The recent move of the Indian government to demonetise the currency notes of Rs. 500 & Rs. 1000 denominations has resulted in a huge furore throughout India. It has thrown up a large number of tax related issues. Some of these are covered in this presentation that was prepared on 20th November.

1. TAXATION ISSUES
ARISING W.R.T.
DEMONETISATION
CA AMEET PATEL
20th
November, 2016

2. Existing reporting
requirements (upto 8th
November, 2016)
AIR or FTRA
To keep a watch on high value transactions undertaken by
the taxpayer, the Income-tax law has framed the concept of
statement of financial transaction or reportable account
(previously called as ‘Annual Information Return (AIR)’.
With the help of this statement, the tax authorities will collect
information on certain prescribed high value transactions
undertaken by a person during the year.

3. Banks and Post Offices were already
reporting certain transactions to the
Income-tax department as per Rule 114E
Existing reporting requirements (upto
8th
November, 2016)

4. BANKS
Sl.
No.
Nature and value of transaction Class of person
(reporting person)
1
(a)Payment made in cash for purchase of bank
drafts or pay orders or banker's cheque of an
amount aggregating to ten lakh rupees or
more in a financial year.
A banking company
or a co-operative
bank to which the
Banking Regulation
Act, 1949 applies.
(b) Payments made in cash aggregating to ten
lakh rupees or more during the financial year
for purchase of pre-paid instruments issued by
Reserve Bank of India under section 18 of the
Payment and Settlement Systems Act, 2007.
(c) Cash deposits or cash withdrawals
(including through bearer's cheque)
aggregating to fifty lakh rupees or more in a
financial year, in or from one or more current

5. BANKS / POST
OFFICES
Sl. No. Nature and value of
transaction
Class of person (reporting person)
2
Cash deposits
aggregating to ten lakh
rupees or more in a
financial year, in one or
more accounts (other
than a current account
and time deposit) of a
person.
(i) A banking company or a co-
operative bank to which the Banking
Regulation Act, 1949 applies
(including any bank or banking
institution referred to in section 51 of
that Act);
(ii) Post Master General10 as
referred to in clause (j) of section 2 of
the Indian Post Office Act, 1898.

6. BANKS / POST
OFFICES / NBFC / NIDHI
Sl.
No.
Nature and value of
transaction
Class of person (reporting person)
3
One or more time
deposits (other than
a time deposit made
through renewal of
another time deposit)
of a person
aggregating to ten
lakh rupees or
more in a financial
year of a person.
(i) A banking company or a co-operative bank to
which the Banking Regulation Act, 1949 applies
(including any bank or banking institution referred
to in section 51 of that Act);
(ii) Post Master General as referred to in clause (j)
of section 2 of the Indian Post Office Act, 1898;
(iii) Nidhi referred to in section 406 of the
Companies Act, 2013;
(iv) Non-banking financial company which holds a
certificate of registration under section 45-IA of the
Reserve Bank of India Act, 1934 (6 of 1934), to
hold or accept deposit from public.

7. BANKS / CREDIT
CARD COMPANIES
Sl. No. Nature and value of transaction Class of person
(reporting person)
Payments made by any person of an
amount aggregating to:
(i)one lakh rupees or more in cash;
or
(ii) ten lakh rupees or more by any
other mode,
against bills raised in respect of one
or more credit cards issued to that
person, in a financial year.
A banking company or a
co-operative bank to which
the Banking Regulation
Act, 1949 applies (including
any bank or banking
institution referred to in
section 51 of that Act) or
any other company or
institution issuing credit
card.

8. TAX AUDITEES
Sl.
No.
Nature and value of
transaction
Class of person
(reporting person)
11
Receipt of cash payment
exceeding two lakh rupees
for sale, by any person, of
goods or services of any
nature (other than those
specified at Sl. Nos. 1 to 10)
Any person who is
liable for audit under
section 44AB of the
Act.

9. But its not only the AIR
or FTRA that a tax
payer needs to worry
about
He also needs to know
CIB

10. CIB
In 1975, the Income Tax Department formed the Central
Information Branch (CIB) for strengthening tax data-base.
Initially, CIB operated under the supervision of DGsIT
(Investigation). This was later brought under the Directorate
of Income Tax (Intelligence) in June 2007.

11. CIB
The key function areas of DCI are
(i)widening of tax base through identification of stop filers
and non-filers
(ii)Deepening of tax base by providing information for
proper selection of cases for scrutiny assessments
(iii)through collection, collation of information from internal
as well as external sources and its dissemination to
Assessing officers (AOs) and other users in I.T. Dept.
It also collects information relating to financial transactions like
investment, expenses, payment of taxes, etc and details of
persons who are involved in some specified activities. The
mandate also provides for identification and investigation of
cases of tax evasion arising out of criminal matters, having any
financial implication punishable as an offence under any Direct
Tax Law.

