-By CA Mahendra Sanghvi 1
Reasons for amendment: After demonetization, some officials said in news that penalty @ 200% shall be levied on unreasonable & disproportionate Income of cash deposited. Having realized that pre amended provisions are not capable to levy penalty, if cash deposited has been voluntarily offered to tax @ 30%, they have amended Sec. 115 BBE & new penalty provision by way of Section 271 AAC from Assessment Year 2017-18. 2
Statement of Objects & Reasons by Finance Minister Arun Jaitley on 26thNovember, 2016 on The Taxation Laws(Second Amendment): 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. 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 provision. 3
Sections dealt in Section 115 BBE 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 Inserted by Finance Act, 2012 w.e.f. 01.04.2013 i.e. Assessment Year 2013-14 Effect of introduction of this section in F A 2012: If additions are made u/s. 68, 69, 69A, 69B, 69C, 69D and Assessee having losses under other heads of Income, set off was possible AND where Assessee is an Ind./HUF. which are taxable slab-wise, No advantage will be available and assesse will still pay tax @ 30%. 4
Amended on 15th December, 2016 vide The Taxation Laws(Second Amendment),2016 W. E.F. Assessment Year 2017-18 Sub-section (1) of Section 115BBE is substituted (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 of Income furnished under section 139; or (b) determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not 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).. 5
Earlier, i.e. for Assessment Year 2013-14 to Assessment Year 2016-17, the Income under Specified Sections i.e. 68, 69, 69A, 69B, 69C or 69D were taxable @ 30% which is increased to 60% from Assessment Year 2017-18 & onwards, Secondly, they have made two compartments, one reflected in Return of Income furnished u/s 139 (not u/s 142) second determined by the A.O. if not covered in his Return of Income. 6
Tax Effect on account of Amendment: Amendment is made in Chapter II, in section 2, in sub-section (9) of the finance Act, 2016. Prior to amendment, if the total Income exceeded the specified amount, only then surcharge was applicable. Now, surcharge of 25% will apply to the Income determined u/s 115 BBE, irrespective of the total Income. Therefore, the effective rate will be 60% tax + 25% surcharge on tax + 3% cess on total of tax & surcharge = 77.25% as against 30.90% (with Cess). 7
Illustration Income from Business Income for other Source Tution Fees received u/s 68 Tax effect before amendment : (Surcharge & Cess Ignored) As per Return of Income 50 Lakhs Assessed Income 45 Lakhs 10 lakhs 60 lakhs 15 lakhs 60 lakhs 16.25 lakhs 16.25 lakhs Tax effect after amendment(surcharge & Cess Ignored) : As per Return of Income As per Income Assessed on 50 lakhs : 13.25 lakhs on 45 lakhs : 11.75 lakhs on 10 lakhs : 6.00 lakhs on 15 lakhs : 9.00 lakhs 19.25 lakhs 20.75 lakhs Plus penalty u/s 271 AAC @ 10% on Rs. 3 lakhs i.e. Rs. 0.30 lakhs. Total Rs. 21.05 lakhs. 8
Sub-Section (2) of Section 115 BBE. (2) Notwithstanding anything contained in this Act, 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). 9
Prior to amendment, it was considered Assessing Officer s prerogative to invoke the provisions of Section 68, 69A, 69B, 69C & 69D if the Assessee is unable to explain the nature and source of it. After amendment, from Assessment Year 2017-18, assesse is permitted to disclose his unexplained income on his own in Return of Income. Treatment of cash deposited due to demonetisation. If the source of income represented by deposit of specified bank notes can be explained then such income is not taxable u/s 115 BBE and will be taxed at normal rates as applicable to the Assessee. If not explainable, but offered in the Return of Income, taxable @ 77.25% u/s.115bbe. If not explainable and not offered in the Return of Income, taxable @ 77.25% plus penalty @ 10% u/s 271AAC, totaling to 83.25%. 10
Assurances given by Officials Immediately after demonetisation, an assurance was given by the Government that cash deposit upto Rs. 2,50,000/- shall not be inquired in the cases of small businessman, housewives, artist, labour, etc. through advertisements and media. Thereafter, Hon ble Prime minister on 12/11/2016 made a public announcement that deposit of notes upto Rs. 2,50,000/- made by married woman will not be subject to any sort of inquiries. But, no official circular was issued in this regard. Representation was made by CTC vide representation dated 14/11/2016 requesting to clarify this issue by way of Circular. No Circular is issued clarifying the same. Instead we have amendment which does not have any threshold limit. Even small amount of Rs. 50,000/- can be covered u/s 115 BBE. 11
