Cash disclosed in ITR not to incur 200% fine

The devil is always in the fine print, especially when it comes to the Income Tax (I-T) Act and its rules. Following demonetisation, tax experts are examining whether penalty under section 270A of the I-T Act (which is 200% of the I-T payable on misreported or under-reported income) can be levied if an individual deposits unaccounted money, but pays advance tax on the same and also declares it in his I-T return (ITR). Prima facie, it appears that in a scenario where income has been declared in the ITR, this penalty cannot be imposed unless the I-T Act is amended. To illustrate: A person has deposited cash in excess of Rs 10 lakh in his bank accounts up to December 31. He has paid advance tax against these sums deposited by December 15 and March 15. Further, he declares such deposits as his income in his ITR for the fiscal year 2016-17. The moot issue is can penalty under section 270A be imposed on the grounds that the income was misreported or under-reported? This issue came up during an in-house panel discussion at the Bombay Chartered Accountants' Society (BCAS). According to Ameet Patel, chairperson of the taxation committee at BCAS, & quot As per the existing provisions of the I-T Act, section 270A cannot be applied in such a situation as the income has been voluntarily offered for tax. So it cannot be construed as a case of under-reporting or misreporting. The problem, however, would be in terms of explaining the source of the income. But that in itself may not be enough for levying penalty.& quot A series of tweets by the ministry of finance (@FinMinIndia), which were retweeted by revenue secretary Hasmukh Adhia on November 9, stated that if cash above Rs 10 lakh is deposited in a bank account and is not matching with declared income (which is the income declared in the ITR), the same will be treated as 'tax evasion'. In such a case, the I-T plus a penalty of 200% of the I-T payable would be levied as per section 270(A) of the I-T Act. & quot This does not seem to be in line with the law as it stands today,& quot adds Patel who, however, admitted that an amendment cannot be ruled out. Gautam Nayak, former president of BCAS, adds, & quot While no penalty can be levied if one discloses the amount in one's ITR, the issue is not so simple. There are other risks besides a likely amendment (especially since the tax rate under the recently concluded Income Disclosure Scheme was higher). There could also be possible litigation regarding the year of taxation with resultant penalty and prosecution.& quot I-T penalty is just one aspect, people should also be aware of the consequences of other laws, such as the Benami Property Act and the Prevention of Money Laundering Act, adds Nayak. Continuing with the same illustration, if the depositor is not able to prove the source of his income, can the I-T officials treat it as income of an earlier year and reopen assessment? & quot They could, but reopening is a lengthy process that requires approval of higher officials. Also, the I-T department is currently not adequately staffed to cope with so many more cases,& quot adds Patel.

OUR TAKE

The government has maintained its stance that the honest taxpayer and honest citizens are not to get worried by the demonetization decision. The task was to catch hold of the fraudsters and thus eliminate black money. The honest taxpayer should in fact, be happy that the dishonest ones are being caught hold of and getting punished.