TAXATION ISSUES ARISING W.R.T.

DEMONETISATION

CA AMEET PATEL20th November, 2016

Existing reporting requirements (upto 8th November, 2016)

AIR or FTRA

To keep a watch on high value transactions undertaken by the taxpayer, the Income-tax law has framed the concept of statement of financial transaction or reportable account (previously called as ‘Annual Information Return (AIR)’.

With the help of this statement, the tax authorities will collect information on certain prescribed high value transactions undertaken by a person during the year.

Banks and Post Offices were already

reporting certain transactions to the

Income-tax department as per Rule 114E

Existing reporting requirements (upto 8th November, 2016)

BANKSSl. No.

Nature and value of transaction Class of person (reporting person)

1

(a)Payment made in cash for purchase of bank drafts or pay orders or banker's cheque of an amount aggregating to ten lakh rupees or more in a financial year.

A banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies.

(b) Payments made in cash aggregating to ten lakh rupees or more during the financial year for purchase of pre-paid instruments issued by Reserve Bank of India under section 18 of the Payment and Settlement Systems Act, 2007.

(c) Cash deposits or cash withdrawals (including through bearer's cheque) aggregating to fifty lakh rupees or more in a financial year, in or from one or more current account of a person.

BANKS / POST OFFICESSl. No. Nature and value of

transactionClass of person (reporting person)

2

Cash deposits aggregating to ten lakh rupees or more in a financial year, in one or more accounts (other than a current account and time deposit) of a person.

(i) A banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);

(ii) Post Master General10 as referred to in clause (j) of section 2 of the Indian Post Office Act, 1898.

BANKS / POST OFFICES / NBFC / NIDHI

Sl. No.

Nature and value of transaction

Class of person (reporting person)

3

One or more time deposits (other than a time deposit made through renewal of another time deposit) of a person aggregating to ten lakh rupees or more in a financial year of a person.

(i) A banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);

(ii) Post Master General as referred to in clause (j) of section 2 of the Indian Post Office Act, 1898;

(iii) Nidhi referred to in section 406 of the Companies Act, 2013;

(iv) Non-banking financial company which holds a certificate of registration under section 45-IA of the Reserve Bank of India Act, 1934 (6 of 1934), to hold or accept deposit from public.

BANKS / CREDIT CARD COMPANIES

Sl. No. Nature and value of transaction Class of person (reporting person)

Payments made by any person of an amount aggregating to:

(i)one lakh rupees or more in cash; or(ii) ten lakh rupees or more by any other mode,

against bills raised in respect of one or more credit cards issued to that person, in a financial year.

A banking company or a co-operative bank to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act) or any other company or institution issuing credit card.

TAX AUDITEESSl.

No.Nature and value of

transactionClass of person

(reporting person)

11

Receipt of cash payment exceeding two lakh rupees for sale, by any person, of goods or services of any nature (other than those specified at Sl. Nos. 1 to 10)

Any person who is liable for audit under section 44AB of the Act.

But its not only the AIR or FTRA that a tax payer needs to worry about

He also needs to know

CIB

CIB

In 1975, the Income Tax Department formed the Central

Information Branch (CIB) for strengthening tax data-base.

Initially, CIB operated under the supervision of DGsIT

(Investigation). This was later brought under the Directorate

of Income Tax (Intelligence) in June 2007.

CIBThe key function areas of DCI are (i)widening of tax base through identification of stop filers and non-filers (ii)Deepening of tax base by providing information for proper selection of cases for scrutiny assessments (iii)through collection, collation of information from internal as well as external sources and its dissemination to Assessing officers (AOs) and other users in I.T. Dept. It also collects information relating to financial transactions like investment, expenses, payment of taxes, etc and details of persons who are involved in some specified activities. The mandate also provides for identification and investigation of cases of tax evasion arising out of criminal matters, having any financial implication punishable as an offence under any Direct Tax Law.

