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Implication of Sec. 115BBE with ref. to sec:68,69 & 69A to

69D Viz a Viz Related Penalty provisions

Paper by Kapil Goel (Advocate) 9910272806

advocatekapilgoel@gmail.com

1. Preface

Under Income Act Act,1961 (Act) taxation of income

has remained at the centre stage. The legislative

scheme and policy of the Act is to tax the income in

the manner provided therein. Before embarking on

chain and string of statutory provisions which deal

with income under the Act, it may be profitable to

make a survey of certain rudimentary principles of the

Act . First important principle which has significant

importance is the charge under the Act is created on

income element only and gross receipts are not

taxable under the Act. Recent Apex court decision in

case of Maxopp order dated 12/02/2018 wherein it is

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held that “It is well known that tax is leviable on the

net income. Net income is arrived at after deducting

the expenditures incurred in earning that income.

Therefore, from the gross income, expenditure

incurred to earn that income is allowed as a deduction

and thereafter tax is levied on the net income.” is

apposite. Second important principle is all receipts are

not income and all income are not taxable income

which is are well settled by Supreme Court in the case

of Parimisetti Seetharamamma v. CIT [1965] 57 ITR

532 and Delhi high court in case of Girish Bansal 289

CTR 514. Also it is held in before mentioned

authorities that burden to establish that income is

there and is taxable, lies on revenue shoulders. Then

next important principle which is to be borne in mind is

that income is taxable in hands of right person only

and mere fact that right person could not be taxed or

wrong person has already paid the tax is of little or no

consequence vide Apex court decision in 218 ITR 239.

Then next and fourth important principle to be borne in

mind is that law basically does not distinguish in moral

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or immoral income and between legal or illegal income,

and what is relevant is income is disclosed or

undisclosed and explained or unexplained then said

income shall be dealt in the manner provided under

the Act. If income is disclosed and explained then

same normally would be taxable in ordinary manner.

But if the same is undisclosed and unexplained then

only possibility to tax it at higher rate u/s 115BBE

may arise depending on overall facts.

Then next and most important principle is to find and

trace the “source” of income. To elaborate on this

aspect which is like of soul of the Act, and to

understand it minutely following jurisprudence may be

traversed:

Allahabad High Court

Seth Shiv Prasad vs Commissioner Of Income-Tax on 23

March, 1971

Equivalent citations: 1972 84 ITR 15 All

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What is a " source of income " ? The expression has been

used in several places in the Act. In Section 2(11) the

definition of " previous year" envisages a different

previous year in respect of each separate source of

income. Section 4, which is concerned with the

application of the Act, declares that the total income of

a person includes all profits and gains, from whatever

source derived, which falls within the categories set out

there. And so on. The first authoritative judicial

pronouncement appears in Rhodesia Metals Ltd.

(Liquidator) v. Commissioner of Taxes, [1941] 9 I.T.R.

(Suppl.) 45, 52 (P.C.) where the Privy Council approved

of the passage quoted by Mr. Justice de Villiers from Mr.

Ingram's work on Income-tax :

" Source means not a legal concept but something which

a practical man would regard as a real source of income

; the ascertaining of the actual source is a practical hard

matter of fact."

7. This quotation was referred to by a Full Bench of our

court in Rani Amrit Kunwar v. Commissioner of Income-

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tax, [1946] 14 I.T.R. 561 (All.) [F.B.]. In that case the

learned Judges considered that an agreement or an order

of the court requiring the payment of a periodical sum

could be regarded as a source of income. In the case of

income from business, which is a separate head

under Section 6, each business has been treated as a

distinct source of income. The decision of the Madras

High Court in Commissioner of Income-tax v. E.K.R.

Savimiamurthy, (3) [1946] 14 I.T.R. 185 (Mad.) proceeds

on that basis. In Commissioner of Income-tax v. Lady

Kanchanbai, [1962] 44 I.T.R. 242 (M.P.) the Madhya

Pradesh High Court observed that each branch of a

business could be described, as a distinct source of

income. A source of income, therefore, may be described

as the spring or fount from which a clearly defined

channel of income flows. It is that which by its nature

and incidents constitutes a distinct and separate origin of

income, capable of consideration as such in isolation

from other sources of income, and which by the manner

of dealing adopted by the assessee can be treated so.

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Kerala High Court

Commissioner Of Income-Tax vs India Sea Foods on 24

September, 1986

Author: T V Iyer

Bench: T K Thommen, T V Iye

23. This view of ours is fortified by the decision of the

Privy Council in CIT v. Chunilal B. Mehta, [1938] 6 ITR

521, where it was observed that the list of heads

(in Section 6 of the 1922 Act), was a list of " sources ".

