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CA Akhil Mittal


The demonetization of Indian High Value Currency Notes is creating havoc and sheer chaos in the Indian Markets. Amidst such a scenario, rumours are spreading on imposition of 200% penalty by the Income Tax Department on the cash deposited in banks by the assessee’s.

It has been rumoured and spread vigorously that the 200% penalty shall be imposed on the cash deposits in the bank accounts, thus you need to pay more than your income! This kind of unwarranted interpretations has led to sheer panic among the Indian masses.

The bare reading of Section 270 A divulges the fact the penalty under the newly inserted section 270A (be it 50 % or 200%) can only be levied on difference between assessed income and returned income.

Lets us examine the taxability of the unaccounted cash deposits in bank accounts. Brevity may be the soul of wit, but unfortunately, not of The Income Tax Act, 1961.

It is very pertinent to mention here four very important statements, which are to be analyzed both logically and legally keeping in view the relevant sections of the Income Tax Act’1961.

The statements are as follows.

1. “We would be getting reports of all cash deposited during 10th Nov to 30th 2016 above threshold of Rs. 2.50 lacs in each A/C.”

2. “Income Tax department would do matching of this with income returns filled by the And suitable action may follow.”

3. “If cash amount of above Rs. 10 lacs is deposited in a bank a/c not matching with declared income, same will be treated as tax evasion”

4. “In such case, tax amount plus a penalty of 200% of the tax payable would be levied as per Section 2 70(A) of the income tax Act”

The levy of penalty for concealment or furnishing of inaccurate particulars of income under the erstwhile provisions of Section 271(1)(c) of Income-tax Act 1961 has always been a matter of litigation between the revenue authorities and the taxpayers.

With a view to reduce the litigation and remove the discretion of tax authority, the Finance Act, 2016, w.e.f 01-04-2017 has inserted new provisions in the form of new Sections 270A and 270AA in the Act which replaced the existing provisions of section 271(1)(c).

Imposition of penalty under sections 270A and 270AA will apply to cases pertaining to A.Y. 2017-18 onwards and provisions of section 271(1)(c) will continue to be applicable to all cases up to A.Y. 2016-17.

Under the new scheme, the penalty matters are categorized in two parts —

(1) Under reporting of income and

(2) Misreporting of income.

Under reported income has been defined in S. 270A(2) which is to be read with sub-section (6) while misreporting of income is defined in sub sections (8) & (9) of this section.

With a view to remove the discretion of the Assessing Officer, Section 270A imposed fixed % of the amount of penalty under the new scheme.

Hence, penalty for under reported income will be at fixed rate of 50% of the tax payable on unreported income while it will be @ 200% of the tax payable on the misreported income as against 100% to 300% of concealed income under the erstwhile provisions of section 271 ( now applicable for A.Y. 2016-17 and earlier assessment years).

The provisions of Section 270A of the Income Tax Act’1961 are reproduced herein under:-

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

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

(3) 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.

Now, 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.

(4) 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.

The bare reading of Section 270 A divulges the fact the penalty under the newly inserted section 270A (be it 50 % or 200%) can only be levied on difference between assessed income and returned income.

Therefore, if unaccounted cash is deposited into bank and applicable tax (maximum 30% plus surcharge/Cess) is paid on this additional income, no penalty for under reporting or misreporting can be imposed by assessing officer u/s 270A of Income tax Act.

This is because penalty for concealment can be levied only on difference between assessed income and returned income.

So in my considered opinion, as rumoured, penalty of 200% under no circumstances can be levied on such income disclosed in return of current year with due payment of taxes on the same.

If, however, the case is such that you have intentionally suppressed facts, deposited the unaccounted cash and didn’t declare the same in your return of income u/s 139 of the act, than surely it is a fit case for imposition on penalty u/s 270A of the act.

Let us illustrate the aforementioned contention –

If an assessee deposits Rs. 10 cr., unaccounted cash, in its bank account, show it in its income tax return for the FY 2016-17, and pay tax on its income as per applicable slab tax rate, there can’t be any imposition of penalty, because it is not misreported or underreported income. The tax authorities will see that the assessee have declared it and paid tax on it, thus making the deposit a legitimate credit.

If, on the other hand, the assessee deposit this Rs. 10 Cr. in its bank account, omit it from its declaration of income (and therefore not pay any tax on it), it will be considered misreported income, and it shall be a fit case for imposition of penalty u/s 270A of the act.

To conclude, the demonetization of currency notes is a positive, historic and game-changing move for the Indian economy and also a good lesson to those who are playing with Indian taxation policy so far.

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  1. CA Atul Mittal says:

    Whether the assessing officer can apply the penaly u/s 270A(50% or 200%) and 271AAC (10%) simultaneously for both as mis reported and Unexplained Income wordings.

  2. JAGDISH GUPTA says:

    JAGDISH GUPTA says at that The declaration by the Government that upto Rs 2,50,000/= cash deposits in old 500/1000 notes will not be questioned is on the ground that a person can earn upto that amount and still not required to pay tax or file tax return under new provisions and raised exempted income limit;

    So, if any person is already employed on a monthly salary basis and TDS is being deducted by the employer, and if that person also deposits cash into his/her account apart from salary credits, such cash deposit can be construed as additional income of the year and it will attract tax unless it can be supported by previous withdrawls, return of loans from friends and relatives upto Rs 20,000/= each, or sale proceeds from some discarded asset etc.

    JAGDISH GUPTA further says at that Onus of proving all or any of the above like situations rests on the assessee for example why would anybody keep cash at home while parallely keeping and maintaining balance in regular salary or business bank account etc.

    And an eternal tussel will always prevail between the assessee and the tax authorities that well once when you have declared your income and also paying tax on it, now why can it not be interpreted that it is your undisclosed and undeclared income of previous years evenly spread over past 5 to 8 years unless it is proved by establishing its source beyond questionable doubt that it has been amassed in this years’ recent few months only;

    JAGDISH GUPTA further says at that Therefore, the Department will trigger a ghost of unwanted litigations by opening previous assessments;

    Had this not been the scenario, there would remain little relevance for the Government’s earlier two Income Declaration and Amnesty Schemes where the assessee was assured by the Government that will be no prosecution or interest and penalty for declaring undisclosed/concealed incomes upto a particular date only, because otherwise, anybody can anytime pay only current rate of tax @ 30% and declare any of his income saying it is his current year’s income; JAGDISH GUPTA says at

  3. Elliyas says:

    Hello sir,
    If someone has never filed ITR (because there was no regular income) and he is now earning around 15k from the last couple of months (direct deposit to bank not cash) and that person also have savings around 2.5 lakh in cash, which he now wants to deposit in the bank, so is this all will be considered as income of this year which will be over 3 lakh by the march’17? does he have to submit ITR in march 2017 with penalty or tax?

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June 2024