-Abhishek Ranjan Singh

A day after IMANDAARI KA UTSAV, A day after PRAMANIKTA KA PARV, A day after MAHAYAGNA, A day after demonetization scheme. Hopefully you all are observing and going through same atmosphere as i am. You may have seen various reports which range from the scary to the alarmist on the topic of demonetization of the Rs 500 and Rs 1000 notes. In fact, here social media warriors must also take the blame for spreading grossly exaggerated news.  Few people are reporting that new Rs 2000 notes have GPRS chip, few are posting the photo of tearing off Rs 2000 note to check the chip. RBI and finance minister of India Mr Arun Jaitley have already cleared that no electronic chip in Rs 2000 note. Few people are posting their own pain in the name of general people. Either they are standing in queue or watching that who are standing in queue and who are not standing in queue to exchange or deposit the notes. Few people are guessing that who are getting benefit from demonetization scheme and who have oppose this scheme in past. In general language they are searching the problem instead of solving it or searching the solution of it.

Some people are posting the unverified computation chart of tax and penalty on cash deposit. Yes, I am talking about the reports and memes which say that you will have to pay almost 95% tax on the old cash you deposit in banks. Some in social media even interpreted that the 200% penalty is on the income, thus you need to pay more than your income.

Is this completely false? No, there is a small grain of truth in this which makes believing such news even easier. But the fact is, to reach this stage where you have to pay 90% + as taxes, you need to go through a lot of stuff. And in the age of instant news and meme-worthy material, such nuances are always lost. So here is what should happen (in the normal course) to a person depositing excessive amounts of cash:

1. Say Mr A has Rs 1 crore in cash of old currency notes. He has time till 30th December 2016 to deposit the same in banks (extended till 31 March 2017 with additional documentation)

2. As soon as Mr A deposits this money, he needs to have an explanation ready for the source of this cash. Note here the explanation needs to be ready, neither the banks nor the Income Tax will ask for it as of now.

3. So the explanations can be any of the below or a combination of the below options, depending on each case:

a. Mr A’s cash is entirely “white”, on which he has already paid tax i.e. this is cash which has been declared in his books of accounts or he has withdrawn this from the bank. Can there be such cases? Any business which is heavily based on cash for business reasons can surely have such a balance of cash, depending on the day to day volumes.

b. Mr A’s cash is entirely “black”, so to speak, which means he has never paid any taxes on the same.

4. So once Mr A deposits such “white” cash, he has no problems what so ever since he has already paid taxes on the same. He just has to collect evidence of the source and keep it ready.

5. If the cash is “black” though, it becomes “white” as soon as he deposits it into the bank. Thus, now Mr A will have to include this in his annual income, and think of a source for it. Since he has added it to his annual taxable income, he has to pay taxes on that (assumed to be 30% for simplicity).

6. Once he pays the taxes, comes the year end in March 2017. He collates all his financial data, and files an income tax return by July or September 2017 depending on his volume of business etc. Here, he should make sure that the money he deposited is shown in the returns. Please note, in the ordinary course, the Income Tax Department will not bother you even till September 2017.

7.  Now since Mr A had huge cash deposits, his transactions would have been reported to the Income Tax Department by the bank. The IT Department will wait till Mr A files his returns, and will probably issue him a notice post September 2017 announcing that they want to scrutinise his books of accounts.

8. This notice will start a series of hearings, proceedings etc where Mr A has to prove things such as where in his tax returns are the cash deposits shown as income, what was the source of income etc.

9. If the officer is not satisfied with his explanations, he can then issue an order which levies a penalty on him. The penalty can be either 50% of tax amount (for under-reporting) or even 200% of tax amount (for mis-reporting) depending on the nature of default. If the officer wants to levy the heavier 200% penalty, the onus lies on the officer to prove that mis-reporting has taken place. Please note by the time this order will be passed, we would be well into 2018.

10. So is the end of the road? No. Mr A can appeal against the decision at multiple levels. He can appeal to the Commissioner (Appeals), the Income Tax Tribunal and even the Courts.

