ISSUE OF IMPOSITION OF PENALTY U/S 270A OF THE INCOME TAX ACT’1961 -CASH DEPOITS IN BANK ACCOUNTS CONSEQUENT TO DEMONETISATION OF HIGH VALUE CURRENCY By CA.Mohit Gupta
The demonetisation of 500 and 1000 rupee banknotes is a step taken by the Government of India to fight corruption and black money issues in the country. Starting from 9th November 2016, all 500 and 1000 rupee notes ceased to be accepted as a form of legal tender in India. The announcement was made by the Prime Minister of India, Sh. Narendra Modi in a live televised address to the nation at 8:15 pm on 8th November’2016. In the announcement, Modi declared circulation of all 500 and 1000 rupee banknotes of the Mahatma Gandhi series as invalid and announced the issuance of 500 and 2000 rupee banknotes in the new Mahatma Gandhi series in exchange for the old banknotes.
The demonetisation was done in an effort to stop the counterfeiting of the current banknotes alleged to be used for funding terrorism and for cracking down on black money in the country.
Following the announcement by the Prime Minister, the RBI Governor issued a press release with details on the procedure for exchanging/depositing the 500 and 1000 rupee notes that are currently in circulation and the procedure for demonetisation.
Previously, similar measures were taken. In January 1946, currency notes of 1000 and 10,000 rupees were withdrawn and new notes of 1000, 5000 and 10,000 rupees were reintroduced in 1954. The Janata Party coalition government had again demonetised notes of 1000, 5000 and 10,000 rupees on 16 January 1978 as a means to curb forgery and black money.
ISSUE OF IMPOSITION OF PENALTY -CASH DEPOITS CONSEQUENT TO DEMONETIZATION OF HIGH VALUE CURRENCY
The demonetisation of Indian High Value Currency Notes is creating havoc and sheer chaos in the Indian Markets. Amidst such a scenario, rumours are spreading throughout about the taxability of the unaccounted cash which will be deposited in the bank accounts.
We are going through an outburst of messages and posts on social media and print media which range from the scary to the alarmist on the topic of demonetization of the Rs 500 and Rs 1000 notes. There are some things the media just doesn’t understand. In fact, here social media warriors must also take the blame for spreading grossly exaggerated news. Most particularly about the media posts and reports wherein they are spreading the rumours of imposition of 200% penalty by the Income Tax Department on the cash deposited in banks by the assessee’s. It has been rumoured and spread vigorously that the 200% penalty shall be imposed on the cash deposits in the bank accounts, thus you need to pay more than your income!
This kind of unwarranted interpretations has led to sheer panic among the Indian masses. It is very pertinent to mention here is that the intent of this demonetisation scheme is to clear up the menace of black money from the economy which in turn will be used for the development of nation and Indian masses. Due to such rumours of taxability ( along with the penalty) of amount even more than deposits, people are resorting to alleged illegal and unfair means in the garb of conversion which should strictly be discouraged immediately and controlled with force. The need of the hour is to acknowledge this wonderful demonetisation scheme and be a stakeholder in the development of the nation. So, deposit the unaccounted wealth in your accounts, pay taxes (incl. advance tax on the same), be a catalyst in this noble cause for cleaning our own country and taking it towards glory.
Lets us examine the taxability of the unaccounted cash deposits in bank accounts.
Brevity may be the soul of wit, but unfortunately, not of The Income Tax Act, 1961.
It is very pertinent to mention here is that The Revenue Secretary has said (rather, tweeted)(check press release here) four very important statements, which are to be analyzed both logically and legally keeping in view the relevant sections of the Income Tax Act’1961.
- The first statement is as follows.
- 1. "We would be getting reports of all cash deposited during 10th Nov to 30th Dec.2016 above threshold of Rs.2.5 lac in each A/C."