The same view was reiterated by the High Court of

Bombay in the decision in Kusumben D. Mahadevia v.

CIT, [1963] 47 ITR 214 in the following terms at page

221 :

"It thus appears that in the Act, the expression 'source '

and the expression ' heads of income' are used in one

and the same sense and it means property, movable or

immovable, belonging to an assessee or the activity of

an assessee that yields or brings income to him, within

the meaning of the Act. "

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Bombay High Court

Sheraton Apparels, Max ... vs Assistant Commissioner Of

... on 3 May, 2002

Equivalent citations: 2002 (5) BomCR 19, (2003) 1

BOMLR 888, 2002 256 ITR 20 Bom, 2003 (1) MhLj 302

The term "source of income" as understood in

the Income-tax Act is to identify or classify income so

as to determine under which head, out of the various

heads of income referred to in Section 14 of the Act, it

would fall for the purposes of computation of the total

income for charging income-tax thereon.

Bombay High Court

Kusumben D. Mahadevia vs Commissioner Of Income-

Tax, ... on 18 September, 1961

Equivalent citations: (1961) 63 BOMLR 1011, 1963 47

ITR 214 Bom

Author: Tambe

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Bench: V Desai, Y Tambe

It thus appears that in the Act, the expression "source"

and the expression "heads of income" are used in one

and the same sense and it means property, movable or

immovable, belonging to an assessee or the activity of

an assessee that yields or brings income to him, within

the meaning of the Act.

Further illuminating and guiding are sage words of

Apex court in 61 ITR 428 holding that “Whether an

income falls under one head or another has to be

decided according to the common notions of practical

men for the Act does not provide any guidance in the

matter.”

Further Hon’ble Apex court in 273 ITR Page 1 in

D.P.Sandhu Brothers has held that

“….But because we have held that Section 45 cannot be

applied, it is not open to the Department to impose tax

on such capital receipt by the assessee under any other

Section. This Court, as early as in 1957 had, in United

Commercial Bank Ltd. V. Commissioner of Income Tax

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Ltd., West Bengal (1957) 32 ITR 688, held that the

heads of income provided for in the Sections of the

Income Tax Act, 1922 are mutually exclusive and

where any item of income falls specifically under one

head, it has to be charged under that head and no other.

In other words, income derived from different sources

falling under a specific head has to be computed for the

purposes of taxation in the manner provided by the

appropriate Section and no other. It has been further

held by this Court in East India Housing and Land

Development Trust Ltd. V. Commissioner of Income

Tax, West Bengal (1961) 42 ITR 49 that if the income

from a source falls within a specific head, the fact that

it may indirectly be covered by an another head will not

make the income taxable under the latter head. (See

also: Commissioner of Income Tax Vs. Chugandas and

Co.(1964) 55 ITR 17)…. Therefore, if the income is

included under any one of the heads, it cannot be

brought to tax under the residuary provisions

of Section 56…”

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More recently this is succinctly explained by Apex

court in case of Raj Dadarkar & Associates vs. ACIT

[2017] 394 ITR 592 holding that “Before dealing with

the respective contentions, we may state, in a

summary form, scheme of the Act about the

computation of the total income. Section 4 of the Act is

the charging Section as per which the total income of

an assessee, subject to statutory exemptions, is

chargeable to tax. Section 14 of the Act enumerates

five heads of income for the purpose of charge of

income tax and computation of total income. These

are: Salaries, Income from house property, Profits and

gains of business or profession, Capital gains and

Income from other sources. A particular income,

therefore, has to be classified in one of the aforesaid

heads. It is on that basis rules for computing income

and permissible deductions which are contained in

different provisions of the Act for each of the

aforesaid heads, are to be applied. For example,

provisions for computing the income from house

property are contained in Sections 22 to 27 of the Act

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and profits and gains of business or profession are to

be computed as per the provisions contained in

Sections 28 to 44DB of the Act. It is also to be borne

in mind that income tax is only One Tax which is

levied on the sum total of the income classified and

chargeable under the various heads. It is not a

collection of distinct taxes levied separately on each

head of the income.”

