Demonetisation and Income tax

1. K.VAITHEESWARAN
ADVOCATE &TAX CONSULTANT
‘VENKATAGIRI’
Flat No.8/3 & 8/4, Ground Floor,
No.8 (Old No.9), Sivaprakasam Street,
T. Nagar, Chennai - 600 017, India
Tel.: 044 + 2433 1029 / 4048
402, Front Wing,
House of Lords,
15/16, St. Marks Road,
Bengaluru – 560 001, India
Tel : 080 22244854/ 41120804
Mobile: 98400-96876
E-mail : vaithilegal@yahoo.co.in / vaithilegal@gmail.com
www.vaithilegal.com

2.  On 12th January 1946, Rs. 500 was demonetized and people were given
10 days for exchange. After this period explanation was required as to
why exchange was not done in the first 10 days.
 The Scheme was a failure as out of the total issue of Rs. 143.97 crores of
High Denomination Notes, Rs. 134.90 crores were exchanged. Thus only
Rs. 9 crores were demonetized.
 1946 exercise turned out to be only an exchange.

3.  On 16th January 1978, Demonetization Ordinance was announced
via AIR at 9 AM.
 The Ordinance provided that banks and treasuries would be closed
on 17th January 1978 for all business except preparation and
presentation or receipt of returns.
 Only 3 days time was given to exchange Rs. 1000, Rs. 5000 and Rs.
10000 notes.
 Long queues formed in front of RBI and SBI to collect declaration
forms.
 Rs. 73 crores was the demonetized figure though Rs. 1067 crores
were added through Rs. 100 notes and smaller denominations
made up for another Rs. 650 crores.
 Very few people were using Rs. 10000 notes.

4.  In 2011, the Supreme Court in the case of Ram Jethmalani and Others
Vs. UOI had directed appointing of an SIT for investigating matters
pertaining to black money and money stashed abroad.
 Application for review dismissed in 2011.
 No action was taken for 3 years
 The new Government in 2014 constituted a Special Investigation Team
(SIT) consisting of two retired judges for recommending steps to curb the
menace of black money.
 Black Money Act, 2015 was enacted to unearth undisclosed foreign income
and assets.
 One time compliance scheme for voluntary disclosure of undisclosed
foreign assets.
 DTAA between India and Mauritius / Cyprus renegotiated.
 Understanding with Switzerland for getting information on bank
accounts held by Indians
 Income Declaration Scheme , 2016.

5.  RURAL : 15.67 crore bank accounts
 URBAN : 9.84 crore bank accounts
 TOTAL : 25.51 crore bank accounts
 NO OF RUPAY CARDS : 19.44 crores
 AADHAAR SEEDED : 13.69 crores
 BALANCE IN ACCOUNTS : Rs. 45636.61 crores
 % OF ZERO-BALANCE-ACCOUNTS : 23.27%
 Recent press reports state that nearly 21,000 Crores
have been deposited in Jan Dhan.

6.  “I propose a limited period compliance window for domestic taxpayers to
declare undisclosed income or income represented in the form of any asset
and clear up their past tax transgressions by paying tax at the rate of 30%;
surcharge at 7.5% and penalty at 7.5% , which is the total of 45% of
undisclosed income. Our Government is fully committed to remove black
money from the economy. Having given one opportunity for evaded income
to be declared once, we would then like to focus all our resources for
bringing people with black money to books…..” - Hon’ble Finance Minister,
Budget Speech 2016.

7.  Mere pyaare Deshwasiyon…
 “Why don’t we, on our own, give the correct details of our income and
property to the government, so that we can rid ourselves from the
burden of hitherto undeclared assets?”
 “I appeal to the countrymen to do this. To the people who have
undisclosed income, the Government of India has given a chance to
declare such income. The government has presented before the
country a special facility to disclose undisclosed income by the 30th of
September.”
 For those who voluntarily declare to the government their assets and
their undisclosed income, no enquiry will be conducted. No questions
as to from where all this wealth came and how it was acquired.