12. So, the ITO already has
two tools with which he
can confront a tax payer
with massive dose of
information
AIR/FTRA & CIB

13. Demonetisation of
High
Denomination
Currency Notes

14. 8/11
The PM dropped a bombshell through his
address on TV
Rs. 500 & Rs. 1000 notes are no longer legal
now
How does this affect us and our clients?

15. Most households in the country would
have a few of the high denomination
notes which are now no longer legal
tender
What to do with these notes?

16. There are 2 aspects involved:
1. Depositing the money into
the bank or exchanging it for
new notes
2. Income-tax implications

17. Let us look at a few
scenarios and how to deal
with them based on public
statements by the Revenue
Secretary & recent
amendments to the Rules

18. Scenario 1 –
House wife / Retired Person /
Senior Citizen
Deposit of cash upto Rs. 2,50,000 in each
account will not attract suspicion and inquiry
It will not be reported also
But does that mean, a scrutiny will not be done?

19. Scenario 2 –
Any other person
Deposit of cash upto Rs. 2,50,000 in each
account will not attract suspicion and inquiry
It will not be reported also
But does that mean, a scrutiny will not be done?

20. Scenario 3 –
Businessman
a) Deposit of cash upto Rs. 10,00,000
b) Deposit of cash in excess of Rs. 10,00,000

21. Scenario 3(a) –
Businessman
Deposit of cash upto Rs. 10,00,000
i) Need to ensure that it can be explained
ii) Questions could be asked
iii) Scrutiny may be attracted

22. Scenario 3(b) –
BusinessmanDeposit of cash in excess of Rs. 10,00,000
i) Need to ensure that it can be explained
ii) Questions could be asked
iii) Scrutiny may be attracted
iv) If the amount does not match with the returned income, it will be added
to the taxable income

23. Scenario 3(b) –
BusinessmanIf that amount is added to your income then:
i) It will be considered as “tax evasion”
ii) You then pay tax + interest
iii) You also pay PENALTY

24. Need proof that the
government is
serious about this?

25. Then see the e-filing
website

26. New section added
already!

27. Can you show the cash as
current year’s income?
Several messages on Whatsapp & Email
saying that tax + interest + PENALTY @ 200%
will be payable
Is this correct?

28. PENALTY @ 200%
Section 270A is being referred to
This section talks of “unreported income”
When you offer income to tax, can it be said to be “unreported
income”?
Too many complications involved here

29. Penalty @ 200%
Will they or will they not?
Every case is different
Facts of each case will be looked at
Scrutinies will be widespread and
many

30. Matching of cash deposited
With current year’s books / income
With earlier years’ income
With other factors (debtors’ aging; seasonal sales pattern, TCS returns
(for scrap sales) etc.
IS IT REALLY CURRENT YEAR’S INCOME? This question is
supremely important

31. So, what advice to give to
clients
Don’t panic
Don’t act in haste
Think 100 times before depositing cash into the bank
DO NOT RELY ON WHATSAPP MESSAGES / EMAIL
/ MEDIA REPORTS

32. Insertion of new Rule
12E
On 16th
November 2016, a notification has been
issued to insert Rule 12E into the Income-tax
Rules, 1961
This Rule defines the “prescribed authority” u/s
143(2) and says that this would be an Income
tax authority not below the rank of an income–
tax officer who has been authorized by the
Central Board of Direct Taxes to act as income-
tax authority for the purpose of Section 143(2).

33. Amendment to Rule
114B
What is Rule 114B ?
Transactions in relation to which Permanent
Account Number is to be quoted in all
documents for the purpose of section
139A(5)(c)

34. Amendment to Rule 114B
Sl.
No.
Nature of Transaction Value of transaction
“10
Deposit with :-
(i)A banking company or a co-
operative bank to which the
Banking Regulation Act, 1949
(10 of 1949), applies (including
any bank or banking institution
referred to in section 51 of that
Act);
(ii) Post Office.
Cash deposits :-
i.Exceeding fifty thousand
rupees during any one day; or
ii.Aggregating to more than
two lakh fifty thousand
rupees during the period 9th
November, 2016 to 30th
December, 2016.