Hon’ble Gujarat High Court in the case of J.K. Chokshi

vs. ACIT (T.A. No.149 of 2003) order dated 22/12/2014

held as under:-

“7. Once it is established that the assessee had no

other source of income at the relevant time or in the

past, it can be safely concluded that the assessee had

no other income other than income from business. Now,

when the business activity of the assessee has been

accepted and no other source of income is found, then

there was no justification for disallowing the salary paid

to Partners at Rs.4.50 Lacs. Therefore, the

disallowance of Rs.4.50 Lacs granted by the A.O and

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confirmed by the Tribunal is erroneous and deserves to

be quashed and set aside. Our view is buttressed by the

principle rendered by the Calcutta High Court in the

case of Md.Serajuddin & Bros.v.CIT [2012] 24

taxmann.com 46 (Cal.) In view of the above, the

question no. 1 as to whether the Tribunal is right in

confirming disallowance of Rs.4,50,000/- made by the

Assessing Officer under Section 40(b) of the Income-

tax Act, 1961 is answered in the negative in favour of

the assessee and against the Revenue.”

Further P&H high court in case of Dulari Digital Photo

Services ... vs Commissioner Of Income Tax on 10

September, 2013 reported at 219 Taxman 126 has held

that

“… The expression "income from other sources" would

come into play only where income is relatable to a

known source. Where the income is not relatable to

any known or any bona fide source, it would

necessarily be brought to tax or considered as income

of the assessee, under Section 68 of the Act. Section

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68 of the Act clearly provides that where a sum is

credited in the books of assessee and the assessee is

unable to offer any explanation about the nature and

source thereof, or the explanation offered is not

satisfactory, the sum so credited may be charged to

income tax as the income of the assessee of that

previous year. What is brought to tax under Chapter IV

of the Act is an income from a known source, i.e., a

particular source from which the income flows but the

source of a particular revenue receipt cannot be

pegged down to any particular source, provisions

of Section 14 of the Act, particularly "income from

other sources", would not apply and such income

would necessarily fall under Section 68 of the Act,

being unexplained cash receipts that do not fall within

the definition of "income from other sources".”

Amritsar ITAT in case of The Dy. Commissioner Of

Income ... vs Sh Inderjit Mehta, Bathinda on 30

November, 2017 has held that, while explaining Kim

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Pharma Punjab & Haryana high court revenue favoring

decision reported at 250 CTR 454:

“….To quote from 'Kim Pharma' 250 CTR 454 (supra)

itself, such amounts have been held to be assessable as

business income:

"In the facts of the present case, we find that assessee

during the course of survey had surrendered the income

as income from other sources, though a plea has been

raised by the assessee that the income was surrendered

as income from job work but no evidence to prove the

stand of the assessee has been brought on record. The

assessee had also surrendered additional income of

Rs.10 lacs in assessment year 2005-06 on account of

sundry credits, repairs to building and advances to staff,

which being relatable to business carried on by assessee

was included as income from business. However, in

respect of cash found during survey, which was not

reflected in the books of account, no source was

declared by the assessee and in the absence of nature of

source of cash being proved; the same is not assessable

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as income from business. In the circumstances, we hold

the order of the CIT(A) in including the additional income

as deemed income u/s 69A of the Act and not allowing

the benefit of the business losses determined against the

said deemed income. The grounds of appeal raised by

the assessee are dismissed." 12.1 From the above

finding, it is apparent that the surrender made on account

of sundry credits, repairs to building and advances to

staff have been held to be relatable to business, whereas

only in respect of cash, it was held to be not relatable to

business. Therefore, the surrender on account of stock

and unexplained investment related to business, whereas

the cash is not assessable as income from business.”

Refer case of J.C. Thakkar Vs. CIT [27 ITR 658 (Bom)]

and the decision of the High Court of Madras in the case

of H.C. Kothari and others Vs. CIT [20 ITR 579 (Mad)]

in support of the proposition that if an income falls under

more than one head, the assessee has the option of

choosing the head of income which makes the burden of

the assessee lighter.( Income Tax Appellate Tribunal –

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Mumbai Hansat Maneklal Savani, Mumbai vs Assessee

on 12 December, 2013)

Taking contra view from P&H high court, Hon'ble

Gujarat High Court in the case of CIT Vs. M/s Shilpa

Dyeing and Printing Mills (P) Ltd.(2014) 381 DTR 381

(Guj) has held that:

“We may further notice that the decision in case of Fakir

Mohmed Haji Hasan Vs. Commissioner of Income Tax

(supra) came-up for consideration in case of Deputy

Commissioner of Income Tax Vs. Radhe Developers

Incia Ltd. and anr (2010) 329 ITR 1 (Guj) (supra),it was

observed as under:

The decisions of this Court in the case of Fakir Mohmed

Haji Hasan (supra) and Krishna Textiles (supra) are

neither relevant nor germane to the issue considering

the fact that in none of the decisions the Legislative

Scheme emanating from conjoint reading of provisions

of sections 14 & 56 of the Act have been considered.