Now, the first tweet talks about a Rs. 2.5 Lakh threshold. This is not an arbitrary number. It is the maximum exemption limit for income tax for individuals. Basically, you are not liable to pay the tax if your annual earnings are below Rs. 2.5 Lakhs. So if you’re a non-earning member who has saved money, you can deposit your savings of up to Rs.2.5 lakhs without wondering if you’ll be pulled up by the tax authorities for having money in your account, out of the blue. If you’re a senior citizen over the age of 60, the limit goes up to Rs. 3 Lakhs, and if you’re a super senior citizen over the age of 80, 5 Lakhs.
Next, he talks about ‘getting reports’. The fact is that the government and Revenue Department had been keeping track of high value cash deposits for a few years now. If you have seen your tax credit statement, the 26 AS, there is a section called "Annual Information Return", where banks are mandatorily required to furnish information about high value transactions that are linked with your PAN. So keeping track of your cash deposits (especially high value deposits) is not something novel that the government is going to do now that the demonetisation has been announced.
But what about the tweets where he talks about income tax action and 200% penalty?
- This is what his other three tweets said:
- 2. "Income Tax department would do matching of this with income returns filled by the depositors. And suitable action may follow."
- 3. "If cash amount of above Rs10 lac is deposited in a bank a/c not matching with declared income, same will be treated as tax evasion"
- 4. "In such case, tax amount plus a penalty of 200% of the tax payable would be levied as per Section 270(A) of the income tax Act"
Let us go through the new penalty regime (inserted by the Finance Act’2016) to have a crystal clarity on the issue of imposition of penalty particularly in case of cash deposits of the demonetized currency in the bank accounts over and above the cash available in the books of accounts as on 08-11-2016.
The levy of penalty for concealment or furnishing of inaccurate particulars of income under the erstwhile provisions of Section 271(1)(c) of Income-tax Act 1961 has always been a matter of litigation between the revenue authorities and the taxpayers. The scope of such provisions was always been a subject matter of litigation since tax authorities always levied the penalty whenever there was an addition or disallowance made by the assessing officer, may be because of pressure of higher authorities, even in cases where there was no prima facie case against the taxpayer. With a view to reduce the litigation and remove the discretion of tax authority, the Finance Act, 2016, w.e.f 01-04-2017 has inserted new provisions in the form of new Sections 270A and 270AA in the Act which replaced the existing provisions of section 271(1)(c). Imposition of penalty under sections 270A and 270AA will apply to cases pertaining to A.Yrs. 2017-18 onwards and provisions of section 271(1)(c) will continue to be applicable to all cases up to A.Yrs. 2016-17.
- Under the new scheme, the penalty matters are categorised in two parts —
- (1) under reporting of income and (Penalty fixed rate of 50% of the tax)
- (2) misreporting of income (Penalty fixed rate of 200% of the tax)
Under reported income has been defined in S. 270A(2) which is to be read with sub-section (6) while misreporting of income is defined in sub sections (8) & (9) of this section. With a view to remove the discretion of the Assessing Officer, Section 270A imposed fixed % of the amount of penalty under the new scheme. Hence, penalty for under reported income will be at fixed rate of 50% of the tax payable on unreported income while it will be @ 200% of the tax payable on the misreported income as against 100% to 300% of concealed income under the erstwhile provisions of section 271 ( now applicable for A.Y. 2016-17 and earlier assessment years). The provisions of Section 270A of the Income Tax Act’1961 are reproduced herein under:-
“Penalty for under reporting and misreporting of income. 270A.
(1) 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.
(2) 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 reassessment;
- (d) the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or section 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 section 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed;
- (f) the amount of deemed total income reassessed as per the provisions of section 115JB or section 115JC, as the case may be, is greater than the deemed total income assessed or reassessed immediately before such reassessment;
- (g) the income assessed or reassessed has the effect of reducing the loss or converting such loss into income.
(3) The amount of under-reported income shall be,—
- (i) in a case where income has been assessed for the first time,—
- (a) 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;
- (b) in a case where no return has been furnished,—
- (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);
- (ii) in any other case, the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order:
- Provided that 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 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 underreported income: Provided further that 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.
Explanation.—For the purposes of this section,—
- (a) “preceding order” means an order immediately preceding the order during the course of which the penalty under sub-section (1) has been initiated;
- (b) 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.
