the financial year immediately preceding the assessment year ( previous year ) the assessee is found to be the owner of any money, bullion, jewellery or other valuable article; such money, bullion, jewellery or other valuable article is not recorded in the books of account, if any, maintained by the assessee; assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article; OR the explanation offered by the assessee is not, in the opinion of the AO, satisfactory, upon all the abovementioned conditions being cumulatively satisfied, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such previous year. 11 Ingredients of section 69B - Amount of investments, etc., not fully disclosed in books of account Ingredients of section 69B there is an assessee the assessee maintains books of accounts in the financial year the assessee has made investments OR; the assessee is found to be the owner of any bullion, jewellery or other valuable article the AO finds that the amount expended on making such investment OR in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account the assessee offers no explanation about such excess OR the explanation offered by him is not, in the opinion of the AO, satisfactory Upon satisfaction of all the abovementioned conditions - the excess amount may be deemed to be the income of the assessee for such financial year. 12

7 Ingredients of section 69C - Unexplained expenditure, etc. Ingredients of section 69C there is an assessee in any financial year the assessee has incurred any expenditure the assessee offers no explanation about the source of such expenditure or part thereof OR the explanation offered by him is not, in the opinion of the AO, satisfactory Upon satisfaction of all the abovementioned conditions - the amount covered by such expenditure or part thereof may be deemed to be the income of the assessee for such financial year; AND such unexplained expenditure which is deemed to be the income shall not be allowed as a deduction under any head of income. 13 Ingredients of section 69D - Amount borrowed or repaid on hundi Ingredients of section 69D there is a person such person has borrowed from any person any amount on a hundi OR such person has repaid to any person any amount borrowed on a hundi AND such repayment is otherwise than through an account payee cheque drawn on a bank Upon satisfaction of all the above mentioned conditions The amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the amount aforesaid, for the previous year in which the amount was borrowed or repaid, as the case may be. If the amount borrowed on a hundi has been deemed to be income of any person under this section, then such person shall not be liable to be assessed again in respect of such amount on repayment thereof Amount of interest paid on amount borrowed shall be regarded as amount repaid 14

8 General Propositions Sections 68 to 69D are some of the provisions in the Act meant to curb the all pervading evil of generation and proliferation of black money CIT v. Intraven 219 ITR 225 (s. 69D) These sections are only clarificatory, and an addition can be made even otherwise in respect of income from undisclosed sources Yadu v. CIT 126 ITR 48 These sections are similarly worded, and following general propositions would be applicable to all of them. The word `may used in section 68 provides discretion to the AO. In general, the word `may is an auxilliary verb clarifying the meaning of another verb of expressing an ability, contingency, possibility or probability. When used in a statute in its ordinary sense the word is permissive and not mandatory. But when certain conditions are provided in the statute and on the fulfillment thereof a duty is cast on the authority concerned to take an action, then on fulfillment of those conditions the word `may takes the character of `shall and then it becomes mandatory. In section 68, there are no such condition on the fulfillment of which the AO is duty bound to make the addition. The word `may denotes the discretion of the AO that he can make an addition or cannot make an addition. Umesh Electricals v. ACIT [2011] 131 ITD 127(Agra Trib)(TM). 15 General Propositions The word `may has been used in all of these sections, thereby giving the discretion to the assessing officer to treat a particular sum as income or not; therefore, even if the assessee does not provide an explanation, or provides one that is unsatisfactory, it is not necessary in all cases for the amount to be treated as the assessee s s taxable income CIT v. Noorjahan 237 ITR 570 (SC), affirming CIT v. Noorjehan 123 ITR 3 (s. 69); CIT v. Moghul Darbar 216 ITR 301 (s. 69); DCIT v. Rohini Builders 256 ITR 360 (s. 68); Mitesh Rolling v. CIT 258 ITR 278 Further, while considering the explanation of the assessee, the assessing officer cannot act unreasonably, and his satisfaction that a particular transaction is not genuine must be based on relevant factors and on a just and reasonable inquiry SumatiDayalv.CIT214ITR801(SC); Khandelwal Constructions v. CIT 227 ITR 900; Rajshree v. CIT 256 ITR

9 General Propositions The assessee is entitled to an opportunity of explaining the transaction before any amount is added to his total income Menon v. ITO 96 ITR 148; Unit Const v. JCIT 269 ITR 189 (s. 69) 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 satisfactorily explained. In these cases, the source not being known, such deemed income will not fall even under the head `Income from Other Sources and the deductions that are applicable to the incomes under any of the heads will not be attracted Fakir Mohmed v. CIT 247 ITR 290; Manharlal v. CIT 215 ITR 634; CIT v. Ramkant 252 ITR 210; Bijjala v. CIT 253 Itr 105. Further, the fiction created under sections 68, 69, 69A, 69 B and 69C cannot, by itself, be extended to penalty proceedings to raise a presumption of concealment of income CIT v. Baroda Tin 221 ITR Illustrative topics under S. 68 A large number of issues arise in interpretation of the provisions of sections 68, 69 and 69A. This presentation is primarily to deal with the provisions of S. 115BBE and S. 271AAC and therefore, the issues under these sections are not covered in detail. However, to provide a flavor of the issues which could possibly arise under these sections, the issues under section 68 are listed hereunder for the benefit of the participants. Is section 68 a charging section? Which is the year of charge? Meaning of `nature and source Is it necessary that the credit referred to in S. 68 has to be in cash or does section 68 cover credits other than those in cash What are the conditions for applicability of s. 68 On whom is the burden of proof under s. 68 Meaning of `books of the assessee what constitutes books; what does not constitute books is pass book a `book ; are rough books also `books ; are loose sheets also `books ; When does the burden shift to the revenue Can assessee be asked to prove source of source Role of Affidavits Is filing of confirmations a discharge of burden imposed on the assessee In case of credits in the books of the partnership firm 18