Whether provision applicable irrespective of slab rates or basic exemptions Whether Chapter VI-A deduction allowed or income taxable under similar lines as winning from lottery, puzzles u/s 115BB 12
Rule 114E Furnishing of statement of financial transaction Sr No. Nature and Value of Transaction Class of Person(reporting person) i. Cash deposit during the period 09.11.16 to 30.12.16 aggregating to(i) Twelve lakh fifty thousand rupees or more, in one or more current account of a person; or (ii)two lakh fifty thousand rupees or more, in one or more accounts(other than a current account) of a person. ii. Cash deposits during the period 01.04.16 to 09.11.16 in respect of accounts that are reportable under Sr. No. 12 i.) A banking company or a cooperative bank to which the Banking Regulation Act, 1949 applies; ii.)post Master General as reffered to in clause (j) of Section 2 of the Indian Post Office Act, 1898 i.) A banking company or a cooperative bank to which the Banking Regulation Act, 1949 applies; ii.)post Master General as reffered to in clause (j) of Section 2 of the Indian Post Office Act, 1898 13
Section 68 Cash Credits Amounts credited in the books of accounts of the assessee, the nature and source whereof is not satisfactorily explained by the assessee. w.e.f. assessment year 2013-14 a proviso is inserted, a closely held company has received share application, share capital, share premium.in such case, source of source is also required to be explained to the satisfaction of the AO. Section 69 Unexplained Investment Amount of investments made by the assessee, which are not recorded in the books of account, and source whereof is not satisfactorily explained. Section 69A Unexplained Money, etc 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. Section 69B Amount of Investment, etc., not fully disclosed in books of account Amount of investment, bullion, jewellery or other valuable article not fully recorded in the books of account. Section 69C Unexplained expenditure, etc Amount of expenditure incurred for which source is not explained satisfactorily. Section 69D Amount borrowed or repaid on hundi. Amount borrowed or repaid on a hundi. 14
Where any sum is found credited in the books of an assessee maintained 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 incometax as the income of the assessee of that previous year : The following proviso s are inserted in Section 68 by Finance Act, 2012 w.ef 01.04.2013 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. 15
Suspicion however great cannot take the place of evidence Addition cannot be made merely on the basis of conjectures and surmises Theory of human probabilities and surrounding circumstances is to be applied where there is no evidence or the evidence is insufficient 16
Complete deeming fiction to treat initial explanation by assessee company to be unsatisfactory The further explanation can be offered only by a resident person Non-resident explanation not entitled to offer any 17
Amendment inserting proviso by F.A. 2012 w.e.f. 01.04.2013 whether prospective or retrospective??? CIT v. Gagandeep Infrastructure P. Ltd. (Bom)(HC), ITA No.1613 of 2014, order dated 20.03.2017, AY 2008-09 Proviso inserted is prospective Pre-amended provision of sec.68 to be applied Decision of CIT v. Lovely Exports (P) Ltd. 317 ITR 218 (SC) applied Royal Rich Developers P. Ltd. v. DCIT (Mum)(ITAT), ITA No.1835 & 1836/Mum/14, AY 2006-07 & 2007-08, Order dated 24.08.2016 Amendment retrospective Relied upon decision of Kol ITAT in SubhlakshmiVanijya (P.) Ltd. v. CIT, [2015] 155 ITD 171 (Kol. Trib) held amendment clarificatory case of 263 18
The word Sum used here in the section is very exhaustive in nature. The sum credited into the account shall be of any form and nature. It applies to all the credits by whatever the name called. This was laid down in the case of Gumani Ram Siri Ram v. CIT [1975] 98 ITR 337 (P&H). The ultimate aim of the Court was to keep the intent of the legislature alive. It does not say that credit should be only in the nature of cash receipt. The credit shall also include both loans and trade creditors and also other receipts, be that of cash or cheque. 19
The existence of the books is a condition under this act. Any sum is found credited in the books of an assessee. The word Books is defined under Section 2(12A) of the Income Tax Act, 1961. 20
ISSUES: Whether Bank statement and bank pass book is Books? Whether unexplained receipts or credits can be deemed to be the income of the assessee u/s.68, even in a situation where books of account are not maintained or the sum is not credited in the books of account of the assessee? 21
