Tax Avoidance - Showing hand loan as income

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This discussion explores the tactic of disguising genuine income as hand loans to avoid tax. It highlights how the Income Tax department can identify such schemes by cross-referencing the accounts of both the lender and borrower. The article points out that loans not obtained from banks are taxable, and repayment rules, like the Rs 20,000 cash limit under Section 269T, can expose fraudulent transactions. Furthermore, if the lender's tax return is scrutinised, the scheme is likely to be uncovered, leading to penalties for tax evasion.

Anubhav

Anubhav (Querist)

24 July 2022 Its more of a academic query. I recently came across income tax computation of a person where his professional friend had attempted to show most of his receipts of income as hand loan thereby trying to avoid tax on genuine income. Now I was wondering what are the ways through which Income Tax department would ensure that such an assessee cannot escape taxation. Also can you point out ways through which this kind of tax avoidance method would fail ?

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)

25 July 2022 Obtaining loan from other than banks and financial institutions not allowed.
Such loans will be added to income.

CA PARTH SHAH

CA PARTH SHAH (Expert)

06 August 2022 Suppose The person who have shown income as Loan is Mr X and the person who have given the amount to Mr X is Mr Y.
Since the Mr X has shown the amount received as loan received, the balance would be remaining outstanding in the books of account of Mr X.
Now Mr X will have to reverse the said amount by returnung the same amount in future to Mr Y.

This might not be easy as Mr Y might have shown the amount he had given as Expenses and not as loans.
So unless the Mr Y also agree to show amount given to Mr Y as loan, this seems not possible.

Also Loan taken cannot be repaid in cash above Rs 20000 as per the Section 269T of the Income Tax Act 1961.

Bigger Challange may arise ITR of Mr Y is selected for scrutiny by the income
tax department. In that case, Assessing officer mighr cross check such expenses by asking confirmation of accounts from Mr X. So in that case Mr Y would be caught for tax invasion.

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