10 Issues arising in Ss. 68, 69 and 69A In case of the partnership firm Treatment of partners credits in the assessment of the firm Onus on the firm in respect of credit in partner s name Is double assessment in both partner and the firm on the same income tenable Income from undisclosed source or undisclosed income from a disclosed source Is the addition mandatory or discretionary significance of `may Can addition be made if income is assessed on an estimated basis Can addition be made in cases where income is assessed on presumptive p basis Is the proviso to s. 68 retrospective in operation Is the nature of burden different in case of public companies and in case of private companies If the shareholder is identified, can addition be made in the assessment of the company issuing share capital Is penalty inevitable in cases of additions under s. 68 Can addition be made in respect of credits recorded in books which are rejected S. 68 versus S. 69 S. 68 versus S. 271(1)(c) Can an assessee suo motto offer income under this section in the return of income filed by him Powers of appellate authorities to reappreciate evidence 19 Object of introducing S. 115BBE One would believe that since these amounts are by a fiction of law to be charged to income-tax as income of the assessee of the previous year in which the credit is reflected, investment is made or expenditure incurred these amounts would be part of total income of the assessee and would be taxed at the rate applicable to the total income so computed. Also, that expenditure incurred, if any, would be deductible and the losses for the year would be set off against such income. The"WhitePaper on Black Money" presented in the Parliament on 16th May, 2012 was, inter alia, concerned with the laundering of unaccounted money by taking advantage of basic exemption limit. The above stated position of taxing income of the nature referred to in the specified sections at the normal rate / applicable rate of income-tax applicable on total income of the assessee has been changed w.e.f by the Finance Act, 2012 as a result of introduction of section 115BBE dealing with a special rate of tax applicable to income of the nature referred to in sections 68, 69, 69A, 69B, 69C and 69D. 20

11 Speech of FM and Explanatory Memorandum for introduction of s. 115BBE The Finance Minister, in his speech, while introducing the Finance Bill, 2012 on 16th March, 2012, said: "I propose a series of measures to deter the generation and use of unaccounted money. To this end, I propose.taxation of unexplained money, credits, investments, expenditures, etc., at the highest rate of 30 per cent irrespective of the slab of income. The rationale behind new section 115BBE has been explained by the Explanatory Memorandum to the Finance Bill, 2012 as under : Under the existing provisions of the Income-tax Act, certain unexplained amounts are deemed as income 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. 21 Object and purpose of the s. 115BBE and amendments to 115BBE 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). Itisalsoproposed p 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. This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year and subsequent assessment years. Thus, section 115BBE is designed to impose greater tax burden on the assessees who fail to explain the "nature and source" of their income, investments, expenses, etc. However, substantive law dealing with provisions of sections 68, 69, 69A, 69B, 69C and 69D is unchanged. The section has since its introduction by the FA, 2012 w.e.f. AY been amended twice once vide FA, 2016 w.e.f when sub-section section (2) was amended to prohibit setting off of any loss against income of the nature referred to in specified sections and second time, very recently, by the Taxation Laws (Second Amendment) Act, 2016 w.e.f The amendments made by the Taxation Laws (Second Amendment) Act, 2016 are drastic and will have far reaching implications, going forward. 22

12 Text of Section115BBE as amended byfa,2016 Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D. 115BBE. (1) Where the total income of an assessee includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, the income-tax payable shall be the aggregate of (a) the amount of income-tax calculated on income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of thirty per cent; and (b) 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 (2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance 46a [or set off of any loss] shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1).] 23 S. 115BBE as applicable upto AY Section 115BBE applies to income referred to in sections 68 to 69D. The section as is applicable for AYs to provides as follows. : Clause (a) of sub-section (1) of section 115BBE provides for tax at the rate of 30% on such income; (surcharge and cess are also applicable). Clause (b) of sub-section (1) of section 115BBE provides that while calculating income-tax, an assessee's total income would be reduced by the income taxed under clause (a) and tax calculated on balance of income. Thereafter, the taxes payable under clauses (a) and (b) would be added. Sub-section (2) provides that notwithstanding anything contained in the Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provisions of the Act in computing his income referred to in clause (a) of sub-section (1). With effect from AY , 18 sub-section section (2) prohibits setting off of any loss against income of the nature referred to in specified sections. In this way, inrespect of the income covered by clause (a) of sub-section (1) of the above section, basic exemption, deductions and set-off of losses are also not allowable. 24

13 Section 115BBE prior to its amendment by Amendment Act Section 115BBE prior to its amendment by the Taxation Laws (Second Amendment) Act, 2016 (Amendment Act) provided that the income of the nature referred to in specified sections which is included in total income of the assessee shall be charged to 30% of such income. In addition to 30% surcharge and cess as is applicable is also required to be paid. Surcharge depends upon the legal status of the person and his total income eg Finance Act, 2016 provides that in case of an individual surcharge is 12% if his total income exceeds Rs 10 crore and not otherwise. In case of domestic companies, surcharge is 7% where total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore and in case of domestic companies whose total income exceeds Rs 10 crore surcharge is 12%. Corresponding rates for foreign companies are 2% and 5%. Cess is 3%. Thus, the tax incidence, for AY , on the income of the nature referred to in specified sections 30.90% to %. Prior to the amendment by the Amendment Act, 2016 it could have been debated as to whether an assessee could, in the return of income, include in his total income amounts of the nature referred to in sections 68, 69, 69A, 69B, 69C or 69D of the Act. Consequent to demonetisation, views were expressed by professionals that the undisclosed income held in the form of demonetized currency can be deposited in the bank and the said amount can be offered for taxation under specified sections and tax thereon paid at the rates mentioned in section 115BBE i.e. 30% plus applicable surcharge and cess. If this was done, the pre-pondrant legal view was that the person doing so would not be liable to any penalty Jagdish under the T Punjabi Act. March 06, Object and purpose of the amendments by the Amendment Act It was with a view to prevent such a disclosure and to overcome the views expressed that the amendments have been made to section 115BBE of the Act. Statement of Objects & Reasons appended to the Taxation Laws (Second Amendment) Bill, 2016, interalia states the object and purpose of introducing PMGKY as under 1. 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 p 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 9 th November, 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 p to make some changes in the Act to ensure that defaulting assessees are subjected to tax at a higher rate and stringent penalty provision. 26

