Dear Moneybags,
Hope you are better now. Anxiety keeps you awake all night, sources tell me. It takes great strength to maintain poise in the face of such financial calamity. Modiji has been harsh indeed — rendering worthless, in one fell swoop, your not-inconsiderable stack of unaccounted ₹500 and ₹1,000 notes.
Your desperate gold-for-notes dash on that fateful night of November 8 after the shock announcement, and attempts to get rid of the papers at a hefty 20-30 per cent discount, courtesy the friendly hawala operator, hardly made a dent on the stash, I’m told. Thankfully, all of us have been allowed to deposit the old notes without any limit in our bank accounts until December 30.
Well, you reconciled, let’s deposit the moolah, pay up the long-evaded tax, and get on with life. But very soon, Revenue Secretary Hasmukh Adhia dropped another bombshell. Cash deposits above ₹2.5 lakh until December 30 that don’t match with the income declared in your tax return will not only be taxed but will also attract penalty at 200 per cent of the tax, he said. Prosecution could follow, he added. You almost fainted. With good reason — given the enormity of your hoard, you could end up paying more than 100 per cent of the cash plus run the risk of going to jail. Why invite all this trouble, you thought, let’s just burn or dump the cash, as some of your fellow Moneybags already seem to be doing.
Your predicament prodded us to check with tax experts as to how the cookie will crumble. What we hear should give you some hope, but only if the government goes by the tax law as it is. If it decides to change the law to take you to task, bad luck. And even within the existing rulebook, there are ifs and buts.
Tax and penalties First, the good news. There is a chance you can get away lightly under the existing law if you come clean at least now. You will have to pay the maximum marginal rate of tax — 30 per cent plus cess plus surcharge if applicable — on the unaccounted money deposited in the bank, and can escape the penalty. For this, you need to disclose the cash deposit as your income of the current year (FY 2016-17) in the tax return filed next year (AY 2017-18). Says Rakesh Nangia, Managing Partner, Nangia & Co, Chartered Accountants, “In the current scenario of demonetisation, assessees depositing cash may include such cash in the income tax return for AY 2017-18 and pay taxes at maximum marginal rate under Section 115BBE of the Income Tax Act.” Don’t expect any more concessions though. Sudhakar Sethuraman, Partner, Deloitte Haskins & Sells LLP, says, “No deduction in respect of any expenditure or allowance or set off of any loss shall be allowed against such income.”
So, when is the penalty payable? That comes into play when you under-report or misreport your income. You will be said to have under-reported when the income assessed or reassessed by the taxman is more than the income offered by you in the income tax return.
Under-reported income becomes misreported income if you misrepresent or suppress facts, fail to record investments or receipt having a bearing on total income, claim expenditure not substantiated by evidence, fail to report any international transaction, or record false entries in the books of accounts.
The penalty is markedly different for under-reported and misreported income. Says Shuddhasattwa Ghosh, Partner - People Advisory Services, EY, “Penalty under Section 270A shall be 50 per cent of the tax in case of under-reporting of income and 200 per cent of the tax in case of misreporting of income.”
So, if you include the total cash deposited under demonetisation in your return of income for the current financial year 2016-17 (AY 2017-18), technically, there will be no under-reporting of income. And since penalty at 50-200 per cent of the tax can be levied only on unreported or misreported income, there will be no penalty. Explains Sudhakar Sethuraman, “Where the taxpayer voluntarily discloses the cash deposits as income under Section 68/ 69A of the Income Tax Act in the income tax return and discharges tax liability thereon, then the same may not attract any penalty under section 270A of the Act for the financial year 2016-2017.”
Ifs and buts But things may not play out so nicely. Says Rakesh Nangia, “The tax authorities may allege that the unexplained cash credit is misreporting of income and liable to penalty at 200 per cent.”
