“Decoding recent Income Tax Notices on alleged bogus donations and cash deposits. Understand the implications, response options, and consequences.”
The Income Tax authorities have the power to scrutinise your tax filings for the last 10 years / 3 years (depending on thresholds) based on information obtained by them through various means. These means generally include data from:
- State and Central Statutory Authorities (Property registrations, Corporate Ministry, GST, Customs, etc. departments)
- Banks and Financial institutions reporting specific transactions
- Withholding tax credits and information reported in Annual Information Statements under rules of statement of financial transaction
- Information obtained during Search proceedings (commonly known as ‘Raid’) under section 132 of income tax act.
The data collection, mining and analysis have gotten stronger and quicker thanks to the technological advancements and data sharing within various agencies. Such scrutiny of old years by the tax authorities is commonly known as ‘re-assessment proceedings u/s 148’ of the Income tax act. In last couple of years, the income tax department have initiated many such re-assessment notices to assesses on two grounds:
1. Information of alleged bogus donations made to political parties obtained during search proceedings of political parties
2. Information of cash deposits by customers obtained from co-operative banks during search proceedings of co-operative banks
How does this work and what are the allegations?
Information of alleged bogus donations made to political parties obtained during search proceedings of political parties
The tax department has alleged that certain Registered Unrecognised Political Parties (RUPPs) have taken donations from tax payers via cheque/NEFT/RTGS. Such donations are exempt in the hands of RUPPs and the doner receives deduction under section 80GGB /80GGC of the Income tax act i.e. tax break for both doner and RUPPS. Later, these donations were routed through various entities and then were paid back to the original donors in ‘cash’ with a certain percentage of commission.
Therefore, basis a list of doners received from the RUPPs, the income tax department has issued notices to doners (majorly individual tax payers) to show-cause why re-assessment proceedings should not be initiated and why the said donations should not be considered as bogus and taxed.
Information of cash deposits by customers in co-operative banks during search proceedings of co-operative banks
The tax department during search proceedings of certain co-operative banks have alleged high scale money laundering through ‘hawala’ route using their customer base. The account holders of these banks are provided cash and are asked to deposit this cash in their accounts. This cash is then transferred to another account or withdrawn almost instantly for a certain percentage of commission / fees to be paid in cash to the account holder. The income tax department have obtained a list of account holders and amount of cash deposited by such account holders from the banks during the search proceedings, based on which, proposed re-assessment notices are being issued to the account holders. The account holder has to substantiate to the tax authorities’ source of the cash deposited in the bank account and why the same has not been offered to tax.
What are the options available with the tax-payers to whom such re-assessment notices are issued?
The tax-payer should respond to the notice issued by the tax department by:
1. Providing all the required information, explanations and documents and the reason for disagreements, within the time line prescribed in the notice
2. Challenging the validity of notice received considering time-barring provisions under the tax laws depending on the year
3. Filing an updated return in ITR-U, if possible, by offering income to tax/removing the deduction and pay taxes, interest, etc. in case such transactions are there for recent years and genuineness of such transactions is sceptical.
In case the tax payer is not satisfied by the outcome of the assessment, he/she may file an appeal with the relevant income tax authority within 30 days of outcome of the proceeding or may even consider filing writ petition with jurisdictional high court.
Usually, the notices are received on the registered email ID of the tax-payer. However, it is also important for the tax-payer to log-in to their income tax ‘e-filing’ account and check under ‘E-proceeding’ tab whether any notice has been uploaded by the tax department.
What are the consequences if the allegations are proved to be correct?
In case tax-payer does accept / does not respond to the allegations of tax department, the tax department will finalise the order where by the amount proposed to be taxed will be taxed at slab rate / 30% (approx.) [in cases of unexplained cash credits 60%] and recover the same with applicable interest (of approx. 1% per month). Further, penalty proceedings may also be initiated where the penalty levied could be in the range of 50%-200% of tax evaded.
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Disclaimer: The above information is intended for academic guidance and is to be used for informative purpose only. The said information is not to be considered as an opinion or advice. The aforesaid information is proprietary and privileged and is not to be used, reproduced and disclosed without consent. It is advisable to check with a subject matter expert before concluding on applicability or non-applicability of any provisions. The views expressed are strictly personal.
About the Authors:
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Shravan Suratwala is a Partner at S.M. Suratwala & Co., Chartered Accountants. Shravan has 8+ years of post-qualification professional experience in advisory, litigation and compliance areas of Corporate and International taxation. He has also worked three plus years in the field of Internal and Process Audit while pursuing chartered accountancy course. |
Aditya Jhadav is currently pursuing his Chartered Accountancy course and is currently completing his internship with S.M. Suratwala & Co., Chartered Accountants, Pune. |
The Author can be reached at contact@smsuratwala.com or shravan.suratwala@outlook.com
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