14 Overview of the Amendment Act The President has given his assent to the Amendment Act on December 16, Chapter II of the Amendment Act amends existing provisions of sections 115BBE and 271AAB of the Income-tax Act, 1961 ( the Act ) and also introduces a new section 271AAC in the Act. Chapter III of the Amendment Act amends the provisions of the Finance Act, 2016 to the extent of levy of surcharge on income chargeable to tax at the rates mentioned in section 115BBE The Amendment Act has w.e.f. AY , amended the provisions of sub-section (1) of section 115BBE. The original sub-section (1) as it stood for AY to and the amended sub-section (1) applicable with effect from AY are stated in the table below- 27 Comparison of S. 115BBE(1) as applicable prior to amendment and thereafter From AY upto AY BBE. (1) Where the total income of an assessee includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, the income-tax payable shall be the aggregate g of (a)the amount of income-tax calculated on income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of thirty per cent; and (b)the amount of income-tax with ih which h the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a). AY onwards 115BBE.(1)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 (b) of income furnished under section 139; or 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 covered under clause (a), 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). (2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) ofsub-section(1). (2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance 46a [or set off of any loss] shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) ofsub-section(1). 28

15 Amendments to section 115BBE The amendments are applicable with effect from AY and therefore would apply to income under specified sections from 1 st April, 2016 to ; income under specified sections during 8 th November,2016to30 th December, 2016 but not on account of demonitised notes; income of subsequent assessment years i.e. AY onwards. The section applies to all assessees irrespective of the legal status i.e. it applies to individuals, HUFs, firms, LLP, co-operative society, AOP, BOI, political party, etc. ; irrespective of their residential status i.e. it applies to residents as well as non-residents including those covered by COFEPOSA, IPC, PMLA, etc. including those covered by presumptive taxation under sections 44AD / 44ADA / 44AE The section applies irrespective of the minimum threshold i.e. the section applies to even a small amount of Rs. 5,000 if the amount is chargeable as income under the provisions of the specified sections. Since the amendment is prospective w.e.f. AY , 18 the income under specified sections for earlier years will continue to be governed by the pre-amended provisions irrespective of the fact that the assessments of such years are completed after the amendment. 29 Amendments to section 115BBE Prior to the enactment of the Amendment Act, 2016 there could have been a question as to whether an assessee, on his own, could offer certain amounts for taxation under the provisions of sections 68, 69, 69A, 69B, 69C and 69D ( specified sections ). It is now clear that items which could have been taxed by the provisions of sections 68, 69, 69A, 69B, 69C and 69D ( specified sections ) can also be offered for taxation by the assessee in his return of income by paying tax, on or before the end of the previous year, at the rates mentioned in section 115BBE. In fact, penalty under section 271AAC can now be levied if the income assessed includes income of the nature referred to in specified sections and if the assessee has not included such income in his return of income or having included it in the return of income has failed to pay tax on such income before 31 st March of the previous year. Upto AY there is no prohibition on set off of loss though deduction in respect of any expenditure or allowance is not allowed. 30

16 Amendments to section 115BBE Clause (a) of sub-section (1) of section 115BBE deals with income referred to in specified sections and which is included in the return of income furnished under section 139. Clause (b) of sub-section (1) of section 115BBE deals with income referred to in specified sections and which is determined by the AO if such income is not covered under clause (a) Irrespective of whether the case of the assessee falls under clause (a) or clause (b), the rate of taxis60% plus surcharge plus cess. However, the levy of penalty depends on whether the case of an assessee falls under clause (a) or clause (b) of 115BE(1). Sub-section (2) of section 115BBE begins with a non-obstante clause and provides that no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1). It was debatable and continues to be a debatable question as to whether deductions under Chapter VI-A are allowable against such income. 31 Amendments to section 115BBE The bar on non-deduction of expenditure or allowance or set off of any loss imposed by sub- section (2) applies to computing income referred to in clause (a) of sub-section section (1) but not to income referred to in clause (b) of sub-section (1). Therefore, it appears that in a case where the AO charges to tax income referred to in specified sections then the assessee would be entitled to claim deduction in respect of expenditure, allowance and also set off of loss. This seems to be unintentional and may be rectified in due course. Clause (a) covers income referred to in specified sections which has been reflected in return of income furnished under section 139. Such income reflected in a belated return or in a revised return furnished under section 139(5) would certainly be covered by clause (a). Pre-requisiterequisite for revising a return of income is discovery of omission or any wrong statement in the return of income filed by the assessee. Consequently, income covered by specified sections which is reflected in revised return after issue of notice by the AO may not be regarded being covered by clause (a). Return furnished under section 153A of the Act is regarded as if it is a return filed under section 139 of the Act and therefore it appears to be arguable proposition that a disclosure in the return filed under section 153A would be regarded as covered by clause (a). It could be debated as to whether a return filed under section 153C could be regarded as being covered by clause (a). 32

