Punitive Charge of Tax

Section 107 — PUNITIVE CHARGE OF TAX (1961 s. 115BBE SUCCESSOR)

Section 107 is the substantive equivalent of 1961 s. 115BBE. Income deemed under ss. 102 (cash credits), 103 (unexplained investment), 104 (unexplained assets), 105 (unexplained expenditure), and 106 (hundi) is charged at the punitive rate prescribed in s. 195. Currently 60% (substantive — no slab benefit, no basic exemption, no Chapter VIII deductions); plus 25% surcharge on the 60% tax, plus 4% cess. Effective rate ≈ 78%. Closes Chapter VI (Aggregation). Chapter VII (Set-off & Carry-forward) follows.

STATUTORY ARCHITECTURE — DEMONETISATION-ERA HARDENING

Section 115BBE in 1961 originally provided 30% rate. FA 2016 raised it to 60% post-demonetisation as anti-black-money measure. FA 2017 added 25% surcharge specifically on this 60% (not subject to general surcharge regime), making effective tax-rate ~75%. With cess at 4%, ~78%. FA 2018 onwards: NO deductions, NO loss-set-off allowed against this income — the 60% applies on GROSS deemed income. FA 2020 onwards: penalty u/s 271AAC — additional 10% — bringing total liability to ~87% (excluding interest) for non-voluntary disclosures.

CONNECTED PENALTY PROVISIONS

Section 481 (1961 s. 271AAC equivalent): additional penalty of 10% of tax on income deemed under ss. 102-106 — unless such income was VOLUNTARILY disclosed in return AND tax was paid before due date. Section 286 (1961 s. 271AAB equivalent): for search-cases, additional penalty of 30%-60% on undisclosed income discovered in search — even if tax paid. Total demoralising effect: tax (60%) + surcharge (25% × 60% = 15%) + cess (4% × 75% = 3%) + penalty (10%) = 88% effective; for search cases higher.

CASE LAW

PCIT v. Karnataka State Industrial and Infrastructure Development Corporation Ltd (Kar HC) — interest on unexplained income u/s 234A/B/C calculated separately on s. 115BBE income. ITAT (various) — voluntary disclosure of unexplained income and full tax-payment before notice → s. 271AAC penalty avoidable but s. 115BBE rate still applies.

PLANNING NOTES

(i) For ANY discovered unexplained income (post-survey / post-search), evaluate cost of voluntary disclosure (60% + surcharge + cess) vs. fight (additional 10% penalty + interest cost + reputation). Most clients prefer voluntary disclosure. (ii) For closely-held company funding rounds, build robust source documentation IN ADVANCE — s. 102 is the most-litigated and 60%+ punitive rate is unforgiving. (iii) Voluntary disclosure under VsV / DTVSV-equivalent schemes may allow rate reduction — monitor Finance Bill amendments. (iv) Maintain segregated tracking of s. 102-106 income items in computation worksheets — cannot be netted against business losses or other deductions.

CROSS-REFERENCES

• Sections 102-106 — Substantive deeming provisions.
• Section 195 — Punitive rate definition.
• Section 481 — s. 271AAC additional penalty.
• Section 286 — Search-block penalty.