8.  At the same time, I want to tell the people of the country
that please consider this plan, which is up to 30th
September as your last chance.
 If any citizen is put through any difficulty, the one who does not
want to follow due rules of government, then it will not be possible
to help them.
 “I want to say this to the people of the country that we do not
wish that after the 30th September anything should happen that
will cause difficulties for you. And so I say that please avail of
this facility before this date and save yourselves from any
possible trouble after the 30th of September.”

9.  8th November 2016 at 8 PM
 Disbelief
 Panic Mode
 Gold Rush
 ATM Rush on 10th November
 Pressure on Banks
 Withdrawal Limits and changes
 Reasons for new norms and additional conditions
 Cash and Liquidity Crunch
 Initial lull in trade and business
 Reaction of Opposition Parties
 Media Reaction

10.  Cash has been sucked out of the system
 It would take months to replace equal amount of cash
 Initial reaction would be to buy on need basis and conserve /
accumulate new notes
 Slow and steady shift to cashless transactions such as RTGS/
NEFT/ debit card/ credit card/e-wallet
 Contrary to popular theory, urban and rural would easily adapt
whereas semi-urban and semi-rural could struggle
 Cluster Banking / ATM on call / outsourced banking centers will
have to be created if society has to move from cash to cashless
rapidly
 Thrust would be towards cashless transactions.

11.  Business would come down due to shock
 Next 6 months would see a dip in GDP
 Inflation would come down significantly
 Banks are expected to receive nearly Rs. 10 lakhs crores
 Money not deposited and simply retained is gain for RBI and
the Government
 Deficit could be wiped out
 More window for huge budget outlay
 If demonetized notes are written off, possibility of
Government printing that much of currency
 Government will have to pump in money by increasing
expenditure

12.  Lesser appetite for non accounting of transactions in the short term
period
 Increased reporting and compliance
 Loss for certain businesses could be very significant
 Huge impact on corrupt politicians, authorities and others
 Impact on commerce and industry which are in possession of
unaccounted but not illegal income
 Some businesses could disappear
 Government vigil and further action would follow since media and
opposition have criticized the Government by stating that black money
exists only in other assets
 Re-start of economic activity
 Whether the problem of corruption has been arrested?
 Prime Minister should follow it up with Surgical Strike III on corruption
if the strike on black money has to succeed.

13.  Huge Direct tax collections on account of new assesses /
fresh taxes by old assesses / disclosure / higher tax
compliance for future
 Possible huge increase in advance tax payments on
15.12.2016.
 Huge work load for the Department
 Information may be sought by the assessing officer under
Section 133 (6) of the Income Tax Act based on bank deposits
or details furnished by the Banks
 Indirect tax notices

14.  When cash balance is available in the properly
maintained books of accounts duly audited, deposit
of such cash cannot be considered as income.
 This is subject to
• Availability of source of income
• Availability of cash balance
• Explanation being accepted by the Authorities in case
notice is issued.

15.  If any sum is found credited in the books of an assessee for any previous
year and
 The assessee offers no explanation about the nature and source thereof
or the explanation is not satisfactory
 The sum so credited may be charged to income tax at the income of
the assessee of that previous year
 Where the assessee is a company not being a company in which public is
substantially interested and the sums so credited consists of share
application money or share premium or share capital etc. any
explanation will be considered as not satisfactory unless
 The other person being a resident in whose name the credit is recorded also
offers an explanation about the nature and source and
 Such explanation is satisfactory in the opinion of the AO

16.  Where in any financial year Assessee is found to be the
owner of any money, bullion, jewellery or other valuable
article and
 Such items are not recorded in the books of accounts for any
source of income and
 No explanation is offered about the nature and source
 The money/ value of bullion, jewellery or other valuable article
may be deemed to be the income of the Assessee for such
financial year.