17 Amendments to section 115BBE However, income referred to in specified sections which has been reflected in returns furnished under section 148 will not be covered by clause (a). Tax rate of 60% is on income under specified sections included in total income. If donations are given which donations qualify for deduction under section 80G, a question arises as to whether tax is payable on gross income under specified sections or net income [See Distributors (Baroda) Pvt. Ltd. v. UOI (1985) 155 ITR 120 (SC); CBDT Circular under section 112. In addition to the 60%, surcharge is 25% of such tax. Surcharge is payable by all assessees irrespective of their legal status or residential status or quantum of income. Thus, a person having income of Rs. 5,000 covered by specified sections will also be liable to pay 25% of tax of 60%. In addition to 60% and 25% of the tax payable, Education Cess and also Krishi Kalyan Cess is also payable. Thus, the total incidence of tax in respect of income of the nature referred to in specified sections is 77.25%. If penalty under section 271AAC is also levied then the incidence of tax works to 83.25%. 33 Amendments to section 115BBE Assessee will be liable to pay interest under section 234C of the Act, if assessee in his return of income declares income under specified sections but does not pay advance tax in accordance with the provisions of the Act. Belated returns will be subject to payment of interest under section 234A and default in payment of advance tax will trigger interest under section 234B. In a case where advance tax paid is more than 90% of the tax payable but less than 100% of the tax payable, interest under section 234B may not be leviable but the assessee will not be entitled to claim immunity from penalty. Set-off of current year's losses under other heads as per section 71 - While calculating "Gross total income", an assessee may, upto AY , set-off current year's losses with income of the nature referred to in specified sections. However, w.e.f. AY , sub-section (2) of section 115BBE prohibits set off of any loss against the income of the nature referred to in specified sections. 34

18 Can penalty be levied in respect of income under specified sections offered in return of income upto AY Shiv Narayan Shivhare v. CIT [1995] 83 Taxman 25 (MP) In this case, the assessee disclosed voluntarily Rs. 75,000 as income from undisclosed sources. The AO treated this amount returned as undisclosed income as concealed income. The AO also levied penalty on this amount. The Tribunal held that there was no question of penalty on the sum which was disclosed as income voluntarily in return, as no penalty is prescribed under the law for not disclosing alleged sources of income. On an application under section 256(2), the High Court held There was no question of any levy of penalty on the sum of Rs. 75,000 which was disclosed as income by the assessee voluntarily in his return. There is also no penalty prescribed under the law for not disclosing the alleged source of income. The contention of the revenue that the penalty should have been imposed by the Tribunal was rightly rejected. 35 Judicial precedents on set off of loss against income of the nature referred to in specified sections Fakir Mohmed Haji Hasan v. CIT [2001] 247 ITR 290/[2002] 120 Taxman 11 (Guj.) In this case the assessee was found to be in possession of gold valued at Rs lakh which was included in his total income. The cost of acquisition of such gold was sought to be claimed as deduction/expenditure. The Court held that the 'deemed incomes' of the nature covered under sections 69, 69A, 69B and 69C have to be treated separately and such deemed incomes were not in the nature of incomes such as salary, house property, profits and gains of business or profession, or capital gains, nor income from 'other sources'. Accordingly, corresponding deductions which were applicable to incomes computed under various heads were not applicable in this case on 'deemed incomes'. The value of investment to the extent undisclosed was held as chargeable to tax 36

19 Judicial precedents on set off of loss against income of the nature referred to in specified sections CIT v. Chensing Ventures [2007] 291 ITR 258/163 Taxman 175 (Mad.) In this case the assessee during the course of survey could not explain the source for the payment of Rs lakh. It was surrendered voluntarily as income for taxation. The assessee filed a return admitting business loss of Rs lakh and set off the same against the income of Rs lakh admitted at the time of survey as income from undisclosed sources. The Assessing Officer did not allow set off of business loss against income from undisclosed sources. The Court held that once the business loss was determined the same had to be set off against the income determined under any other head of income. A loss after set off against the income under the same head was eligible for set off against other heads of income, unless the law prohibited or banned such set off. The Court, accordingly, held that the income offered during the course of survey had to be scaled down by the business loss of the assessee. 37 Kim Pharma (P) Ltd v. CIT (ITA No. 106 of 2011)(Punj & Har) Kim Pharma (P) Ltd v. CIT (ITA No. 106 of 2011)(Punj & Har) In this case the Punjab and Haryana High Court held that the income surrendered by the assessee voluntarily in a survey could not be reduced by set off of brought forward losses. It held that sections 70 and 71 could not be applied for setting off losses against the income surrendered consequent to survey. 38

20 CIT and Liberty Plywoods (P.) Ltd. v. Asstt. CIT (Chd. Trib) Liberty Plywoods (P.) Ltd. v. Asstt. CIT [2013] 29 taxmann.com 268 (Chd.-Trib) In this case the assessee was subjected to a survey under section 133A. The case relates to assessment year The assessee offered Rs. 70 lakh as income representing unaccounted cash of Rs. 50 lakh, unaccounted investments of Rs lakh unaccounted expenditure of Rs lakh under sections 69A, 69B and 69C respectively. The assessment was completed by the Assessing Officer determining the total income at Rs lakh after allowing set off of brought forward business loss and brought forward unabsorbed depreciation against the income admitted during the course of survey. The Commissioner invoked revisional jurisdiction under section 263 and held that the incomes offered during the course of survey were 'deemed incomes' under sections 69, 69A, 69B. So, those incomes were not eligible for set off against brought forward business loss or unabsorbed depreciation of the earlier years. 39 CIT and Liberty Plywoods (P.) Ltd. v. Asstt. CIT (Chd. Trib) The Tribunal in Liberty Plywood's case referred to its jurisdictional High Court's decision in the case of Kim Pharma (P.) Ltd. (supra) and held that the income offered during the course of survey has to be assessed separately as 'deemed income'. Following the precedent in Kim Pharma's case the Tribunal held that the business loss cannot be set off against the income surrendered at the time of survey. However, it held that in Kim Pharma (P.) Ltd.'s case the issue, whether depreciation brought forward from the earlier year(s) is eligible for set off against the surrendered income, was not discussed and, hence, it made a voyage on the decisions on this issue. It looked into the various changes with regard to treatment of depreciation, both in the year of claim and on carry forward and finally held that depreciation of the block of assessment years, viz., assessment year to assessment year could be set off against the income offered or surrendered during the course of survey. However, where the depreciation related to assessment years preceding or succeeding the block period (i.e., other than assessment years to ) the Tribunal held that the surrendered income could be reduced to the extent of unabsorbed depreciation brought forward from the earlier years. 40

