Section 195 of the Income-tax Act, 2025 levies tax at a flat rate of 30% on amounts covered by Sections 102 to 106, which correspond to Sections 68 to 69D of the Income-tax Act, 1961.
Broadly, these provisions deal with:
Section Particulars
102 Unexplained credit
103 Unexplained investment
104 Unexplained asset
105 Unexplained expenditure
106 Amount borrowed or repaid otherwise than through an account payee cheque, bank draft, or prescribed electronic mode
Nature of Sections 102 to 106
A closer examination of Sections 102 to 106 shows that these provisions come into play only when the Assessing Officer examines a transaction and is not satisfied with the explanation offered by the assessee. For example, Section 102 applies where a sum is found credited in the books of account as a loan, trade creditor, share application money, share capital, or share premium and the assessee fails to satisfactorily explain its nature and source. Similarly, Sections 103 and 104 apply where investments or assets are found to be unrecorded or inadequately explained. Section 105 deals with unexplained expenditure, while Section 106 relates to borrowings or repayments made through impermissible modes. In each of these cases, the issue ordinarily arises during assessment proceedings when the Assessing Officer examines the facts and calls upon the assessee to explain the nature and source of such transactions.
Deemed Income Arises Only Upon Determination
Amounts covered by Sections 102 to 106 do not necessarily constitute income by their very nature. They become taxable u/s 195 as income only because the law creates a deeming fiction once the conditions prescribed in those sections are satisfied.
Significantly, these provisions use expressions such as “the Assessing Officer finds”, “assessed”, and “the amount may be deemed to be the income of the assessee”. These expressions indicate that the deeming fiction operates only after a determination is made by the Assessing Officer during assessment proceedings.
The Apparent Conflict
Tax on income referred to in sections 102 to 106.
195. (1) Where the total income of an assessee—
(a) includes any income referred to in section 102 or 103 or 104 or 105 or 106 and reflected in the return of income furnished under section 263; or
(b) determined by the Assessing Officer includes any income referred to in any of the said section 102 or 103 or 104 or 105 or 106, if such income is not covered under clause (a),
the income-tax payable shall be the aggregate of—
(i) income-tax calculated on the income referred to in clauses (a) and (b), at the rate of 60%; and
(ii) income-tax with which the assessee would have been chargeable had his total income been reduced by income referred to in clause (i).
(2) Irrespective of anything contained in this Act, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing his income referred to in sub-section (1)(a) and (b).
The difficulty arises from Section 195(1)(a) above. This provision seeks to levy tax not only on amounts determined by the Assessing Officer under Sections 102 to 106, but also on amounts voluntarily reflected by the assessee in the return of income. This raises an important legal question. If an amount becomes deemed income only after examination and determination by the Assessing Officer, can it be subjected to tax under Section 195 merely because it has been disclosed in the return of income?
Until such determination is made, it may be argued that the amount cannot conclusively be regarded as income falling within Sections 102 to 106. Consequently, the levy of tax under Section 195(1)(a) solely on the basis of a disclosure in the return appears to run ahead of the assessment process contemplated by those provisions may not be valid collection of tax under the law.
Conceptual Issue
The issue becomes more significant because the definition of “income” under Section 2(49) of the Income-tax Act, 2025 does not appear to have been correspondingly amended to expressly accommodate this new mechanism to collect tax on income of the nature referred to in section 195 (1 )a). As a result, a conceptual tension continues to exist between the charging provision in Section 195 and the deeming provisions contained in Sections 102 to 106.
Conclusion
The introduction of Section 195(1)(a) gives rise to an important jurisprudential issue. Can tax be charged on an amount merely because it is disclosed in the return of income, even before it is determined in accordance with Sections 102 to 106 that the amount constitutes deemed income?
The answer to this question will ultimately depend upon judicial interpretation. However, the provision undoubtedly raises a debate as to whether Section 195, in its present form, operates ahead of the assessment process on which the deeming provisions themselves are founded.