Surrendered Amount Recorded in Audited Books Cannot Be Retrospectively Taxed Under Section 115BBE as Unexplained Investment

By | June 11, 2026
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Surrendered Amount Recorded in Audited Books Cannot Be Retrospectively Taxed Under Section 115BBE as Unexplained Investment

Issue

Whether the Assessing Officer (AO) was justified in treating a surrendered amount of ₹25 lakhs (allocated for hospital building construction) as an “unexplained investment” under Section 69 and taxing it at the higher retrospective rate of 60% under Section 115BBE, when the investment was recorded in audited books of accounts that were neither rejected nor found defective by the AO.

Facts

  • Assessment Year: 2017-18.

  • The Disclosure: During a survey action, the assessee surrendered a total sum of ₹75 lakhs, which comprised ₹50 lakhs as business receipts and ₹25 lakhs allocated toward the construction of a hospital building under the Income Declaration Scheme (IDS), 2016.

  • Tax Return Treatment: The assessee declared the entire surrendered amount of ₹75 lakhs as business income in their return of income.

  • AO’s Reclassification: The Assessing Officer treated the ₹25 lakhs building component as an “unexplained investment” under Section 69. The AO brought it to tax at the higher rate of 60% under Section 115BBE, on the grounds that the assessee failed to conclusively prove that the building investment originated out of normal business receipts.

  • Evidentiary Compliance: Throughout the assessment proceedings, the assessee produced all audited books of accounts, balance sheets, capital accounts, and fixed asset schedules before the AO.

  • No Defect Found: The AO thoroughly examined this documentary evidence but did not point out any defects, discrepancies, or irregularities in the records, nor did he formally reject the assessee’s books of accounts.

Decision

  • Higher Retrospective Tax Inapplicable (In Favor of Assessee): The Court/Tribunal held that since the ₹25 lakhs represented an investment in an ongoing hospital building project that was duly captured in the audited books, and because the full amount was declared under the IDS, there was no legal basis to invoke Section 69.

  • Section 115BBE Addition Deleted: Consequently, there was no occasion for the Revenue to retrospectively apply the stringent, higher tax provisions of Section 115BBE to the surrendered amount.

Key Takeaways

  • Audited Books Protect Against Section 69: For an asset or investment to be deemed “unexplained” under Section 69, it must be completely missing from the taxpayer’s books of accounts. If an investment is clearly recorded in books that the AO fails to reject, the asset cannot be labeled as an unexplained investment.

  • Limits on Retrospective Application of Section 115BBE: The penalizing tax rates introduced under Section 115BBE cannot be applied arbitrarily to voluntary business disclosures or surrenders made during surveys, particularly when the underlying transactions seamlessly integrate into verified business records.

  • Rejection of Books is a Prerequisite: Before an AO disregards a taxpayer’s characterization of surrendered income (e.g., changing business income to unexplained asset investments), they must find specific flaws and formally reject the books of accounts under Section 145(3). Summary additions without identifying accounting defects are legally unsustainable.