Books of accounts must be of assessee himself and not of any other assessee. In Smt Shanta Devi v. CIT [1998] 171 ITR 532 (P&H), it was held that a perusal of Section 68 would show that the expression books has been used with reference to the word assessee. In other words, such books of account have to be books of the assessee himself and not of any other assessee. Thus books of account of a partnership firm cannot be considered to be the books of account of the partner. Any cash credit shown therein cannot be brought to tax as income under Section 68 in the hands of the partners. Where amounts not credited in books of accounts? Held that amount not credited in books of accounts cannot be brought to tax u/s 68. Baladin Ram vs. CIT (71 ITR 427) (SC). ITO vs. Kamal Kumar Mishra reported in [2013] 33 taxmann.com 610 (Lko.) Credits on first day of the previous year, can well be examined u/s 68. (CIT vs Ashok 125 ITR 336) Maintenance of books of account is a condition precedent for application of section 68 DCIT v/s Finlay Corporation Ltd. 86 ITD 626 (Del.Trib) 22
Bank Pass book could not be treated as a book of the assessee CIT vs. Bhaichand N. Gandhi 141 ITR 67(Bom) Bombay High Court noted the decision of the SC in case of Baladin Ram vs. CIT 71 ITR 427 SC held that it was only when an amount was found credited in the books of an assessee the provision of sec. 68 would apply. 23
Arunkumar J. Muchhala vs. C.I.T. 85 Taxmann.com 306(Bom). According to the assessee, since he had not maintained books of account, the amount detected from bank statements could not be considered for additions under section 68. The court observed that when the assessee was doing business, it was incumbent on him to maintain proper books of account. And since he was required to maintained, he could not be allowed to take advantage of his own wrong. Bombay High Court considered the decision of Sudhir Kumar Sharma (HUF) vs CIT 224 Taxman 178 (P&H) in that case SLP of the assessee is dismissed by Supreme Court. 24
In the case of CIT vs. Taj Borewells 291 ITR 232, the Madras High Court, considered a case of the first year of assessment of a partnership firm, where no books of account were maintained, but accounts were presented in the form of profit and loss account and balance sheet. The Madras High Court held that the profit and loss account and balance sheet were not books of account as contemplated u/s. 68. It held that since there were no books of account, there could be no credits in such books, and therefore the provisions of section 68 could not be invoked to tax capital contributions of partners in the hands of the firm. 25
In Devinder Singh v. ACIT [2006] 101 TTJ 505 (ITAT-Asr) it has been held that there is nothing in Section 68 that books of account must be rejected before making an addition under Section 68. This is an independent and deeming provision and will apply if the assessee fails to offer an explanation of the source of particular receipt/credit appearing in the books of account or if the explanation given by the assessee is found to be not satisfactory by the A.O. 26
Primary Onus on whom? Primarily on assessee to prove: Identity Genuineness Credit-worthiness Secondary Onus on Revenue On adverse finding Onus again Shifts to Assessee 27
Initial burden being discharged, onus on the Department to enquire and investigate about the creditworthiness & veracity of transaction before making addition u/s 68 AO duty bound to prove that such addition on account of share application money or share capital indeed income of the assessee No addition u/s 68 merely because creditor fails to respond to Department notices M/s Hind Globe Links Vs Income Tax Officer (ITAT Delhi) -ITA No. 4904/Del/2014, M/s Essan Remedies Ltd. vs DCIT ITA No. 256/Del/04 28
CIT V/S LOVELY EXPORTS LTD. 6 DTR 308 (SC) Can the amount of share money be regarded as undisclosed income under section 68 of the Income-tax Act, 1961? We find no merit in this special leave petition for the simple reason that if the share application money is received by the assessee-company from alleged bogus shareholders, whose names are given to the Assessing Officer, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment. 29
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. 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 20-7-2012] 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. 30
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. 31
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. 32
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. 33