So, the ITO already has two tools with which he can confront a tax payer with massive dose of informationAIR/FTRA & CIB

Demonetisation of High Denomination Currency Notes

8/11 The PM dropped a bombshell through his

address on TV

Rs. 500 & Rs. 1000 notes are no longer legal

now

How does this affect us and our clients?

Most households in the country would have a few of the high denomination notes which are now no longer legal tender

What to do with these notes?

There are 2 aspects involved:1. Depositing the money into the bank or exchanging it for new notes

2. Income-tax implications

Let us look at a few scenarios and how to deal with them based on public statements by the Revenue Secretary & recent amendments to the Rules

Scenario 1 – House wife / Retired Person / Senior Citizen

Deposit of cash upto Rs. 2,50,000 in each account will not attract suspicion and inquiry

It will not be reported also

But does that mean, a scrutiny will not be done?

Scenario 2 – Any other person

Deposit of cash upto Rs. 2,50,000 in each account will not attract suspicion and inquiry

It will not be reported also

But does that mean, a scrutiny will not be done?

Scenario 3 – Businessmana) Deposit of cash upto Rs. 10,00,000

b) Deposit of cash in excess of Rs. 10,00,000

Scenario 3(a) – BusinessmanDeposit of cash upto Rs. 10,00,000

i) Need to ensure that it can be explainedii) Questions could be askediii) Scrutiny may be attracted

Scenario 3(b) – Businessman

Deposit of cash in excess of Rs. 10,00,000i) Need to ensure that it can be explainedii) Questions could be askediii) Scrutiny may be attractediv) If the amount does not match with the returned income, it will be added

to the taxable income

Scenario 3(b) – Businessman

If that amount is added to your income then:

i) It will be considered as “tax evasion”ii) You then pay tax + interest iii) You also pay PENALTY

Need proof that the government is serious about this?

Then see the e-filing website

New section added already!

Can you show the cash as current year’s income?

Several messages on Whatsapp & Email saying that tax + interest + PENALTY @ 200% will be payable

Is this correct?

PENALTY @ 200% Section 270A is being referred to

This section talks of “unreported income”

When you offer income to tax, can it be said to be “unreported income”?

Too many complications involved here

Penalty @ 200% Will they or will they not? Every case is different Facts of each case will be looked at Scrutinies will be widespread and many

Matching of cash deposited

With current year’s books / income

With earlier years’ income

With other factors (debtors’ aging; seasonal sales pattern, TCS returns (for scrap sales) etc.

IS IT REALLY CURRENT YEAR’S INCOME? This question is supremely important

So, what advice to give to clients

Don’t panic Don’t act in haste Think 100 times before depositing cash into the bank DO NOT RELY ON WHATSAPP MESSAGES / EMAIL / MEDIA REPORTS

Insertion of new Rule 12E

On 16th November 2016, a notification has been issued to insert Rule 12E into the Income-tax Rules, 1961This Rule defines the “prescribed authority” u/s 143(2) and says that this would be an Income tax authority not below the rank of an income–tax officer who has been authorized by the Central Board of Direct Taxes to act as income- tax authority for the purpose of Section 143(2).

Amendment to Rule 114B

What is Rule 114B ? Transactions in relation to which Permanent Account Number is to be quoted in all documents for the purpose of section 139A(5)(c)

Amendment to Rule 114BSl. No.

Nature of Transaction Value of transaction

“10

Deposit with :-

(i)A banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act); (ii) Post Office.

Cash deposits :- i.Exceeding fifty thousand rupees during any one day; or

ii.Aggregating to more than two lakh fifty thousand rupees during the period 9th November, 2016 to 30th December, 2016.

Rule 114 E What is Rule 114E?

Statement of financial transactions under section 285BA(1) of the Act shall be furnished in respect of a financial year in Form No. 61A and shall be verified in the manner indicated therein

Amendment to Rule 114ESl. No.

Nature and Value of Transaction Class of Person (reporting person)

“12

Cash deposits during the period 9th November, 2016 to 30th December, 2016 aggregating to :- i.Twelve lakh fifty thousand rupees or more, in one or more current account of a person; or

ii.Two lakh fifty thousand rupees or more, in one or more accounts (other than a current account) of a person.

i. A banking company or a co-operative bank to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act);

ii.Post Master General as referred to in clause (j) of section 2 of the Indian Post Office Act, 1898 (6 of 1898).

