Demonetisation and its eEffect on Income Tax

Brief: Demonetization is the act of stripping a currency unit of its status as legal tender. In order to curb and remove the menace of corruption the government has initiated the move of Demonetisation in order to kick start the pursuit of a Corruption Free India with stringent penalty introduced.

INTRODUCTION

Demonetization is the act of stripping a currency unit of its status as legal tender.

After years of watching cash being hoarded and the vulgar consumption of hoarders, the public is gleeful seeing those burglars of society being subject to the stringent penalty of 200%.
On November 8, the Honourable Prime Minister announced an epic movement aiming to combat black money, counterfeit currency notes and corruption by demonetising Rs500 and Rs 1000 notes. All accounts that receive deposits of over Rs 2.5 lakhs between November 9 and December 31 will be investigated.

MAIN BODY

Those dealing with black money need to start thinking of ways of doing business the legitimate way. Traders buying and selling goods/providing services without paying VAT/service tax should obtain VAT/service tax registration and, in due course, obtain GST registration and start doing their business the right way, i.e., pay the due indirect taxes to the government.

Those arguing that not every business can be done through banking channels need to understand that cash is required only when one wants to buy goods and services without paying VAT/service tax. If one is willing to pay the due taxes to the government, there is no bar on doing business through banking channels. Those claiming that India is a cash economy and this move shall dampen economic growth are failing to understand that this step has been taken to contain only tax evaders and not the genuine businessmen.

Evasion of indirect taxes was not the isolated reason for the massive resentment by the sophisticated defalcators however the reason for this displeasure is indeed the income tax levy.

Under section 139 of the Income Tax Act, every person with taxable income is statutorily required to file a return of income on or before the due date. However, only 51.6 million people that is to say a mere 4% of the population – filed income tax returns in 2014-2015.

Of the declarations made by those 51.6 million, nearly 30% are “no income” declarations. Moreover, according to senior officials in the income tax department, only 1% of total declarations are fully scrutinised.

In other words, in a country of 1.25 crore people, the actual number of cases that come under scrutiny is just 3.5 lakh.

As per the current provisions of Law under the Income Tax Act, a return of income would either be summarily processed under section 143(1) to compute the total income or to check for any arithmetical adjustments, disallowances, or inclusion of any additional income not included in computing the total income or  may also be selected for scrutiny under the computer assisted scrutiny selection  under section 143(2) of the Act by the Assessing Officer. Also, if the AO has circumstances to believe that any income chargeable to tax has escaped assessment, a notice can be issued under section 147 to re-assess such income under section 148. The AO can re-open assessments by issuing notices up to 6 years from the end of the assessment year in which the income was first assessable.

In respect of the present penalty provisions, section 271(1)(c) provides for levy of penalty for concealment of income or for furnishing inaccurate particulars of income. Disregarding the present system, the Parliament by way of the Finance Act, 2016 introduced section 270A under the Act and repealed section 271, both with effect from 1 April 2017. The section deals with penalty for underreporting and misreporting of income. The penalty in the event income is ‘underreported’ is 50% of the tax payable on such underreported income, and in case of mis-reporting, the penalty is 200% of the tax on such amount. Hence, penalty for ‘concealment of income’ is effectively replaced by penalty for ‘underreporting’ and ‘misreporting’ of income.

The Supreme Court had held previously in many cases that the burden of proof is on the Department to prove that the assessee had a guilty mind to establish that it concealed income or furnished inaccurate particulars. To overcome this interpretation, an Explanation was introduced in section 271(1)(c) where the burden of proof was imposed on the assessee to establish bona fides and innocence. However, under section 270A, the operative portion of the section (assessed income being more than declared income) is sufficient to levy penalty. However, to establish ‘misreporting’, the burden is cast on the Department to prove the same, as there is no provision similar to Explanation under section 271(1)(c). Going by the above, though mensrea may not be required to be established under law, if the material and evidence with the AO sufficiently points to misreporting on the part of the asseessee that falls within the confines of subsection (9), penalty may be imposed under the Act.

