CA Rahul Sureka

Rahul Sureka

Whether cash deposited in bank account could attract penalty under Income tax Act?

On-a-days lot of messages are been circulated on social media that cash deposited in a bank may attract tax and penalty of 200%, I have tried to explain the provisions of Income Tax Act 1961 in this respect.

Article deals with disproportionate cash deposited in a bank account and income declared by the assessee. The Finance Act 2016 has introduce a new regime whereby penalty which was leviable under section 271 (1)(c) of the Income-tax Act (the “Act”) for concealment of particulars of income or furnishing inaccurate particulars of income get replaced by penalty in cases of under reporting and misreporting of income. Penalty section 271 (1) (c) shall not apply to and in relation to any assessment for the assessment  year commencing on or after the 1stday of April, 2017 and subsequent assessment years and penalty be levied under the newly inserted section 270A with effect from 1st April, 2017.

Let us 1st study what the provision of section 270A of the Act.

Penalty for under reporting and misreporting of income.

270A. (1) The Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner may, during the course of any proceedings under this Act, direct that any person who has under-reported his income shall be liable to pay a penalty in addition to tax, if any, on the under-reported income.

(2) A person shall be considered to have under-reported his income, if—

(a) the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143;

(b) the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished;

(c) the income reassessed is greater than the income assessed or reassessed immediately before such reassessment;

(d) the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;

(e) the amount of deemed total income assessed as per the provisions of section 115JB or section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed;

(f) the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;

(g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.

(3) The amount of under-reported income shall be,—

(i) in a case where income has been assessed for the first time,—

(a) if return has been furnished, the difference between the amount of income assessed and the amount of income determined under clause (a) of sub-section (1) of section 143;

(b) in a case where no return has been furnished,—

(A) the amount of income assessed, in the case of a company, firm or local authority; and

(B) the difference between the amount of income assessed and the maximum amount not chargeable to tax, in a case not covered in item (A);

(ii) in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order:

Provided that where under-reported income arises out of determination of deemed total income in accordance with the provisions of section 115JB or section 115JC, the amount of total under-reported income shall be determined in accordance with the following formula—

(A — B) + (C — D)

where,

A = the total income assessed as per the provisions other than the provisions contained in section section 115JB or section 115JC (herein called general provisions);

B = the total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of under-reported income;

C = the total income assessed as per the provisions contained in section 115JB or section 115JC;

D = the total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC been reduced by the amount of under-reported income:

Provided further that where the amount of under-reported income on any issue is considered both under the provisions contained in section 115JB or section 115JC and under general provisions, such amount shall not be reduced from total income assessed while determining the amount under item D.

Explanation.—For the purposes of this section,—

(a) “preceding order” means an order immediately preceding the order during the course of which the penalty under sub-section (1) has been initiated;

(b) in a case where an assessment or reassessment has the effect of reducing the loss declared in the return or converting that loss into income, the amount of under-reported income shall be the difference between the loss claimed and the income or loss, as the case may be, assessed or reassessed.

(4) Subject to the provisions of sub-section (6), where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred to as “preceding year”) and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.

(5) The amount referred to in sub-section (4) shall be deemed to be amount of income under-reported for the preceding year in the following order—

(a) the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and

(b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on.

(6) The under-reported income, for the purposes of this section, shall not include the following, namely:—

(a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;

(b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;

(c) the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;

(d) the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and

(e)the amount of undisclosed income referred to in section 271AAB.

(7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.

(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income.

(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:—

(a) misrepresentation or suppression of facts;

(b) failure to record investments in the books of account;

(c) claim of expenditure not substantiated by any evidence;

(d) recording of any false entry in the books of account;

(e) failure to record any receipt in books of account having a bearing on total income; and

(f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

(10) The tax payable in respect of the under-reported income shall be—

(a) where no return of income has been furnished and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income;

(b) where the total income determined under clause (a) of sub-section (1) of section 143 or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income;

(c) in any other case determined in accordance with the formula—

 (X-Y)
where,
X = the amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and
Y = the amount of tax calculated on the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.

