Section 115BBE and demonetisation: Penal taxation impeding settling of disputes?

Introduction of section 115BBE and amendments

  1. Section 115BBE of the Income-tax Act, 1961 (the “Act”) contains special provisions for taxation of cash credits, unexplained money, investments etc. It was introduced w.e.f. Financial Year 2012-13 onwards. Prior to introduction of this section, such incomes were subject to tax as per the tax rate applicable to the assessee and in case of individuals, HUF, etc., no tax was levied up to the basic exemption limit.

  2. As per the Memorandum explaining the provisions of Finance Bill, 2012, the section sought to curb the practice of laundering of unaccounted money by taking advantage of the basic exemption limit. Hence, in sub-section (1) of section 115BBE, it was provided that unexplained credits, money, investment, expenditure, etc., which would be deemed as income under sections 68, 69, 69A, 69B, 69C or 69D (the “Deemed Unexplained Incomes”), would be taxed at a flat rate of 30% (plus surcharge and cess as applicable).

  3. Sub-section (2) of this section provided that no expenditure or allowance shall be allowed to be deducted from such incomes, thereby eliminating the possibility of assessees claiming deductions so as to reduce their taxable unexplained incomes. However, what the Government failed to consider was to prohibit set off of losses against the Deemed Unexplained Incomes.

  4. In order to tighten the provisions of section 115BBE, Finance Act, 2016 amended sub-section (2) further w.e.f 1st April 2017 (i.e. from Financial Year 2016-17) to provide that no set off of loss would be permitted against the Deemed Unexplained Incomes. Though this amendment was in line with the object of introducing section 115BBE i.e. to tax full unexplained incomes at the maximum marginal rate, certain overzealous revenue officers started denying set off of losses for assessment years even prior to this amendment took effect. In one such case before the Kerala High Court pertaining to Assessment Year 2013-14 where the Principal Commissioner, in exercise of powers under section 263 of the Act, revised the assessment order on the ground that set off of brought forward loss against income under section 68 of the Act was incorrect, the High Court held that amendment brought in section 115BBE(2) by Finance Act, 2016 whereby set off of losses against income under section 68 was denied, would be effective from 1st April 2017, and therefore, for Assessment Year 2013-14, there was no bar with respect to allowing set off of carried forward unabsorbed depreciation on fixed assets against such income under section 681. A similar view was taken by the Jaipur2and Chandigarh3benches of the Income Tax Appellate Tribunal.

  5. Considering the inconsistent approach being adopted by Assessing Officers regarding set off of losses against the Deemed Unexplained Incomes, the Central Board of Direct Taxes (the “CBDT”), in its Circular No. 11/ 2019 dated 19th June 2019, acknowledged that the “pre-amended provision of section 115BBE of the Act did not convey the intention that losses shall not be allowed to be set-off against income referred to in section 115BBE of the Act and hence, the amendment was made vide the Finance Act, 2016”. However, since this amendment was specifically inserted w.e.f 1st April 2017, the CBDT clarified that an assessee would be entitled to claim set off of loss against incomes referred to in section 115BBE till Assessment Year 2016-17. Thus, a controversy which could have been averted with slightly more assiduousness at the time of drafting and introducing section 115BBE into the Act was put to rest, albeit after loss of precious judicial time.

Demonetisation and further amendment of section 115BBE

  1. The most prominent amendment in section 115BBE came later in the year 2016 in the aftermath of the demonetisation of high denomination currency notes (“HDNs”) w.e.f. 9th November 2016. After announcement of demonetisation of HDNs, sections of the media reported that unscrupulous persons were employing dubious ways of converting their black money into white. Apart from illegally getting HDNs exchanged with valid currency notes for a commission, assessees found out that they could even deposit HDNs in their bank accounts, offer the amount represented by HDNs as income, pay tax @ 30% and enjoy the balance 70%! Even if an assessee could not substantiate the source of income for the cash deposit, the fact that he had paid tax at the applicable rate on the same was sufficient to resist any further tax-scrutiny in respect of the same.