The Apex Court in the case of D.P.Sandu Bros.Chembur

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P. Ltd.,(supra) has dealt with this very issue while

deciding the treatment to be given to a transaction of

surrender of tenancy right. The earlier decisions of the

Apex Court commencing from case of United

Commercial Bank Ltd.Vs. CIT (1957) 32 ITR 688 (SC)

have been considered by the Apex Court and, hence, it

is not necessary to repeat the same. Suffice it to state

that the Act does not envisage taxing any income under

any head not specified in section 14 of the Act. In the

circumstances, there is no question of trying to read any

conflict in the two judgments of this Court as submitted

by the learned Counsel for the Revenue.”

(Also refer Gaurish Steels Pvt. Ltd. Vs. ACIT, 43 ITR

(Trib.) CHD-Trib)

Therefore in light of said principle if five heads

(sources of income)are discussed in juxtaposition to

section 68 to section 69D (dealing with unexplained

income in form of cash credit , investment , money and

expense etc) , one principle which may be inferred is

that five heads normally apply when source of income

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is existing/identified like business is there, capital

asset is there, house property is there , employment is

there etc , and when source is missing and is inchoate

and income remains anonymous in nature then

possibility to invoke section 68 to section 69D may be

applied . To put it simply if business income is

undisclosed then source of income being business ,

business head should continue to apply . For example

when in search and survey and other 26AS cases

suppressed receipts from business are detected and

thereafter when profit element which is deduced from

such suppressed receipts , said profit element could

not be taken u/s 68 to 69D and business head would

apply to said profit element as far as nature of income

is concerned. Whereas if no tangible source is

available to a person and still certain unexplained

income (asset) is found in hands of said person then

strict liability u/s 68 to section 69D may arise.

Circular No 37 of 2016 dated 2/11/2016 which states

that disallowances made while computing business

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income related to business activity shall enhance

profits of eligible business for purposes of deduction

under chapter VI-A may also apply in context of

section 115BBE to decide whether an income falls

under business head etc or under section 68 to section

69D.

2. Legislative intent behind section 115BBE may be

culled out from :

Budget speech of then Finance Minister Hon’ble Sh

Pranab Mukherjee(March 16, 2012) “…155. I propose

a series of measures to deter the generation and use

of unaccounted money….. Taxation of unexplained

money, credits, investments, expenditures etc., at the

highest rate of 30 per cent irrespective of the slab of

income..”

Further, the memorandum to the Finance Bill, 2012

on Section 115BBE reads as under :-

"Under the existing provisions of the Income-tax Act,

certain unexplained amounts are deemed as income

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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. 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). It is also proposed 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.

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This amendment will take effect from 1st April, 2013 and

will, accordingly, apply in relation to the assessment

year 2013-14 and subsequent assessment years.

[Clause 45)."

The italicized words “…to curb the practice of laundering

of unaccounted money …” brings home the point that

laundering and unaccounted money must be there to

apply section 115BBE . So when laundering and

unaccounted money is not there then section 115BBE

may not apply on basis of purposive interpretation

principle. Laundering and unaccounted money have set

connotations in eyes of law and are not words of infinite

scope. Further the jurisdictional condition to invoke this

draconian provision (sec 115BBE) which needs to be

fulfilled at the outset is provisions of section 68 to

section 69D are applicable undoubtedly without which

section 115BBE would remain non-starter.

This interpretation principle is in accordance with well

settled interpretation principle that legislative intent has

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crucial role to interpret the statute as held by Hon’ble

supreme Court decision in case of “

CRIMINAL APPEAL NOS.12171219 OF 2017

[Arising out of S.L.P. (Crl.) Nos. 26402642 of 2016]

Ms. Eera Thro

ugh Dr. Manjula Krippendorf ... Appellant(s)

Versus

State (Govt. of NCT of Delhi) & Anr. …Respondent

(s)

In its order dated July 21, 2017 has observed as under:

“24. It is thus clear on a reading of English, U.S.,

Australian and our own Supreme Court judgments that

the ‘Lakshman Rekha’ has in fact been extended to move

away from the strictly literal rule of interpretation back

to the rule of the old English case of Heydon, where the

Court must have recourse to the purpose, object, text,

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and context of a particular provision before arriving at a

judicial result. In fact, the wheel has turned full circle. It

started out by the rule as stated in 1584 in Heydon’s

case, which was then waylaid by the literal interpretation

rule laid down by the Privy Council and the House of

Lords in the mid 1800s, and has come back to restate the

rule somewhat in terms of what was most felicitously put

over 400 years ago in Heydon’s case.”