Also, if the cash pertains to concealed income of earlier years, then the penalty amount shoots up. Girish Vanvari, Partner and Head of Tax, KPMG in India explains , “ The penalty for FY 2017 and onwards for undisclosed income is governed by Sections 270A of the IT Act. For earlier years, the penalty provisions are under Section 271(1)(c). If the income pertains to a period prior to FY 2017, penalty could range from 100 per cent to 300 per cent of the amount of tax sought to be evaded.”
Here’s what this means. The taxman may not accept your explanation that the entire cash deposited is income of the current year. If he is able to establish that the income pertains to earlier years, then he could take a view that you concealed income and charge penalty under Section 271(1)(c). This could go up to 300 per cent of the tax sought to be evaded. Ouch!
Prosecution Also, jail could beckon if you have tried to be too clever. Prosecution provisions under Section 276C come into play if you have wilfully attempted to evade any tax, penalty or interest. “Prosecution may be initiated if the tax on under-reported income is more than ₹25,000,” says Rakesh Nangia. Where the tax sought to be evaded or tax on under-reported income exceeds ₹25 lakh, imprisonment, a rigorous one at that, could be between six months and seven years along with fine. For lower amounts, the rigorous imprisonment could be between three months and two years along with fine.
Appeals and immunity Not all may be lost though. If you are unhappy with the taxman’s order, you can appeal to the Commissioner of Income Tax (Appeals). But you will have to pay the demand unless a complete stay is obtained. If the CIT (Appeals) rules against you, you can knock the doors of the Income Tax Tribunal.
You can also apply under Section 270AA to get immunity from penalty under Section 270A and from prosecution proceedings under Section 276C. But for this, you have to pay the tax and interest as per the taxman’s order within the stipulated time and should not file appeal against the order. Depending on the facts of the case, the taxman may grant immunity, if there was no malafide intention to conceal. No immunity is granted in cases of misreporting of income. In case immunity is not given under Section 270AA, you can apply for a once-in-a-lifetime waiver of penalty to the Commissioner of Income Tax under Section 273A. This would require voluntary disclosure of unaccounted income, co-operation in enquiries and payment of all tax dues with interest before detection by the assessing officer.
Government dilemma If the government goes by the current rulebook, you, Moneybags, could perhaps get away with paying 35 per cent tax or so on your cash hoard. This will be much lower than the 45 per cent charged to those who declared under the Income Declaration Scheme (IDS) that closed on September 30. Will the government allow this? Also, some reports indicate that tax department will not wait until next year; it may impose tax and penalty even before the income tax return is filed. Whether the government tightens the screws thus needs to be seen.
Tax experts think such moves may be unlikely given that it would require retrospective changes to the tax law. Rakesh Nangia says, “As per current provisions, cash deposited during the financial year 2016-17 needs to be accounted for in the return of income to be filed for AY 2017-18. While assessing the income for AY 2017-18, the assessing officer would scrutinise the case in the light of income returned and assessed in preceding years. An assessee depositing cash has to establish the source of such cash deposited. In case an assessee is unable to explain the source of such cash, the same shall tantamount to unexplained cash credit liable to tax at the maximum marginal rate of 30 per cent (plus surcharge and cess).”
Nangia adds, “Accordingly, to levy penalty, there has to be an assessment of income and if it is found that there is under-reporting/misreporting of income, penalty may be levied. Hence, as per the existing provisions of tax law, a penalty cannot be levied on the mere incidence of cash deposit. Merely depositing cash does not imply that the assessee shall not be able to explain the source of income.”
Still, the Damocles sword hangs over those who have much to hide. Says Divya Baweja, Partner, Deloitte Haskins & Sells LLP, “As per information obtained from banks and post offices, tax authorities could initiate search proceedings or send notices asking for information regarding the nature and source of the deposits. Based on the responses, they can levy tax along with interest and penalty on under-reported income, if it could be established that such income pertains to previous years (prior to FY 2016-17) and was not reported by the depositor while filing the tax return.” The schoolbook was right, Moneybags. Honesty is the best policy.
Yours truly,