Section 115BBE of Income Tax Act: Taxation of Income from Undisclosed Sources
The clause in the Income Tax Act of 1961 addresses the taxation of income derived from unreported sources in Section 115BBE. The purpose was to stop tax evasion and black money. We will go over the many facets of Section 115BBE in this article, such as its application, scope, and the repercussions of non-compliance.
Table of content
Scope of Section 115BBE
Unreported sources of income are subject to Section 115BBE. Any income not included in the books of accounts, returns, or other documents provided under the Income Tax Act is considered such income. All taxpayers, including partnerships, corporations, and individuals, are covered by this section.
Applicability of Section 115BBE
Section 115BBE is applicable in the following circumstances:
Income considered unexplained under sections 68, 69, 69A, 69B, 69C, and 69D is subject to section 115BBE of the Income Tax Act. It covers inexplicable cash credits, investments, funds, jewellery, bullion, and other valuable items.
The taxpayer has unreported sources of income.
No tax returns, books of accounts, or other documents submitted under the Income Tax Act include such an income.
This income has not been taxed by the taxpayer.
The Income Tax Act is used to identify the income during proceedings.
Regardless of their legal status, all taxpayers—individuals, HUFs, corporations, and others—are subject to this section.
Provisions of Section 115BBE
Section 68 describes the tax treatment of amounts credited in a taxpayer's books for which the taxpayer does not provide their nature and source or does so in a way the Assessing Officer deems inadequate. These amounts might be subject to taxation as the taxpayer's annual income.
Section 68
If the following criteria are satisfied, Section 68 is relevant:
Bookkeeping: Appropriate bookkeeping maintained by the assessee.
Entry of credit: A certain amount credited to the books at the end of the fiscal year.
Absence of a Good Reason: The Assessing Officer finds the taxpayer's explanation inadequate, or the taxpayer does not give a good reason for the nature and origin of the credited amount.
The credited amount may be taxed as the taxpayer's income for that year if these requirements are met.
Section 69
If a taxpayer makes investments in a given year that are not documented in their books by:
The value of such investments may be treated as the taxpayer's income for that year if the taxpayer fails to explain the nature and source of the investments or if the taxpayer doesn't give a sufficient explanation for the type and origin of the investments, or
if they do, the Assessing Officer may consider the value of the investments to be their income for that year.
Section 69A
A taxpayer has cash, gold, jewelry, or other valuables during a year and
The value of such money, bullion, jewelry, or valuable articles may be treated as the taxpayer's income for that year if they are not listed in the taxpayer's books of accounts (if kept) and the taxpayer is unable to give a convincing explanation for how and where were acquired.
Section 69B
A taxpayer invests or holds jewelry, bullion, or other valuables, and
If the taxpayer doesn't explain the excess amount or the Assessing Officer finds it inadequate, the excess amount is the taxpayer's income for that year. It is because the amount spent on these investments or acquisitions exceeds the amount shown in their books of accounts.
Section 69C
If a taxpayer spends money in a given year and
Fails to explain where the expense (or a portion of it) came from, or if the Assessing Officer finds the explanation inadequate, the amount of the unexplained expense may be considered the taxpayer's income for that year.
Furthermore, no deduction is under any income head for any unexplained expense treated as income under Section 69C.
Section 69D
Amount Owed or Paid Under Section 69D on Hundi.
The amount borrowed or paid back will be considered the taxpayer's income for the year it was borrowed or repaid if the transaction is not completed with an account-payee check drawn from a bank, the taxpayer borrows money or pays back any debt owed to third parties on a hundi.
On the other hand, the taxpayer will not be assessed again for the same amount upon repayment if any amount borrowed on a hundi has already been treated as income under Section 69D. The amount repaid also covers interest paid on the loan balance.
Tax Rates under Section 115BBE
According to Section 115BBE, the tax rate on an assessee's total income will be 60% if it comes from unexplained sources listed in Sections 68, 69, 69A, 69B, 69C, or 69D. The following situations apply to this rate:
Income included in the return: The income from sources that cannot be explained is included in the Section 139 income return.
Assessing Officer-determined income: The Assessing Officer ascertains the income not covered by the first scenario.
The 60% tax rate is raised even more with a 6% penalty and a 25% surcharge, the final tax rate (including cess) is 84%. However, if the income under Sections 68, 69, etc., is reported in the return and the tax paid by the end of the applicable prior year, the 6% penalty won't be applied. Furthermore, under Section 115BBE, no deductions for expenses, allowances, or loss set-offs will be permitted when determining income.