While so holding the Hon’ble Supreme Court has

emphasised that “Interpretation must depend on the text

and the context. They are the basis of interpretation. One

may well say if the text is the texture, context is what

gives the colour. Neither can be ignored. Both are

important. That interpretation is best which makes the

textual interpretation match the contextual”. .

In Commissioner of Income Tax, Bangalore Vs. J.H. Gotla

Yadagiri AIR 1985 SC 1698 Hon’ble Apex Court

propounded that though equity and taxation are often

strangers, attempts should be made that these do not

remain always so and if a construction results in equity

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rather than injustice, then such construction should be

preferred to the literal construction. In Oxford

University Press v. Commissioner of Income Tax (2001)

3 SCC 359, Mohapatra, J. has opined that interpretation

should serve the intent and purpose of the statutory

provision. . In that context, the learned Judge has

referred to the authority in State of T.N. v. Kodaikanal

Motor Union (P) Ltd. (1986) 3 SCC 91 wherein this Court

after referring to K.P. Varghese v. ITO[ (1981) 4 SCC

173 and Luke v. IRC (1964) 54 ITR 692 has observed:-

“The courts must always seek to find out the intention of

the legislature. Though the courts must find out the

intention of the statute from the language used, but

language more often than not is an imperfect instrument

of expression of human thought. As Lord Denning said it

would be idle to expect every statutory provision to be

drafted with divine prescience and perfect clarity. As

Judge Learned Hand said, we must not make a fortress

out of dictionary but remember that statutes must have

some purpose or object, whose imaginative discovery is

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judicial craftsmanship. We need not always cling to

literalness and should seek to endeavour to avoid an

unjust or absurd result. We should not make a mockery

of legislation. To make sense out of an unhappily worded

provision, where the purpose is apparent to the judicial

eye ‘some’ violence to language is permissible.”

In Seaford Court Estates Ltd. vs. Asker [1949] 2 All ER

155 hallowed by time, outlining the duty of the Court to

iron out the creases, it was enunciated, that whenever a

statute comes up for consideration, it must be

remembered that it is not within human powers to

foresee the manifold sets of facts which may arise and

even if it were, it is not possible to provide for them in

terms free from all ambiguity, the caveat being that the

English language is not an instrument of mathematical

precision. It was held that in an eventuality where a

Judge, believing himself to be fettered by the supposed

rule that he must look to the language and nothing else,

laments that the draftsmen have not provided for this or

that or have been guilty of some or other ambiguity, he

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ought to set to work on the constructive task of finding

the intention of the Parliament and that he must do this

not only from the language of the statute, but also from

a consideration of the social conditions which gave rise

to it and of the mischief which it was passed to remedy

and then he must supplement the written word so as to

give “force and life” to the intention of the legislature.

The Supreme Court, in the case of CIT v. Amarchand N.

Shroff , administered a caution that a fiction should not

be stretched beyond the purpose for which it was

enacted. The said caution was also noticed by the

Supreme Court in the case of CIT v. Ajax Products Ltd.

[19651 55 ITR 741.

3. The major change in section 115BBE was brought by

Taxation Laws (Second Amendment) Bill, 2016

(26/11/2016) (received assent of the President on

15/12/2016) subsequent to demonetization

announcement of high denomination notes (HDN’s)

,wherein under statement of objects and reasons it was

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stated that “…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. 2.

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

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provision….” In the press release dated 1/12/2016 it

was clarified by CBDT that “…It is hereby clarified that

the above Bill has not introduced any new provision

regarding chargeability of tax on jewellery. The Bill

only seeks to enhance the applicable tax rate under

section 115BBE of the Income-tax Act, 1961 (the Act)

from existing 30% to 60% plus surcharge of 25% and

cess thereon.This section only provides rate of tax to

be charged in case of unexplained investment in assets.

The chargeability of these assets as income is governed

by the provisions of section 69, 69A & 69B which are

part of the Act since 1960s. The Bill does not seek to

amend the provisions of these sections. Tax rate under

section 115BBE is proposed to be increased only for

unexplained income as there were reports that the tax

evaders are trying to include their undisclosed income

in the return of income as business income or income

from other sources. The provisions of section 115BBE

apply mainly in those cases where assets or cash etc.

are sought to be declared as ‘unexplained cash or asset’

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or where it is hidden as unsubstantiated business

income, and the Assessing Officer detects it as such….”