Application of Section 270A to Deposit of Specified Notes

In instances where the above Specified Notes are deposited by the assessee, the liability to establish that it has been generated from an established and bona fide sources depends on facts of the case. Any liability to offer explanation only arises after a return has been filed for the current period (i.e. before 31 July 2017 or 30 September 2017), and if the return is taken up for scrutiny. Any cash deposited in the bank accounts may even form a part of the income which was subject to tax previously or may form part of the funds in the ordinary course of business and which has been deposited in the account, and subsequently offered to tax in the return of income.

Section 273A(1) empowers the Principal Commissioner or Commissioner to grant waiver or reduction from penalty imposed or imposable under section 270A. The waiver or reduction under section 273A(1) can be granted by the Principal Commissioner or Commissioner either on his own motion or otherwise, i.e., on an application made by the taxpayer. The assessee should have, prior to the detection by the AO of the concealment of particulars of income, voluntarily and in good faith, made full and true disclosure of such particulars. He should have also co-operated in any enquiry relating to the assessment of his income and has either paid or made satisfactory arrangements for the payment of any tax or interest payable in consequence of an order passed under the Act. An order accepting or rejecting the application shall be passed within a period of twelve months from the receipt of the application after giving the assessee an opportunity of being heard.

Further, assessee should be cautious while making claims of sources as loans or advances towards property transactions as sections 269SS and 269T prohibits cash transactions in excess of Rs. 20,000 for accepting or advancing loans and deposits or in relation to transfer of an immovable property, whether or not the transfer takes place. Provisions with regard to collection of tax at source under section 206C and quoting of PAN of the buyers have to be borne in mind by bullion traders who make cash sales above specified limits (bullion exceeding Rs. 2,00,000 and jewellery exceeding Rs.5,00,000) and by sellers who receive sale consideration in cash exceeding Rs. 2,00,000 for sale of any goods.

More importantly, attention maybe drawn to section 276C which contains provisions for launching prosecution for wilful attempt to evade tax. The section has been further amended to provide for rigorous imprisonment (between six months to seven years) where the amount sought to be evaded, or tax on under-reported income exceeds Rs. 25,00,000.

Further, as announced by the Revenue Secretary, Rules 114B and 114E (corresponding to Section 285BA of the Act relating to Annual Information Reports) were amended to enable banks to report cash deposits of over Rs. 250,000 (previously Rs. 10,00,000) to the Central Board of Direct Taxes (“CBDT”). It isfurther announced that any cash deposits made from undisclosed sources would attract penalty of 200% of tax payable, even if they are subject to tax at the maximum marginal rate of 30%.

CONCLUSION

The primary point to be noted here is that all cash that is deposited is not definitely income, or for that matter, undisclosed income. However, the onus is largely on the assessee to prove that he has not misreported or suppressed any facts while making deposits of the Specified Notes. At the same time, the Department cannot summarily, and without any cogent reasons, reject the explanations offered by the assessees. It is not an exaggeration to say that this drive is likely to result in prolonged litigation and some degree of inconvenience to the assessees. With reports coming in that notices are already being issued seeking explanation for the sources of cash deposits, we can only hope that the ‘ease of doing business principles’ are emulated even with the Indian residents and assessees.

However, the income tax department, on which falls this herculean task, is pessimistic about whether such a massive investigation is even possible, especially given its manpower crunch.

The demonetisation move means that the income tax department will have to scrutinise a large number of accounts. The Income Tax Department has begun to send notices to those who made deposits at banks that exceeded Rs 2.5 lakh. Hundreds of notices seeking the source of the money were issued after banks reported cases of “unusual or suspicious volumes of cash deposits” since the Centre’s decision to demonetise Rs.500 and Rs.1,000 notes.

Accordingly, in view of the various recent amendments in the law and the excitation of the government it seems that THE CORRUPTION FREE INDIA which was only a castle in the air, this move has earmarked the journey towards this pursuit.