60% Tax On Unexplained Income Prospective From April 2017, Not Applicable To AY 2017–18: ITAT Ahmedabad

The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) has dismissed the Department's appeal in a dispute over the applicable tax rate on unexplained income, holding that the enhanced 60% tax under Section 115BBE cannot be applied to Assessment Year 2017–18 and that such a change cannot be made through rectification under Section 154.

Section 115BBE of the Income Tax Act, 1961, imposes a steep penal tax rate on unexplained income, such as cash credits, investments, or assets found during searches or assessments.

Section 154 of the Income Tax Act allows individuals and HUFs to claim exemption from long-term capital gains (LTCG) tax when selling a residential house, provided the gains are reinvested into a new residential property in India.

The bench comprising Judicial Member Siddhartha Nautiyal and Accountant Member Narendra Prasad Sinha observed that once the amendment was held to be prospective, the very basis of the rectification order collapsed.

The bench held that "Thus, a consistent judicial view has emerged that the amended provisions of section 115BBE enhancing the rate of tax to 60% are prospective and do not apply to Assessment Year 2017–18. Once this position is accepted, the very foundation of the rectification order passed under section 154 collapses."

The dispute arose when the assessing officer, while completing reassessment proceedings under Sections 147 read with 144B in the case of an individual assessee, Udayan Mandavia, made an addition of Rs. 1.40 crore under Section 69A and initially taxed it at 30%.

Subsequently, through a rectification order under Section 154 dated 21.10.2024, the officer recomputed the tax at 60% by applying the amended provisions of Section 115BBE introduced by the Taxation Laws (Amendment) Act, 2016.

The assessee challenged this rectification, contending that the issue was debatable, the amendment was prospective, and that no opportunity of hearing was granted.

The Commissioner (Appeals) accepted the assessee's contention and quashed the rectification order, observing that the applicability of the amended rate was subject to judicial interpretation and therefore outside the scope of Section 154. The Department carried the matter in appeal before the Tribunal.

The Tribunal noted that the issue of applicability of the amended provisions of Section 115BBE had already been considered in multiple judicial precedents, including the decision of the Madras High Court in S.M.I.L.E Microfinance Ltd. v. ACIT (2025) 479 ITR 172 /179, wherein it was held that the enhanced rate of 60% is prospective and applicable only to transactions from 01.04.2017 onwards.

It further relied on consistent views taken by various benches of the Tribunal, holding that for Assessment Year 2017–18, the pre-amended rate of 30% would apply.

The bench stated that "the very basis of rectification is the applicability of the amended provisions of section 115BBE enhancing the rate of tax from 30% to 60%. This issue, in our considered view, is not only debatable but also stands substantially settled by judicial precedents in favour of the assessee."

The Tribunal held that since two views were possible and the matter required interpretation of statutory provisions, the issue was clearly debatable and could not be rectified under Section 154, which is limited to mistakes apparent on record.

The bench stated that "the issue of applicability of amended section 115BBE is debatable and beyond the scope of section 154 of the Act and on merits also, the enhanced rate of 60% under section 115BBE is not applicable to the present assessment year i.e. Assessment Year 2017–18."

The bench thus found no infirmity in the order of the CIT(A) and upheld the deletion of the enhanced tax computation, effectively restoring taxation at the pre-amended rate.

Accordingly, the appeal filed by the Department was dismissed.

For Appellant: Sudhakar Verma, Sr. DR

For Respondent: Palak Pavagadhi, AR