Corruption Yesterday, Corruption Today, Corruption Tomorrow

Corruption Yesterday, Corruption Today, Corruption Tomorrow

LIMIT, TAX AND PENALTY

There is no limit on cash deposit in bank accounts. Some social media post are claiming that till Rs 2.5 lakhs income tax department will not question you, but it is not 100% correct. Income tax department may ask if it is not shown in the returns / not accounted or not matched with your book of accounts / source of income. Taxpayers will have to explain large cash deposits made in their bank accounts and state whether their income-tax returns reflect these deposits, as per a new feature introduced on the tax filing website www.incometaxindiaefiling.gov.in. Further, all bank accounts linked to an individual’s permanent account (PAN) number have been collated, indicating that the accounts are being monitored by the tax authorities. The taxpayer will then have to explain cash deposits in all the bank accounts separately—choosing from among six options; transactions are considered to be in ITR; transactions are considered in ITR of another account holder; transactions are not considered for ITR; transactions are partly considered for ITR; transactions are not taxable or exempt (e.g. agricultural income) and transactions do not have a relation with this account. In case a taxpayer declares that the large cash deposits are linked to farm income and are not liable to be taxed, the department may decide to further investigate the matter by comparing the deposit with the land holdings of the farmer and the corresponding yields. By adding this new feature from current year, the income-tax department will be asking taxpayers who are making large cash deposits, to confirm whether this amount has been already included in income-tax returns or not.

Tax will payable on this amount as per Income tax slab rate if it is shown in ITR and if not tax and penalty on or after the 1st day of April, 2017 and subsequent assessment years and penalty be levied under the newly inserted section 270A with effect from 1st April, 2017. The new section 270A provides for levy of penalty in cases of under reporting and misreporting of income.Sub-section (1) of the proposed new section 270A seeks to provide that the Assessing Officer, Commissioner (Appeals) or the Principal Commissioner or Commissioner may levy penalty if a person has under reported his income. It is proposed that 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 re-assessment;

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

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

The amount of under-reported income is proposed to be calculated in different scenarios as discussed herein. In a case where  return is furnished and assessment is made for the first time the amount of under reported income in case of all persons shall be the difference between the assessed income and the income determined under section 143(1)(a). In a case where no return has been furnished and the return is furnished for the first time, the amount of under-reported income is proposed to be:

(i) for a company, firm or local authority, the assessed income;

(ii) for a person other than company, firm or local authority, the difference between the assessed income and the maximum amount not chargeable to tax.

In case of any person, where income is not assessed for the first time, the amount of under reported income shall be the difference between the income assessed or determined in such order and the income assessed or determined in the order immediately preceding such order.

It is further proposed that in a case 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 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.

However, 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.

It is clarified that 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.

Calculation of under-reported income in a case where the source of any receipt, deposit or investment is linked to earlier year is proposed to be provided based on the existing Explanation 2 to sub-section (l) of section 271 (1).

It is also proposed that the under-reported income under this section shall not include the following cases:

(i) where the assessee offers an explanation and the income-tax authority is satisfied that the explanation is bona fide and  all the material facts have been disclosed;

(ii) where such under-reported income is determined on the basis of an estimate, if the accounts are correct and complete but the method employed is such that the income cannot properly be deducted therefrom;

(iii) where the assessee has, on his own, estimated a lower amount of addition or disallowance on the issue and has included such amount in the computation of his income and disclosed all the facts material to the addition or disallowance;

(iv) 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;

(v) where the undisclosed income is on account of a search operation and penalty is leviable under section 271AAB.

It is proposed that the rate of penalty shall be fifty per cent of the tax payable on under-reported income. However in a case where under reporting of income results from misreporting of income by the assessee, the person shall be liable for penalty at the rate of two hundred per cent of the tax payable on such misreported income. The cases of misreporting of income have been specified as under:

(i) misrepresentation or suppression of facts;

(ii) non-recording of investments in books of account;

(iii) claiming of expenditure not substantiated by evidence;

(iv) recording of false entry in books of account;

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

(vi) failure to report any international transaction or deemed international transaction under Chapter X.

It is also proposed that in case of company, firm or local authority, the tax payable on under reported income shall be calculated as if the under-reported income is the total income. In any other case the tax payable shall be thirty per cent of the under-reported income.

