Cash Deposit Rs500 and Rs 1000 notes: Tax issues

The Govt of India has announced demonetisation scheme for Rs 500 and Rs 1000 rupee notes from the mid night of 8th Nov 2016.There are long queues before the bank branches and ATMs. We try to address apprehensions about the taxation issues.

Some people are posting the unverified computation chart of tax and penalty on cash deposit. It is a perception by some that the penalty of 200% is on the amount deposited. It is not correct.The facts are as follows:

1. You have time   till 30th December 2016 to deposit the same in banks (extended till 31 March 2017 with additional documentation)

2. As soon as one deposits, one 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.The explanation will be on case to case basis;

 

3. (a) The cash may be  entirely “white”, on which one has already paid tax i.e. this is cash which has been declared in his books of accounts or he has withdrawn this from the bank. or (b)The cash may be entirely “black”, so to speak, which means he has never paid any taxes on the same. or (C) it may be combination of both.

4. So when one 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 one will have to include this in his annual income, and think of a source for it. Since one 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. If one deposits cash of more than Rs 2.5 lakhs, his transactions might have been reported to the Income Tax Department by the bank. The IT Department will wait till one 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 hearing where one 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. In case the officer decides to impose penalty of 200%, the onus lies on the officer to prove that the mis reporting has taken place. Please note by the time this order will be passed, we would be well into 2018.

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

 Income Tax return

 Taxpayers will have to explain large 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.

Tax will payable on this amount as per Income tax slab rate if it is shown in ITR.In case of discrepancy, tax 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.It is proposed that the rate of penalty shall be 50% 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 200% of the tax payable on such misreported income.

Reference: Tax Guru

Last modified on Saturday, 11 March 2017 06:06

Prakash Praharaj

Shri Prakash Praharaj has a passion for excellence. He has been awarded two gold medals for securing top positions both in Graduation and Post Graduation in Commerce. He is an MBA with specialization in Finance and marketing. He has been awarded Diploma in Treasury, Investment and Risk Management besides CAIIB from the Indian Institute of Bankers. He is a Certified Financial Planner from the Financial Planning standards Board, India (FPSB), affiliated to FPSB, Denver, USA and Certified Personal Financial Adviser from NISM. He is also a SEBI registered Investment Adviser vide Reg. no. INA 000000045 dated 2nd August 2013.His book "Your Every day guide to Personal Finance and Insurance" has been published by CNBC TV 18 in August 2015.

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