2025 (6) TMI 66 - AT - Income Tax

AO cannot apply section 115BBE without first establishing addition under proper charging provision

ITAT Delhi held that AO erred in applying section 115BBE without first establishing the addition under any proper charging provision. The tribunal found ... Unexplained unaccounted income - chargeable to tax u/s 115BBE - HELD THAT:- It is crystal clear that before application of provisions of section 115BBE the income must fall within the parameter of the sections so specified. However, in this case, the Assessing Officer has failed to pin point any such charging section under which the proposed addition was made. Section 155BBE falls within the chapter-XII of the Income Tax Act, 1961 and is basically concerned with determination of tax in special cases. AO has fallen into palpable error in jumping to section 115BBE without initially fixing the addition under any of the charging provision. The legal infirmity in the assessment order was pointed out to the Ld. Sr. DR but she could not elucidate about what should be the proper charging provision to bring the sum of Rs. 1 Crore as income. Order of the ld. CIT(A) is mainly reiterating the order of the AO and he has glossed over the fact that in absence of charging provision is fatal to the finality of the assessment order. Accordingly, the entire addition is directed to be deleted. Since, we have deleted the addition in entirety, we need not answer about the applicability of section 115BBE of the Act at this juncture. Accordingly, the appeal of the assessee is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the addition of Rs. 1 crore made by the Assessing Officer (AO) as unexplained unaccounted income, and taxed under section 115BBE of the Income Tax Act, 1961, was justified in law and on facts.(b) Whether the AO and the National Faceless Appeal Centre (NFAC) were correct in concluding that the assessee did not carry on any genuine business and that the cash deposit represented unaccounted money.(c) Whether the assessee was required to maintain books of account or other records under the provisions of section 44AD, given that the business income was declared on presumptive basis.(d) Whether the interest under section 234B was correctly levied by the AO.(e) Whether the tax rate of 60% under section 115BBE was applicable to the cash deposit made on 23.11.2016, which was prior to 1.4.2017, or the tax should have been levied at the normal rate of 30%.(f) Whether the addition was properly made in the absence of identification of any charging provision under the Act prior to invoking section 115BBE.2. ISSUE-WISE DETAILED ANALYSISIssue (a) & (b): Legitimacy of addition of Rs. 1 crore as unexplained income and existence of businessThe legal framework revolves around the provisions of the Income Tax Act, particularly section 44AD which provides for presumptive taxation for eligible businesses, and section 115BBE which deals with taxation of unexplained income under sections 68 to 69D. The AO made an addition of Rs. 1 crore treating it as unexplained cash deposit and taxable under section 115BBE. The NFAC confirmed the addition, holding that the assessee had fabricated the story of business and failed to substantiate the source of cash.The AO's reasoning was based on eight criteria (para 9.1 of the assessment order) questioning the physical existence of business, official premises, registration, employees, strategic planning, dealers/agents, mode of transportation, and correlation of income to expenses. The AO concluded no business was conducted and thus the cash deposit was unaccounted income.The assessee rebutted these points by demonstrating continuity of business over multiple years, filing returns under section 44AD on presumptive basis, and furnishing details of gross receipts, expenses, and bank transactions. It was argued that the business was carried out from residential premises and only cash sales were feasible, especially during demonetization. The assessee contended that under section 44AD, maintenance of detailed books of account was not mandatory, and the AO's objections were irrelevant.The Tribunal noted that the assessee had declared business income consistently under section 44AD for preceding and succeeding years, with turnover below Rs. 2 crore, satisfying eligibility criteria. The assessee's bank account showed the cash deposit was part of gross receipts and expenses were incurred and reflected in bank statements. The AO failed to produce concrete evidence disproving the business existence or showing fabrication.The Tribunal observed that the AO's approach was arbitrary and ignored the statutory framework of presumptive taxation, which does not require maintenance of detailed records or physical office. The AO's reliance on absence of physical infrastructure and registration was misplaced given the nature and scale of the business. The NFAC's confirmation of addition was also based on irrelevant considerations, such as the form of currency notes deposited during demonetization, which did not negate the business income declared.Accordingly, the Tribunal concluded that the addition of Rs. 1 crore as unexplained income was not sustainable as the assessee had sufficiently explained the source and nature of the income under the statutory provisions.Issue (c): Applicability of section 44AD and requirement of books of accountSection 44AD provides for presumptive taxation where eligible assessees engaged in eligible businesses may declare income at a prescribed rate (8% in this case) of gross receipts or turnover, and are not required to maintain detailed books of account under section 44AA(2)(iv). The assessee relied on this provision, asserting that the business income was declared on presumptive basis and no further records were mandatory.The Tribunal examined the interplay between sections 44AD, 44AA, and 44AB, and found that the assessee was eligible and had complied with the conditions for presumptive taxation. The AO's insistence on physical evidence and detailed documentation was contrary to the legislative intent behind section 44AD. The Tribunal held that the assessee was entitled to the benefit of presumptive taxation and the AO's objections on lack of records were legally untenable.Issue (d): Levy of interest under section 234BThe assessee challenged the levy of interest under section 234B for non-payment of advance tax. However, since the primary addition itself was deleted, the Tribunal did not find it necessary to adjudicate on the interest levy separately.Issue (e): Applicability of tax rate under section 115BBEThe AO and NFAC taxed the addition at 60% under section 115BBE. The assessee contended that the deposit was made on 23.11.2016, prior to the effective date of the higher 60% rate (1.4.2017), and therefore the normal rate of 30% should apply if at all taxable.The Tribunal acknowledged the assessee's reliance on a High Court decision holding that the 60% rate applies only for transactions on or after 1.4.2017, and earlier transactions attract 30% tax. However, since the addition was deleted on the ground of absence of charging provision, the Tribunal did not decide on the applicability of tax rates under section 115BBE.Issue (f): Absence of charging provision for addition prior to invoking section 115BBEThe Tribunal scrutinized the legal validity of the addition made under section 115BBE without first establishing the charging provision under sections 68 to 69D. Section 115BBE prescribes the tax rate on income deemed under those sections but does not itself constitute a charging section.The AO failed to identify any specific charging section under which the addition was initially made. The Tribunal observed that this was a fundamental legal infirmity, as the addition must be grounded on a charging provision before invoking section 115BBE for tax determination. The Senior Departmental Representative could not justify the absence of such identification.The CIT(Appeals) merely reiterated the AO's order without addressing this crucial defect. The Tribunal held that the absence of a charging provision rendered the addition invalid and accordingly deleted the entire addition of Rs. 1 crore.3. SIGNIFICANT HOLDINGSThe Tribunal laid down the following core principles and made key determinations:'It is crystal clear that before application of this provision [section 115BBE], the income must fall within the parameter of the sections so specified. However, in this case, the Assessing Officer has failed to pin point any such charging section under which the proposed addition was made. Section 115BBE falls within the chapter-XII of the Income Tax Act, 1961 and is basically concerned with determination of tax in special cases. The Assessing Officer has fallen into palpable error in jumping to section 115BBE without initially fixing the addition under any of the charging provision.'The Tribunal affirmed that presumptive taxation under section 44AD exempts the assessee from maintaining detailed books of account and that physical presence of office or employees is not a mandatory requirement to prove business existence in such cases.The Tribunal concluded that the AO's and NFAC's findings were based on irrelevant and legally untenable considerations, and the addition of Rs. 1 crore as unexplained income was unsustainable.Accordingly, the Tribunal allowed the appeal, deleted the addition, and refrained from adjudicating on the applicability of section 115BBE tax rates or interest levy due to the primary deletion.