  2. Acknowledging that the existing provisions of the Act could possibly be used for concealing black money, the Government amended the Act by introducing the Taxation Laws (Second Amendment) Bill, 2016. The Bill was purportedly introduced “to plug these loopholes as early as possible so as to prevent misuse of the provisions”4. With a view to visit defaulting assessees to tax at a higher rate and stringent penalty provision, section 115BBE was amended to provide that the Deemed Unexplained Incomes, whether suo motu reflected by the assessee in his return of income or determined by the Assessing Officer during assessment, would be subject to tax at the rate of 60% and surcharge of 25% thereon & applicable cess. By the Taxation Laws (Second Amendment) Bill, 2016, section 271AAC was also introduced as per which penalty for additions made by the Assessing Officer towards the Deemed Unexplained Incomes would be leviable at the rate of 10% of the tax payable under section 115BBE.

  3. After the above amendment, section 115BBE(1) of the Act read as under:

“115BBE. Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D.

(1) Where the total income of an assessee,—

(a) includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished under section 139; or

(b) determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (a),

the income-tax payable shall be the aggregate of—

(i) the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate of sixty per cent.; and

(ii) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i).”

  1. What this amendment has done is that even if an assessee suo motu reflects any income under sections 68, 69, 69A, 69B, 69C or 69D in his return of income, he would still be liable to pay tax at the rate of 60% on the amount and 25% surcharge. This was done to negate the ingenious advice that the assessees were receiving to deposit their otherwise unsubstantiated HDNs in bank accounts, offer the same as income even under sections 68/ 69/ 69A/ 69B/ 69C/ 69D, pay tax @ 30% and enjoy the balance. After the amendment, a sum motu reflection in assessee’s return of income as above would result in an outflow of 77.25% (including tax, surcharge and cess) whereas any income determined by the Assessing Officer under sections 68, 69, 69A, 69B, 69C or 69D would be visited with an aggregate outflow into Government coffers at the rate of 83.25% (including tax, surcharge & cess and penalty under section 271AAC).

  2. However, quite afar from the stated objective of plugging loopholes to prevent misuse of existing provisions in the aftermath of demonetisation of HDNs, the amendment in fact had no correlation with demonetisation or additions made as a result of unsubstantiated cash deposits in the form of HDNs.

  3. What this amendment did under the garb of plugging loopholes was only increase the tax rate for certain types of incomes/ additions; it had no correlation with the purported misuse of the provisions of the Act which the amendment sought to address. This amendment by the Taxation Laws (Second Amendment) Act, 2016 was made applicable from 1st April 2017 i.e. Financial Year 2016-17 onwards. In other words, the higher tax rate is applicable even for pre-demonetisation period from 1st April 2016 to 8th November 2016. It would cover additions which have no correlation with unsubstantiated deposits of HDNs. It covers in its sweep all additions that an Assessing Officer may make upon rejecting the explanation offered by an assessee regarding the source and genuineness of a credit in the books, loans, identities of donors/ lenders/ payers, unexplained expenditure/ investments, amounts borrowed or repaid on hundi. The amendment, in other words, is retroactive.

Rule that assessment be in accordance with law existing on first day of financial year given a go-by

  1. It is quite settled that the Act, as it stands amended on the first day of April of any financial year applies to the assessments of that year and any amendments which come into force after that date do not apply to the assessment for that year. The Supreme Court, in the case of Karimtharuvi Tea Estate Ltd. v. State of Kerala [1966] 60 ITR 262 (SC), observed as under:

“Now, it is well-settled that the Income-tax Act, as it stands amended on the first day of April of any financial year must apply to the assessments of that year. Any amendments in the Act which come into, force after the first day of April of a financial year, would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force.”

  1. However, the Taxation Laws (Second Amendment) Act, 2016 which received Presidential assent on 15th December 2016 has altered the tax rate for the Deemed Unexplained Incomes from 1st April 2016 onwards. Though the power of the legislature to amend the provisions of a taxing statute retrospectively or to give effect to provisions retroactively cannot be doubted, this can be said to be in violation of the principle enunciated by the Supreme Court in Karimtharuvi Tea Estate Ltd.(supra). The validity of this amendment to section 115BBE by the Taxation Laws (Second Amendment) Act, 2016 has been challenged before the Rajasthan High Court5. By order dated 6th March 2020, the High Court has issued notice to the Ministry of Finance and as an interim measure directed that no coercive steps shall be taken against the petitioner towards recovery. The Writ Petition is pending for hearing.

