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Presently e-notices are being sent by the department to the assessee and seeking the verification of information regarding deposit of cash during the period 9th November to 30th December 2016. The intention behind asking these information is just to verify whether such deposit belongs to the assessee and if yes then what is the nature of source of such deposit. The next step by the department probably would be co-relating the deposit with the income of the past years or out of the additions made in such year in assessing the total income. In all such cases, the onus will be on the person depositing the money to reasonable establish that the money so deposited is the income of the previous years that has remained in cash and such cash was held in specified bank notes (SBN). If the assessee fails to explain the reasonable source of such receipts of SBN, the possibility of levy of penalty cannot be ignored. In such cases the levy of penalty on application of Explanation 2 to Section 271(1)(c) and/or section 270A(4) and (5) of the Act and now even Section 270AAC will also have to be considered. It is also seen that in the month of January 2017 the Income Tax Department has issued notices u/s 133(6) for enquiring the source of deposit of SBN and some cases Survey u/s 133A has been carried out. In case of enquiry u/s 133(6) and survey u/s 133A the liability to penalty will be solely determined with reference to income disclosed in the return of income. To avoid the consequential penalties, the person will have to establish that the income and the deposit thereof are duly recorded in the books of account.
While replying the notices to the Income Tax Department, it is important to note that the reply must be correct, it should have substance and it is properly documented. Many businesses have received SBN after 8th November 2016 as consideration for sale of goods or services or against payment of their outstanding dues and subsequently deposit such SBN into the respective bank accounts. These answers may not substantiate in the eyes of law because the transaction of such SBNs are not legally tendered w.e.f the midnight of 8th November 2016. This was only allowed for certain business like, electricity companies, hospitals, pharmacies, consumer co-operative stores, etc. only these business can legitimately claim that the source of deposit of the SBN by them in the bank account is on account of such sales or receipts. The same answer will not sustain in the case of other businesses.
One can also take the view that there is no prohibition of transfer or receipt of the SBNs which has cease to be legal tender if both the parties of the transaction are willing to transact in such notes. One can also take a plea that in the year 1978 when demonetisation took place, there was specific provision in the Demonetisation Bank Notes (Demonetisation) Act, 1978 which says "no person could, after 16th day of January 1978, transfer to the possession of another person or receive to the possession of another person any high demonetisation bank notes". However, such prohibition is not there in the notification issued by Ministry of Finance. On the contrary, the consideration of a contract to be settled by exchange of SBNs is opposed to public policy, and the consideration is therefor unlawful. Under the current demonetisation, by withdrawal of SBNs as legal tender, prohibition on their transfer should be implied. Therefore, one cannot claim setoff of such receipts against the deposit of SBN.
Interesting issues may arise in a case of a sale of goods, on or after 9th November 2016 against demonetised currency where he is not an authorised person to receive such currency. In such case, a question arises as to whether the seller can be construed to have sold goods for no economic consideration and accordingly not be taxed on so called sale proceeds. If so, the question will also arise whether the purchaser of goods can be subjected to tax u/s 56(2)(vii) for having acquired the goods for inadequate or no consideration, in such a case.
Now the situation arises, what if the deposit of SBN in specified period does not belongs to the assessee and the assessee chooses option 'NO'. This may trigger the provisions of the newly amended "Benami Transactions (Prohibitions) Amendment Act, 2016 which has been made effective from 01.11.2016. under this Act, holding of the property in the name of a person other than the owner is an offence and the property so held is made liable to confiscation and the owner of the property, in addition, is subjected to a fine and punishment too. Similarly holding of the property in the fictitious name is subjected to the same fate. The government has also issued a press release dated 18th November 2016, clarifying that such tax evasion activities can be made subject to income tax and penalty if it is established that the amount deposited in the account was not of the account holder but of somebody else.
If the person declares that this deposit belongs to him but this has come as loan taken by him or repayment of certain loan and not through sale proceeds, the provision of Section 269SS and Section 269T will attract. The threshold limit under this section for transaction otherwise than by an account payee bank draft or use of electronic clearing system through a bank account is Rs. 20,000/-. Contravention of the provisions of the above mentioned sections may attract penalty, a sum equal to the amount of the loan or deposit accepted or repaid.
Another situation can arise when a person deposited the SBNs in his account and transferred the amount to the account of the beneficiary. In this situation there is two transactions taken place. The first transaction is deposit of SBNs in his savings/current account and the second transaction is payment through proper banking channel. This can be a serious offence or in other words, it's a crime and you will expose to the stringent provisions of Prevention of Money Laundering Act. Any money received in violation of the provisions of enactments like SEBI, SCRA and other laws may be treated as the proceeds of crime and will be subject to confiscation and fine and imprisonment for the offender. Any person indulging in conversion of the SBNs may be considered to have committed an offence under the Indian Penal Code.
Further, consider a situation where the aggregate amount deposited in a bank account is less than Rs. 2.5 lakh. A new requirement of furnishing details through AIR by bank and post office has been inserted in Rule 114E, requiring furnishing of details of cash deposit made during the period 9th November to 30th December 2016 if such cash deposit is Rs. 12.50 lakh or more in current account and Rs. 2.50 or more in any other account. It is important to note that mere non-reporting in the AIR does not mean that amount of deposit is not taxable. Such deposit may escape taxation in the case of a person who is not an assessee and does not file his return. However, if the depositor is an assessee and files his tax return and if such case selected for scrutiny, the depositor would necessarily have to explain the source of such deposit and the penalty will be leviable if he fails to do so.
The after effect of the demonetisation is very huge because those who have deposited the SBN into their bank account may get a notice from the Income Tax Department and to prove the genuinity of such collection and deposit is based upon the documentation done by the assessee in this regard.
This is not end of the story and things may be more worst. If the deposit of SBN is not in commensurate with the income declared in the preceding year Income Tax Return, then the assessing officer has full right to open the earlier year's file under the provision of section 147 of Income Tax Act.
Another important situation may arise when the deposit of SBN is more than the cash in hand at the end of 8th November 2016 and the assessee declares the same in his return u/s 68, the tax payable thereon may be as per the provisions of amended section 115BBE.
To conclude, all the department action will not trigger penalty per se, until the assessee files his income tax return and the penalty can be levied only after scrutiny of such return and further the assessee will also get the opportunity of being heard. This is only the documentation which help the assessee to come out from the unnecessary tax burden and penalty.