IN THE ITAT AGRA BENCH ‘DB’
Mukesh Agarwal
v.
ACIT*
Sunil Kumar Singh, Judicial Member
and S RIFAUR RAHMAN, Accountant Member
IT Appeal No. 142 (Agra) of 2026
[Assessment year 2017-18]
MAY  21, 2026
Deepak Maheshwari, Adv for the Appellant. Harsh Siddharth Gautam, Sr. DR for the Respondent.
ORDER
Sunil Kumar Singh, Judicial Member.- This appeal has been preferred against the impugned order dated 15.01.2026 passed in Appeal No CIT(A)-IV/KNP/10762/2019-20 by the ld Commissioner of Income Tax, Kanpur [hereinafter referred to as the “CIT(A)] u/s. 250(6) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act), for the A.Y. 2017-18, wherein ld CIT(A) has dismissed assessee’s appeal.
2. The brief facts state that the assessee e-filed his return of income on 18.09.2017, declaring total income at Rs. 88,20,210/- for A.Y. 2017-18. A search action u/s. 133A of the Act was carried out in the case of assessee on 31.08.2016. Subsequently, the case was selected for compulsory manual scrutiny due to said survey proceedings. Statutory notices u/s. 143(2) and 142(1) of the Act were issued and served upon the assessee. The assessing officer noticed in the course of assessment proceedings that assessee surrendered income of Rs. 75,00,000/-, which included an amount of Rs. 50,00,000/- in the head of business receipts and an amount of Rs. 25,00,000/- in building construction. Assessee was asked to submit evidence of investment in building construction of Rs 25,00,000/- but the assessee could not give any supporting evidence to show that these were out of his business receipts. Accordingly, the assessing officer subjected the amount of Rs. 25,00,000/- to tax under provisions of section 115BBE @ 60% as against the rate of 30% paid by the assessee.
3. Assessee filed an appeal against the assessment order before ld CIT(A), who dismissed assessee’s appeal, approving the action of assessing officer.
4. Appellant assessee has raised following grounds under this second appeal:
“1. That on the facts and in the circumstances of the case, the learned Assessing Officer erred in invoking section 115BBE of the Income-tax Act, 1961 in respect of the voluntary disclosure made during survey on 31.08.2016, which was prior to the amendment introducing the enhanced rate of tax, rendering the application of section 115BBE legally unsustainable and it will be applicable from A.Y. 2018-19.
2. That the learned Assessing Officer and the learned Commissioner of Income-tax (Appeals) erred in law in applying section 115BBE without recording a valid and independent finding under section 69 of the Act, despite the books of account having been produced, examined, and not rejected.
3. That the authorities below erred in treating the investment of Rs. 25,00,000/-in hospital building as unexplained, ignoring the fact that the investment was duly recorded in the books of account, supported by audited financial statements, and formed part of the regular business activity of the appellant.
4. That the learned Assessing Officer and the learned Commissioner of Income Tax (Appeals) erred in applying the amended provisions of section 115BBE of the Income-tax Act, 1961, brought into force by the Taxation Laws (Second Amendment) Act, 2016 and published in the Official Gazette on 15.12.2016 with the stipulation that it ‘shall come into force at once’, to a disclosure made during survey on 31.08.2016, prior to the coming into force of the amendment, rendering such application contrary to law.
5. That the impugned orders are vitiated for violation of principles of natural justice, as no adverse material or third-party evidence was confronted to the appellant before re-characterising the disclosed income as unexplained or before invoking section 115BBE.
6. That the learned authorities erred in law in re-characterising a voluntary disclosure made during survey proceedings under section 133A as income falling under section 69, even though the disclosure was duly honoured in the return of income and accepted under normal provisions of the Act.
7. That section 115BBE, being a special and penal provision, has been applied mechanically and on presumptions, contrary to settled judicial principles requiring strict interpretation, rendering the impugned action unsustainable in law.
8. The appellant craves for liberty to add fresh ground(s) of appeal and also to amend, alter and modify any of the grounds of appeal.”
5. Perused the records and heard ld representative for the appellant assessee and ld Sr DR for the respondent revenue.
6. The main point for determination, on the basis of aforesaid grounds raised under appeal, is as to whether ld CIT(A) has erred in confirming the action of the assessing officer in subjecting Rs. 25,00,000/- to tax under the provisions of section 115BBE?
7. Ld AR has submitted that during the survey conducted u/s. 133A of the Act on 31.08.2016, appellant, voluntarily disclosed Rs. 75,00,000/- ,under IDS scheme 2016, as income from business but during the course of survey it was sum up that out of this, Rs. 25,00,000/- was declared in the hospital building under construction and balance Rs. 50,00,000/- as income from relevant A.Y. 2017-18, however, the whole income was from business related to A.Y. 2017-18. Appellant assessee also declared his surrendered income in his return for A.Y. 2017-18 as income from business. However, ld A.O. has applied Rs. 50,00,000/- as income from business and Rs. 25,00,000/- from other sources subjecting it to tax u/s. 115BBE. Ld AR has further submitted that section 115BBE was introduced after demonetization with effect from 15.12.2016 after the survey action dated 31.08.2016. Hence, the provisions of section 115BBE cannot be applied in assessee’s case retrospectively.
8. Ld AR has referred order dated 19.11.2024 passed by Hon’ble /Madras High Court in W.P (MD) No. 2078/2020 and WMP (MD) No. 1742/2020 inS.M.I.L.E Microfinance Ltd. v. Asstt. CIT 479 ITR 172 (Madras), wherein it has been held that enhanced rate of tax @ 60% as provided in section 115BBE of the Act could be made applicable only from assessment year 2018-19 onwards and cannot be applied for earlier years. Ld AR has further referred order dated 03.02.2025 passed by the Agra bench of this tribunal in (A.Y. 2017-18), Jai Narayan Maheshwari v. ITO [IT Appeal No. 209 (Agr) of 2023, dated 03.02.2025], wherein, this tribunal has referred and relied S.M.I.L.E Microfinance Ltd. (supra)
9. Ld DR for the respondent revenue has submitted that Rs. 25,00,000/-was not part of assessee’s business income and was unexplained amount. Ld DR submitted that the said addition has rightly been confirmed by the ld CIT(A). Prays to dismiss assessee’s appeal.
10. It is an undisputed fact that assessee declared Rs. 75,00,000/- as income, under IDS scheme 2016, from business on 31.08.2016 when the survey was conducted. According to assessee, he has also declared his surrendered income in his return income in A.Y. 2017-18, as income from business. All audited books of accounts, balance sheet, capital account and fix assets schedule were produced before the assessing officer during the assessment proceedings. The assessing officer examined all documentary evidence produced by assessee and could neither point out any defect in assessee’s books nor rejected assessee’s books of accounts. According to assessee, the said investment of Rs. 25,00,000/- in the hospital building was part of ongoing construction activity and was also duly recorded in the books. In such circumstances, more particularly when the assessee has declared the entire amount of Rs. 75,00,000/-, including the disputed amount of Rs. 25,00,000/-, under IDS 2016, there was no occasion for the assessing officer to subject Rs. 25,00,000/- to tax under the provisions of section 115BBE retrospectively. In such circumstances the proviso of section 115BBE of the Act cannot be applied in the case in hand. The aforesaid point is accordingly determined in positive in favour of the appellant assessee and against the revenue. The appeal is liable to be allowed.
11. In the result, the assessee’s appeal is allowed.