(11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.

(12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the Assessing Officer, the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be.

Analysis

When disproportionate cash deposited in bank account and case falls under any of below discussed clause in such a case penalty u/s 270A of the Act can be leviable for Misreporting of Income and as a results underreporting of income and in such a case penalty is levied at 200% of tax amount. There are several instances, as mentioned above, for misreporting of income out of which in my opinion disproportionate cash deposited in bank account may fall under any of following clauses:

(a) Misrepresentation or suppression of facts; or

(d) Recording of any false entry in the books of account; or

(e) failure to record any receipt in books of account having a bearing on total income;

Let us analysis misrepresentation or suppression of facts; as far as misreporting of facts is concern it implies wrong reporting or misleading assertions about something. As far as suppression of facts is concerned it implies intentional non-disclosure. Thus wherever it is proved that there is any mala fide intention of the assessee for not disclosing any facts or for wrong disclosure, the case would fall within the ambit of misreporting of income. The burden of proving misreporting will be on the assessing officer, penalty for misreporting cannot be automatic unless AO is satisfied about misrepresentation, suppression, failure and falsity on the part of the Assessee. Or

Recording of any false entry in the books of account; where any entry made in books of accounts is false then the related under reporting income shall be on account of misreporting of income (like fake entry passed in books or entry pass in fake name etc). Hence, if person passes entries in his books of accounts which prove to be false and as a results income is underreported then penalty u/s 270A of Act can be imposed. Or

Failure to record any receipt in books of account having a bearing on total income:- where assessee fail to record any receipt in the books of accounts which has bearing on total income of the assessee the penalty u/s 270A of the Act can be leviable. It means if no entries is pass in books of account and assessee found to be receipt of any income or entries is pass but no income has not been offer for tax ( when entries is routed through balance sheet) in such a case penalty u/s 270A of the Act can be levied.

Any person deposit cash in his/her accounts which was disproportionate to his/her income (cases of disproportionate cash may be as under assesseee has never furnished return of income or  furnished income but has shown income below taxable limit and deposit cash 2.50 lakh or more in his/her bank account by 30th December 2016, or has furnished income which is above taxable limit say 10 lakh and deposit 20 lakh in his bank account) in such a case assessing officer may serve him/her a notice under the Act and ask him to give sources of such cash/income. Thereafter, after considering submission of the assessee, assessing officer may propose to impose penalty u/s 270A of the Act if case fall under any of under mentioned cases:

(a) Misrepresentation or suppression of facts; or (d) Recording of any false entry in the books of account; (e) failure to record any receipt in books of account having a bearing on total income;

Therefore, in order to safeguard against tax and penalty of 200% assessee should make sure that he has not Misrepresented or suppressed of any facts related to income or has correctly record entries in books of account (I;e receipt of income is shown as income and also offer for tax while filing return of income) and not shown as balance sheet items and skipped while filing return of income.

Article is written by CA. Rahul Sureka, FCA, CS, LLB and can be reached at rahulsureka28@gmail.com

Disclaimer: This articles is for general guidance on matters of interest only and does not constitute any professional advice from us. One should not act upon the information contained in this article without obtaining specific professional advice. Further, no representation or warranty (expressed or implied) is given as to the accuracy or completeness of the information contained in this article.

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37 responses to “200% Income tax penalty on Cash deposit in bank account”

  1. shiv says:

    deaf sir iam govt.employee since2006.and earn 2600000 since 2006. out of which 800000 is my saving in elss and ulip plan.500000 is my expendicture since job.rest of money is in cash at home.now i have to change it. is it white or black?can i deposite it in bank without penLity please reply soon. thanks

  2. shiv says:

    deaf sir iam govt.employee since2006.and earn 2600000 since 2006. out of which 800000 is my saving in elss and ulip plan.500000 is my expendicture since job.rest of money is in cash at home.now i have to change it. is it white or black?can i deposite it in bank without penLity. thanks

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