Disallowing the set-off of losses against undisclosed income detected through searches, requisitions, or surveys : Clause 120 of Income Tax Bill, 2025 Vs. Section 79A of Income Tax Act, 1961

Clause 120 No set off of losses against undisclosed income consequent to search, requisition and survey.

Income Tax Bill, 2025

Introduction

Clause 120 of the Income Tax Bill, 2025, introduces a significant provision that restricts the set-off of losses or unabsorbed depreciation against undisclosed income that arises due to a search, requisition, or survey. This clause is a part of the broader legislative framework aimed at curbing tax evasion and ensuring that undisclosed incomes are taxed appropriately without the benefit of offsetting them with losses. The provision is critical in the context of tax administration and compliance, as it directly impacts the computation of total income for tax purposes following specific investigative actions by tax authorities.

Objective and Purpose

The legislative intent behind Clause 120 is to tighten the noose on tax evasion by disallowing the set-off of losses against undisclosed income detected through searches, requisitions, or surveys. This measure aims to ensure that individuals and entities cannot diminish their tax liabilities by using losses or unabsorbed depreciation to offset income that was previously concealed from tax authorities. The policy consideration is to enhance revenue collection by taxing undisclosed income at full rates without any deductions, thereby discouraging the practice of hiding income and assets.

Detailed Analysis of Clause 120 of the Income Tax Bill, 2025

Clause 120 operates irrespective of any other provision in the Income Tax Bill, 2025, underscoring its overriding nature. It explicitly states that no loss, whether carried forward or otherwise, and no unabsorbed depreciation shall be allowed to be set off against undisclosed income included in the total income of a tax year. The clause is applicable when such undisclosed income results from a search u/s 247, a requisition u/s 248, or a survey conducted u/s 253, excluding surveys u/s 253(4).

The term "undisclosed income" is defined in section 301, which is crucial for the interpretation and application of Clause 120. The definition is expected to encompass income not reported in the regular course of business and detected only through tax authority interventions. This broad definition ensures that any income not previously disclosed to tax authorities is subject to the restrictions imposed by Clause 120.

Comparative Analysis with Section 79A of the Income Tax Act, 1961

Section 79A of the Income Tax Act, 1961, introduced by the Finance Act, 2022, contains similar provisions to Clause 120, with minor differences in language and structure. Both provisions aim to disallow the set-off of losses or unabsorbed depreciation against undisclosed income resulting from searches, requisitions, or surveys.

However, there are notable distinctions:

1. Scope and Definitions: While both provisions target undisclosed income, Section 79A provides a detailed explanation of what constitutes undisclosed income, including income represented by money, bullion, jewellery, or false entries in books of account. Clause 120, on the other hand, refers to section 301 for the definition, which may have different parameters.

2. Overriding Effect: Both provisions have an overriding effect, but Clause 120 explicitly states it operates irrespective of any other provision in the Act, emphasizing its supremacy in the context of undisclosed income.

3. Legislative Evolution: Section 79A was a recent addition to the Income Tax Act, 1961, reflecting evolving strategies to combat tax evasion. Clause 120 builds on this by incorporating similar restrictions into the new legislative framework of the Income Tax Bill, 2025.

Practical Implications

The practical implications of Clause 120 are significant for taxpayers subject to searches, requisitions, or surveys.

Businesses and individuals will need to maintain comprehensive and accurate financial records to avoid the classification of income as undisclosed. The inability to set off losses against such income means that taxpayers could face higher tax liabilities, emphasizing the importance of compliance and transparency in financial reporting.

For tax professionals and advisors, Clause 120 necessitates a reevaluation of tax planning strategies, particularly for clients at risk of being subjected to tax authority investigations. The provision also implies a potential increase in litigation, as taxpayers may challenge the classification of income as undisclosed or the applicability of the clause in specific circumstances.

Conclusion

Clause 120 of the Income Tax Bill, 2025, represents a continuation of efforts to prevent tax evasion by disallowing the set-off of losses against undisclosed income. Its implementation will have far-reaching effects on taxpayers, necessitating increased diligence in financial reporting and compliance. The provision aligns with global trends in tax legislation aimed at increasing transparency and accountability. As the Bill progresses through legislative processes, further clarifications and potential amendments may arise, especially concerning the definition and scope of undisclosed income.

Full Text:

Clause 120 No set off of losses against undisclosed income consequent to search, requisition and survey.

Dated: 14-4-2025