There may be instances where some investments are done in your name, payments of others expenditures done by you, but the source of the funds for these investments/payments for the expenditures are not you at all. Even it is quite common between friends that one friend make the credit card payment of another, you suddenly become the owner of any asset/money received as a gift from your relatives and friends etc.

Have you ever thought of, what will be the consequences in the eyes of income tax law if you are not able to clarify such activities? For e.g. Sunil’s net monthly salary income is Rs. 50,000 only, he has no other source of income. Sunil also holds a credit card with a limit of Rs. 2,00,000. It is found that every month Sunil pays Rs. 70,000 – Rs. 80,000 credit card bills. Surprise!!  how is this possible with Rs. 50,000 of income, payments are plus Rs. 70,000? Yes it is possible for Sunil, this is all because he is a very good friend in nature who gives his credit card to his friends for their personal expenditures and his friends pay him back before the bill amount is due. The mistake of Sunil here is, he doesn’t keep any documents/proofs of such transaction which actually clarifies how the expenses have been met even though his income is less than the incurred expenses.

One of the section of Income Tax law says, if the assessee (here Sunil, the tax payer) has incurred any expenditure and he/she offers no explanation about the sources of such expenditure or part thereof, or the explanation, if any, offered by him is not in the opinion of A.O. (Assessing Officer satisfactory). Finally the amount of income-tax calculated on income (here the expenditure incurred with regards to payment of CC will be treated as deemed income) will be straight 30%.

Let us see one by one the various section under Income Tax Act defining Undisclosed, Non-Satisfactory activities by Tax Payer

Certain transaction of amounts satisfying some conditions under Income Tax Act will be considered as deemed incomes. Thus, such income will be included in the income of the assesse for income tax purpose.

Section 68 – Unexplained Cash Credit: According to section 68 of Income Tax Act 1961, where any sum is found credited in the books of an assessee (who pays taxes) maintained for any previous year, and the assessee is not able to furnish any explanation about the nature and source of such activity to the A.O. (Assessing Officer). This means the Identity of the creditor, the capacity of the creditor to advance money and the genuineness of the transaction is unknown/vague.

Section 69A – Unexplained Money: Where any financial years, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the account, if any maintained by him for any source of income and the assessee offers no explaining about the nature and source of the acquisition.

Section 69B – Unexplained Investments: Where any financial year the assesse has made investment or is found to be the owner of any bullion, jewellery, valuable article and other investments which is has not been fully disclosed in the books of account.

Section 69C – Unexplained Expenditure: Where in any financial year, an assessee has incurred any expenditure and he/she offers no explanation about the sources of such expenditure or part thereof, or the explanation, if any, offered by him is not in the opinion of Assessing Officer satisfactory.

Section 69D – Amount Borrowed or Repaid on Hundi: Where any amount is borrowed on a hundi from, or any amount due thereon is repaid to, any person otherwise than through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the amount aforesaid for the previous year in which the amount was borrowed or repaid, as the case may be :

Provided that, if in any case amount borrowed on hundi has been deemed under the provisions of this section to be the income of any person, such person shall not be liable to be assessed again in respect of such amount under the provisions of this section on repayment of such amount.

Explanation: For the purposes of this section, the amount repaid shall include the amount of interest paid on the amount borrowed.

So what are the repercussions if such activities have been taken place?

Section 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 includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of thirty per cent. ; and
(b) 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 (a).
(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1)

Repercussion of Undisclosed Income, Investment & Expenditure by Tax Payer

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