For better understanding of OHD (Rs-1000 and Rs-500) notes scheme you can go through my following article : http://taxguru.in/rbi/understanding-of-ohd-rs-1000-rs-500-notes-scheme.html

India’s largest lender State Bank of India said on Friday banks received deposits worth Rs 53,000 crore after this scheme. Be part of this scheme, this is IMANDAARI KA UTSAV, this is PRAMANIKTA KA PARV, and this is MAHAYAGNA. Make it successful. Please consult an expert with the exact facts of your case. Do not take tax advice from social media forwards. I would like to share a hindi poem of poet Gajanan Madhav Muktibodh :

जो है उससे बेहतर चाहिए

JO  HAI  USASE  BEHATAR  CHAHIYE

पूरी दुनिया साफ़ करने के लिए मेहतर चाहिए

POORI  DUNIYA  SAPH  KARANE  KE  LIYE  MEHATAR  CHAHIYE

वह मेहतर मैं हो नहीं पता

VAH  MEHATAR  MAIN  HO  NAHIN  PATA

पर, रोज कोई भीतर चिल्लाता है

PAR, ROJ  KOI  BHITAR CHILLATA  HAI

की कोई काम बुरा नहीं

KI  KOI  KAM  BURA NAHIN

बशर्ते की आदमी खरा हो

BASHARTE  KI  ADAMI  KHARA  HO 

NO FEAR IF YOUR MONEY IS FAIR

We would be glad to know your doubts or queries or clarification or suggestion. Please feel free to contact us at: abhishek@arssolutions.co.in +919022838615.

The Author is a Certified and authorized Tax Return Preparer of Income Tax Department of India; currently he is Managing Director and Founder of ARS Solutions.

Disclaimer – Before making any decisions do consult the experts. Author does not take any responsibility for misrepresentation or interpretation of act or rules. Neither the author nor the firm accepts any liability for the loss or damage of any kind arising out of information in this document or for any action taken in reliance there on.

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46 responses to “Limit, Tax and Penalty on Cash Deposit – Myth and Truth”

  1. nijaguna shivayogi j.c. says:

    i have the similier query kindly send by the
    Girishkumar J. Patel says Sl.no.:15
    and also you will prove the whole sums is for current year and also it is in the old currency.

  2. TONY ALPHONSO says:

    The queries above are raised, will you please guide me as how and when and where the answers to the queries will be made and how to know the same.

  3. azhar says:

    dear sir now i am filing income tax returns for 2 years 31.3.2015 and 31.3.2016 in which cash on hand is around 3 lakhs and sundry debtors as per balance sheet is around 5 lakhs now sundry debtors is realised and i deposit this full amount in bank

  4. Vilas Naik says:

    I have joint account SB, with Mother her age is 75 plus can she deposit 500& 1000 notes in her account ? up to what amount ? I am taxable and regularly filing retun and she has agriculture receipts , pl advice.

  5. B Srivatsa says:

    I had lent 5 lacks through cheque to a business man. He did not return the money for last 5 years & it was a sort of bad debt for me. Now after latest demonitisation ,he wants to pay back in cash. I am employed n paying tax through TDS under form 16. Can I accept cash in return. I have paid him 5 years back from my salary account only.

  6. CA Prashant Agale says:

    This article is based on law, as it stands on date. Do you think the top brains in Income tax Dept must have not thought about this logic?.

    Govt may introduce some other Penal provision with retro respective effect to tax such money in Budget 2017

  7. Krishna says:

    Thanks for Nice article.
    Many house wives are having agriculture income and accumulated cash savings. They will not have any record nor filed any IT return. If they deposit accumulated cash in bank , how to prove it is Accumulated savings.
    Every one is depositing their cash funds not this year income. How is it fair to treat it as income and collect income tax, saying no proofs are there.
    Kindly answer.

  8. Naveed says:

    Hello Sir. My uncle is a pensioner with income of Rs. 15,000 per month. He had savings of about 1.5 lakh in cash. Will he be subject to any investigation for this deposit and also should he deposit this multiple times in with amounts less than 50,000 or can straight away deposit 1.5 lakh ? Kindly advise.

  9. ASHISH says:

    IF ANY OF MY CLIENT INCOME IS ALREADY TAXABLE @ 30%. CAN HE DECLARE U/S 115 RS 30.00 LACS AS UNDISCLOSED INCOME AND CAN PAY TAX @ 30 % ON SAME AND NO PENALTY WILL BE LEVIED ON THAT.

