Introduction

The Ministry of Finance has declared existing series of the value of Rs.  500 and Rs. 1,000  not to be a legal tender. As the Specified Notes cease to be legal tender as part of the demonetization plan of government to club black money, a system has been primed under which the Specified Notes can be deposited or exchanged across bank branches and other places designated by the Reserve Bank of India up to 30 December 2016 (and in exceptional cases, 31 March 2017). There has been a lot of discontent over many aspects related to this budge, however, the most puzzling aspect has been the nature of treatment of such deposit of the Specified Notes under the Income Tax Act, 1961. Concerns were raised that the existing provisions of Income-tax Act, 1961 does not provide for stringent provisions to tax and penalize undisclosed income in the form of cash deposits.

Let s address the changes in penalty provisions and tax at maximum marginal rate for un-explained source – vis-à-vis demonetization.

 

Amendment in Rules 114B and 114E (corresponding to Section 285BA of the Act relating to Annual Information Reports)

 As announced by the Revenue Secretary, Rules 114B and 114E (corresponding to Section 285BA of the Act relating to Annual Information Reports) were amended to enable banks to report cash deposits in AIR of over Rs. 250,000 (previously Rs. 10,00,000) to the Central Board of Direct Taxes (“CBDT”). It is further announced that any cash deposits made from undisclosed sources would attract penalty of 200% of tax payable, even if they are subject to tax at the maximum marginal rate of 30%.

Introduction of a scheme called – ‘Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016’ (PMGKY) as Chapter IX A of the Finance Act 2016.

The purpose of the PMGKY scheme is to provide a new window for taxpayers to declare and pay tax on undisclosed cash deposits in the form of income for the period upto  Financial year 2015-16. In respect of the undisclosed income in the form of cash and bank deposit for period upto Financial year 2015-16, a declarant is required to pay the following:

• 30% as tax of the income declared
• 33% of tax as surcharge
• 10% as penalty of the income declared.  
• This would total to approx  50% of income.  Additionally, a declarant is also required to deposit 25% of declared income in interest free Deposit Scheme (referred to as Pradhan Mantri Garib Kalyan Deposit Scheme, 2016) for 4 years from the date of deposit.                                                                                                               
  

  Further, amendment has also been proposed in the Income Tax Act by way of Taxation Laws (Second Amendment) Bill, 2016 (‘the Bill’) to provide for tax treatment of undisclosed income primarily resulting from the demonetization drive. The bill has been passed by the Lok Sabha on 29 November 2016.

 Amendment to Income Tax Act 1961 to provide for higher taxation & stringent penal provisions w.e.f. 1 April 2016 (AY 2017-18).Non declaration of undisclosed income under the Scheme will render such undisclosed income liable to tax at a higher rate and stringent penalty provision, changes have been proposed in section 115BBE, Section 271AAC and section 271AAB. The tax and penal provisions shall also be applicable in all other cases(apart from the scheme) of unexplained money, credits, investments, expenditures, etc.

Section 115BBE

This section is applicable when assessee voluntarily offers undisclosed income in return of income and pays taxes before the end of the financial year; or such income is determined by the Assessing Officer during the assessment proceedings.

Earlier Provisions	Changed Provisions
Flat rate of tax@30%+surcharge+cess (No  expense, deductions, set-off is allowed)	– Flat rate @ 60% of income – Surcharge @25% of tax, i.e. 15% of income  – Total incidence of tax = 75%* *Cess to be considered separately @ 3% (No expense, deductions, set-off is allowed)

Introduction of new section 271AAC for penal provisions

This section is applicable if Assessing Officer determines income referred to in section 115BBE, penalty may be levied by him. PENALTY under Section 271AAC is applicable if Assessing Officer determines income referred to in section 115BBE, then penalty @10% of tax payable would be levied in addition to tax (including surcharge) of 75% as per Section 115BBE.

Penalty for search cases in 271AAB

Earlier Provisions	Changed Provisions
(i)                  10% of income, if admitted, returned and taxes are paid (ii)                20% of income, if not admitted but returned and taxes are paid (iii)               60% of income in any other case	(i)                  30% of income, if admitted, returned and taxes are paid (ii)                60% of income in any other case

Introduction of new Section 270A

Under the existing provisions, penalty on account of concealment of particulars of income or furnishing inaccurate particulars of income is leviable under section 271(1)(c) of the Income-tax Act. In order to rationalize and bring objectivity, certainty and clarity in the penalty provisions, it is proposed that section 271 shall not apply to and in relation to any assessment for the assessment year commencing on or after the 1stday of April, 2017 and subsequent assessment years and penalty be levied under the newly inserted section 270A with effect from 1stApril, 2017. The new section 270A provides for levy of penalty in cases of under reporting and misreporting of income. Sub-section (1) of the proposed new section 270A seeks to provide that the Assessing Officer, Commissioner (Appeals) or the Principal Commissioner or Commissioner may levy penalty if a person has under reported his income. It is proposed that a person shall be considered to have under reported his income if,-

• the income assessed is greater than the income determined in the return processed under clause (a) of sub-section (1) of section 143;
• the income assessed is greater than the maximum amount not chargeable to tax, where no return of income has been furnished;
• the income reassessed is greater than the income assessed or reassessed immediately before such re-assessment;
• the amount of deemed total income assessed or reassessed as per the provisions of section 115JB or 115JC, as the case may be, is greater than the deemed total income determined in the return processed under clause (a) of sub-section (1) of section 143;
• the amount of deemed total income assessed as per the provisions of section 115JB or 115JC is greater than the maximum amount not chargeable to tax, where no return of income has been filed;
• the income assessed or reassessed has the effect of reducing the loss or converting such loss into income

Section 270A provides that if there is “under -reporting” of income under any of the said situations (stated above), then penalty equal to 50% of the tax payable on the under-reported income would be levied. In the case of “under-reporting” of income, two rates for levy of penalty have been prescribed by the statue, as follows:-

1. When the “under-reporting” is not because of misreporting, the penalty would be 50% of tax payable on the “under-reported” income.
2. When the “under-reporting” is because of misreporting, the penalty would be 200% of the tax payable on the “under-reported” income.

 Conclusion

The primary point to be noted here is that all cash that is deposited is not definitely income, or for that matter, undisclosed income. However, the onus is largely on the assessee to prove that he has not misreported or suppressed any facts while making deposits of the Specified Notes. At the same time, the Department cannot summarily, and without any coherent reasons, reject the explanations offered by the assessees. It is not an exaggeration to say that this drive is likely to result in prolonged litigation and some degree of inconvenience to the assessees. With reports coming in that notices are already being issued seeking explanation for the sources of cash deposits, we can only hope that the ‘ease of doing business principles’ are followed with the Indian residents and assessees.