21 Amendments to section 115BBE Since the amendment to S. 115BBE, made by the Amendment Act, is effective from , a question arises as to whether it is retroactive since it covers cases where income of the nature referred to in specified sections pertains to the period from to In other words, is the section applicable to acts done before its enactment A statute is retrospective when it takes away or impairs any vested right acquired under the existing laws, or creates a new obligation, or imposes a new duty, or attaches a new liability in respect of transactions or considerations already past. A substantive law determine the rights and liabilities of the parties concerned, whereas procedural laws govern the manner in which such rights or obligations are to be enforced or realised. A law applicable to the assessment is the law as it stands in the year of assessment and not that during the year in which the income was earned. 41 Amendments to section 115BBE In Karimtharuvi Tea Estate Ltd. v. State of Kerala[1966] 60 ITR 262 (SC), it was held: "10. Now, it is well-settled that the Income-tax Act, as it stands amended on the first day of April of any financial year must apply to the assessments of that year. Any amendments in the Act which come into, force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force." In Scindia Steam Navigation Co. Ltd. v. Commissioner of Income-tax [1954] 26 I.T.R. 686,, a Division Bench of the Bombay High Court, considered the question-as to the effect of an amendment which came into force after the commencement of the financial year. Thefacts in that case were these. The assessee's ship was lost as a result of enemy action. The Government paid the assessee in 1944 a certain- amount as compensation which exceeded the original cost of the ship. The Income-tax Officer included the difference between the original cost and the written down value of the ship in the total income of the assessee for the assessment year The Tribunal upheld that decision and referred the question, whether the sum representing the difference between the original cost and the written down value was properly included in the assessee's total income computed for the assessment year It was argued that the fourth proviso to section 10(2)(vii) ) of the Income-tax Act (inserted by the Amendment Act of 1946 with effect from May 4, 1946) under which the inclusion of the amount was justified by the department, had no application to the case. 42

22 Amendments to section 115BBE The learned judges held that: "as it was the Finance Act of 1946 that imposed the tax for the assessment year , the total income had to be computed in accordance with the provisions of the Income-tax Act as on April 1, 1946; that as the amendments made by the Amendment Act of 1946 with effect from May 4, 1946, were not retrospective, they could not be taken into consideration merely because the assessee was assessed after that date ; and that the assessee was not liable to pay tax on the sum because the fourth proviso to section 10(2)(vii) ) of the Income-tax Act under which it was sought to be taxed was not in force in respect of the assessment year ". The Supreme court affirmed this decision in CIT v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 (SC) The rate of tax on income subjected to tax under section 115BBE of the Act is specified in the Act itself and not in the annual Finance Act. The Taxation Laws (Second Amendment) Act, 2016, inter alia, amended the provisions of Section 115BBE of the Act so as to enhance the rate of tax from thirty per cent to sixty per cent and also sub-section (9) of section 2 of the Finance Act, 2016 so as to impose a surcharge at the rate of twenty-five per cent of the tax. 43 Consequences of s. 115BBE No basic exemption allowed while calculating tax at special rate under section 115BBE - No basic exemption is provided for while calculating the tax liability under the provisions of section 115BBE. In the Memorandum explaining the Finance Bill, 2012, the Legislature had made it clear that it desired to curb the practice of laundering of unaccounted money by taking advantage of the basic exemption limit. Here, one may refer to the proviso to clause (a) of subsection (1) of section 112 of the Act whereby in case of long-term capital gain which is also taxed at a special rate, the benefit of basic exemption is granted. Section 115BBE does not contain any similar proviso. So, it is clear that no basic exemption is allowed while calculating tax at special rate under section 115BBE. Restriction on deductions under Chapter VI-A - Sub-section (2) of section 115BBE restricts deduction in respect of any expenditure allowable to the assessee under any provision of the Act. This is not to be confused with deductions admissible in computing "Gross Total Income" under Chapter VI-A. In the case of an assessee having income referred to in section 115BBE and no other income, while determining the "Gross total income", deduction under Chapter VI-A appears to be admissible. This will result into a lower 'Gross Total Income/Total income' as compared to income determined u/s 115BBE. 44

