Taxation of Unexplained Incomes : Clause 195 of Income Tax Bill, 2025 Vs. Section 115BBE of Income-tax Act, 1961

Clause 195 Tax on income referred to in section 102 or 103 or 104 or 105 or 106.

Income Tax Bill, 2025

Introduction

Clause 195 of the Income Tax Bill, 2025 and Section 115BBE of the Income-tax Act, 1961 represent legislative responses to the challenge of taxing certain classes of income that are susceptible to abuse or evasion. Both provisions are designed to ensure that unexplained, unaccounted, or otherwise suspect incomes-often referred to as "deemed incomes"-are subject to a higher rate of taxation, and that taxpayers cannot mitigate their tax liability on such incomes through deductions, allowances, or set-off of losses. This commentary provides a detailed analysis of Clause 195 of the Income Tax Bill, 2025, examining its structure, legislative purpose, and practical implications, followed by a comprehensive comparative analysis with Section 115BBE of the Income-tax Act, 1961.

Objective and Purpose

The legislative intent behind both Clause 195 and Section 115BBE is rooted in the need to deter tax evasion and to provide a punitive framework for the taxation of incomes that are not satisfactorily explained or are discovered through assessment proceedings. Historically, sections such as 68, 69, 69A, 69B, 69C, and 69D in the Income-tax Act, 1961, provided the substantive basis for taxing unexplained cash credits, investments, money, expenditures, and borrowings. However, prior to the introduction of Section 115BBE (and now Clause 195), such incomes were taxed at the normal rates, which could sometimes be mitigated by deductions or set-off of losses. This created a loophole where taxpayers could benefit from lower effective tax rates even on incomes that lacked legitimate explanation.

In response, Section 115BBE was introduced to impose a higher rate of tax and to deny the benefit of deductions or set-offs on such incomes. The same philosophy underpins Clause 195 of the Income Tax Bill, 2025, albeit with reference to a new set of sections (102, 103, 104, 105, and 106), which likely correspond to the analogous provisions in the new tax code. The overarching policy consideration is to create a strong disincentive against the generation and concealment of unaccounted income, thereby strengthening the integrity of the tax system.

Detailed Analysis of Clause 195 of the Income Tax Bill, 2025

1. Scope and Coverage

Clause 195(1) applies where the total income of an assessee includes any income referred to in sections 102, 103, 104, 105, or 106. These sections, while not detailed in the provided text, can be inferred to relate to unexplained cash credits, investments, money, expenditure, and borrowings, in line with the earlier sections 68, 69, 69A, 69B, 69C, and 69D of the Income-tax Act 1961. The provision covers two scenarios:

• (a) Income reflected in the return: Where the assessee himself discloses such income in the return of income furnished u/s 263 (analogous to section 139 of the 1961 Act).
• (b) Income determined by the Assessing Officer: Where the Assessing Officer determines that such income exists, even if not disclosed by the assessee.

This dual coverage ensures that both voluntary and detected cases of unexplained income are brought within the ambit of the special tax regime.

2. Computation of Tax

The tax payable under Clause 195 is the aggregate of:

1. Tax at 60% on unexplained income: The income referred to in sections 102 to 106 is taxed at a flat rate of 60%, irrespective of the total income or the applicable slab rates.
2. Tax on remaining income: The balance income (i.e., total income minus the unexplained income taxed at special rates) is taxed as per normal rates applicable to the assessee.

This structure ensures a punitive tax burden on unexplained income, while the rest of the income is taxed per the regular regime.

3. Disallowance of Deductions and Set-off

Clause 195(2) categorically states that, notwithstanding anything contained in the Act, no deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed in computing the income referred to in sub-section (1)(a) and (b). This non-obstante clause overrides all other provisions and ensures that the assessee cannot reduce the taxable unexplained income by claiming expenses, allowances, or set-off of losses, whether current or brought forward.

4. Legislative Technique and Drafting

The language of Clause 195 closely mirrors that of Section 115BBE, with updated references to the new sections and procedural provisions (e.g., section 263 instead of section 139 for filing returns). The structure is clear, with two sub-sections dealing with the computation of tax and the disallowance of deductions, respectively. The use of a non-obstante clause in sub-section (2) is a standard legislative technique to give overriding effect to the disallowance provision.

5. Rate of Taxation

The imposition of a 60% tax rate is significantly higher than the normal rates applicable to individuals, HUFs, firms, or companies. This high rate is intended to serve as a deterrent against the introduction of unexplained income into the system, particularly in the context of cash transactions, shell companies, or benami holdings.

Practical Implications

1. Impact on Taxpayers

The practical effect of Clause 195 is to impose a significant tax burden on any income that falls within sections 102 to 106. Taxpayers who are unable to satisfactorily explain the source of certain credits, investments, expenditures, or borrowings will face a 60% tax rate on such amounts, without the ability to reduce the taxable amount through deductions or losses. This can result in substantial tax liabilities, especially in cases involving large unexplained sums.

2. Compliance and Procedural Considerations

Taxpayers must exercise greater diligence in maintaining records and providing satisfactory explanations for all credits, investments, and expenditures. The inability to do so can result in the application of Clause 195, with its attendant penal tax consequences. From a procedural standpoint, the AO is empowered to invoke this provision whenever he determines that the income in question falls within sections 102 to 106.