17.  Section 69 – Unexplained investments
 Section 69B – Investments not disclosed in books of
accounts
 Section 69C – Unexplained expenditure
 Section 69D – Amount borrowed or repaid in hundi

18.  Where income includes income referred to in Section 68 / 69
/ 69A / 69B / 69C / 69D, the income tax payable shall be the
aggregate of
• Tax at the rate of 30% on income referred to in Section 68 /
69 / 69A / 69B / 69C / 69D and
• Tax which the Assessee would have been charged on his
total income as reduced by the amount referred to above.
 No deduction of expenditure or allowance or set off is
available.

19.  Under reporting of income.
 Under reporting if income assessed is greater than
the returned income.
 Under reporting attracts penalty equal to 50% of
tax.
 If under-reporting is in consequence of mis-
reporting, penalty is equal to 200% of the tax on
under reported income.

20.  Misreporting would cover
• Misrepresentation or suppression of facts
• Failure to record investments in books of
accounts
• Claim of expenditure not substantiated by
evidence.
• Failure to record any receipt in the books of
account having a bearing on the total income.

22.  Bill No.229 of 2016 introduced in the Lok Sabha.
 Section 115BBE proposed to be amended from
01.04.2017.
 Amendments to Section 271AAB(1)
 Insertion of Section 271AAB(1A)
 Insertion of Section 271AAC
 Amendment to Section 2(9), Chapter II, Finance
Act 2016
 Introduction to Chapter IXA (Section 199A to
199R) to Finance Act 2016

23.  Where total income of an assessee includes
(a) any income referred to in Section 68 / 69 / 69A / 69B / 69C /
69D, and reflected in the return under Section 139; or
(b) income determined by the Assessing Officer includes any
income referred to in Section 68 / 69 / 69A / 69B / 69C / 69D if
not covered above, …..
 Then the income tax payable shall be the aggregate of
• Tax at the rate of 60% on income referred to in Clause (a) or
(b) above and
• Tax which the Assessee would have been charged on his
total income as reduced by the amount referred to above.
 Section 115BBE(2) which provides that no deduction of expenditure
or allowance or set off would be granted continues.

24.  Section 271AAB(I) to have a sunset clause upto the date the Amendment
Bill receives the assent of the President.
 Where a search is initiated under Section 132 after the Amendment Act
receives the assent of the President, penalty is payable in addition to the
tax
• @ 30% of the undisclosed income of the specified previous year if the
Assessee through a statement under Section 132(4) admits
undisclosed income and specifies the manner in which it was derived
and substantiates the same and
• Pays tax with interest is any before the specified date in respect of
the undisclosed income and
• Furnishes return for specified previous year declaring undisclosed
income.
 Penalty at 60% of the undisclosed income if it is not covered under the
provisions of clause (a) above.

25.  AO not withstanding anything contained in the Act other
than Section 271AAB direct that if the income determined
includes income under Section 68 / 69 / 69A / 69B / 69C /
69Dfor any previous year.
 The Assessee shall pay penalty in addition to tax under
Section 115BBE @ 10% of the tax payable under Section
115BBE(1)(i).
 No penalty if income included in the return and tax under
Section 115BBE has been paid on or before the end of the
relevant previous year.
 No penalty under Section 270A.
 Section 274 & 275 shall apply in relation to the penalty.

26.  Existing surcharge rates on advance tax in
respect of tax determined under Section
115BBE deleted.
 Surcharge rates at 25% of advance tax in
respect of income chargeable to tax under
Section 115BBE(I)(i).

