Cash Deposits: Tax implications



Cash Deposits can’t be shown as income in ITR under Sec.115BBE



November 18, 2016[2016] 75 taxmann.com 198 (Article)


The provisions of section 115BBE are as under:
The Finance Act, 2012 inserted section 115BBE in the Income-Tax Act (‘the Act’) to tax unaccounted money represented by the additions covered by sections 68(Cash credits), 69(Unexplained investments), 69A(Unexplained money, etc.), 69B(Amount on investments, etc., not fully disclosed in books of account), 69C(Unexplained expenditure, etc.)  and 69D(Amount borrowed or repaid on hundi) at flat 30% without any deductions or basic threshold exemption limit.

Section 115BBE provides that where the total income of an assessee includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, the income-tax payable shall be the aggregate of— (a)the amount of income-tax calculated on income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of thirty per cent; and (b)the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a).

Section 115BBE further provides that notwithstanding anything contained in the Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of the Act in computing his income referred to in (a) above.

Section 115BBE was enacted “In order to curb the practice of laundering of unaccounted money by taking advantage of basic exemption limit.

From the above, the following position emerges:
Section 115BBE refers to sections 68,69A, 69B, 69C and 69D

Sections 68 to 69D nowhere contemplate voluntary disclosures made in ITR by the assessee

Sections 68 to 69D contemplate additions for unaccounted/unexplained income detected by the AO during search or survey or scrutiny. This is clear from the words “where any sum is found credited in the books of an assessee”(section 68), “Where in any financial year the asssessee is found to be the owner of any money, bullion, jewellery or other valuable article”(section 69A)

Thus, section 115BBE read with sections 68 to 69D nowhere envisage a voluntary disclosure scheme where past unaccounted income can be declared by assessee in current ITR by paying 30% flat tax. If section 1155BBE is to be construed as a voluntary disclosure scheme, there was no need for Income Disclosure Scheme, 2016 or one-time window under the Black Money Act, 2015 for foreign black money.
Section 115BBE can be invoked only by AO and cannot be invoked by assessee to show huge cash deposits in bank as income in ITR at special tax rate of 30% under Section 115BBE.


No tax free status for all cash deposits up to Rs.2.5 lakhs



November 18, 2016[2016] 75 taxmann.com 197 (Article)


1. Deposits up to Rs. 2,50,000 have not been given any blanket tax-free status. Only such deposits will not be reported to the Income-tax Department by banks/post offices.
At Present:
A. The regular threshold exemption limit for individuals (other than resident senior citizens and super-senior citizens) is Rs. 2,50,000.
B. If the individual is a resident and senior citizen (aged 60 or more but less than 80), then it is Rs. 3,00,000.
C. If the individual is a resident and super-senior citizen (aged 80 years or more), it is Rs. 5,00,000.
D. If total income for any year exceeds this limit, it will be taxed as per applicable slabs.
E. If individual is found to be the owner of any money, bullion, jewellery or other valuable article and same is not recorded in any books of account of the individual and the source of acquisition is not satisfactorily explained, amount will be charged at flat 30% without regard to above threshold exemption limit.
F. If any individual deposits cash exceeding Rs. 50,000, on any one day, in account in bank or post office, PAN is required. This requirement of PAN for cash deposit also applies if aggregate deposits in bank account from 09-11-2016 to 30-12-2016 exceeds Rs. 2,50,000 in the aggregate.
G. Bank and Post office will have to report on or before 31-01-2017 cash deposits during the period 09th November, 2016 to 30th December, 2016 aggregating to:
Rs. 12,50,000 or more in one or more current account of a person; or
Rs. 2,50,000 or more in one or more accounts (other than a current account of a person)
The following clarifications in Press Release dated 10-11-2016 may be noted:
“Q.1 A lot of small businessmen, housewives, artisans, workers may have some cash lying as their savings at home, will the Income-tax Department ask questions if the same is deposited in banks?

A.1: Such group of people as mentioned in the question need not worry about such small amount of deposits up to Rs.1.5 or 2 lacs, since it would be below the taxable income. There will be no harassment by Income Tax Department for such small deposits made.”

Q.2: Will the Income-tax Department be getting reports of cash deposits made during this period? If so, will the current threshold of reporting requirement of reporting cash deposits of more than Rs. 10 lacs will only continue?

A.2: We would be getting reports of all cash deposited during the period of 10th November to 30th December, 2016 above a threshold of Rs. 2.5 lacs in every account. The department would do matching of this with income returns filed by the depositors. And suitable action may follow.