Experience with assessments dealing with deposit of HDNs and invocation of section 115BBE

  1. 31st December 2019 was the last date for completion of scrutiny assessments for Financial Year 2016-17 i.e. the financial year in which HDNs were demonetised and contained a demonetisation window6for deposit of HDNs in bank accounts. The ITR forms prescribed by the CBDT required assessees to furnish details of cash deposited by assessees in each of their bank accounts in the demonetisation window. On 31st January 2017, the Income Tax Department launched Operation Clean Moneywith e-verification of large cash deposits made in the demonetisation window as one of its tasks in the initial phases. In the first batch, the Income Tax Department identified 18 lakh persons in whose cases, cash transactions did not appear to be in line with the tax payer’s profile7.

  2. In order to aid Assessing Officers in carrying out verification of deposit of HDNs by assessees and evaluating the explanations furnished by assessees in this regard, the CBDT issued a verification checklist8and instructions9. For the use by the Assessing Officers, the CBDT even issued Standard Operating Procedures10. It also issued an internal guidance note11and enabled a tab called “Cash Transactions 2016” in the e-filing account of assessees to facilitate faceless responses to tax queries pertaining to cash deposits during the demonetisation window. All these steps were taken so that Assessing Officers could complete assessments with issues arising from deposit of HDNs in a fair and objective manner. However, the experience of assessees undergoing such assessments has been far from satisfactory.

  3. Scrutiny assessments for the Financial Year 2016-17 were concluded by 31st December 2019. It has been the experience of tax professionals that during these scrutiny assessments, Assessing Officers have obtained details of cash deposited in the pre-demonetisation period, in earlier financial years during the period corresponding to the demonetisation window, details of cash sales, cash deposits and withdrawals during different periods etc. strictly in line with the letter of the Verification checklist dated 9th August 2019. However, it has been the common grievance of tax professionals and assessees that in many cases, explanations and evidence furnished by assessees to substantiate deposit of HDNs in their bank accounts were rejected and/ or not considered and additions were made. In some cases, additions were made without granting an opportunity of personal hearing to the assessee. In some cases, the explanation of the assessees that the amount represented by cash deposits being already reflected in the return of income as sales and offered to tax was not only rejected but no corresponding downward adjustment to sales was made despite adding the same amount as income under section 68, leading not only to double taxation but taxation at the absurd rate of 105%12by taking recourse to section 115BBE.

  4. In one Writ Petition before the Madras High Court13involving a challenge to an assessment order making additions in respect of cash deposited by the assessee in the demonetisation window, the High Court while setting aside an assessment order observed as under:

    1. “The Government of India has introduced E-Governance for conduct of assessment proceedings electronically. It is a laudable steps taken by the Income-tax Department to pave way for an objective assessment without human interaction. At the same time, such proceedings can lead to erroneous assessment if officers are not able to understand the transactions and statement of accounts of an assessee without a personal hearing. The respondent should have to be therefore at least called for an explanation in writing before proceeding to conclude that the amount collected by the petitioner was unusual.

    2. In my view, the petitioner has prima facie demonstrated that the assessment proceeding has resulted in distorted conclusion on facts that amount collected by the petitioner during the period was huge and remained unexplained by the petitioner and therefore same was liable to be treated as unaccounted money in the hands of the petitioner under section 69A of the Income-tax Act, 1961. Therefore, the impugned order making the petitioner liable to tax at the maximum marginal rate of tax by invoking Section 115BBE of the Income-tax Act, 1961 placing reliance on the decision of the Honourable Supreme Court in Smt. Shrilekha Banerjee v. CIT, 1964 AIR SC 697 appears to be misplaced.

    3. Since the assessment proceedings no longer involve human interaction and is based on records alone, the assessment proceeding should have commenced much earlier so that before passing assessment order, the respondent assessing officer could have come to a definite conclusion on facts after fully understanding the nature of business of the petitioner. It appears that the return of income was filed by the petitioner on 02-11-2017. However, the assessment proceeding commenced much later towards the end of the period prescribed under section 153 of the Income-tax Act, 1961. In my view, assessment proceeding under the changed scenario would require proper determination of facts by proper exchange and flow of correspondence between the petitioner and the respondent Assessing Officer.”