  10. N. Desai says:

    How can you prove that the cash deposit you are making is from previous years’ post tax amount from the bank? Are ATM withdrawal transactions proof enough? Is that proof enough? I deliberately kept withdrawing a slightly larger sum than my needs over time to keep some cash handy for my old father’s anticipated medical conditions. How would I explain this?

  11. Brij mohan Adhlakha says:

    If one can show that the deposit in bank is from a legal source & already declared/to be declared in the current IT return, then no penalty would be imposable.

  12. M Mandal says:

    Please post in hindi

  13. Dhrumil P says:

    If Mr A has 1crore rupees black money of 500 & 1000 notes with 200% panalty how much the tax deductable fromhim?

  14. Sheela K says:

    DEAR SIR IF I HAVE 5 FIRM ACCT IN ALL BANKS
    HOW MUCH I CAN DEPOSIT IN MY FIRM ACCT TILL DEC 2016

  15. Satya ND says:

    Good n Informative article

  16. Girishkumar J. Patel says:

    Respected Sir,

    First of all,
    Thank you very much for such useful article.

    We always read such articles form seniors like you and tries to get knowledge / experience.

    We humbly request you to guide us regarding some queries.

    Situation 1 :-
    Suppose Mr. A have 8,00,000/- cash /- and he deposits the same in his Savings accounts as receipts U/s 44 AD. He shows total Rs. 800000/- as net income and pays tax on total Rs. 800000/-
    Can Department levy penalty or can challenge in any way ? if yes, what will be the effects ?

    Situation 2 :-
    Suppose Mr. A have 8,00,000/- cash /- and he deposits the same in his Savings accounts as receipts U/s 44 AD. He shows 10% of total Rs. 800000/- i.e. Rs. 80000/- as net income and since it is below the limit, do not pay any tax.
    Can Department levy penalty or can challenge in any way ? if yes, what will be the effects ?

    Situation 3 :-
    Suppose Mr. A have 8,00,000/- cash /- and he deposits the same in his Savings accounts. Rs. 400000/- as agricultural income but he do not have any bills and Rs. 400000 as receipts U/s 44 AD. He shows total Rs. 400000/- as net income and pays tax on total Rs. 400000/-
    Can Department levy penalty or can challenge in any way ? if yes, what will be the effects ?

    Situation 4 :-
    Suppose Mr. A have 8,00,000/- cash /- and he deposits the same in his Savings accounts as income from other sources, but do not have any proofs of income. He shows total Rs. 800000/- as net income and pays tax on total Rs. 800000/-
    Can Department levy penalty or can challenge in any way ? if yes, what will be the effects ?

    We will be grateful to you, if you gives us guidance.

    GIRISHKUMAR J. PATEL

  17. Syedd Najish Ali says:

    Very good information. Thanks Abhishek.
    The person who have white money on which he have already paid taxes or exempt income, need not to fear at all. We have a enough time to deposite the same untill you really need the money.
    This is the time the Govt has also make some strict guidelines for Social Media, so that person making the fake/wrong news, rumors can be made responsible for the same.

  18. indravadan shah says:

    I am 82 years old senior citizen. with total yearly interest income around 200,000
    i have household savings of 150000 over the years kept for any kind of medical & social needs. will i attract any tax / penalty liabilities for depositing this cash? or basic limit of 500000 will cover this?

    • Syed Najish Ali says:

      Dear Sir,
      You need not to pay any tax on this.
      1st – if you have adequate docs or supports from where you have collected this and already paid taxes or it may be tax free, the question of further tax will not arise.
      2nd – if you have no proof, still it will be covered under basic limit of Rs. 5 lakh.

    • CA HARSHIT SHAH says:

      What would be implications if Assesse files ITR u/s 44AD or 44AE?

  19. Vijay says:

    Mr. Abhishek, I congratulate you for providing us fact focusing information. Its undoubtedly time to show our solidarity towards our nation’s pride and future prospects. Mere forwarding msgs on social media against terrorist or such other evil activators will not do and i firmly if this action which is taken by current Govt. was in fact needed before 10 years back. Still we can “Der aye durast Aye”.

  20. ketaki shet says:

    good article bhai..

  21. mlarora_53@yahoo.co.in says:

    Excellent article to remove the misgivings and doubts. One small clarification is needed. As I am a pensioner and getting a pension of Rs.30,000.00 and if I deposit Rs.1,00,000.00 in my account, Whether I will have to pay tax?

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