2. Tax-free status is for those whose total income does not exceed threshold limit of Rs. 2,50,000/Rs. 3,00,000/Rs. 5,00,000. One can imagine that savings of people with meagre income are not likely to exceed this amount. If they can prove they saved higher amount because they live in joint family and other family members have more income, then even higher cash deposits will not be taxed.
3. Housewives can even get exemption for higher cash deposits if it is savings out of pin money given to them by husbands for their expenses. Only that it will have to be established that husband is regular ITR-filer and has disclosed sufficient incomes and made sufficient cash withdrawals or transfers through banking channels to wife
4. Those whose cash deposits during the period 09-11-2016 to 30-12-2016 do not exceed Rs. 2,50,000 will not be picked up for scrutiny automatically as no reporting of the same is done by banks/post offices. But if their returns are picked up for scrutiny on random basis, this deposit can be examined and taxed at 30% under section 115BBE if not satisfactorily explained. There is as yet no instruction from department to AOs to ignore demonetized notes deposited in bank account up to Rs. 2,50,000 during scrutiny assessment.
5. Again it is not as if you have Rs. 10 lakhs in old notes and you have four bank accounts and you deposit Rs. 2.5 lakhs in each of the 4 accounts, your Rs. 10 lakhs has become tax-free. Your accounts may not be reported by bank/post office to ITD. But if your return is picked up in scrutiny at random, all four bank accounts will be called for and checked and if you fail to explain source of the amounts satisfactorily, then you will be taxed flat 30% on Rs. 10,00,000 without allowing for any regular threshold exemption limit as above. The Income-tax Department may also come to know about all deposits below the threshold limit, if Income-tax Returns forms introduce a new column asking for maximum balance during the year in each bank account.


Cash deposits in old currency may attract 200% penalty



Introduction
1. The opportunity to declare undisclosed income under Income Declaration Scheme, 2016 and pay 45% on the same expired on 30th September, 2016. If demonetized high denomination notes deposited in bank account pertain to cash in hand declared under IDS, 2016, there would be no problem. But what if IDS has not been availed? Can the assessee simply deposit undisclosed income in form of demonetized notes in his bank account, quantify tax liability @ 30%, pay advance tax and show the same in ITR of FY 2016-17 (current financial year) without attracting penalty of 200% under section 270A for misreporting?
Penalty under Section 270A
2. Salient features of penalty u/s 270A are as under:
Section 270A providing for “Penalty for under reporting and misreporting of income” was inserted in Income-Tax Act,1961 by the Finance Act,2016 with effect from Assessment Year 2017-18.

Section 270A(1) provides that “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”.

The words “may…..direct that any person who has under-reported his income shall be liable to pay a penalty” are significant. Imposition of penalty under section 270A is discretionary and not mandatory in view of the word “may” used in sub-section (1).

Where no return is furnished, income is said to be under-reported if the income assessed exceeds the maximum income not chargeable to tax .

Where return has been furnished, the starting point for determining whether there is under-reporting is an arithmetical calculation ascertaining difference between two figures-between income assessed or reassessed and income earlier assessed or as per return processed. If the former figure exceeds the latter, income is said to be under-reported

The amount of under-reported income shall be, in a case where income has been assessed for the first time, 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.

In a case where no return has been furnished, the amount of under-reported income shall be (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)

In any other case, under-reported income shall be the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order

Where under-reported income is in consequence of misreporting, the penalty shall be equal to 200% of the amount of tax payable on under-reported income[Section 270A(8)]

Where there is only under-reporting without mis-reporting, the penalty shall be 50% of amount of tax payable on under-reported income[Section 270A(7]

Levy of penalty is discretionary but amount of penalty is not discretionary.

In a fit case, the authorities may decide not to impose penalty. But if they decide to impose, then they must impose the mandatory quantum as per section 270A(7)/(8)-no more and no less.

Section 270A(9) provides that misreporting of income shall cover the following cases (and hence liable to 200% penalty):

(i) misrepresentation or suppression of facts;
(ii) failure to record investments in the books of account;
(iii) claim of expenditure not substantiated by any evidence;
(iv) recording of any false entry in the books of account;
(v) failure to record any receipt in books of account having a bearing on total income; and,
(vi) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction.
From the above provisions of section 270A, the following points emerge:
Now misreporting per se will not attract penalty under section 270A @ 200%..To attract the penalty @ 200%, misreporting should result in assessed income being more than what is determined on processing under section 143(1)(a).

There is a view that when unaccounted income in the form of demonetized notes is banked and same is shown in ITR for FY 2016-17 as “income from other sources” and tax @ 30% is paid thereon, the assessed tax will not exceed the tax as per return processed u/s 143(1)(a) and hence no penalty is imposable under section 270A. This view seems to be based on Press Release dated 10-11-2016 which contains replies by the Revenue Secretary. Q.No.3 in the Press Release clarifies that if huge cash deposits do not match with income declared, then it will be a case of tax evasion attracting penalty.

If huge cash deposit is reported in ITR for AY2017-18, it can not be said to be “not matching with income not declared.

