ITAT Agra Rules Out Retrospective Levy of Section 115BBE on Pre‑Amendment Disclosure

Background of the Dispute

The case of Mukesh Agarwal Vs ACIT (ITAT Agra) revolves around the applicability of the enhanced tax rate under Section 115BBE of the Income Tax Act 1961 to income surrendered during a survey conducted prior to the amendment date.

A survey under Section 133A was carried out on 31.08.2016 at the assessee’s premises. During this operation, the assessee made a voluntary disclosure of ₹75,00,000, which was bifurcated as:

  • ₹50,00,000 – treated as business receipts
  • ₹25,00,000 – linked to investment in a hospital building then under construction

Subsequently, for A.Y. 2017-18, the assessee filed a return of income on 18.09.2017 declaring total income of ₹88,20,210, in which the entire ₹75,00,000 surrendered during the survey was offered as business income.

The controversy arose when the Assessing Officer (AO) taxed ₹25,00,000 at the special rate prescribed in Section 115BBE (after its amendment), treating it as unexplained investment rather than regular business income.

The CIT(A), Kanpur confirmed this treatment. The assessee carried the matter to the Income Tax Appellate Tribunal (ITAT), Agra Bench, which has now ruled in favour of the assessee.

Assessment Proceedings and AO’s Stand

Selection for Scrutiny

  • Due to the survey under Section 133A conducted on 31.08.2016, the assessee’s case was compulsorily selected for manual scrutiny for A.Y. 2017-18.
  • Statutory notices under Section 143(2) and Section 142(1) were issued and duly complied with.

Disclosure and Treatment by AO

During the assessment, the AO noted that:

  • The assessee had surrendered ₹75,00,000 during survey.
  • Out of this:
    • ₹50,00,000 was treated as business receipts.
    • ₹25,00,000 was stated to relate to the hospital building under construction.

The AO asked the assessee to substantiate that the ₹25,00,000 invested in the hospital building was sourced from business income. According to the AO, satisfactory supporting evidence was not produced to prove the nexus between business receipts and this particular investment.

On this premise, the AO:

  • Considered ₹25,00,000 as income of the nature covered by Section 69 (unexplained investment).
  • Applied the enhanced tax rate under Section 115BBE at 60% to this amount.
  • Treated only ₹50,00,000 as business income taxable at normal rates.

The assessee had originally computed tax at the regular rate (30%) on the entire disclosure.

CIT(A)’s Decision

The assessee challenged the assessment order before the CIT(A). However, the CIT(A) upheld the AO’s action on the following broad lines:

  • Acceptance of the AO’s view that ₹25,00,000 represented unexplained investment.
  • Approval of taxation of this amount under Section 115BBE at the enhanced rate.

Consequently, the assessee’s appeal was dismissed, prompting a further appeal to the ITAT.

Grounds Raised Before ITAT

The assessee’s appeal before the ITAT questioned both the characterisation of income and the applicability of the amended Section 115BBE. Key grounds (paraphrased) included:

  1. **Prospective applicability of amendment to Section 115BBE😗*
    The assessee argued that the disclosure was made on 31.08.2016, while the amendment introducing the enhanced tax rate under Section 115BBE came into force only on 15.12.2016 via the Taxation Laws (Second Amendment) Act, 2016. Hence, the higher rate could not be applied to a disclosure made prior to that date and was applicable only from A.Y. 2018-19.