Above press release makes it amply clear that aforesaid

change made in 2016 has no where changed the basic corpus

of the provision (Sec 115BBE) which is attracted only when

section 68 to section 69D are applicable ,and no change is

made in provisions of section 68 to section 69D either by

amendment bill of 2016 nor by section 115BBE. So sans

section 68 to section 69D , section 115BBE can not be

invoked. Further it clarifies that amendment bill only

increases the tax rate without anything more. Moreover, it

notably clarifies that section 115BBE has restricted

applicability to “unexplained investment in asset” or

“unexplained cash or asset”. The fear and apprehension in

minds of assesses carrying real business gets addressed by

press release when it says that only hidden “unsubstantiated”

business income as “detected” by AO shall come under

purview of section 115BBE . Therefore when business

income is substantiated by surrounding circumstances and

material available on record (like assessee is regularly and

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consistently showing business income and is maintaining

books of account etc for business, and is registered with

other govt agencies like VAT and Service tax , running

infrastructure etc) then no adverse inference u/s 115BBE

may be possible.

4. Some real life and practical case studies which may

help us to understand this lethal provision in more better

way are taken up in this section of the Article:

4.1 An assessee is there who is carrying on business of

sale of diamonds. He is surveyed by income tax

department u/s 133A of the Act. During survey he

surrenders explicitly that out of business he has

earned excess stock of Rs 10 lacs and excess

investment of Rs 10 lacs. Total surrender made is

Rs 20 lacs. Following questions can arise from this:

i) Whether such surrender of excess stock or

investment from business activity can fall u/s

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68 to 69D read with section 115BBE or it shall

be treated as business nature income ?

ii) If assessee surrenders it in return of income

u/s 139(1) whether penalty u/s 270A or

(section 271(1)(c)) can be levied ?

Apropos first part of the case study (i) above, direct

answer to this can be found from:

Income Tax Appellate Tribunal - Mumbai

Acit Cen Cir 13, Mumbai vs Rahil Agencies, Mumbai

on 23 November, 2016

“19. We have considered rival contentions and

found that by applying provisions of Section 115BBE

the AO has declined set off of business loss against

income declared during the course of

survey/search. The provisions of Section

115BE are applicable on the income taxable

under section 68, 69, 69A, 69B, 69C or 69D of the

Act. The income declared by the assessee is

unrecorded stock of diamond found during the

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course of search. The assessee is in the business of

diamond trade and such stock was part of the

business affair of the company. Therefore since

income declared is in the nature of business income,

the same is not taxable under any of the section

referred above and accordingly section 115BBE has

no application in case.”

Further as discussed in preceding portion of the

paper, when income can fall under more than one

head (here business head or section 68 to section

69D/115BBE) then assessee may opt for the

provision which keeps his burden lighter (business

head). Further if there are two views whether

section 115BBE can be applied or not, as settled,

view favoring assessee/taxpayer would be adopted.

Here there can be myriad of surrenders made by

assessee qua business activity. For example

surrender made on basis of loose slip which is like

jotting/scribbling /rough noting treating it as

unexplained advances etc whether section 68 to

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section 69D can be applied r.w.s 115BBE? Answer

should be no when one keeps in mind the ratio of

Apex court ruling in Common cause case reported

at 394 ITR 220 . That is if addition per se on basis

of loose documents stands on weaker footing, and

its tenability can be seriously contested, then to

apply draconian provision of section 115BBE by

casually and routinely taking recourse to section 68

to section 69D, to such doubtful and debatable

inchoate income would lead to absurd and

anomalous results. Therefore in authors opinion,

even when assessee accepts certain addition to

income loosely assessed u/s 68 to section 69D, to

honor the surrender made u/s 133A etc, then also

AO has got all rights to see whether conditions to

apply section 115BBE are scrupulously satisfied or

not. If slightest of doubt exist as to the applicability

of the conditions which are sine qua

non/indispensable to attract section 115BBE, then

section 115BBE may not be applied.

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Further, regarding approach to be adopted by revenue authorities u/s 68, it maybe

useful to make reference to full bench decision of P&H high court reported at 382

ITR 453:

The Hon'ble Punjab & Haryana High Court in a recent judgement in the case of

CIT vs Jawaharlal Oswal and Others (I.T.A. No. 49 of 1999, Judgment delivered

on 29.01.2016) dismissed the Department’s appeal by holding that suspicion and

doubt may be the starting point of an investigation but cannot, at the final stage of

assessment, take the place of relevant facts, particularly when deeming provision is

sought to be invoked. The Hon’ble Court has observed ,

“...The principle that governs a deeming provision is that the initial

onus

lies upon the revenue to raise a prima facie doubt on the basis of

credible material. The onus, thereafter, shifts to the assessee to

prove that the gift is genuine and if the assessee is unable to

proffer a credible explanation, the Assessing Officer may

legitimately raise an inference against the assessee. If, however,

the assessee furnishes all relevant facts within his knowledge and

offers a credible explanation, the onus reverts to the revenue to

prove that these facts are not correct. The revenue cannot draw an

inference based upon suspicion or doubt or perceptions of

culpability or on the quantum of the amount, involved particularly

when the question is one of taxation, under a deeming provision.