  5. The months of January and February of 2020 have seen a spate of appeals being filed before the Commissioner (Appeals) against assessment orders making additions in respect of cash deposited in bank accounts in the demonetisation window. Furthermore, since the higher rate of 60% tax prescribed in section 115BBE and 25% surcharge thereon does not differentiate between additions made on account of unsubstantiated deposit of HDNs in bank accounts or the other Deemed Unexplained Incomes, or between cash deposits in the demonetisation window or prior thereto, all additions under sections 68, 69, 69A, 69B, 69C or 69D made by Assessing Officers in scrutiny assessments for Financial Year 2016-17 have been subject to this penal taxation. Obviously, the appellate authorities under the Act cannot go into the question of whether the amendment by the Taxation Laws (Second Amendment) Act, 2016 increasing the rate of tax and surcharge even for the pre-demonetisation part of FY 2016-17 is valid or not. Therefore, the appellate authorities, upon coming to the conclusion that on merits an addition under sections 68, 69, 69A, 69B, 69C or 69D for the pre-demonetisation part of FY 2016-17 is justified, they are very likely to uphold the invocation of section 115BBE also. An assessee aggrieved by the invocation of section 115BBE of the Act to Deemed Unexplained Incomes for the pre-demonetisation part of FY 2016-17 may have to challenge the amendment before the High Court similar to the challenge before the Rajasthan High Court in the case of Deepak Maratha v. UoI, through the Ministry of Finance & Anr

Vivad se Vishwas scheme and Section 115BBE

  1. Encouraged by the success of the indirect tax dispute resolution scheme which saw settling of over 1,89,000 indirect tax cases14, the Union Budget for the fiscal year 2020-21 contained an announcement of a similar scheme for direct tax disputes’ resolution/ settlement. Touted as “No dispute but Trust” scheme, the statute was named the Direct Tax Vivad se Vishwas Act, 2020 (the “VsV Act”) under which inter aliaincome-tax disputes pending as on 31st January 2020 were eligible to be settled. The Government is desperate to see the tax disputes being settled and revenue locked in disputes be released so much so that the CBDT has even informed its officers that their performance in respect of VsV Act would be an important factor in determining their future postings15.

  2. By and large, most scrutiny assessment orders pertaining to Financial Year 2016-17 involving additions towards the Deemed Unexplained Incomes and levying penal tax under section 115BBE of the Act would be eligible under the VsV Act. However, the question is whether assessees would or should opt for the same. With tax disputes being usually contested at the cost of a fraction of the tax involved in the dispute and even lesser effort on part of the taxpayer, time, energy and resources likely to be saved by the taxpayer are unlikely to persuade him to settle his disputes. The success of dispute resolution schemes depends on:

    1. What are the chances of assessees’ success before the appellate authorities; and,

    2. What they would receive in real terms by settling the dispute.

  3. A person is unlikely to settle a tax dispute if he feels that he has a good chance of succeeding before the appellate authorities or that the benefit accruing to him by settling is far less than the benefit he would derive if he were to take a chance and prosecute his appeal. On the other hand, if the assessee feels that the chances of his success are less, he may want to settle the dispute to negate penalty and/ or criminal prosecution.

  4. As per India‘s Annual Economic Survey – 201816, out of the total number of direct tax cases pending by the quarter ending March 2017, litigation initiated by the Income-tax Department at the ITAT and the Supreme Court was 88% while that before the High Courts was 83%. This unambiguously means that statistically the odds of an assessee succeeding in a tax appeal are very high.

  5. In the context of additions towards Deemed Unexplained Incomes for Financial Year 2016-17, an assessee whose explanations and evidence were unreasonably rejected or not considered at all by the Assessing Officer are likely to take a chance at least before the fact finding appellate authorities. Despite pressure from tax officers in this regard17, such assessees may want to pursue their appellate remedies rather than settle the dispute under the VsV Act. Thus, even overzealousness of Assessing Officers in making additions in a premeditated manner may become a roadblock in settling tax disputes under the VsV Act.

  6. One more stumbling block on the road to settling such disputes for Financial Year 2016-17 is that the tax payable by the assessee would be at the rate of 77.25%. In order to settle the dispute under the VsV Act, the assesse would have to pay this amount, being the “disputed tax” as per section 2(1)(j) r/w section 3 of the VsV Act. An assessee may not find the differential of a mere 22.75% sufficient to settle the dispute. It is important to note that the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 for indirect tax disputes resolution provided for payment of 40-70% of the disputed demands which is one of the key differences between the two schemes.