(4) Subject to the provisions of sub-section (6), where the source of any receipt, deposit or investment in any assessment year is claimed to be an amount added to income or deducted while computing loss, as the case may be, in the assessment of such person in any year prior to the assessment year in which such receipt, deposit or investment appears (hereinafter referred to as “preceding year”) and no penalty was levied for such preceding year, then, the under-reported income shall include such amount as is sufficient to cover such receipt, deposit or investment.
(5) The amount referred to in sub-section (4) shall be deemed to be amount of income underreported for the preceding year in the following order—
- (a) the preceding year immediately before the year in which the receipt, deposit or investment appears, being the first preceding year; and
- (b) where the amount added or deducted in the first preceding year is not sufficient to cover the receipt, deposit or investment, the year immediately preceding the first preceding year and so on.
(6) The under-reported income, for the purposes of this section, shall not include the following, namely:—
- (a) the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered;
- (b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;
- (c) the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance;
- (d) the amount of under-reported income represented by any addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, 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; and (e)the amount of undisclosed income referred to in section 271AAB.
(7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.
(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income.
(9) The cases of misreporting of income referred to in sub-section (8) 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.
(10) The tax payable in respect of the under-reported income shall be—
- (a) where no return of income has been furnished and the income has been assessed for the first time, the amount of tax calculated on the under-reported income as increased by the maximum amount not chargeable to tax as if it were the total income;
- (b) where the total income determined under clause (a) of sub-section (1) of section 143 or assessed, reassessed or recomputed in a preceding order is a loss, the amount of tax calculated on the under-reported income as if it were the total income;
- (c) in any other case determined in accordance with the formula— (X-Y) where, X = the amount of tax calculated on the under-reported income as increased by the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order as if it were the total income; and Y = the amount of tax calculated on the total income determined under clause (a) of sub-section (1) of section 143 or total income assessed, reassessed or recomputed in a preceding order.
(11) No addition or disallowance of an amount shall form the basis for imposition of penalty, if such addition or disallowance has formed the basis of imposition of penalty in the case of the person for the same or any other assessment year.
(12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by the Assessing Officer, the Commissioner (Appeals), the Commissioner or the Principal Commissioner, as the case may be.
The bare reading of Section 270 A divulges the fact the penalty under the newly inserted section 270A (be it 50 % or 200%) can only be levied on difference between assessed income and returned income. Therefore, if unaccounted cash is deposited into bank and applicable tax (maximum 30% plus surcharge/Cess) is paid on this additional income, no penalty for under reporting or misreporting can be imposed by assessing officer u/s 270A of Income tax Act. This is because penalty for concealment can be levied only on difference between assessed income and returned income. So in my considered opinion, as rumoured, penalty of 200% under no circumstances can be levied on such income disclosed in return of current year with due payment of taxes on the same.
If, however, the case is such that you have intentionally suppressed facts, deposited the unaccounted cash and didn’t declare the same in your return of income u/s 139 of the act, than surely it is a fit case for imposition on penalty u/s 270A of the act.
Let us illustrate the aforementioned contention – If an assessee deposit Rs. one crore, unaccounted cash , in its bank account, show it in its income tax return for the FY 2016-17, and pay tax on its income as per applicable slab tax rate, there can’t be any imposition of penalty, because it is not misreported or underreported income. The tax authorities will see that the assessee have declared it and paid tax on it, thus making the deposit a legitimate credit.
If, on the other hand, the assessee deposit this Rs. One Crore in its bank account, omit it from its declaration of income (and therefore not pay any tax on it), it will be considered misreported income, and it shall be a fit case for imposition of penalty u/s 270A of the act.
To conclude, the demonetization of INR 500 and INR 1000 currency notes is a positive, historic and game-changing move for the Indian economy and also a good lesson to those who are playing with Indian taxation policy so far. It’s now or never!!!! Come clean not only by words but also by action and be a catalyst in this noble cause of cleaning our own country and taking it towards glory.
Disclaimer: The contents of this article are solely for informational purpose keeping in view of my personal interpretation of law aligned with the available facts or assumptions relied upon. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out.
CA MOHIT GUPTA
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