Thus, neither suspicion/doubt, nor the quantum shall determine

the exercise of jurisdiction by the Assessing Officer….Further a

deeming provision requires the Assessing Officer to collect relevant

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facts and then confront the assessee, who is thereafter, required to

explain incriminating facts and in case he fails to proffer a credible

information, the Assessing Officer may validly raise an inference of

deemed income under section 69-A. As already held, if the

assessee proffers an explanation and discloses all relevant facts

within his knowledge, the onus reverts to the revenue to adduce

evidence and only thereafter, may an inference be raised, based

upon relevant facts, by invoking the deeming provisions of Section

69-A of the Act. It is true that inferences and presumptions are

integral to an adjudicatory process but cannot by themselves be

raised to the status of substantial evidence or evidence sufficient

to raise an inference. A deeming provision, thus, enables the revenue

to raise an inference against an assessee on the basis of

tangible material and not on mere suspicion, conjectures or

perceptions”

Apropos second part of the case study (ii) above, in

author opinion, as per various precedents like Delhi

high court in Neeraj Jindal 393 ITR Page 1 and SAS

Pharmaceuticals etc , normal penalty u/s 270A (or

section 271(1)(c)) etc may not be leviable once

surrendered amount during survey is voluntarily

reflected in return u/s 139(1).

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4.2 An assessee is filing return on presumptive basis of

his business/profession u/s 44AD/Sec 44ADA .

Cash sales and receipts are declared on which profit

is offered as per applicable rates prescribed under

resp. provisions of sec 44AD/44ADA. During

assessment , Assessing officer is not satisfied on

genuineness of cash sales etc and assess them

accordingly in section 68 to section 69 read with

section 115BBE . Whether AO’s action is correct.

Firstly, receipts and sales even though cash,

directly cannot be bodily lifted to section 68 as

assessee has already offered profit on the same in

presumptive income provision by which receipts

stand offered for taxation and therefore section 68

applicability stands ruled out as it would amount to

double taxation etc.(refer Gujarat high court in

Vishal exports (3/07/2012) in Tax Appeal no

2471/2009).

Otherwise also , in worst case scenario, since sales

and receipts per se are not income u/s 4 which is

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charging provision under the Act and only income

can be considered , at best AO could make best

judgment assessment u/s 144 read with section 145

and then also he is to make the assessment

considering material on records whereby he can

assess only income earned by assessee. By this

route also, he would be required to make

reasonable assessment. If assessee has already

shown reasonable income, scope of further

additions gets mitigated. It is settled law that under

best judgment assessment it is not necessary that

some additions are made. Here also by simply

making best judgment assessment nature and

character of income would not get altered.

To say that entire cash sales and receipts are

income of assessee u/s 68 of the Act dehors section

44AD/44ADA, would come in the teeth of

observations of Apex court in Maxopp case (supra)

which says only net income can be considered

under the Act.

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4.3 If an assessee has earned income from trading of

commodity derivative on recognized commodity

exchange , which is established by documentary

evidences like broker contract note etc can said

income be treated as unexplained income u/s 68 to

69d so as to trigger section 115BBE? Since

documentary evidences are of impeccable

character, to lightheartedly apply section 68 etc

r.w.s 115BBE to such income which is fully

substantiated , may not pass muster of law.

Answer: Refer: T&AP high court decision in case of Pendurthi

Chandrashekhar (order dated 23/02/2018) “…. Despite the

availability of overwhelming and unimpeachable

documentary evidence, the AO was not prepared to accept

the same, as his approach appeared to be loaded with

prejudice, suspicion and pre-determined mind and

preconceived notions. The whole approach of the AO

appears to be some how reject the every explanation of the

assessee and the evidence produced in support of such

explanation, by assigning reasons which are wholly

imaginary and perverse. ….While the authorities are

entitled to examine each transaction minutely, they cannot

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approach every transaction with undue suspicion by

wearing coloured glasses. The approach of the AO reminds

us of somebody describing a lamb as a dog and trying to

make everyone to believe it to be so….”

