Finance Bill, 2022 proposes to provide that no set-off of any loss shall be allowed against undisclosed income detected during search and survey operations as per new section 79A to be inserted in the Income-tax Act, 1961 (‘Act’).
This proposed amendment is inserted as deterrence against tax evasion.
While presenting the Union Budget 2022, Finance Minister Smt. Sitharaman announced that the Government proposes to provide that no set-off of any loss shall be allowed against undisclosed income detected during search and survey operations.
She pointed out that presently, there is ambiguity regarding set off, of brought forward loss against undisclosed income detected in search operations.
She further added that it has been observed that in many cases where undisclosed income or suppression of sales among others is detected, payment of tax is avoided by setting off, of losses. This proposal would bring certainty and would increase deterrence among tax evaders, stated the minister.
For this purpose, Clause 19 of the Finance Bill, 2022 proposes to amend the Act by inserting a new section 79A in the following manner-
Insertion of new section 79A.
19. After section 79 of the Income tax Act, the following section shall be inserted, namely:–
No set off of losses consequent to search, requisition and survey.
‘79A. Notwithstanding anything contained in this Act, where consequent to a search under section 132 or a requisition under section 132A or a survey under section 133A other than under sub-section (2A) of that section, the total income of any previous year of an assessee includes any undisclosed income, no set off, against such undisclosed income, of any loss, whether brought forward or otherwise, or unabsorbed depreciation under sub-section (2) of section 32, shall be allowed to the assessee under any provision of this Act in computing his total income for such previous year.
Explanation.–For the purposes of this section, the expression “undisclosed income” means,–
(i) any income of the previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132 or a requisition under section 132A or a survey under section 133A other than under sub-section (2A) of that section, which has—
(A) not been recorded on or before the date of search or requisition or survey, as the case may be, in the books of account or other documents maintained in the normal course relating to such previous year; or
(B) not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search or requisition or survey, as the case may be; or
(ii) any income of the previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the previous year which is found to be false and which would not have been found to be so, had the search not been initiated or the survey not been conducted or the requisition not been made.’.
Explaining the provisions of the proposed insertion of section 79A
Clause 19 seeks to insert a new section 79A in the Act, relating to no set-off of losses consequent to search, requisition and survey.
The proposed new section seeks to provide that notwithstanding anything contained in the Act, no set off of losses brought forward, or otherwise, or unabsorbed depreciation under sub-section (2) of section 32 shall be allowed to an assessee while computing his total income in any previous year which includes undisclosed income –
(i) that is found in the course of a search under section 132 or a requisition under section 132A or a survey under section 133A, other than under sub-section (2A) of that section, or
(ii) that is represented, either wholly or partly, by any entry in the books of account in respect of an expense or other documents maintained in the normal course relating to the previous year which is found to be false and would not have been found to be so, had the search not been initiated or the survey not been conducted or the requisition not been made.
The proposed new section further seeks to define the expression “undisclosed income” for the purposes of the said section.
This amendment will take effect from 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.
Rationale of introducing section 79A
The Explanatory Memorandum states the rationale for disallowing or restricting the set-off of loss in search and survey cases.
Chapter VI of the Act deals with aggregation of income and set off or carry forward of loss. In Sections 70-80 of the Act there are specific provisions relating to set off or carry forward and set off of losses while computing the income under various heads and with respect to different classes of persons.
It is noticed that in some cases, assessees claim set off of losses or unabsorbed depreciation, against undisclosed income corresponding to difference in stock, undervaluation of stock, unaccounted cash payment etc. which is detected during the course of search or survey proceedings. Currently there is no provision in the Act to disallow such set-off and no distinction is made between undisclosed income which was detected owing to search & seizure or survey or requisition proceedings and income assessed in scrutiny assessment in the regular course of assessment though for incomes falling in section 68, section 69, section 69B etc., such restriction is there.
Allowing the adjustment of undisclosed income detected as a result of search or requisition or survey against the loss or unabsorbed depreciation is resulting in short levy of tax. The provision of non-adjustment of loss or unabsorbed depreciation against undisclosed income detected as a result of search or requisition or survey would help in ensuring that proper tax is paid on income detected due to a search or survey and also result in increased deterrence against tax evasion.
Therefore, it is proposed to insert a new section 79A in the Act to provide that notwithstanding anything contained in the Act, where consequent to a search initiated under section 132 or a requisition made under section 132A or a survey conducted under section 133A, other than under sub-section (2A) of section 133A, the total income of any previous year of an assessee includes any undisclosed income, no set off, against such undisclosed income, of any loss, whether brought forward or otherwise, or unabsorbed depreciation under sub-section (2) of section 32 shall be allowed to the assessee under any provision of this Act in computing his total income for such previous year.
Further, the term “undisclosed income” is proposed to be defined for the above purpose as–
(i) any income of the previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a search under section 132 or a requisition made under section 132A or a survey conducted under section 133A, other than that conducted under sub-section (2A) of section 133A, which has—
(a) not been recorded on or before the date of search or requisition or survey, in the books of account or other documents maintained in the normal course relating to such previous year; or
(b) not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search or requisition or survey, or
(ii) any income of the previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the previous year which is found to be false and would not have been found to be so, had the search not been initiated or the survey not been conducted or the requisition not been made.
Concluding remarks
There exists section 115BBE which does not allow set-off of loss against undisclosed income made under section 68, section 69, section 69A, section 69B. In this case, undisclosed income is detected by the Assessing Officer in the course of the assessment.
However, there are no provisions in the Act which prohibits the set-off of loss with undisclosed income found during search and survey. The proposed section 79A seeks to prohibit the set-off of loss with such undisclosed income.
There is a fundamental difference between the undisclosed income for the purpose of section 115BBE and section 79A. In the former case, there is no definite or identified source of the undisclosed income but in the latter case, there is a definite source of the undisclosed income. In search or survey case, the source of income is known only it is not recorded in the books and thus it is treated as undisclosed income and still the set-off of losses is restricted. On the contrary, the source itself is not known in the case of taxability under section 115BBE. Thus, in the authors view, prohibiting the set-off of loss against income having a definite source is quite harsh.
These wordings of these provisions are similar to the provisions of section 158BB. Further, the expression ‘non-disclosure of income before the PCCIT/CCIT/PCIT/CIT’, so as to qualify as undisclosed income, is similar to the wordings used in Explanation 5 to section 271(1)(c).
Further, the restriction is applicable to the set-off of any brought forward losses and unabsorbed depreciation under section 32(2).
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