Demonetisation has led to a huge amount of cash being deposited into bank accounts. With a limit of Rs 2.5 lakh per taxpayer, even the genuine taxpayer holding tax paid money is afraid of depositing his old currency notes, lest he faces tax scrutiny. It is important to understand that this limit of Rs 2.5 lakh is not arbitrary. It is the basic tax exemption limit for an individual and stands increased to Rs 3 lakh in case of a senior citizen.
Those who have not been filing return of income till now since their annual income in the past was below the basic exemption limit of Rs 2.5 lakh need not worry. Here are the rights of the taxpayer and those of the taxman on the cash being deposited under demonetisation:
Taxpayer’s rights and duties
Any income earned during a financial year ending March 31 is required to be reported in the income tax return to be filed in July of the following year. Now those depositing cash because of demonetisation need to ensure that they have a valid explanation about the source of such cash.
Where the cash being deposited pertains to financial year 2016-17, the same should be duly included in the return of income to be filed in July 2017. Further appropriate advance taxes should have been duly deposited with the treasury.
Taxman’s rights and duties
The taxman has the right to ask questions in respect of the cash deposited on demonetisation. However, such questions should be based on ‘reason to believe’. Any cash deposited during 2016-17 and duly reported in the return for AY 2017-18, coming from explained sources, doesn’t give such reason to believe.
However, where the taxpayer is unable to explain the source of such excess cash deposited, but at the same time has included the same in his return of income for the current financial year, tax may be levied at the maximum marginal rate of 30%, but penalty cannot be levied since the penalty provisions applicable for the current financial year provide that penalty can only be levied on unreported income, i.e., excess of income assessed over the income returned.
Hence, where there is no unreported income, penalty cannot be levied. But, if income of current financial year is substantially higher than that declared in the preceding years and the taxman has reason to believe that the income reported as that of current year actually pertains to previous years, the same shall tantamount to be undisclosed income of preceding year liable to tax and penalty.
Thus it is best to be prepared for questions from the tax authorities by keeping supporting documents handy.
The writer is managing partner, Nangia & Co.