Finance Act, 2012 inserted, w.e.f. 01-04-2013, section 115BBE in the Income Tax Act so as to tax unaccounted income covered u/s 68 to 69D in Chapter VI, at a flat rate of 30% plus surcharge and cess as applicable. It also provided to disallow deduction in respect of any expenditure or allowance. In order to tax, cash deposited in bank after demonetisation of high value currency notes, Taxation Laws (Second Amendment) Bill, 2016 enhance the rate of tax to 60% as against 30%. After amendment, the effective tax incidence came to 77.25% (surcharge @ 25 per cent of tax + education cess). Taxation Laws (Second Amendment) Bill, 2016 also introduced penalty provision u/s 271AAC, w.e.f. 01-04-2017, to provide for levy of penalty @ 10%, in addition to tax u/s 115BBE, if income computed by the AO included income covered u/s 68 to 69D. The effective tax incidence after penalty u/s 271AAC, came to 83.25 % of unexplained/undisclosed income. The discussion in the present write up is whether such tax incidence to extent of 77.25 % for declaring, in the return of income, unaccounted income covered u/s 68 to 69D, is conducive to bring unaccounted income in the mainstream and if not what would be the nature of amendment Government should consider.
2. Background of section 115BBE:
A controversy arose after the decision of Hon'ble Gujarat High Court in Fakir Mohmed Haji Hasan v. CIT  247 ITR 290/ 120 Taxman 11 (Guj.), to the effect that business loss cannot be allowed to be set off against unaccounted income (covered u/s 69A) and its subsequent consideration in Dy. CIT v. Radhe Developers India Ltd.  329 ITR 1/ 198 Taxman 58 (Mag.), which created a contrary effect, as a result of which business losses were allowed to be set off against such income. The Tribunal/ court allowed the loss against unaccounted income covered u/ss 68 to 69D, following the decision of Apex Court in CIT v. Vegetable Products Ltd.  88 ITR 192 (SC). [refer- Satish Kumar Goyal v. JCIT  70 taxmann.com 382 (Agra - Trib.); K.R. Automobiles v. ACIT  47 taxmann.com 383 (Ahmedabad - Trib.); CIT v. Shilpa Dyeing & Printing Mills (P.) Ltd  39 taxmann.com 3 (Gujarat); Gaurish Steels (P.) Ltd. v. ACIT  82 taxmann.com 337 (Chandigarh - Trib.)]. Probably, in order to set the controversy at restand also to curb the practice of laundering of unaccounted money (covered u/s 68 to 69D falling in Chapter VI of Income Tax Act) by taking advantage of basic exemption limit and paying no taxes on such unaccounted money, section 115BBE was introduced. The new section also provided 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. The effective tax incidence came to about 35% -37% of such income. Even though, there was criticism of this provision in certain quarters, but the taxpayers accepted it as a window to declare their unaccounted receipts/ income and pay taxes a flat rate of 30%. In sub-section (2) of section 115BBE, as introduced by Finance Act 2012, only disallowance of expenditure or other allowance was considered against unaccounted income u/s 68 to 69D but business loss was not covered. Finance Act 2016, w.e.f. 01-04-2017 inserted expression to deny benefit of set off of any loss.
3. Rational of increasing tax rates to 60% u/s 115BBE:
It can be matter of speculation only as to what prompted Government to increase tax rates under section 115BBE from 30% to 60%. It may be noted an Income Disclosure Scheme (IDS), 2016 was promulgated, to effective from 01-06-2016 and come to end by 30-09-2016. The effective tax rates under that scheme was 45% of undisclosed income (30% tax + 25% of tax as surcharge + 25% of tax as penalty) whereas u/s 115BBE it would have been only 35% to 37% of undisclosed income brought to tax by the taxpayer u/ss 68 to 69D. Further, after demonetisation, the Government announced PMGKY (Pradhan Mantri Garib Kalyan Yojana, 2016) under which demonetised currency deposited in bank could be declared with effective tax rates of 49.9% and deposit of 25% of unaccounted money for four years without interest.The Scheme commenced on 17.12.2016 and came to an end on 31-3-2017. Thus, it appears that it was inconceivable that cash depositors should opt for declaration u/s 115BBE in preference to PMGKY. Now, the rational if any for keeping tax rates u/s 115BBE so high, is over, it is time to revisit the reasons for retaining such high tax rates.
4. Generation and utilisation of unaccounted money:
Inspite of stringent action taken by the Government to curb generation and utilization of unaccounted money, by pushing the digital transaction, thorough investigation in scrutiny assessments, bringing Amendments in various Statute such as Benami Transactions (Prohibition) Amendment Act, 2016, etc., the generation of unaccounted money, although reduced, but has not been eliminated altogether. Unaccounted income/receipt in the form of cash is still generated (i) in agriculture sector (ii) by understating sale consideration of immovable properties by taking part consideration in cash. (iii) in sale of ornaments/ gold/ silver without accounting for capital gains (iv) by not accounting for sales made in cash (v) by understating sale receipts in books where sales are made in cash as seller is not required to obtain the identity of the buyer who purchases goods/ services at less than Rs. 2 lakhs etc. (vi) by not accounting for receipt in cash by service providers. (vii) by claiming bogus expenditure and obtaining the benefit in cash. The expenditure/ investment in cash is effected (i) by agriculturist (ii) in purchases below Rs. 2 lakhs each (iii) for unaccounted purchases for business (iv) in marriages and celebrations (v) in tours and travel in India and abroad (vi) in purchase of gold/ diamond/ silver ornaments (vii) in artefacts and entertainment etc. (viii) in purchase of immovable properties in India and abroad. There is hardly a small percentage of such cash utilized in business for higher productivity and generation of taxable income.