Insertion of entry 12 after serial number 11 in sub rule (2) of Rule 114E

Amendment to Rule 114E (Continued)

Sub-rule (5) :- The statement of financial transactions referred to in sub-rule (1) shall be furnished on or before the 31st May, immediately following the financial year in which the transaction is registered or recorded

Following proviso is now inserted :- “Provided the statement of financial transaction in respect of the transactions listed at serial number (12) in the Table under sub-rule (2), shall be furnished on or before the 31st day of January, 2017.”

Reporting will happen by 31st January, 2017

There is no legal possibility of the Income-tax department getting any knowledge of specific account wise information of cash deposits during the period 9th November to 30th December except through the Report filed by banks by 31st January, 2017

Therefore, the notices that are circulating on social media are either fake or have been issued after obtaining information forcibly from a particular bank

Misreporting of Income u/s. 270A(9)

Cases of misreporting of income referred to in sub-section (8) [i.e. Penalty which will be equal to 200% of the amount of tax payable on under-reported income] 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.

Section 68 and Section 115BBE

Section 68 of the Act provides inter alia that if any sum is found credited in the books of a taxpayer and he either does not offer any explanation about nature and source of such sum, or the explanation offered by him is not satisfactory in the opinion of Assessing Officer, then such sum can be taxed as his income.

Section 115BBE of the Act can be applied with reference to the provisions of Section 68 of the Act dealing with unexplained cash credit.

Section 115BBE of the Act specifically levies tax on such unexplained items deemed as income at the flat rate of 30% (plus surcharge and cess, as applicable), irrespective of the slab of income. Moreover, no deduction is available for any expenditure or allowance while computing such deemed income.

Tax and PenaltyIn case of Scrutiny, if no satisfactory explanation is given by such person the assessing officer can treat this amount deposited in the Bank as unexplained cash credit under section 68 and levy tax at 30% u/s 115BBE of the Income tax Act. He can also levy penalty upto 200% of tax (i.e 60%) u/s 270 A. He also has the power to prosecute such persons.

In short,

Tax would be Levied u/s 115BBE @ 30% on the unexplained Cash credit found u/s 68.

Penalty on tax would be levied u/s 270A @ 200% on taxed amount.

Contradiction of IdeasLet’s take a example of a case of Mr. “A” who is carrying on business. He deposits 50 Lakhs in the form of old notes during the period 10/11/2016 to 30/12/2016 in his Bank Account. He is not able to explain the source of this deposit, and therefore, he declares this amount as his “Income from Other Sources” in his return of income for A.Y. 2017-18 and he pays Advance tax accordingly . His Taxable income for A.Y.2017-18 is suppose 73,00,000 (Including old notes deposited)

Thereafter, if the A.O. makes some addition while making the assessment u/s 143(3) and the income assessed is 75 Lakhs the difference between the assessed income and income determined u/s 143(1)(a) will be only `2 Lakhs. This amount will be considered as under reported income for the purpose of levy of penalty u/s 270A.

Contradiction of Ideas (Continued) Case 1 :-

If the A.O. makes an order for additional income of 2 Lakhs then according to section 270A, penalty will be charged only on additional demand of 2 Lakhs. In other words, 50 Lakhs deposited by the assessee during the period of 10.11.2016 to 30.12.2016 in the form of old 500 / 1000 Notes will not be considered as under reported income and no penalty can be levied on this amount which is declared as Income from other sources.Case 2:-If A.O. finds there was misreporting of Income for amount of 50 Lakhs and if there would not be any justification from Mr.A, then A.O. can charge Penalty u/s 270A(9) which will be equal to 200% of the the amount of tax payable on under reported income that will be 200% of 50 Lakhs.

It is still in contradiction that in which sub section of 270A such penalty will be charged

Thank You

ameet.patel@mca.co.inYou can contact me on:

@patelameet