The Modi Government’s surgical strike on black money has left many people worried about how to secure the extra stashes of cash lying around in underground storerooms, suitcases and mattresses. With rumors flying around of penalties imposed @ 200%, many honest and hard-working citizens are also worried about being penalized by Tax Authorities for depositing the bulk cash in their accounts.

The Government has given time to deposit the cash till 30th December, extended till 31st March with additional documentation.

This article is an attempt to clarify the provisions of the Tax Act, and on the applicability of penalty and tax provisions on cash deposits.

1) For people depositing cash upto Rs. 2.5 lakhs – Government has assured that there will no questions asked on deposits till Rs. 2.5 lakhs. However, you may end up paying tax on these amounts, if you are already earning taxable income. For an Individual to avoid addition of such cash deposit to his taxable income – he should be having documentary proof such as Cash Withdrawal from Bank Statement to prove that the money is out of his taxable income, on which tax is already paid. Similarly, for businesses, the best proof will be the Business’s trading and profit/ loss accounts and the cash & bank books, showing that this is business cash to be deposited to Bank in normal course of operations.

2) Cash deposited between Rs. 2.5 lakhs and Rs. 10 lakhs – Most of the middle-class people will be covered in this category. The government will scrutinize deposits up to Rs. 10 lakhs, and the Tax department can issue notices for explaining the source of such deposits. Again, Explanations along with documentary proofs should be ready by the assesse to support the source of such deposits. If the AO is satisfied with the explanation and the documentation to support it, there will be no further complications. If not, then in the worst-case scenario, these deposits will be added back as cash credits u/s 68 and tax @ 30.9% u/s 115BBE must be paid by the assesse.

The Government has also further assured the public that the 200% penalty will not touch deposits till Rs. 10 lakhs.

3) Cash deposits above Rs. 10 lakhs – will be attracting the harsh provisions of section 115BBE and section 270A. You will end up paying tax at the highest marginal rate of 30.9% on gross deposits u/s 115BBE, without being eligible to claim any deductions against them. You will also be liable to pay penalty u/s 270A, which ranges from 50% to 200% of tax payable on the difference between assessed income and returned income.

Let’s see how this will work for cash deposits above Rs. 10 lakhs:

The cash deposited in account will either be white or black.

If the cash is white, there is no issue as tax has already been paid, and you will have evidence of the source and the tax payment.

If the cash is black, the cash will become white as soon as it enters the banking system, provided that:

1) You pay tax u/s 115BBE @ 30.9% on gross deposit without claiming any deduction.

2) File return by 30th July, 2017, declaring such cash deposits in your return.

3) Be ready for a tax notice u/s 143(2) arriving at your doorsteps.

4) If the ITO is not satisfied with the explanations & documentary proofs, he will levy penalty u/s 270A.

What is Penalty u/s 270A?

The Penalty u/s 270A is levied in two cases – Under-reporting and Mis-reporting of Income.

Where the AO is satisfied that income has been under-reported in the tax return by the assesse, penalty @ 50% is levied on the tax payable on the difference between assessed income and the returned income. So if the assesse already pays the 30.9% tax as advance tax on the cash deposit and declares the deposit as income in his ITR, he should escape the penalty as the assessed and the returned income would be the same.

{Note of Caution: Currently in the news, there is talk of retrospectively amending the Section 115BBE in order to catch those who take advantage of paying tax @ 30.9% and avoid paying penalty.}

Where the AO feels the income has been mis-reported, he can invoke the harsher provisions of the Anti-money Laundering Act and along with the tax, he will also impose 200% penalty.

To impose the penalty of 200% under section 270A, any of the following conditions have to be fulfilled. The onus is also on the AO to prove that one of the following has taken place:

  • Misrepresentation or suppression of facts.
  • Failure to record investments in the books of account.
  • Claim of expenditure not substantiated by any evidence.
  • Recording of any false entry in the books of account.
  • Failure to record any receipt in books of account having a bearing on total income;
  • 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

Further points to note:

As per a new feature introduced on the tax filing website – Taxpayers must explain large cash deposits made in their bank accounts and state whether their income-tax returns reflect these deposits.

Further, all bank accounts linked to an individual’s permanent account (PAN) number have been collated, indicating that all bank 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 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)
  • 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.

The nightmares most assesses are having are:

Even if the IT department is satisfied with the source/ explanations of cash deposits & does not levy penalty, will the service tax and other indirect departments chase such businesses for non-reporting or under-reporting of income? The answers seem but obvious at this moment.

And finally, will the I-T office share the information with Enforcement Directorate who in turn may invoke the harsh anti-money laundering law?

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