However, one should pay careful attention to Q.No.2 of press release which says that all deposits exceeding Rs.2.5 lacs during 10th November to 30th December 2016 will be reported to Department and “The department would do matching of this with income returns filed by the depositors. And suitable action may follow.” As per amended Rule 114E , cash deposits during the period 09-11-2016 to 30-12-2016 aggregating to Rs.12,50,000 or more in current account or aggregating to Rs.2,50,000 or more in savings account will be reported by banks to tax dept. up to January 31, 2017.

Thus, Department will match cash deposits with returns filed for past assessment years upto and including AY 2016-17 in January 2017 itself. If such deposits not matching with the past returns, notices may be sent out by February 2017 itself. In appropriate cases, surveys and raids may take place also. If that happens, assessee may not get a chance to execute this plan of showing cash deposits in ITR of AY 2017-18. If assessee is not able to explain it as current income of FY 2016-17, then it may attract 200% penalty under Section 270A.

Further, Department will not accept a disproportionate spurt compared to preceding year as current year’s income unless satisfactorily explained. The Finance Minister clarified in Rajya Sabha as under:

Sir, there is an existing law which would apply. I think what Mr. Gujral is referring to is when somebody declares it as a part of his current income and when current income is taxable at the rates provided in the Income Tax Act. But if the current income suddenly becomes 5,000 per cent of last year’s income, will it be treated as current income or otherwise?”

For instance, if someone declares a total income of Rs.10 lakhs in preceding year and declares a huge amount of Rs.3.15 crores including a huge cash deposit of say Rs.3.0 crores, the Department is unlikely to accept that the huge cash deposit is from current year’s income unless the spurt in economic activity is satisfactorily explained by assessee. Further in such cases, Department may not even wait till ITR of current year is filed and based on report by bank it may initiate survey or search or even issue notice calling for explanation or details.

Declaring past years’ income as current year’s income will amount to making of false statement in verification and would attract prosecution under section 277.
Conclusion
3. The strategy of declaring huge cash deposits in bank as current year’s income and paying tax on it is fraught with risks and assessee may end up with proceedings for past years being reopened with resultant huge interest and penalties for past years besides prosecution. Another thing to be noted is merely showing income does not fulfill assessee’s obligations under the Act as can be seen from a conspectus of various provisions of the Act. Assessee is obliged to also disclose and establish (i) source (ii) manner of deriving income and (iii) period in which derived. In other words a ‘full and true disclosure’ is contemplated. Further, disclosure of huge cash deposit may result in investigations under indirect tax laws such as VAT/Service Tax/Excise for evasion of those taxes also.
(SRINIVASAN ANAND G.CA) November 18, 2016 [2016] 75 taxmann.com 174 (Article)


Receipt of cash in new currency on selling a property would also invite penalty



In CIT v. A.M. Fazil [2012] 22 taxmann.com 238 (Ker.), the Court observed that ” unless prohibition is introduced against cash transactions particularly in sale of property, in film industry and the like at least for payments over a certain limit in cash, black money generation and circulation cannot be controlled because the disincentives on cash dealings contained under the various provisions of the Income-tax Act have failed to achieve the objective.” Accordingly, the Finance Act, 2015 amended sections 269SS and 271D of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). Section 269SS, as amended, prohibits acceptance of Rs. 20,000 or more for any transaction of transfer of immovable property otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account. The prohibition applies whether the sum is received as advance or otherwise. In terms of section 271D, violation of this prohibition attracts a penalty equal to the amount accepted or received
Following situations can arise where a seller receives property sale proceeds in cash off the record (i.e., in black)
Case 1: Seller sold the property and received part of it in black prior to demonetization and declared it in IDS
If seller had already declared the black component in IDS and old demonetized notes were deposited from this declared amount, seller will get immunity from penalty and prosecution under IT Act, 1961 and, hence, he will not be liable for penalty under section 271D. Also there would be no liability for capital gains tax.
Case 2: Seller sold the property and received part of it in black prior to demonetization and had not declared it in IDS
If the seller of property deposits the black component of sale price (received in cash) in bank account and explains it as consideration for sale of property, he is liable to pay capital gains tax with reference to total consideration including black. He will also be visited with a penalty under section 271D equal to the amount of cash accepted or received by him. What is more unlike IDS declaration which is confidential , these explanations given by seller that it is black component of sales price can be forwarded to Stamp Duty authorities for action.
Case 3: Seller has entered into agreement to sell prior to demonetization and received advance (bayana) in old notes prior to demonetization, i.e., on or before 8thNovember, 2016 and had not declared it in IDS
Seller can deposit in bank. However, he will be liable to pay capital gains tax with reference to total consideration including black. He will also be visited with a penalty under section 271D equal to the amount of cash accepted or received by him. What is more unlike IDS declaration which is confidential, these explanations given by seller that it is black component of sales price can be forwarded to Stamp Duty authorities for action.
Case 4: Seller has entered into agreement to sell post demonetization (unlikely as real estate deals have been hit) and received advance (bayana) in old notes post demonetization, i.e., on or after 9th November, 2016

The deal is illegal as cash ceased to be legal tender.

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