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Facts
The assessee, engaged in selling timber, made a surrender of Rs. 175 Lacs during a survey under Section 133A on 08-09-2016. While the assessee offered this as normal business income, the AO applied a higher tax rate of 60% under Section 115BBE. Additionally, a lump-sum disallowance of Rs. 5 Lacs was made for unsubstantiated expenses.
Held
The Tribunal held that the higher tax rate of 60% under Section 115BBE is not applicable to transactions prior to April 1, 2017, as the survey occurred before this date and before the relevant amendment came into force. It directed the AO to apply normal tax rates to the surrendered income. The Tribunal also reduced the lump-sum disallowance from Rs. 5 Lacs to Rs. 2 Lacs, deleting the remaining Rs. 3 Lacs.
Key Issues
The key legal issues were the applicability of the higher tax rate under Section 115BBE to income surrendered during a survey conducted before the effective date of the amended provision, and the quantum of a lump-sum disallowance of expenses.
Sections Cited
143(3), 133A, 115BBE
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Income Tax Appellate Tribunal, “B” BENCH, CHANDIGARH
Before: HON’BLE SHRI RAJPAL YADAV & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2017-18 arises out of an order of learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [CIT(A)] dated 17-03-2025 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 24-12-2029. The sole grievance of the assessee is application of higher rate of tax u/s AY: 2017-18 115BBE as well as confirmation of addition of Rs.5 Lacs. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under. Proceedings before lower authorities 2.1 The assessee is stated to be engaged in selling timber for past many years. The assessee was subjected to survey u/s 133A on 08- 09-2016 wherein assessee made surrender of Rs.175 Lacs over its normal business income. The surrender was on account of following discrepancies: - No. Head Amount (Rs.) 1. Excess Stock Rs.85.25 Lacs 2. Excess Cash Rs.9.75 Lacs 3. Addition in capital account Rs. 75 Lacs 4. Misc. Income Rs.5 Lacs Total Rs.175 Lacs 2.2 In the return of income, the assessee offered the surrender as normal business income. However, Ld. AO opined that on this surrender, higher rates of tax as prescribed u/s 115BBE would apply. The additional income was to be assessed as unexplained investment, unexplained cash credit and unexplained money. Accordingly, higher tax rate of 60% was applied on this surrender. 2.3 The assessee claimed salary & wages, freight, repair & maintenance expenses aggregating to Rs.38.20 Lacs in support of which the assessee furnished ledger extracts but without supporting bills and vouchers. The Ld. AO made lump sum disallowance of Rs.5 Lacs and framed the assessment.
AY: 2017-18 2.4 The Ld. CIT(A), after due consideration of assessee’s submissions, confirmed the assessment against which the assessee is in further appeal before us. Our findings and Adjudication 3. Upon due consideration of material facts, it could be seen that the assessee has made surrender of Rs.175 Lacs during survey and honored the same in the return of income. The only dispute is with respect to applicable rate of tax. While the assessee has applied normal rates of taxes, Ld. AO has held that the surrender would be subjected to higher tax rate of 60% as prescribed u/s 115BBE. We find that this issue stand covered in assessee’s favor by the decision of Hon’ble High Court of Madras (Madura Bench) in S.M.I.L.E. Microfinance Ltd. vs. ACIT (WP (MD) No.2078 of 2020 dated 19-11- 2024) as under: - 16. The next contention raised by the Learned Senior Counsel is that the under section 115BBE the rate of tax imposed is increased from 30% to 60% and the same is applicable with effect from 01.04.2017 onwards as per the amendment. Therefore, the same is applicable to any transaction from 01.04.2017 onwards and nor prior to any transactions prior to 01.04.2017. Since in the present case all alleged transactions are for the period from 08.11.2016 to 30.12.2016, hence the erstwhile rate of tax 30% only is applicable. But the contention of the revenue is that the amendment was with effect from 01.04.2017 and hence the same is applicable for the financial year 2016-2017 and the assessment year 2017-2018. Further the amendment to section 115BBE is directly related to demonetization which would be evident from objects and reasons for such amendment. In order to consider the same, the objects and reasons of Taxation Laws (Second Amendment) Bill 2016 is extracted hereunder: Press Information Bureau Government of India Ministry of Finance 28-November-2016 15:56 IST Taxation Laws (Second Amendment) Bill, 2016 introduced in Lok Sabha; A scheme namely, ‘Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016’ (PMGKY) proposed in the Bill.
