Cash deposits in old currency – Unexplained cashcredit?

tax-penalty

The provisions of Section 115BBE of the Income Tax Act, 1961, applicable from A.Y. 2013-14 onwards is probably the section under which the Income Tax department would be taxing the unexplained cash deposits during the period upto 30th December 2016.

Pre 115BBE

Prior to the enactment of this section, certain unexplained cash credit, investment, expenditure, etc., were deemed as income under Section 68, Section 69, Section 69A, Section 69B, Section 69C and Section 69D of the Act and were subject to tax as per the tax rate applicable to the taxpayer.

As a consequence, in case of individuals, HUF, etc., no tax was levied up to the basic exemption limit and hence these cashcredits and deposits upto the basic exemption limit safely escaped being taxed at all.

Post 115BBE

Section 115BBE of the Act specifically levies tax on such unexplained items deemed as income at the flat rate of 30 per cent (plus surcharge and cess, as applicable), irrespective of the slab of income. Moreover, the assessee does not have the right to claim any deduction from this money on account of any expenditure or allowance while computing such deemed income.

Example:

Sr. No. Particulars Tax impact
Pre 115BBE Post 115BBE
a. Unexplained items deemed as income under Section 68, etc. 2,00,000 2,00,000
b. Other income 50,000 50,000
c. Total income (a + b) 2,50,000 2,50,000
d. Tax on unexplained income (30% of a) Not Applicable 60,000
e. Tax on other income Nil Nil
f. Tax on total income (d + e) Nil 60,000

 

Brief Analysis

How would be the applicability of Section 115BBE of the Act with reference to the provisions of Section 68 of the Act dealing with unexplained cash credit, being the deposits of cash in old currency notes into the bank account during the period upto 30th December.

Section 68 of the Act provides inter alia that if any sum is found credited in the books of a taxpayer and he either does not offer any explanation about nature and source of such sum, or  the explanation offered by him is not satisfactory in the opinion of Assessing Officer, then such sum can be taxed as his income.

Considering a scenario where an individual files his return of income, declaring the entire cash deposits done by him as income from Tuition fees and avails the tax slab benefit. However, such individual is unable to demonstrate / substantiate the source of such income (as regards the payer, etc.) and the Assessing Officer rejects the explanation, being not properly explained to his satisfaction.

Under such circumstances, it appears that the Assessing Officer may surely be tempted to trigger the provisions of Section 115BBE of the Act read with Section 68 of the Act, which means that such income, though already offered to tax by the taxpayer in the return of income filed for a.y.2016-17, would still be taxable at flat rate of 30 per cent on gross basis (i.e., without any deduction / allowance) even if the total income of the individual after considering these cash deposits fall below the basic exemption limit.

Conclusion

Isn’t the provisions sound very draconian on first reading? Does this means that the Assessing Officer is vested with unfettered powers to reject any explanation, being not to his satisfaction?

In my opinion, the answer to these questions posed above is a categorical NO.

The Assessing Officer is bound under law to act reasonable and just with prudence while framing any satisfactory opinion surrounding the explanation offered by the taxpayer.

But a word of caution that the taxpayer is nevertheless saddled with the primary obligation to demonstrate the nature and source of these cash deposited into the bank account

Section – 115BBE of the Income-tax Act, 1961

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 (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).

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