Decoding Unexplained Income: Tax Implications

What is Unexplained Income?

When an assessee does not have any explanation for the source/generation or nature of income being assessed, that income is known as unexplained income.

Further, any income for which the assessee has an explanation but the Assessing officer is not satisfied with the same is also called unexplained income.

Sections Covering Concept of Unexplained Income

• Section 68- Cash Credits*

Section 68 deals with cash credits credited in the books of accounts of an assessee during the previous year and the assessee has no explanation or unsatisfactory explanation for the source of income of such credits.

Unexplained cash credits include the amount raised by the assessee being a company ( not a company in which the public is substantially interested)  for share capital, share application money, share premium or any such amount by whatever name it is called.

Company shall be liable to pay tax on such unexplained credits unless:

• The person, being resident in India from whom such amount is credited provides evidence or explanation regarding the source and nature of such sum credited; and
• Such explanation shall be satisfactory in the opinion of the Assessing Officer.

Exception: In case of Company, no action shall be taken if the person who contributed the sum is a venture capital fund or venture capital company.

Such unexplained cash credits shall be deemed to be the income of the assessee for such FY.

*Cash Credit is any sum credited in the books of the assessee, for which the assessee does not offer any explanation or satisfactory explanation.

• Section 69- Unexplained Investments

Unexplained investments such as purchase of property, investments in securities etc. which are not recorded in the assessee’s books of accounts, or if books are maintained by the assessee for any income source but does not provide any explanation/ satisfactory explanation for the income source and nature from which such investments are made, then value of such investments shall be deemed to be included in the assessee’s income for the previous year in which it is identified.

• Section 69A- Unexplained Money

If any money, jewellery, bullion or any other valuable article without any record in the books of accounts of the assessee is found to be owned by him/her and the assessee offers no explanation or unsatisfactory explanation about the nature and source of acquisition of such money, jewellery, bullion or any other valuable article, then such income shall be deemed to be the income of the assessee for the such Financial Year.

• Section 69B- Amount of Investments etc., not “fully” disclosed in books of accounts

If assessee has made any investment or is found to be owner of money, jewellery, bullion or any other valuable article during any FY and the A.O finds that the amount expended off in the books on such investments or in acquiring such jewellery, bullion or valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income without explaining/unsatisfactorily explaining such exceeding amount, shall be deemed to be the income for such FY.

• Section 69C- Unexplained Expenditure etc.

Where the assessee has incurred expenditure and offers no or unsatisfactory explanation about the source of such expenditure in any FY, shall be included in the income of the assessee for such FY and such expenditure shall not be allowed as deduction under any head of income.

• Section 69D- Amount borrowed or repaid on hundi**

Where an assessee has borrowed or repaid any amount from hundi/due on hundi to any person otherwise through an account payee cheque drawn on bank, then such borrowed or repaid amount shall be deemed to be the income of the assessee for such FY in which amount is borrowed or repaid.

Provided that once the borrowed amount is considered income of the assessee, shall not be considered income again in the year of repayment of such amount.

Explanation- For the purpose of the section repaid amount shall include the amount of interest paid on borrowed capital.

**Term Hundi has not been defined in the Income Tax Act,1961. In commercial language, it means an instrument in local/vernacular language which can be used by the holder to collect money due thereon without using any currency.

Applicability of Section 115BBE

Section 115BBE has been inserted in the Income Tax Act, 1961 with the objective to deal with unexplained income or unaccounted money.

However, before 15^th December 2016, section 115BBE levies on tax specifically on unexplained incomes/expenses deemed as income at the rate of 30% (plus applicable surcharge and cess) irrespective of the income slab without any deduction being allowed against such income.

A Retrospective Amendment has been made w.e.f 1^st April 2016 making the provisions of Section 115BBE stringent for taxing the unexplained income as defined under sections 68, 69, 69A, 69B, 69C, 69D.

Post amendment the tax rate on unexplained income has been increased from 30% to 60% along with surcharge of 25% and 4% Cess.

Penal Provisions

1. Section 271AAC has been introduced in the Finance Act, 2016 for levying a penalty at the rate of 10% of tax payable on unexplained income as computed under section 115BBE. The penalty needs to be paid on or above the tax liability computed under Section 115BBE.

The Assessing Officer (A.O.) can levy Penal Provisions under Section 271AAC under the following conditions:

• The Assessee has not disclosed his unexplained income in the Income Tax Return of respective previous year to which such income belongs and the same has been determined by the A.O during any proceedings; or
• The Assessee disclosed his unexplained income in the Income Tax Return of the respective previous year to which such income belongs but has not paid tax on such income on or before the end of the previous year.

Note: Once the Ld. A.O has penalized unexplained income under Section 271AAC, Section 270A (Penalty for underreporting or misreporting of Income) can’t be levied on such unexplained income.

2. Penalties under section 234A, 234B and 234C shall be applied respectively in addition to penalty under Section 271AAC.

Conclusion

In nutshell, harsher provisions have been implemented in the form of Section 115BBE by levying a tax rate twice the pre-amendment tax rate along with applicable surcharge and cess i.e. from 30% to 60% plus 25% surcharge and 4% cess. In addition to the tax liability, the assessee in default is liable to pay penalty@10%. Therefore, an assessee needs to be alert while declaring income in ITR as determination of unexplained income or invocation of provisions of Section 68/69/69A/69B/69C/69D leads to heavy consequences as explained above.