Jaipur ITAT , ITA No. 431 & 432/JP/2016 , M/s Choice

Buildestate Pvt. Ltd., Jaipur vs. ITO, Jaipur

Order dated 28/03/2018

“… If the Assessing Officer harbours any doubts of the

legitimacy of any subscription he is empowered, nay duty-

bound, to carry out thorough investigations. But if the

Assessing Officer fails to unearth any wrong or illegal

dealings, he cannot obdurately adhere to his suspicions

and treat the subscribed capital as the undisclosed income

of the Company. We therefore agree with the contentions

of the ld AR that in absence of any falsity which have been

found in the documents so submitted by the assessee

company to prove the identity, creditworthiness and

genuineness of the share transaction, these documents

cannot be summarily rejected as has been done by the AO

in the instant case. ..”

4.4 If an assessee is filing return showing tuition income from

past many years which is never disturbed and contradicted

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and post section 115BBE , ld AO tries to apply section 68

to 69D to said tuition income alleging it to be laundering of

unaccounted money to get basic exemption benefit etc

whether such attempt is lawful? As per legislative intent

burden to apply section 115BBE and section 68 to section

69D rest on revenue shoulder. That burden cannot be

discharged on basis of assumption and presumption only.

For that cogent material is to be brought on records by

necessary enquiry and examination. Sans cogent material,

suggested straight application of section 115BBE and sec

68 to sec 69D treating tuition income as unexplained in

nature may be defeated by consistency principle:

a. 394 ITR 449 SC Godrej case Sec.14A

b. 388 ITR 1 SC (first year relevance u/s 35D)

c. 358 ITR 295 (SC) Excel Indsutries case

d. 106 ITR 1 (SC) Parshuram Potteries

e. 193 ITR 321 (Radhaswami Satsang) SC

4.5 Can section 115BBE be applied in summary manner u/s

143(1) processing? Answer is emphatic no because it is

highly contentious and moot issue.

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4.6 To apply section 115BBE whether CIT can initiate revision

proceedings u/s 263 which is missed by AO? Since section

263 uses the expression erroneous and prejudicial to

interest of revenue, if on applicability of section 115BBE

two views are possible, revision u/s 263 by CIT may not

sustain in law.

5. Conclusion of the paper

From aforesaid discussion following principles emerge:

i) Since section 68 to section 69D are discretionary

in nature and section 115BBE is dependent on

section 68 to section 69D said discretion has be

exercised with extreme care and caution;

ii) “Laundering” of “unaccounted money” is to be seen

as per legislative intent;

iii) Benefit of doubt should go to favor of taxpayer;

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iv) “Source” of income must be seen pragmatically

and not pedantically;

v) Section 115BBE can not be applied in routine and

ordinary manner unless exceptional facts are there;

vi) Sales and receipts which are already offered for

taxation under presumptive scheme etc by offering

profit element therein, it may not be available for

assessment u/s 68 as unexplained cash credit;

vii) Section 115BBE cannot be viewed as a tool to

generate more revenue and is in nature of deterrent

provision

viii) All surrendered income during survey and search

cannot be domiciled ipso facto in section 68 to

section 69D read with section 115BBE without

making holistic consideration of obtaining factual

position specially business activity related income

may not ordinarily get placed u/s 68 to section 69D

Closing Note

Hon'ble Supreme Court in the case of Krishena Kumar & Ors. V/s. Union of India

& Ors., AIR 1990 SC 1782.

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“29. The argument of Mr. Shanti Bhushan is that the State's obligation

towards pension retirees is the same as that towards P.F. retirees. That

may be morally so. But that was not the ratio decidendi of Nakara.

Legislation has not said so. To say so legally would amount to legislation

by enlarging the circumference of the obligation and converting a moral

obligation into a legal obligation. It reminds us of the distinction between

law and morality and limits which separate morals from legislation.

Bentham in his Theory of Legislation, Chapter XII, page 60 said:

“Morality in general is the art of directing the actions of men

in such a way as to produce the greatest possible sum of good.

Legislation ought to have precisely the same object. But although these

two arts, or rather sciences, have the same end, they differ greatly in

extent. All actions, whether public or private, fall under the jurisdiction of

morals. It is a guide which leads the individual, as it were, by the hand

through all the details of his life, all his relations with his fellows.

Legislation cannot do this; and, if it could, it ought not to exercise a

continual interference and dictation over theconduct of men. Morality

commands each individual to do all that is advantageous to the community,

his own personal advantage included. But there are many acts useful to

the

community which legislation ought not to command. There

are also many injurious actions which it ought not to forbid, although

morality does so. In a word legislation has the same center with morals,

but it has not the same circumference.”

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