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During the past few years what we have experienced that one of the major causes of dispute between the Income Tax Department and the Assessee is unexplained cash deposited in the Bank Account during a particular financial year. Let us examine this situation from the perspective of the honest assessee and the law being followed by the income tax department.

Honest assessee caught in the web of section 269 cash deposit

Let us take the example of a retailer who sells his product both on cash as well as through other modes of transaction. Is cash sale prohibited under the income tax Act? The simple answer to it is no but is subject to the provisions of Section 269 ST of the income tax act which allows cash transactions in all forms to a certain limit and subject to certain conditions. Even Section 269 SU of the income tax act which makes it mandatory for the notified business entities to make digital transfer facilities available, does not debar such an organization from entering into cash transactions, in case there is no violation of Section 269ST. After receiving cash from whatever source without violating the provisions of the income tax act one is bound to deposit the same into a bank account. Even returns filed under section 44AD/44ADA/44AE etc under presumptive tax scheme does not prohibit cash sale but provide some incentives to those assesses who have avoided or minimized cash sales.

State has directed all the banks, financial institutions and others to generate a report of those assesses who have deposited cash or transacted in cash beyond a certain limit and submit the same to the designated authorities.

The Income-tax department selects cases for scrutiny form such reports and without asking for explanations to start re-assessments by issuing notice u/s 148 directing the assessee to file revised return. An honest Assessee gets confused as he has already filed his income tax returned and in majority of cases assessment has already been completed by CPC. In majority of the cases three questions are asked:

  • Why unexplained cash deposited in the bank shall not be added to the income of the years to which it belongs.
  • You are directed to file a revised income tax return in case not filed earlier.
  • The reason for carrying cash in hand.
  • The most frustrating point for an assessee is that he wonders how it is possible that the department knows about the cash deposit but does not know whether the assessee concerned has filed his income tax return along with other relevant documents/information which is available at the Income Tax port which can be accessed by any income-tax authority delegated with such powers.

The question is can’t we have a report duly certified or as a piece of information in the Income Tax Return Form mentioning that during the financial year cash to the tune of whatever has been deposited by an assessee along with the source of such cash. There are a number of ways to verify the same and where the information is found to be genuine and correct no notices for re-assessment, or explanations, or re-calculation of tax liability and issuance of demand is made and harassment to an honest taxpayer is avoided as far as possible. This will also save time, cost and energy of authorities of the income tax department which can be utilized for productive results and generation of more revenue. Not only the time and energy of assesses is wasted but also of the assessing officers, officers assigned the job of settling appeals, Appellate Tribunals and the Judiciary at different levels. 

Since most cases relate to business houses the verification of cash sales can be done with the help of Goods and Services Portal. After the enactment of the Goods and Service Tax Act, every transaction regarding buying/selling and or service provided is recorded through generation of a pre-numbered invoice. All the invoices must be uploaded at the Goods and Services Tax portal. In simple words, all the sale books and purchase books with respect to any sale/purchase/service is available with the authorities. Thus, reconciliation in terms of sale or purchase or services entered during the year through whatever mode including barter or cash can be reconciled with the income as shown in the income tax return filed by the assessee.  Help in resolving this grave issue can be taken from auditors by making changes in the reporting formats and or in tax audit reports whichever is applicable to a case.

With the economy supposed to double and become a five trillion by 2024, the Government must act fast in resolving issues like the one discussed above for the sake of efficiency, utmost utilization of resources, digitization in reconciliation and use of different portals for gathering correct information. This will save time and cost of assessing officers, appellate authorities and the assesses.

The author is an Income tax practitioner and can also be reached at: dilip@rklegal.org


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Category Income Tax, Other Articles by - Dilip K Raina 



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