27.  Chapter IXA of Finance Act 2016 effective from date
notified.
 Taxation and Investment Regime for Pradhan
Mantri Garib KalyanYojana 2016.
 Declaration of undisclosed income in the form of
cash or deposit.
 In an account maintained with a specified entity.
 Chargeable to tax for any AY commencing on or
before 01.04.2017.
 No deduction

28.  Specified Entity shall mean RBI, Banking Company, Co-operative bank to
which Banking Regulation Act applies, Head Post Office, Sub-Post Office
or any other notified entity
 Undisclosed income declared under Section 199C shall be chargeable to
tax @ 30% notwithstanding anything contained in the Income Tax Act or
any Finance Act.
 Surcharge @ 33% of the tax called as Pradhan Mantri Garib Kalyan
Cess.
 Penalty @ 10% of the undisclosed income.
 Effective outflow 49.9%
 Section 199F provides that person making declaration should deposit an
amount not less than 25% of the undisclosed income in the Pradhan Mantri
Garib Kalyan Deposit Scheme 2016.

29.  No interest on said deposit
 Lock in for 4 years from date of deposit.
 Amount can be withdrawn after 4 years subject to conditions
specified in the scheme.
 Section 199G requires a declaration under Section 199C by a
person competent to verify the return of income
 Declaration to the Principal Commissioner or the Commissioner
notified.
 Tax, Surcharge and Penalty payable before filing declaration
 Deposit before filing declaration
 Proof of payment of tax, surcharge, penalty and deposit should
accompany the declaration.

30.  Section 199I provides that undisclosed income declared as
per Section 199C shall not be included in the total income of
the declarant for any AY under the IT Act.
 Undisclosed income declared cannot affect finality of
completed assessments.
 No refund of amount paid
 Section 199L provides notwithstanding anything contained
in any other law for the time being in force nothing contained
in the declaration made under Section 199C(1) shall be
admissible in evidence against the declarant for the purpose of
any proceeding under any Act other than the Acts mentioned in
Section 199O.

31.  Section 199O provides that the scheme shall not apply to
• Person in respect of whom an order of detention has been
issued under COFE POSA.
• Prosecution of offence under Chapter IX to XVII of IPC, NDPS
Act, Unlawful Activities Prevention Act 1967, Prevention of
Corruption Act 1988, Prohibition of Benami Property
Transactions Act 1988, Prevention of Money Laundering Act,
2002.
• Any person notified under Section 3 of the Special Court (Trial
Of Offences RelatingToTransaction In Securities) Act 1992
• In relation to any undisclosed income and asset which is
chargeable under the Black Money (Undisclosed Foreign
Income and Assets) and Imposition ofTax Act, 2015.

32.  Section 199P provides that nothing contained in the
Scheme shall be construed as conferring any
benefit, concession or immunity on any person
other than the person making the declaration under
the Scheme.
 Form of declaration, verification to be prescribed
through the Rules.

33.  This scheme is wider in scope than the earlier scheme
 Exclusions are very limited in the new scheme
 Earlier scheme contemplated a deferred outflow of 45%
whereas new scheme contemplates an instant outflow of
49.9% with the additional deposit requirement
 No restrictions in the new scheme in the context of pending
proceedings or notices
 Earlier scheme covered income chargeable to tax either in
the form of income or in the form of investments whereas
new scheme covers income in the form of cash or deposits in
a specified entry

34.  Higher level of compliance
 W.e.f. AY 01.04.2017, if income includes income referred to in
68 / 69 / 69A / 69B / 69C / 69D and reflected in the return or is
determined by the officer, the tax rate is 60% under
Section 115BBE.
 Surcharge at 25% of the tax
 Section 271 AAC provides for a penalty of 10% of the tax
payable under Section 115BBE(i)

35. K.VAITHEESWARAN
ADVOCATE &TAX CONSULTANT
‘VENKATAGIRI’
Flat No.8/3 & 8/4, Ground Floor,
No.8 (Old No.9), Sivaprakasam Street,
T. Nagar, Chennai - 600 017, India
Tel.: 044 + 2433 1029 / 4048
402, Front Wing,
House of Lords,
15/16, St. Marks Road,
Bangalore – 560 001, India
Tel : 080 22244854/ 41120804
Mobile: 98400-96876
E-mail : vaithilegal@yahoo.co.in vaithilegal@gmail.com
www.vaithilegal.com