Under present legal scenario, where a person deposit his / her cash in bank and declare voluntarily such amount as income in his / her return and he / she is not able to explain source of such amount (can be termed as black money), in such a case, neither penalty @ 50% nor 200% be imposed because of non coverage of such situation under penalty provisions (fully explained in subsequent part of this article).
Suppose, a businessman like Mr. X deposit Rs.5 Cr. in his bank account and subsequently voluntarily offer this amount as income in his return of current year, which is to be filed, and he is not able to explain source of this amount / income i.e. black money? Discuss the tax implications?
(1) TAX RATE:
Flat 30% + Cess, (as given under section 115BBE which is leviable on income under section 68 to section 69D)
Section 68 which deals with unexplained credit in books will be attracted here because assessee who deposits cash in bank and intends to offer such amount as income, will certainly be required to credit such amount in his capital account because bank balance (i.e. debit) has been created in asset side through cash deposit, as soon as assessee in his books credit such amount in his capital account, it will become unexplained credit u/s 68 BECAUSE ASSESSEE IS NOT IN POSITION TO EXPLAIN ITS SOURCE.
Text of Section 68 (From Bare Act):
- Where any sum is found credited in the books of an assessee maintained for any previous year and
- The assessee offers no explanation about the nature and source thereof, or, the explanation offered is not satisfactory,
- The sum so credited may be charged as income of the assessee for that previous year.
(2) INTEREST UNDER SECTION 234B & 234C:
If assessee does not pay advance tax, as required, on such income, then interest will certainly be charged.
The one and only tool which is available to I.T. Department is section 270A which can be used as weapon by them for like cases,
But Department should understand that this section permits to impose penalty only on such person who has under reported his income. [Sub-section (1) of section 270A]
In a case where return is filed, assessee will be considered to have under-reported his income where assessed income (i.e. total income as adopted by Assessing officer under assessment) is greater than the income processed under section 143(1) [Broadly speaking, income disclosed in return subject to certain adjustments]. [Sub-section (2) of section 270A]
Infact, base of penalty i.e. under-reported income* [as per section 270A(3)] shall be:
Assessed income (less) Income processed u/s 143(1) [broadly, income disclosed in return subject to certain adjustments]
Normally, quantum of penalty is 50% of tax on under-reported income, but this rate of 50% shall be substituted by 200% where under-reported income is in consequence of any misreporting their of like misrepresentation or suppression of facts, failure to record investment, etc. [List of these cases in exhaustive sense is given in sub-section (9) of section 270A].
In above Case I, since assessee is already disclosing such amount in his return, therefore, apparently, question of under-reported income does not arise. Even equation to calculate under-reported income (as shown above) will not produce any fruitful result to revenue because such disclosed income will appear as part of assessed income as well as income processed under section 143(1) normally.
Don’t get confuse from the words used in section 270A(9) viz. Misrepresentation or suppression of facts i.e. case of misreporting of income, those are only for the purpose of levying penalty 200% instead of 50%, Infact, prerequisite for charging of penalty is, there must be under-reported income*
[As supported by sub-section (1) of section 270A]
Actually, in above Case I, Chargeability of this section 270A does not arise as there is no under-reported income in accordance with specific legal provisions as given.
If an assessee deposits his cash i.e. black money in bank and does not offer such amount as income in his return, then that will be under-reported income because this figure will become part of Assessed income but not be a part of income processed income under section 143(1) [broadly, income disclosed in his return subject to certain adjustments], because such income is not being disclosed by assessee is his return.
This will be case of misreporting of income as well because assessee has suppressed the facts of that amount of income and will be liable for penalty under section 270A @ 200% of tax on under-reported income.
POSSIBLE WAY OUT FOR IMPOSITION OF PENALTY IN AFORESAID CASE- I:-
(1) Retrospective amendment can be made in section 270A by upcoming Finance Act to cover above Case-I specifically with in the scope of penalty.
Upon challenge, this act of retrospective amendment may be supported from possibility of arising of illogical resultant situation in absence of such required retrospective amendment that is a person who declared his income under INCOME DISCLOSURE SCHEME and paid 45%, whereas other person who has not disclosed his income under IDS and tried to defeat the purpose of Govt. scheme, by still concealing such amount and now offering such amount under pressure (i.e. solely due to demonetization) is only paying 30%, certainly it’s unjustifiable.
Of course, certain flexibility may be given in quantum of penalty under retrospective amendment as compare to person covered under Case II above, because assessee has offered such income on his part.
(2) Since base of penalty is under-reported income viz.
Assessed income (i.e. Total income as adopted by AO under assessment) (less) Income processed / determined u/s 143(1)
If, by any means, such amount (which is deposited by assessee in bank and offer such amount as income but not able to explain source) could be excluded from income processed under section 143(1) and included in assessed income then, in such a case, Department will be in position to impose penalty because such disclosed income (without source) of assessee will be resulted as difference of assessed income and processed income under section 143(1), and shall be considered as under-reported income lawfully, and will be a fit case for penalty under section 270A.
Plan / process for achieving such target of exclusion of such disclosed income (for which assessee is not able to explain source) from income processed under section 143(1) in Case-I:-
(I) For such type of income, in income tax return forms, which have to be notified for assessment year 2017-18, a column of SOURCE may be added with the amount of such income i.e. amount deposited in bank and declared as income but not able to explain source,
[As in the case of donation i.e. deduction under section 80G, column of PAN of payee exists].
Additionally, it may be refreshed that, section 143(1), inter alia, provides that, in processing of return, total income of an assessee shall be computed after making the adjustment to the total income in the return of an incorrect claim if such incorrect claim is apparent from any information in the return viz. Claim on the basis of an entry in the return in respect of which information required to be furnished to substantiate such entry, has not been furnished under this Act.
(II) As assessee is not in position to explain the source i.e. fill the column of source, such claim / disclosure of income can easily be ignored / excluded** in computing income processed under section 143(1) even if it’s a part of return of income and
An intimation may be generated showing refund***(because assessee would already have been paid tax on such disclosed income of Case-I),
But, Instead of actual granting of such refund, notice for scrutiny assessment can be issued* and
Under scrutiny assessment, such disclosed income which is being excluded from income processed under section 143(1) [in absence of source / by virtue of blank column of source], can easily be included in assessed income because assessee would already have been admitted that amount as income in his return, and scope of scrutiny assessment is much wider than processing of return under section 143(1).
By doing so, amount deposited in bank & declared as income will become under-reported income viz.
Assessed income (which will be appeared as inclusive of bank deposit declared as income by assessee) (less) Income processed/determined u/s 143(1) [which will be appeared as exclusive of such disclosed income]
Difference viz. amount deposited in bank & declared as income but not able to explain it’s source
And, now Department / assessing officer will confidently be moved on for imposition of penalty.
**[As we ignore/exclude the deduction under section 80G in case of absence of detail of PAN of payee.
It may additionally be noted here that term “claim” can’t be confined upto expenditure.
In simple words, if I show any amount of income let say `5 Cr. It means I am claiming my income is at Rs.5 Cr., similarly, if I show an expense at `2 Cr., it means I am claiming my expense at Rs.2Cr.] * By making such type of situation i.e. case-I, a criteria for scrutiny under CASS, in substance having cases.
***Note: Section 143(1) is not a tool which is solely designed for the benefit of revenue. Under this section, a new refund may arise, e.g. if any arithmetical error is corrected in processing under this section then by virtue of that a new refund may certainly be come into the existence.
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