Exceptions to Section 115BBE
A few exceptions exist to Section 115BBE. They are as follows:
Income declared under the Income Declaration Scheme (IDS): Section 115BBE will not apply to income earned from undisclosed sources if the taxpayer has declared it under the IDS.
Income revealed during a search or survey: Section 115BBE will apply if the Income Tax Department finds income obtained from unreported sources during a search or survey. However, Section 115BBE will not apply if the taxpayer declares such income and pays taxes before the search or survey.
Income stated in a settlement commission: Section 115BBE will not apply if the taxpayer pays taxes on income received from unreported sources before the settlement commission.
Consequences of Non-Compliance to Section 115BBE
A taxpayer may face the following implications if they violate Section 115BBE
Tax on income from undisclosed sources: The income earned from undisclosed sources will be taxed at a flat rate of 60% as per Section 115BBE. This tax rate is substantially higher compared to the regular income tax rate.
Penalty: In addition to the tax on income, the taxpayer may also be liable to pay a penalty of 10% of the tax due.
Prosecution: Under the Income Tax Act, the taxpayer may also face prosecution in extreme non-compliance cases. The taxpayer may face imprisonment of up to 7 years with a monetary penalty.
Procedure for Invoking Section 115BBE
The Income Tax Department may invoke Section 115BBE in any proceedings under the Income Tax Act. To invoke Section 115BBE, follow these steps:
Undisclosed income detection: During a survey, search and seizure operation, or other investigation, the Income Tax Department may find undisclosed income.
Notice issuance: The taxpayer will receive a notice from the Income Tax Department requesting an explanation of the source of the income.
Taxpayer response: The taxpayer must reply to the notice and explain their income source. It will be regarded as income from undisclosed sources if the taxpayer is unable to offer a satisfactory explanation.
Assessment by the Income Tax Department: By Section 115BBE, the Income Tax Department will evaluate income derived from unreported sources and tax it at a flat rate of 60%.
Fine: The taxpayer pays a penalty equal to 10% of the tax owed with the income tax.
Prosecution: Under the Income Tax Act, the taxpayer may also face prosecution in extreme non-compliance cases.
Conclusion
The Income Tax Department has a strong tool in Section 115BBE to combat black money and tax evasion. It penalises non-compliance and raises the tax rate on income derived from unreported sources. To avoid the repercussions of failing to comply with Section 115BBE, taxpayers must follow the guidelines of the Income Tax Act and declare all of their income. Seeking expert assistance is advised in order to adhere to the Income Tax Act's provisions and avoid any legal issues.
FAQ
Q1. What is Section 115BBE of the Income Tax Act, 1961?
The Income Tax Act's Section 115BBE deals with the income obtained from unreported sources. It raises the tax rate on such income to combat tax evasion and black money. This clause enforces severe tax consequences and applies to income classified under sections 68 to 69D.
Q2. What is the surcharge under Section 115BBE?
It implies that income from unreported sources will be subject to a flat 60% gross tax rate without any deductions or allowances, even if the taxpayer has already reported it. A 25% surcharge on the tax and applicable cess will also be applied.
Q3. What happens in case of non-compliance with Section 115BBE?
For a taxpayer who violates Section 115BBE, a ten percent penalty is imposed. They are prosecuted under the Income Tax Act, which could have more implications.
Q4. Who does Section 115BBE apply to?
All taxpayers, including partnerships, corporations, and individuals, are subject to Section 115BBE.
Q5. What is the tax rate under Section 115BBE?
Section 115BBE imposes a flat tax rate of 60%.
Q6. What are the exceptions to Section 115BBE?
Income declared under the Income Declaration Scheme (IDS), income revealed during a search or survey, and income revealed during a settlement commission are among the exceptions to Section 115BBE.
Q7. Can a taxpayer appeal against the tax assessed as per Section 115BBE?
A taxpayer has the right to contest the tax assessed under Section 115BBE.
Q8. What is the significance of complying with Section 115BBE?
Section 115BBE is abided because its failure may result in harsh fines and legal action under the Income Tax Act.
Q9. Can a taxpayer voluntarily disclose the income earned from undisclosed sources?
A taxpayer can avoid the penalties associated with non-compliance with Section 115BBE by voluntarily disclosing and paying taxes on income obtained from unreported sources.
Q10. Can a taxpayer claim any deductions or exemptions on income earned from undisclosed sources?
No, a taxpayer receiving income from unreported sources is not eligible for exemptions or deductions.
Q11. Is it advisable to seek professional help for complying with Section 115BBE?
To avoid any legal issues and penalties, it is indeed advisable to seek professional assistance to comply with Section 115BBE.
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