23 S. 115BBE wider in scope than other provisions of Chapter XII Scope of Section 115BBE: Chapter XII of the Income-tax Act, 1961 contains many provisions whereby certain special cases are taxed at specified flat rates of tax, considering those incomes as a separate taxable block of income. Section 115BBE forms part of this Chapter. It imposes tax at a flat rate of 30%(plus applicable surcharge and cess) upto AY and at a flat rate of 60% (plus applicable surcharge and cess) w.e.f. AY on such income, as is the subject-matter of this section (without making any deduction in respect of any expenditure or allowance as may be admissible to an assessee under any provision of the Act.) Compared to various other provisions of Chapter XII, the provisions of section 115BBE are different from them in the following respects: (a) whereas various other provisions of Chapter XII apply to income determined at an estimated percentage of gross receipts, section 115BBE, read with section 68 applies to "sum credited". The expression "sum credited" is a wider term which includes receipts of all kinds, e.g., capital, creditors, loans and revenue receipts. Similarly, section 155BBE, read with other sections e.g., sections 69, 69A, 69B and 69C apply to the entire amount of unexplained money, bullion, jewellery or other valuable article or expenses. Section 69D applies to amounts borrowed and repaid on hundi loans otherwise than by an account-payee cheque or a bank draft. 45 Amendments to section 115BBE (b) Prior to insertion of section 115BBE, an assessee was entitled to basic exemption, deductions and allowances under the provisions of the Act in respect of additions made under the above circumstances. But after the insertion of section 115BBE, no such basic exemption, deductions and allowances would be allowed for calculating tax at a flat rate of 30% (plus surcharge and cess) upto AY and for AY at a flat rate of 60% (plus 25% and cess) on income added under any of the groups of section 68, etc. The tax liability of the assessee would be higher under the new regime. This difference between section 115BBE on the one hand and other provisions contained in Chapter XII has been created by the Legislature deliberately so as to enact deterrent provisions in cases where nature and source of sum received, etc., are not satisfactorily explained. Impact of section 115BBE under various circumstances: The provisions of section 115BBE are likely to have an impact upon the tax liability of various taxpayers and none would remain unaffected by this provision. For a better understanding of the provision, let us consider the impact of the provision under various assumed circumstances, as follows: 46

24 Impact of s. 115BBE under various circumstances When assessee has incurred unexplained expenses - When an addition to a returned income made by the Assessing Officer under any of the groups of section 68, etc., consists of such income, investments, money, bullion, jewellery or other valuable articles as are not recorded in the books of account by an assessee and/or has incurred unexplained expenses or repaid hundi loans in a manner other than that prescribed. When assessee's income is recorded in books but has not been offered for taxation - When an addition to a returned income made by the Assessing Officer in respectofincomeof the nature referred to in specified sections, i.e. the income consists of investments, money, bullion, jewellery or other valuable articles as are recorded in the books of account as part of capital, loans, sundry creditors or such other credits which are not offered for taxation by the assessee voluntarily and the assessee fails to prove the nature and source thereof satisfactorily. When assessee is found to be in possession of unexplained investments - When an assessee is not required to maintain the books of account but is found to be in possession of unexplained investments, money, bullion, jewellery or other valuable articles; and/or having incurred unexplained expenditure. 47 Impact of s. 115BBE under various circumstances When an assessee voluntarily returns income but is unable to prove source thereof - When an assessee voluntarily returns income for taxation but is unable to prove the nature and source thereof, to the satisfaction of the Assessing Officer, such income though voluntarily declared could be held to be liable for taxation under specified sections. Some legal precedents - In the past, the instances of application of the deeming provisions on voluntarily returned income have been few as the Department had no reason to do so. Such cases are likely to increase in view of the power available under the provisions of section 115BBE. Even in the past, wherever, loss of revenue was evident, the Department rejected the returned income and applied deeming provisions. We can refer to the following legal precedents, in this connection: 48

25 Bogus income claimed as exempt income from horse racing Claiming bogus income from horse racing as exempt - In the case of B.C. Paul v. CIT [1981] 6 Taxman 170 (Cal.), in return filed for the assessment year , the assessee, being not a regular punter, disclosed receipts of Rs. 1,58,250 but claimed the same to be exempt from tax on the ground that they were casual receipts from horse racing. ITO treated impugned amount as an income from undisclosed sources holding that there were discrepancies in assessee's statement and that assessee had failed to discharge onus of proving nature and source of impugned receipt. As the assessee failed to prove the receipts from horse racing as a genuine claim, the application of section 68 by the Assessing Officer was upheld. 49 Claiming amount as income from agricultural operations Claiming bogus income from agricultural operations as exempt - In the case of Avdhesh Kumar Jain v. CIT [1990] 48 Taxman 266 (All.), the assessee claimed that certain amount earned from agriculture operations was exempt. The ITO found that the assessee had failed to produce any satisfactory evidence about his being engaged in agricultural activities. The assessee was also not able to state as to whom the agricultural produce was sold. He, therefore, assessed the aforesaid amount as income from undisclosed sources in the hands of the assessee. So, it can be concluded that a voluntary return does not stand in the way of Assessing Officer's reaching a different conclusion in the matter. 50

26 Impact of s. 115BBE when assessee credits cash sales Impact of section 115BBE when an assessee credits "Cash sales" in his books of account - The provisions of section 68 are attracted when any sum is found credited in the books of an assessee. The words "any sum" are wide enough to cover the transactions of "Cash Sales" appearing in the books of an assessee and, therefore, if the assessee offers no explanation about the nature and source of "cash sales" or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, cash sales may be deemed as unexplained incomes chargeable to tax under section 68 of the Act. While it may seem preposterous that cash sales credited in the books of account can be deemed as income under the provisions of section 68 and can be subjected to flat rate of 30% from AY to AY or 60% w.e.f. AY without making deduction for purchases. Before reaching any conclusion, it would be useful to take note of the following legal precedents which directly deal with the issue: Legal precedents which directly deal with the issue ITO v. Jethu Ram Prem Chand [2001] 114 Taxman 219 (Delhi)(Mag.) Harish Kumar v. Dy. CIT [2003] 85 ITD 366 (Hyd.) Nitisha Silk Mills (P.) Ltd. v. ITO[IT Appeal No. 896 (Ahd.) of 2011, dated ] 51 Cash Sales treated as Cash Credits under s. 68 ITO v. Jethu Ram Prem Chand [2001] 114 Taxman 219 (Delhi)(Mag.) In this case, the Assessing Officer noted that the assessee had sold substantial quantities of rice but the addresses of the buyers were not mentioned in the cash memos. He also observed that the truck numbers in respect of loading of the rice were not recorded. The Assessing Officer, therefore, concluded that the cash sales amounting to Rs lakhs represented cash introduced by the assessee and, therefore, treated the same as unexplained income under section