  7. In a given case where indiscriminate invocation of section 115BBE has resulted in double taxation and imposing tax at the rate of 105% (as set out in para 16 above), assessees would be well-advised to not opt for settling the dispute under the VsV Act as it is very likely that the appellate authorities might correct such errors of the Assessing Officer and assessees would get a chance to even contest the additions on merits. This would be a classic example of Government’s failure to reign in accountability on part of the Assessing Officers impeding its own efforts to tackle proliferation in tax litigation.

  8. In a case where an assessment order for Financial Year 2016-17 involves other additions apart from those inviting section 115BBE, an assessee may be constrained to prosecute his challenge to the assessment order as it is not possible for an assessee to avail the VsV Act for certain additions and prosecute the appeal for other additions in the same assessment order18. Thus, even one addition which the assessee may consider as unreasonable and unwarranted may result in him wanting to contest the matter rather than settle it.

  9. Obviously, each case would have to be seen on its own merits before deciding on whether it would be prudent to opt for the VsV Act. However, due to the above reasons, it is unlikely that too many assessment orders involving taxation under section 115BBE especially the ones which suffer from non-application of mind on part of the Assessing Officers or violation of principles of natural justice would be settled by assessees under the VsV Act.


  1. Much of the problem of lakhs of crores of rupees19being locked up in tax disputes lies in the high-pitched assessments that Assessing Officers are used to making with impunity. As famous American lawyer Clarence Darrow humourously said “the trouble with law is lawyers”, in the Indian tax context, it is often said that the real trouble with tax law is tax administration. Unless the tendency of making short-sighted amendments, later amending them to “convey the intention” of the earlier amendments and of making amendments having no nexus with the purpose of amendment as we have seen in the case of section 115BBE of the Act is stopped, it is unlikely that the trend in tax disputes will see an overall decline.

  2. The CBDT may issue directives to its officers to bring all pending disputes under the VsV Act and even link their future postings with their performance in respect of VsV Act, but without addressing the real issues that plague the implementation of progressive schemes such as the VsV Act, rather than earning the vishwasof taxpayers, this will only lead to virodh(dissension)20 from the officers themselves.

  1. Vijaya Hospitality and Resorts Ltd. v. CIT [2020] 419 ITR 322 (Ker.).

  2. ACIT v. Sanjay Bairathi Gems Ltd. [2017] 166 ITD 445 (Jp.).

  3. Famina Knit Fabs v. ACIT [2019] 176 ITD 246 (Chd.).

  4. Para 2 of the Statement of Objects and Reasons of the Taxation Laws (Second Amendment) Bill, 2016.

  5. Deepak Maratha v. UoI, through the Ministry of Finance & Anr,Civil Writ Petition No. 3625/ 2020 – Before the Jodhpur Bench of the Rajasthan High Court.

  6. The period between 9th November 2016 to 30th December 2016 (both days inclusive) when holders of HDNs were permitted to deposit their HDNs in their bank accounts.

  7. Source: Press Release dated 31st January 2017 –

  8. Verification Checklist dated 9th August 2019 (F.No.225/145/2019-ITA-II) – Though marked “Strictly for departmental use”, it is freely available on the web.

  9. Instruction No. 3/ 2017 dated 21st February 2017 and Instruction No. 4/ 2017 dated 3rd March 2017.

  10. SOP issued vide F. No. 225/363/2017/ITA-II dated 15th November 2018 and 3rd March 2019.

  11. Internal Guidance Note issued vide F. No. 225/145/2019/ITA-II dated 13th June 2019.

  12. 30% tax on offering the amount as sales + 75% tax and surcharge by invoking section 115BBE (excluding cess and penalty).

  13. Salem Sree Ramvilas Chit Company (P) Ltd. v. DCIT [2020] 114 492 (Mad.).

  14. Source: Para 126 of the Budget Speech for fiscal year 2020-21.

  15. Office Memorandum dated 13th February 2020.

  16. Chapter 09 “Ease of Doing Business Next Frontier: Timely Justice” – Para 9.24.

  17. It has been reported in the media that assessees have started to feel the pressure from tax officials to withdraw cases and settle the disputes through the scheme – Refer:

  18. FAQ Nos. 11 r/w 14 of CBDT clarification dated 4th March 2020 on the provisions of the VsV Act.

  19. As on the 30th November, 2019, the amount of disputed direct tax arrears is Rs. 9.32 lakh crores – Source: Statement of Objects and Reasons of the Direct Tax Vivad se Vishwas Bill, 2020.

  20. Read Vivad se Vishwas scheme: I-T officials up in arms over CBDT diktat at


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