3. Effect on Tax Administration

For tax authorities, Clause 195 provides a powerful tool to combat tax evasion and to ensure that unaccounted incomes are taxed at a punitive rate. However, it also places a premium on the proper identification and classification of income under the relevant sections, as the application of Clause 195 hinges on such classification.

4. Potential for Litigation

Given the high stakes involved, disputes are likely to arise over whether a particular sum falls within the ambit of sections 102 to 106, and hence within Clause 195. Issues may also arise regarding the denial of deductions or set-offs, especially in complex cases involving multiple sources of income and losses.

Comparative Analysis with Section 115BBE of the Income-tax Act, 1961

1. Structural Similarities

Both Clause 195 and Section 115BBE share a common structure:

• They apply to incomes referred to in specified sections (102-106 in the Bill; 68-69D in the Act).
• They impose a flat tax rate of 60% on such incomes.
• They deny the benefit of deductions, allowances, or set-off of losses against such incomes.
• They apply both to incomes disclosed in the return and those determined by the AO.

2. Differences in Referenced Sections

The primary difference lies in the sections referenced:

• Section 115BBE: Applies to incomes u/ss 68 (unexplained cash credits), 69 (unexplained investments), 69A (unexplained money, bullion, jewelry, etc.), 69B (amount of investments not fully disclosed), 69C (unexplained expenditure), and 69D (amount borrowed or repaid on a hundi).
• Clause 195: Applies to incomes u/ss 102 to 106 of the new Bill. While the precise content of these sections is not provided, it is reasonable to infer that they serve the same function as sections 68 to 69D, i.e., taxing unexplained or unaccounted incomes.

3. Procedural Differences

Section 115BBE refers to income reflected in the return under section 139, whereas Clause 195 refers to the return filed u/s 263. This reflects a change in the numbering and possibly the structure of the new tax code. The underlying principle, however, remains the same: the provision applies regardless of whether the income is self-disclosed or added by the AO.

4. Evolution of the Law

Section 115BBE was inserted by the Finance Act, 2012, effective from 1 April 2013, and has since undergone amendments to increase the tax rate (from 30% to 60%) and to clarify the denial of set-off of losses. The current version is the result of legislative fine-tuning to close loopholes and enhance deterrence. Clause 195, as proposed in the 2025 Bill, represents the transposition of these principles into the new tax code, with updated section references and possibly expanded coverage.

5. Policy Continuity and Legislative Intent

The continuity between Section 115BBE and Clause 195 underscores the enduring policy objective of deterring tax evasion and ensuring that unexplained incomes are subject to punitive taxation. The legislative intent is to maintain a robust framework for taxing such incomes, with minimal opportunity for tax mitigation by the assessee.

6. Potential Areas of Divergence

While the structure and intent of Clause 195 closely mirror those of Section 115BBE, differences may arise depending on the precise language and scope of sections 102 to 106 in the new Bill. If these sections have a broader or narrower ambit than sections 68 to 69D, the practical coverage of Clause 195 could differ. Additionally, any changes in the procedural requirements for assessment or the definition of "return of income" could affect the application of the provision.

7. International Comparison

Many jurisdictions adopt similar approaches to unexplained or unaccounted incomes, often taxing them at higher rates or denying deductions. The Indian approach, as reflected in Section 115BBE and Clause 195, is consistent with international best practices in combating the laundering of unaccounted money through the tax system.

Ambiguities and Issues in Interpretation

Potential ambiguities may arise in the following areas:

• Classification of Income: Whether a particular sum falls within the ambit of the specified sections can be contentious, especially in complex factual scenarios.
• Interaction with Other Provisions: The overriding nature of Clause 195 and Section 115BBE may create conflicts with other provisions, such as those relating to the computation of business income or capital gains.
• Procedural Safeguards: The absence of a requirement for the AO to record reasons or provide an opportunity for explanation before invoking the provision could raise issues of natural justice.
• Constitutional Validity: Although the penal tax rate is justified as a deterrent, challenges could be mounted on grounds of arbitrariness or disproportionate taxation.

Practical Recommendations and Compliance Strategies

Taxpayers should take the following steps to mitigate the risk of adverse consequences under Clause 195 (and Section 115BBE):

• Maintain comprehensive records of all credits, investments, expenditures, and borrowings.
• Ensure that all sources of funds are properly explained and substantiated.
• Seek professional advice in complex cases to ensure compliance with the law.
• Exercise caution in filing returns and in responding to assessment proceedings, particularly where there is a risk of income being classified under the relevant sections.

Conclusion

Clause 195 of the Income Tax Bill, 2025 represents a continuation and reinforcement of the legislative approach embodied in Section 115BBE of the Income-tax Act, 1961. Both provisions serve as powerful tools in the fight against tax evasion, ensuring that unexplained or unaccounted incomes are subject to a punitive rate of taxation and that taxpayers cannot mitigate their liability through deductions or set-offs. While the core structure and intent remain unchanged, the precise scope and application of Clause 195 will depend on the interpretation and implementation of the new sections 102 to 106. Taxpayers and practitioners must remain vigilant in understanding and complying with these provisions, as the consequences of non-compliance are severe and far-reaching.

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Full Text:

Clause 195 Tax on income referred to in section 102 or 103 or 104 or 105 or 106.

 

Dated: 3-5-2025