27 Cash Sales treated as Cash Credits under s. 68 However, on appeal, the Commissioner (Appeals) deleted the addition observing that the assessee was maintaining day-to-day stock registers in which no defects had been pointed out by the Assessing Officer. The Tribunal held as follows: "It was obvious that the assessee made purchases from J.R. New Delhi, on to the tune of 1970 quintals and the sales in cash of the same were made on and thereafter. As the purchase as well as sales were duly recorded in the books of account and the assessee had shown the profits on these sales made in the return of income, one failed to understand as to how the figure of total cash sales amounting to Rs. 35,48,005, could be treated as unexplained cash credit under section 68. The assessee made available to the Assessing Officer all the necessary particulars of the party from whom the assessee purchased the goods which were sold in cash and became the subject-matter of controversy at hand. The Assessing Officer in his wisdom thought it fit not to examine the supplier. It indicated that he was satisfied with the genuineness of the purchase aspect of the transaction. It was not the case of the revenue that the assessee had not shown any purchase in its books of account against which the sales had been recorded. The case law cited by the revenue as to the burden of proof on the assessee was not applicable to the facts of the present case, because the factum of purchase and sale of the goods in the assessee's books of account stood established beyond a shadow of doubt. Under these circumstances, the order of the Commissioner (Appeals) was to be upheld." 53 Cash Sales treated as Cash Credits under s. 68 On a close reading of the above judgment, it is apparent that, though no addition was finally upheld, yet "cash sales" were doubted by the Department in the absence of proof of sales. The assessee could succeed because the nature and source were explainable with reference to purchases which were made from established sources and were duly recorded in his books. One must consider what would have been the finding if the names of the persons from whom the purchases were made were not available with the assessee and the purchases could not be proved as genuine. This case establishes the fact that an assessee has the duty to explain the nature and source of "cash sales" when questioned by the Assessing Officer. Harish Kumar v. Dy. CIT [2003] 85 ITD 366 (Hyd.) - The assessee submitted his return of income which, inter alia, included capital gains on sale of gold and jewellery. Heavailedthe benefit of Voluntary Disclosure of Income Scheme, 1997 and declared gold and diamonds and necessary certificate under the said Scheme was issued by the Commissioner. Later on, the assessee sold the gold and diamonds to 'A' and 'S', respectively. The sale of gold was accepted as genuine by the Assessing Officer, while as the sale of diamonds to 'S' was not accepted as genuine and entire sale value thereof was added under section 68 by the Assessing Officer, treating the same as unexplained credit. Accordingly, gy assessment was completed. On appeal, the Commissioner (Appeals) confirmed the addition made by the Assessing Officer. 54

28 Cash Sales treated as Cash Credits under s. 68 On second appeal, it was held as under: "As regards the sale of diamonds to 'S', at Surat it was found that the identity of the party had been established, the transaction was genuine and the creditworthiness of jeweller had been proved beyond doubt by the assessee. The bank accounts of 'S' which were collected by the Assessing Officer showed that the amounts were received by account-payee DDs from Mumbai. The DDs were taken by 'S' and sent to the assessee which were credited in his bank account and used for business purposes of his business entities. It was not the duty of the assessee to prove the sources of the credits in the bank account of 'S'. The assessee could not establish the source of the source. The decision of the Madras High Court in S. Hastimal v. CIT [1963] 49 ITR 273, also supported this view of the assessee. [Para 30]. Onaclosereadingoftheabovejudgment, one would find that in a case where the Department doubted the sales itself, the assessee succeeded because he had collected the sale proceeds of the diamonds by account payee demand drafts from customers whose identity and creditworthiness were proved. If such credit sales can be questioned by the Department, then there is no doubt that cash sales are not immune from the applicability of the provisions of section Cash Sales treated as Cash Credits under s. 68 NITISHA SILK MILLS (P.) LTD. v.ito [IT Appeal No. 896 (Ahd.) of 2011, dated ] - In an unreported recent case, dated 20th July, 2012, in the case of Nitisha Silk Mills (P.) Ltd. (supra) before the Ahmedabad Bench of the Income Tax Tribunal, assessee had claimed to have effected cash sales of grey cloth on three dates, i.e., , and totalling to an amount of Rs. 9,95,870/-. 95 The A.O. 's objection was that this that why cash sales were only on these three dates in the year and not on other dates. With regard to this objection of the A.O., it was submitted by the assessee before the A.O vide a written submission, dated that since the assessee decided to discontinue the business, major quantity of grey cloth lying in various process houses was called back without processing and the grey cloth so received was sold in cash. It was also submitted that some of the process houses could not trace grey cloth of the assessee and, therefore, cash equal to that value of grey cloth was given by the owners of the process houses. Considering these facts of the present case, in its entirety, we are of the considered opinion that the claim of the assessee regarding cash sales under peculiar conditions that the assessee was discontinuing its business and, therefore, some sales were made in cash could not be summarily rejected. We also find that it was observed by the Ld. CIT(A) on pages of his order that the assessee could not provide even the names and addresses of those parties to whom cash sales were claimed to have been made. This was the main basis on which Ld. CIT(A) had confirmed the decision of the A.O. In our considered opinion, it cannot be said that in the case of cash sales, the assessee is bound to keep record of the names and addresses of the buyers. 56

