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Steps Introduced To Control Corruption But A Punishment To The Small Tax Payers.

11-Jul-2013

Section 115 BBE

Introduction
Corruption is the subject which is on the tongue of the each individual of India. On the issue of corruption and black money the government took various proactive steps to create a legislative frame work to tackle this issue. One of the steps is the introduction of new sections in the Income Tax Act are concerned with laundering of unaccounted money. The newly introduce section 115BBE is the first step wherein, the departments decided to tax the unaccounted and undisclosed income at the highest slab rate of 30% straight away without any deduction thereof.
Now let us consider the said section 115BBE from the bare Income Tax Act-
Section 115BBE was inserted by clause no. 45 of the Finance Act 2012 w.e.f. 1st April 2013.

SECTION 115BBE

115BBE Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D

  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—
      1. 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

      1. 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 (a).
  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) of sub-section (1).

Since, the above section directly relates to the section 68 and section 69 and the part thereof. Let us also know the basic provisions of those sections also. The said provisions have been reproduced below:

SECTION 68


Cash Credits

Where any sum is found credited in the books of an assessee maintained for any previous year, and 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—

  1. 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
  2. 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.

SECTION 69

Unexplained investments

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 912[Assessing Officer], satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.]

SECTION 69A

Unexplained money, etc.

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 912[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 of such financial year.]

SECTION 69B

Amount of investments, etc., not fully disclosed in books of account

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 915[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 915[Assessing Officer], satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year.]

SECTION 69C

Unexplained expenditure, etc

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 915[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 :]

SECTION 69D

Amount borrowed or repaid on hundi

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 that, if in any case amount borrowed on hundi has been deemed 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.]
The introduction of this section is explained: in the Explanatory Memorandum of the Act which runs as under with the caption 'Measures to prevent generation and circulation of unaccounted money':
"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, and 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 incomes 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.
The working of the tax computation under this provision could be summarized below –
Section 115BBE applies to income referred to in sections 68 to 69D. It 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 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).


In this way, in respect of the income covered by clause (a) of sub-section (1) of the above section, basic exemption, deduction under Chapter VIA and set-off of losses are also not allowable.
In the language of Lay Man the provision can be simplified on following lines

  1. The provision applies to the additions made on account of undisclosed income, undisclosed investments, undisclosed expenditure, etc.
  2. Flat tax rate of 30% will be charged on those additions.
  3. No deductions of basic exemptions or under any chapter VIA will be allowed against the said addition of income. Even losses of any kind will also not affect the taxation of 30% under this section.
  4. No deduction in respect of any expenditure and allowance shall be allowed to the assesse under any provision of this act in computing the income covered by this section.

Advantages and Disadvantages of this section-

Advantages:

  1. If the assessee maintains regular books of accounts and explains the nature and source of each investment and expenditure whether recorded or not. This provision of section 115BBE will not be applicable.
  2. If the assessee is not required to maintain regular books of account such as income from other sources whether recorded or not. This provision of section will not be applicable.
  3. When the assessee declares his income under deeming provision say 44AD or 44AE etc. He is not required to maintain books of accounts. However, he has to file certain particulars of assets and liabilities in his return of income. However, if he explains the nature and source of all those items the provision of section 115BBE is not applicable.
  4. It has been proved in the court of law that the additions on this six section of section 68 & 69 have not been sustained because the court has taken a view that the source of source is not required to be proved. In this situation the assessee is saved from the immunity of this section.
  5. The provision of this section will not be applicable at all if the assessee satisfies the pre-conditions of six group sections of section 68 & 69.

Disadvantages:

  1. If the assessee maintains regular books of accounts and explains the nature and source of each investment and expenditure which is not accepted by the department authority then the provision of the said section will be applicable.
  2. If the assessee is not required to maintain regular books of account such as income from other sources whether recorded or not. This provision of section will be applicable if the assessee fails to give explanation with evidence in relation to the six sections of section 68 & 69 to the satisfaction of assessing officer.
  3. When the assessee declares his income under deeming provision say 44AD or 44AE etc. He is not required to maintain books of accounts. However, he has to file certain particulars of assets and liabilities in his return of income. However, if he does not explain the nature and source of all those items with evidence in relation to the six sections of section 68 & 69 to the satisfaction of assessing officer, the provision of section 115BBE is applicable.
  4. It has been proved in the court of law that the additions on this six section of section 68 & 69 have been sustained because the court has taken a view that the source of source is required to be proved. In this situation the assessee is not saved from the immunity of this section.
  5. The provision of this section is harmful to the small tax payers. It is because “when you are unable to take action against the strong, you heavily come down on the weak”.
  6. This draconian provision becomes a tool in the hands of assessing officers to harass the assessee.
  7. It is also pertinent to note that if the tax is charged at the highest rate of 30% on deemed income, there would be an un due heavy demand and the problem of its recovery from the small tax payers would create problems.

Conclusion:
It is clear that the Legislature is under an unprecedented pressure to tackle the menace of black money. While there can be no objection to the various steps taken for this purpose, the Government should not overlook the plight of its honest citizens who have been contributing taxes to the exchequer over number of years. So, appropriate guidelines should be framed as to what would constitute a 'nature and source' in specific situation.

Suggestions:
To achieve the real motive behind introduction of this section to curb the laundering of unaccounted money we advocate for following suggestions which may please be implemented.

  1. Those provisions should be fassened against the big sharks of the Business Tycoon.
  2. The implementations of those provisions should be impartial.
  3. Linent view may please be token against the small tax payers about the applicability of the six group section of section 68 & 69.
  4. The tax rate of 30% may please be brought down to 15%.
  5. The demand should not be pressed on such additions till the final adjudication in the hierarchy of tax decision structure.

Disclaimer:
The intention of the write up of this article is to introduce the said section to the general public, clients and professional colleagues. The interpretation and the scope of the said section may change as the time to come. It is not a legal friend but just an interpretation in simple language. The author does not take any liability of the content of the above article being used by anybody. On the other hand specific advice must be sought before taking any action pursuant to this article.

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