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

120(1)

Irrespective of anything to the contrary contained in any other provision of this Act, any loss, whether brought forward or otherwise or unabsorbed depreciation, shall not be allowed to be set off against any undisclosed income which is included in the total income of any tax year, consequent to a search conducted under section 247 or a requisition under section 248 or a survey conducted under section 253, not being a survey under section 253(4).

120(2)

In this section, the expression “undisclosed income” for any tax year shall have the meaning assigned to it in section 301.

Explanation

Section Summary:

This section (Section 120) prohibits taxpayers from setting off any losses (whether brought forward or current) or unabsorbed depreciation against undisclosed income that is identified during a search, requisition, or survey conducted by tax authorities. The purpose is to ensure that taxpayers cannot reduce their tax liability on undisclosed income by using legitimate losses or depreciation.

Key Changes:

• New Restriction: Previously, taxpayers could set off losses or unabsorbed depreciation against any income, including undisclosed income. This section now explicitly disallows such set-offs for undisclosed income detected during a search, requisition, or survey.
• Scope of Undisclosed Income: The definition of "undisclosed income" is tied to Section 301, which clarifies what constitutes undisclosed income for tax purposes.

Practical Implications:

• Taxpayers with Undisclosed Income: If undisclosed income is discovered during a search, requisition, or survey, taxpayers cannot reduce their tax liability by setting off losses or unabsorbed depreciation against this income. This increases the tax burden on such income.
• Businesses and Individuals: Businesses or individuals who may have relied on setting off losses against undisclosed income in the past will now face higher tax liabilities if such income is detected during enforcement actions.
• Compliance Burden: Taxpayers must ensure accurate reporting of income to avoid penalties and higher tax liabilities associated with undisclosed income.

Critical Concepts:

• Undisclosed Income: Refers to income that has not been reported or disclosed to the tax authorities. It is defined under Section 301 of the Act.
• Set-off of Losses: The process of reducing taxable income by deducting losses incurred in previous years or unabsorbed depreciation.
• Search, Requisition, and Survey: These are enforcement actions by tax authorities to detect undisclosed income or assets. A search is a detailed inspection, a requisition involves seizing documents or assets, and a survey is an on-site verification.

Compliance Steps:

1. Accurate Reporting: Ensure all income is disclosed in tax returns to avoid classification as "undisclosed income."
2. Maintain Documentation: Keep proper records of losses, depreciation, and income to substantiate claims during audits or enforcement actions.
3. Avoid Undisclosed Income: Take steps to ensure all income is reported and accounted for to prevent penalties and higher tax liabilities.

Examples:

• Scenario 1: A business has ₹10 lakh in undisclosed income discovered during a search. It also has ₹5 lakh in brought-forward losses. Under this section, the business cannot set off the ₹5 lakh loss against the ₹10 lakh undisclosed income. The entire ₹10 lakh will be taxed without any reduction.
• Scenario 2: An individual has ₹2 lakh in unabsorbed depreciation and ₹3 lakh in undisclosed income found during a survey. The individual cannot use the ₹2 lakh depreciation to reduce the taxable amount of the ₹3 lakh undisclosed income. The full ₹3 lakh will be subject to tax.

This section reinforces the importance of transparency and compliance in reporting income, as undisclosed income will now face stricter tax treatment.