CBDT issues directions for scrutiny assessment in case of revised ITRs filed post demonetisation Revision of Income-tax return (ITR) is allowed only if any omission or wrong statement is noticed therein by the assessee. Such omission or wrong statement may have occurred due to a bonafide and inadvertent error or a mistake on part of assessee. However, post demonetisation period, it was found that some of the assessees tried to build an explanation for cash deposits in their bank accounts by manipulating their books of accounts and filing revised or belated ITRs. Filing revised or belated ITRs just to build an explanation for cash deposits in bank account becomes questionable and, therefore, the transaction disclosed in it which are over and above the original return are liable to be taxed under anti-abuse provisions of the Income-tax Act. 34
Accordingly, The Central Board of Direct Taxes (CBDT) has issued directions related to some important issues which are to be considered by the Assessing Officer (AO) while framing scrutiny assessments pertaining to filing of revised/belated returns by assessees post-demonetisation. The following are a few issues which may be kept in view by AO during verification and framing of scrutiny assessments:- 1. The claim of enhanced sales may be compared with Central Excise/VAT returns, 2. Parties to whom additional sales made have claimed must have identity, creditworthiness and transaction must be genuine. 3. Omission or wrong statement in the original return must be pointed out by the auditor in case the accounts had been subjected to tax audit. 4. Source of cash in hands of the person who made payments to the assessee has to be verified carefully. 5. Any manipulated receipts or sale is liable to be taxed as cash credit under section 68 and not merely on net profit basis. 6. Unaccounted income so assessed in scrutiny assessment is liable to be taxed at higher rate without any set-off of losses, exp., etc., under section 115BBE 35
Introduced w.e.f. 01/04/2017, i.e. Assessment Year 2017-18 271AAC. (1) The Assessing Officer may, notwithstanding anything contained in this Act other than the provisions of section 271AAB, direct that, in a case where the income determined includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D for any previous year, the assessee shall pay by way of penalty, in addition to tax payable under section 115BBE, a sum computed at the rate of ten per cent. of the tax payable under clause (i) of sub-section (1) of section 115BBE. 36
Penalty is leviable if: A) The total Income determined of the Assessee includes any income referred to in Section 68, 69, 69A, 69B, 69C & 69D And B) i) The said Income has not been included in the Return of Income furnished u/s 139 Or ii) Tax on the said Income is not paid on or before the end of the relevant previous year in accordance with provisions of section 115BBE (1) (i) Amount of penalty 10% of tax payable as per provisions of section 115 BBE (1)(i) Whether 10% of 60% or 10% of 60% plus surcharge and cess thereon. i.e. 10% (60% or 75% or 77.25%)? 37
Section 271AAC No penalty u/s 270A due to under reporting of income shall be imposed in respect of the income on which penalty can be levied u/s 271 AAC. Penalty imposable u/s 271 AAB due to search being conducted u/s 132, simultaneous penalty can be levied u/s 271 AAC. Provisions of Section 274, dealing with Procedure for levy of penalty and section 275, dealing with Bar of limitation for imposing penalty are applicable Order levying penalty u/s 271 AAC is appealable before C.I.T. (A), because 271 AAC is covered under chapter XXI which is covered u/s 246 A(1) (q). Section 273A : Power to reduce or waive penalty, etc., in certain cases Section 270A is covered, however section271aac is not covered. 38
Section 271AAB Amended on 15th December, 2016 vide The Taxation Laws(Second Amendment), 2016 Penalty where search has been initiated Section 271AAB provides for levy of penalty in a case where search has been initiated u/s 132 of the Act. It applies to the undisclosed income of the specified previous year Specified previous year means the previous year i. which has ended before the date of search, but the date of furnishing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assesse has not furnished the return of income for the previous year before the date of search; or ii. in which search was conducted. 39
Section 271AAB Earlier, i. e. prior to 15/12/2016, there were three rates of penalty depending upon the case. After amendment higher rates of penalty is prescribed Sr. No. 1 Type of Case Rate of Penalty of undisclosed Income Assessee admits in statement u/s 132 (4), Old New 10% 30% 20% 60% 30% to 90% 60% specifies the manner and substantiates the manner in which the undisclosed income was derived. And pays taxes (incl. interest) and furnishes the Return of Income. 2 Assessee does not admit in statement u/s 132 (4) but declares in the Return of Income and pays tax (incl. Interest) 3 Not covered by above 40
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