What are Unexplained Investments?
Section 69 of the Income Tax Act, 1961, states that if an assessee makes investments that are not recorded in their books of account and fails to provide a satisfactory explanation about the source of funds, the Assessing Officer may treat the value of such investments as the assessee’s income for that financial year.
Essential Conditions Under Section 69
Given below are the essential conditions that need to be fulfilled for any income to be treated under Section 69 -
- The assessee has made an investment in the financial year immediately preceding the assessment year.
- The investments are not recorded in the books of accounts if maintained by him for any source of income.
- Either the assessee is unable to furnish an explanation about the nature and source of investments or if the Assessing officer thinks that the explanation offered by him is not satisfactory.
Situations Where Books of Accounts are Not Produced Before AO?
This situation arises when an assessee records investments in their books of accounts and submits financial statements with the income tax return but fails to present the books during assessment.
In such cases, the Assessing Officer (AO) may invoke Section 69, treating the investment as unexplained due to a lack of verification. However, it can be argued that the Balance Sheet and Profit & Loss Account summarize the books of accounts. For tax audit cases, the Tax Audit Report serves as strong evidence that books were properly maintained, audited, and verified by the auditor.
What is the Difference Between Section 68 and Section 69?
The table below summarizes the points of difference between Section 68 and Section 69 -
| Point of Difference |
Section 68 |
Section 69 |
| Record in Books of Account |
The amount should be credited in the books of accounts. If it is not credited, then section 68 will not be applicable. |
The investment should not be recorded in the books of accounts. If it is recorded in the books of accounts then section 69 will not be applicable. |
| Maintenance of books of accounts |
Maintaining books of accounts is compulsory |
Maintaining books of accounts is optional. |
| Explanation to AO |
AO can ask for an explanation only if any sum is credited in the books of accounts. |
AO can ask for an explanation only if investment is not recorded in the books of accounts |
| Applicable Tax Rate |
As per section 115BBE, tax will be calculated @60% tax on such income (+ 25% surcharge + 4% cess in all cases) |
As per section 115BBE, tax will be calculated @60% tax on such income (+ 25% surcharge + 4% cess in all cases) |
| Penalty |
Assessing Officers can initiate penalty only under Section 271AAC, where tax is payable under section 115BBE. Penalty is levied at 10% of the tax payable under section 115BBE. |
Assessing Officers can initiate penalty only under Section 271AAC, where tax is payable under section 115BBE. Penalty is levied at 10% of the tax payable under section 115BBE. |
What is the Burden of Proof Under Section 69?
Section 69 requires the assessee to provide proof of income and provide a proper explanation of the source of such unexplained income. The initial burden is on the assessee to give a reasonable explanation with regards to the investment along with a suitable proof of such investment. If the Assessing Officer rejects the explanation, the burden shifts to the department to prove that the explanation is incorrect or insufficient using additional evidence. It is the right of the assessing officer to frame the opinion if the evidence is sufficient or not.
Opportunity of Being Heard Under Section 69
Section 69 also provides for giving the assessee an opportunity to provide explanation of such undisclosed income before the assessing officer. This opportunity has to be provided before the undisclosed income of the assessee is included in the total income.
Year of Taxability Under Section 69
The phrase “Such financial year” incorporated in Section 69 is important. The amount of unexplained investment will be deemed to be the income of the investor/assessee of the financial year in which the investment has been made.
Splitting of Investment Under Section 69
It can be argued that an unexplained investment may be considered income from previous financial years. For example, if a bank fixed deposit (FD) of ₹1,15,000 was created on the date 03/05/2004, then the assessee may claim that it originates from an earlier FD of ₹1,00,000 dated 04/05/2002.
Section 69A: Unexplained Money
If an assessee is found to own money, bullion, jewelry, or other valuable assets that are not recorded in their books of account and fails to provide a satisfactory explanation for their source, the Assessing Officer may treat the value of these assets as the assessee's income for that financial year.
Section 69B: Amount of Investment Not Fully Disclosed in the Books of Accounts
If an assessee makes an investment or owns bullion, jewelry, or other valuable assets, but the amount recorded in the books is less than the actual investment, the Assessing Officer may treat the difference as the assessee’s deemed income for that financial year.
Section 69C
If an assessee incurs any expenditure during a financial year and fails to provide a satisfactory explanation, or if the Assessing Officer does not accept the explanation, the amount of such expenditure may be treated as the assessee’s deemed income for that year.
Section 115BBE
Until the assessment year 2016-17, unexplained investments or expenditures were taxed at a flat 30%, plus surcharge and cess. During demonetization in November 2016, many individuals deposited old ₹500 and ₹1,000 notes into their bank accounts, paid 30% tax, and legalized their money.
From the assessment year 2017-18, the tax rate increased to 60%, with a 25% surcharge on this tax (15%), bringing the total to 75%. An education cess of 3% on this 75% resulted in a total tax rate of 77.25%.
From the assessment year 2019-20, a 4% health and education cess on 75% raised the total tax rate to 78%.
Section 271AAC: Penalty
Under Section 271AAC, a 10% penalty is imposed on the tax calculated @60% under Section 115BBE. The total tax liability includes:
- Income Tax: 60%
- Surcharge (25% on 60%): 15%
- Health & Education Cess (4% on 75%): 3%
- Penalty under Section 271AAC (10% on 60%): 6%
Total Tax Payable: 84%
Additionally, under Section 115BBE, the assessee cannot claim any deductions or expenses to reduce taxable income.
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