29 Cash Sales treated as Cash Credits under s. 68 In all the cases cited above, although the attempt of the Revenue to tax cash sales as unaccounted income failed, yet it could not be said and concluded that cash sales were outside the purview of the provisions of section 68. The cases were decided in favour of the assessees on the basis of the facts and circumstances of the cases. In practical situations, it would be very difficult for assessees to keep fool-proof and detailed record of its transactions relating to purchases and sales. Petty traders running stalls on waysides, hawkers, etc. do not issue cash memos/bills and obtain purchase invoices. Wholesale Departmental stores like "Big Bazaar" making numerous transactions of sales in a day cannot carry out the exercise of "KYC", i.e, "know your customer" like banks. Although in cases of cash sales, an assessee is not required to prove the "source of source", yet then it would be a Herculean task for him to prove the nature and source of "cash sales". 57 Impact of section 115BBE in cases of persons having income from profession Impact of section 115BBE in cases of persons having income from profession - As stated earlier, the expression "sum credited" is wide enough to include receipts from a profession. So, in case of all sums credited/received as professional receipts, the assessee would be duty- bound to explain the nature and source thereof, failing which no deduction will be allowed for expenses incurred for carrying out the profession. As has been stated hereinabove, in case of "cash sales", maintenance of stock registers, evidence of purchases, etc., help the businessman in explaining the nature and source of cash sales. But a professional is at a disadvantage as he can seldom establish a link between an expense incurred and revenue generated therefrom. He will have to prove the nature and source of his receipts in some other way, probably by applying "KYC" norms. 58

30 Penalty under section 271AAC Amendment Act has w.e.f introduced section 271AAC in the Act. Penalty under section 271AAC is leviable if the following conditions are satisfied the total income determined includes any income referred to in the specified sections; and the income referred to in the specified sections has not been included in the return of income furnished under section 139; or tax on income referred to in specified sections, in accordance with provisions of section 115BBE(1)(i) has not been paid on or before the end of the relevant previous year. If the above conditions are satisfied then the AO may direct that the assessee shall pay a penalty in addition to tax payable under section 115BBE. The quantum of penalty will be ten percent of the tax payable under clause (i) of sub-section section (1) of section 115BBE. 59 Penalty under section 271AAC A question could arise as to whether the ten per cent is on tax rate of 60% or on the aggregate of tax rate (of 60%) plus surcharge thereon (25% of 60%) i.e. whether the ten per cent is to be computed on 60% or 75%. While it is true that the Supreme Court has held that tax includes surcharge considering the language of the provision which reads as under.. The assessee shall pay by way of penalty, in addition to tax payable under section 115BBE, a sum computed at the rate of ten per cent of the tax payable under clause (i) of sub-section (1) of section 115BBE: it appears that the rate of 10% is to be applied to tax of 60%. The provisions of this section are notwithstanding anything contained in the Act other than provisions of section 271AAB. Sub-section (2) of s. 271AAC clearly states that in respect of the income referred to in sub- section (1) i.e. income of the nature referred to in specified sections penalty under section 270A shall not be imposed. In other words, in respect of a specified previous year in a case where search has been initiated, penalty will be levied under section 271AAB and not under this section. 60

31 Penalty under section 271AAC Penalty under section 270A of the Act shall not be imposed upon the assessee in respect of income referred to in sub-section (1) i.e. the income referred to in specified sections. The provisions of sections 274 (dealing with `Procedure for levy of penalty ) and 275 (dealing with `Bar of limitation for imposing penalty ) are made applicable to levy of penalty under this section. While at first blush it appears that there is no consequential amendment providing for provision to file an appeal against levy of penalty under section 271AAC to the CIT(A) or the Tribunal it is not so. An appeal against an order levying penalty under this section will lie to the CIT(A) under section 246A(1)(q) which deals with an order imposing a penalty under Chapter XXI;, and an appeal to the Tribunal will lie under section 253 dealing with appeals to the Tribunal, which provides for an appeal against order of CIT(A) under section 250 of the Act. Order by CIT(A) will be under section 250 of the Act. 61 In search cases is penalty under section 271AAC leviable for specified previous year? In search cases, for specified previous year, penalty in respect of income referred to in specified sections may be levied under sections 271AAB and not under section 271AAC. Penalty under both the sections is not envisaged as a person cannot be punished twice unless expressly provided. Certainly, there is no such express provision for levy of penalty under both sections 271AAB as well as section 271AAC. Infact, the language g of sub-section (1) to s. 271AAC and section 271AAB(1A) clearly suggests that in a case where penalty can be imposed under section 271AAB it shall not be imposed by section 271AAC. The language of s. 271AAC(1) is that the section is notwithstanding anythign in this Act other than provisions of section 271AAB. Therefore, section 271AAC is not notwithstanding what is stated in s. 271AAB. Further, section 271AAB(1A) is notwithstanding anything contained in this Act. Therefore, while section 271AAB(1A) is notwithstanding anything contained in this Act, section 271AAC is not overriding provisions of section 271AAB. 62

32 Jagdish T Punjabi B.Com., B.G.L., FCA. March 06, Penalty under section 271AAB Amendment Act has amended the provisions of section 271AAB of the Act which deal with levy of penalty, in cases where search has been initiated, in respect of undisclosed income of specified previous year. The terms specified date ; specified previous year and undisclosed income are defined in an Explanation to this section. Presently, section 271AAB provides for 10% of undisclosed income if the case falls under clause (a) of sub-section (1) of section 271AAB 20% of undisclosed income if the case falls under clause (b) of sub-section (1) of section 271AAB; 30% to 90% of undisclosed income if the case falls under clause (c) of sub-section (1) of section 271AAB. 64

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