5. Nature and scope of section 115BBE:
If seen from the point of view of businessman, section 115BBE provides a window to him to bring unaccounted income or receipt in the books of accounts after paying taxes @ 30% (effective 35% approx.). This also fulfils the objective of the Government to reduce circulation of unaccounted money and collect tax thereon for the welfare of the people. Since, the tax rates prior to amendment by Taxation Laws (Second Amendment) Act, 2016 was maximum marginal rate, and no adjustment of any expenditure, allowance or loss is allowable against such income, it was enhancing tax collection. However, when effective tax incidence has been increased to 77.25%, it dampens the will of the taxpayer to come forward and declare in the return of income, unaccounted income/receipt/ expenditure/ investment covered u/ss 68 to 69D. High tax incidence encourages manipulation and creation of unethical devices and arrangements for camouflaging the unaccounted income. The taxpayer starts comparing the high incidence of taxation with cost of litigation arising from manipulations and arrangements to avoid/ evade taxation.
6. Manipulations/ arrangements:
Where unaccounted money is generated in business, the taxpayer feels the need of bringing this money into books, for expansion, for meeting business expenses, for payment of taxes, for purchases through recognised dealers, for acquiring assets for the employees and for the business etc. He always weighs the pros and cons of manipulating practices for bringing unaccounted money in books. When some taxpayers find that tax incidence of bringing such unaccounted money in books u/ss 68 to 69D is very high, they, under the wrong advise, go for manipulations and arrangements to bring such money in books. Some of the manipulations/ arrangements normally adopted to explain the unaccounted money brought in books, can be briefly described as under-
(i) Past savings, inheritance, pin money
(ii) As sales receipts in cash.
(iii) Obtaining accommodation entries from entry providers by paying cash with some commission. Such entries are in the form of loan or in the form of share capital and premium.
(iv) Showing capital gains and obtaining benefit u/s 10(38) by arranging sale and purchase of penny stock.
(v) Arranging bogus gifts from relatives and friends in India and abroad (which is although largely curbed u/s 56(2))
(vi) Routing unaccounted money through hawala process as share capital/ loan.
Some instances of explanation in case of cash deposits of unaccounted money in bank accounts are described by the CBDT in Letter [F.No.225/391/2017/ITA.II], Dated 24-11-2017 (in the context of revised return filed after demonetization) as under-
i. Unsubstantiated reduction in closing stock.
ii. Reporting of higher sales.
iii. Enhancing cash-in-hand as on 31-3-2016 or 31-3-2015.
iv. Additional cash inflow claimed to be out of earlier year savings, receipt of loans/advances /gifts/repayments/sale of capital assets.
v. Reducing cash outflow by paying some of the liabilities in cash.
vi. Significantly higher cash-in-hand as on 31-3-2016 or 31-3-2015 compared to the preceding year.
7. Window for unaccounted money:
The window for bringing unaccounted money in books should not be wide enough to allow every kind of manipulation and arrangement to succeed with insignificant cost. At the same time, it should not be narrow enough where taxpayer is discouraged to comply. Where window is reasonable and inconsonance with general rate of tax, it is likely that the taxpayer will use that window to get out of mess created by him by generating unaccounted income/receipt, whether under compulsion of doing transaction in cash or by force of habit. As a general practice of curbing black money, the tax rates should be reasonable enough which can be paid without suffering excessive pain. The present tax rates of 77.25% is highly unreasonable and deters the taxpayers to bring/ declare income of the nature described u/ss 68 to 69D in the return of income as contemplated in Proviso to section 271AAC (1). Such discouragement to compliance to section 115BBE read with Proviso to section 271AAC(1) results in manipulations as described above and increases cost of litigation and engages the Government machinery in fruitless and endless chase.
8. The punishment:
Where tax incidence is reasonable, the consequence of non-compliance should be heavy. Under the present provisions of section 115BBE and section 271AAC, the tax incidence is very high whereas punishment for non-compliance is very low i.e. only 10% of the tax payable u/s 115BBE which in effect is 6% of deemed income assessed u/s 68 to 69D. It is very sincerely submitted that the tax incidence itself pushes back the taxpayers from utilizing the window of section 115BBE. The penal provisions of section 271AAC become inconsequential. On the other hand, the philosophy of compliance should be tax incidence should be reasonable and penal provisions for non-compliance should be very heavy.
9. The proposal for amendment:
It is submitted that the tax rate u/s 115BBE should be reduced to 30% (plus surcharge and education cess) which was existing prior to amendment by Taxation Laws (Second Amendment) Act, 2016. On the other hand, the penalty u/s 271AAC for addition of deemed income u/ss 68 to 69D should be enhanced to 45% of deemed income (as against 10% of tax, levied u/s 115BBE, under the present provision of section 271AAC), or 150% of tax levied u/s 115BBE as considered appropriate.
Reasonable tax rate will encourage the taxpayers who has unaccounted receipt/ income/ expenditure /investment taxable u/ss 68 to 69D to declare the same in the return of income and pay maximum margin of rate of 30% (plus surcharge and education cess). The heavy penalty u/s 271AAC will deter him in adopting any manipulative arrangements for bringing unaccounted income/receipt in the books.