35. Rule 114 E
What is Rule 114E?
Statement of financial transactions under
section 285BA(1) of the Act shall be
furnished in respect of a financial year in
Form No. 61A and shall be verified in the
manner indicated therein

36. Amendment to Rule 114E
Sl.
No.
Nature and Value of Transaction Class of Person (reporting
person)
“12
Cash deposits during the period
9th November, 2016 to 30th
December, 2016 aggregating to :-
i.Twelve lakh fifty thousand
rupees or more, in one or more
current account of a person; or
ii.Two lakh fifty thousand rupees or
more, in one or more accounts
(other than a current account) of a
person.
i. A banking company or a co-
operative bank to which the
Banking Regulation Act, 1949 (10
of 1949) applies (including any
bank or banking institution
referred to in section 51 of that
Act);
ii.Post Master General as referred
to in clause (j) of section 2 of the
Indian Post Office Act, 1898 (6 of
1898).
Insertion of entry 12 after serial number 11 in sub rule (2) of Rule 114E

37. Amendment to Rule
114E (Continued)
Sub-rule (5) :-
The statement of financial transactions referred to in sub-
rule (1) shall be furnished on or before the 31st May,
immediately following the financial year in which the
transaction is registered or recorded
Following proviso is now inserted :-
“Provided the statement of financial transaction in
respect of the transactions listed at serial number
(12) in the Table under sub-rule (2), shall be
furnished on or before the 31st day of January,
2017.”

38. Reporting will happen
by 31st
January, 2017
There is no legal possibility of the Income-tax department getting
any knowledge of specific account wise information of cash
deposits during the period 9th
November to 30th
December except
through the Report filed by banks by 31st
January, 2017
Therefore, the notices that are circulating on social media are
either fake or have been issued after obtaining information forcibly
from a particular bank

39. Misreporting of Income
u/s. 270A(9)
Cases of misreporting of income referred to in sub-section (8) [i.e.
Penalty which will be equal to 200% of the amount of tax payable on
under-reported income] shall be the following, namely:—
(a) misrepresentation or suppression of facts;
(b) failure to record investments in the books of account;
(c) claim of expenditure not substantiated by any evidence;
(d) recording of any false entry in the books of account;
(e) failure to record any receipt in books of account having a bearing
on total income; and
(f) failure to report any international transaction or any transaction
deemed to be an international transaction or any specified domestic
transaction, to which the provisions of Chapter X apply.

40. Section 68 and Section
115BBE
Section 68 of the Act provides inter alia that if any sum is found
credited in the books of a taxpayer and he either does not offer any
explanation about nature and source of such sum, or the explanation
offered by him is not satisfactory in the opinion of Assessing Officer,
then such sum can be taxed as his income.
Section 115BBE of the Act can be applied with reference to the
provisions of Section 68 of the Act dealing with unexplained cash credit.
Section 115BBE of the Act specifically levies tax on such unexplained
items deemed as income at the flat rate of 30% (plus surcharge and
cess, as applicable), irrespective of the slab of income. Moreover, no
deduction is available for any expenditure or allowance while
computing such deemed income.

41. Tax and Penalty
In case of Scrutiny, if no satisfactory explanation is given by such
person the assessing officer can treat this amount deposited in the
Bank as unexplained cash credit under section 68 and levy tax at
30% u/s 115BBE of the Income tax Act. He can also levy penalty
upto 200% of tax (i.e 60%) u/s 270 A. He also has the power to
prosecute such persons.
In short,
Tax would be Levied u/s 115BBE @ 30% on the unexplained
Cash credit found u/s 68.
Penalty on tax would be levied u/s 270A @ 200% on taxed
amount.

42. Contradiction of Ideas
Let’s take a example of a case of Mr. “A” who is carrying on business. He
deposits 50 Lakhs in the form of old notes during the period 10/11/2016
to 30/12/2016 in his Bank Account. He is not able to explain the source
of this deposit, and therefore, he declares this amount as his “Income
from Other Sources” in his return of income for A.Y. 2017-18 and he
pays Advance tax accordingly . His Taxable income for A.Y.2017-18 is
suppose 73,00,000 (Including old notes deposited)
Thereafter, if the A.O. makes some addition while making the
assessment u/s 143(3) and the income assessed is 75 Lakhs the
difference between the assessed income and income determined u/s
143(1)(a) will be only `2 Lakhs. This amount will be considered as under
reported income for the purpose of levy of penalty u/s 270A.

43. Contradiction of Ideas
(Continued)
Case 1 :-
If the A.O. makes an order for additional income of 2 Lakhs then according to
section 270A, penalty will be charged only on additional demand of 2 Lakhs. In
other words, 50 Lakhs deposited by the assessee during the period of
10.11.2016 to 30.12.2016 in the form of old 500 / 1000 Notes will not be
considered as under reported income and no penalty can be levied on this
amount which is declared as Income from other sources.
Case 2:-
If A.O. finds there was misreporting of Income for amount of 50 Lakhs and if
there would not be any justification from Mr.A, then A.O. can charge Penalty
u/s 270A(9) which will be equal to 200% of the the amount of tax payable on
under reported income that will be 200% of 50 Lakhs.
It is still in contradiction that in which sub section of 270A such penalty will
be charged

44. Thank You
ameet.patel@mca.co.in
You can contact me on:
@patelameet