Tax On Undisclosed Source of Income or Black Money

Undisclosed income means the income which is not shown by taxpayer in his income tax return and not paid the taxes on the same. Popularly known as Black Money in India. The objective of the Income Tax department is to bring all the undisclosed sources of income into tax.

Tax on Undisclosed Income (aka Black Money)

Undisclosed sources of income include cash credits, unexplained investments, unexplained money, amounts of investments not fully disclosed in the books of accounts, unexplained expenditure, amount borrowed or repaid on hundi

This document covers

Black Money Vs Undisclosed Source of Income
Undisclosed Sources of Income
Income Tax on Undisclosed Sources of Income

1. Black Money Vs Undisclosed Source of Income

Income Tax Act identified the treatment of 'Black Money' and 'Undisclosed Source of Income' differently under different sections, though both are used interchangeably.

'Black Money': All funds earned through illegal activity and the legally but not disclosed in taxes both domestic and abroad.

Terms that are loosely used in our society that represent 'Black Money' are unaccounted income, black income, dirty money, black wealth, underground wealth, black economy, parallel economy, shadow economy, underground economy or unofficial economy

Black money further classified into the representation of money or advantage that is due to 'Manipulation of Books of Accounts', and "Outside of Books of Accounts" (i.e., hidden).

Manipulation of Books of Accounts

Manipulation of Sales / Receipts
Manipulation of Expenses
Bogus expenses to Foreign entities
Manipulation of the Capital
Manipulation of Closing Stock
Inflation of Capital Expenses

Outside of Books of Accounts

Informal Economy
Parallel Books of Accounts
Unaccounted Assets
Investment in shares of listed companies through dummy route

The Scope of this document is adjusted to cover the 'Undisclosed Sources of Income' from Domestic Activity.

2. Undisclosed Sources of Income

2a. Cash Credits (Section 68)

Where any amount is credited in the books of taxpayer and the taxpayer offers no explanation about the nature and source or the explanation offered is not satisfactory in the opinion of Assessing officer, the amount credited will be treated as income of the taxpayer of that financial year

2b. Unexplained Investments (Section 69)

If the taxpayer has made investments which are not recorded in the books of accounts and the taxpayer offers no explanation or explanation offered is not satisfactory in the opinion of Assessing officer, then the value of the investments will be treated as income of the taxpayer of that financial year

Example: Mr Bharath is an NRI and he has purchased a property in India for rs 1 crore. The source of funds for the purchase of property is his salary earned during the NRI period and accumulated savings. Mr Bharath has not filed his income tax return and he has not responded to the notices sent by the income tax department. In this case, there is a chance that the Income tax officer will treat this investment as unexplained investment and levy taxes.

2c. Unexplained Money (Section 69A)

If the taxpayer is found to be the owner of any money, bullion, jewellery or other valuable articles and the same is not recorded in the books of account and the taxpayer offers no explanation or explanation offered is not satisfactory in the opinion of Assessing officer, then the money and value of items will be treated as income of the taxpayer of that financial year.

Note: Ownership is important and mere possession is not enough

2d. Amount of Investments etc not fully disclosed in the books of accounts (Section 69B)

If the taxpayer has made investments or found to be the owner of any bullion, jewellery or other valuable article and if the Assessing officer finds that the amount spent on making such investments or acquiring such articles exceeds the amount recorded In the books of account maintained by taxpayer and the taxpayer offers no explanation or explanation offered is not satisfactory in the opinion of Assessing officer, then the excess will be treated as income of the taxpayer of that financial year.

2e. Unexplained Expenditure (Section 69C)

If the taxpayer has incurred any expenditure and he offers no explanation about the source of such expenditure or the explanation is unsatisfactory in the opinion of the Assessing officer, then such unexplained expenditure will be treated as income of the taxpayer of that financial year.

Note : Such unexplained expenditure shall not be allowed as deduction under any head of income

2f. Amount borrowed or repaid on hundi (Section 69D)

If the amount is borrowed on hundi or any amount due is repaid other 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 or repaying for the financial year in which the amount was borrowed or repaid.

Note : If any amount borrowed on a hundi has been deemed to be the income of any person, he will not be again liable to be assessed again in repayment of such hundi.

3. Income Tax on Undisclosed Sources of Income

Section 115BBE covers the taxation of undisclosed sources of income.
Undisclosed sources of income i.e., cash credits, unexplained investments, unexplained money, amounts of investments not fully disclosed in the books of accounts, unexplained expenditure, amount borrowed or repaid on hundi are taxable @ 60%. Surcharge @ 25% of tax and education cess of 4% will be levied in addition to tax. The effective rate of tax is 78% on undisclosed sources of income.
No basic exemption or allowance or expenditure will be allowed to the taxpayer in computing the tax under Section 115BE
No Set off of any loss shall be allowable against income