AY: 2017-18 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 Rs.500 and Rs. 1000 [Specified Bank Notes (SBN)] have been recently withdrawn the Reserve Bank of India. Concerns have been raised that some of the existing provisions of the Income tax Act, 1961 (the Act) can possibly be used for concealing black money. The Taxation Laws (Second Amendment) Bill, 2016 (‘the Bill’) has been introduced in the Parliament to amend the provisions of the Act to ensure that defaulting assessees are subjected to tax at a higher rate and stringent penalty provision. Further, in the wake of declaring specified bank notes “as not legal tender”, there have been suggestions from experts that instead of allowing people to find illegal ways of converting their black money into black again, the Government should give them an opportunity to pay taxes with heavy penalty and allow them to come clean so that not only the Government gets additional revenue for undertaking activities for the welfare of the poor but also the remaining part of the declared income legitimately comes into the formal economy. In this backdrop, an alternative Scheme namely, ‘Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016’ (PMGKY) has been proposed in the Bill. The declarant under this regime shall be required to pay tax @ 30% of the undisclosed income, and penalty @10% of the undisclosed income. Further, a surcharge to be called ‘Pradhan Mantri Garib Kalyan Cess’ @33% of tax is also proposed to be levied. In addition to tax, surcharge and penalty (totaling to approximately 50%), the declarant shall have to deposit 25% of undisclosed income in a Deposit Scheme to be notified by the RBI under the ‘Pradhan Mantri Garib Kalyan Deposit Scheme, 2016’. This amount is proposed to be utilised for the schemes of irrigation, housing, toilets, infrastructure, primary education, primary health, livelihood, etc., so that there is justice and equality. An overview of the amendments proposed in the Bill are placed below; xxxxx xxxxx 17. In the aforesaid objects and reasons nowhere it is stated that due to “demonetization” the unaccounted money ought to be charged 60% rate of tax. It only states that step had been taken to curb black money by withdrawing Specified Bank Notes of denomination of Rs.500 and Rs.1000. And also states the people may find illegal ways of converting their black money into black again, hence as per experts advice heavy penalty ought to be levied. From the language of the object “that instead of allowing people to find illegal ways of converting their black money into black again”, it is evident that the government is intended to impose the same for future transactions. Especially the use of word “again” in the object would clearly indicate it is AY: 2017-18 for future transactions i.e. from 01.04.2017. Therefore this Court is of the considered opinion that the revenue is empowered to impose 60% rate of tax for the transactions from 01.04.2017 onwards and not prior to the said cut-off date. And for prior transaction the revenue is empowered to impose only 30% rate of tax. The Hon’ble Court held that the revenue is empowered to impose 60% rate of tax for the transactions from 01-04-2017 onwards and not prior to the said cut-off date and for prior transaction, the revenue is empowered to impose only 30% rate of tax.
Secondly, it emerges that the survey has happened on the assessee on 08-09-2016 whereas notification prescribing higher rate of tax has come into force vide Taxation Laws (Second Amendment) Bill, 2016, notification dated 28-11-2016. In other words, the higher rate has been prescribed later on whereas the surrender has been made for income arising to the assessee prior to that date.
For both the above reasons, the application of higher tax rate of 60% as prescribed u/s 115BBE could not be held to be justified. Therefore, Ld. AO is directed to charge normal rates of tax on surrendered income.
The lumpsum addition of Rs.5 Lacs on account of various expenditure roughly translates into 13% of relevant expenditure as claimed by the assessee. The same is slightly on the higher side. Since the expenses could partially be substantiated by the assessee, we reduce the estimation to Rs.2 Lacs and delete the remaining disallowance of Rs.3 Lacs. The Ld. AO is directed to re-compute the income of the assessee accordingly.