In the days after demonetisation, thousands handled their hidden cash by dumping the currency in banks, filing a revised income-tax return, and forking out a little over 30% tax for the extra cash that was deposited.
This, they believed, was a neat way to take care of the cash and keep tax officers at bay. But things may turn out differently. On Friday, the government told all tax offices to accept only those revised tax returns where there is a “bona fide inadvertent error” or “a mistake” on part of the assessee. If inquiries indicate any dubious manipulation to legitimise undisclosed cash deposit, then an assessee should be taxed at a much higher rate under the anti-abuse provisions of the law.
The law, however, gives taxpayers a greater latitude than the government’s internal communique suggests. According to the Income-Tax Act, a revised return is permitted when a taxpayer “discovers any omission or any wrong statement”. Probably because the law does not specify conditions for filing revised returns, the communique mentions that the “guidelines are only suggestive”.
“An assessee can file revised returns under Section 139(5) of I-T Act. It could be due to various reasons, including intention to conceal income. The suggestion that a revised return can be filed only when there is a bona fide inadvertent error or a mistake is an interpretation contrary to the provision of the law,” said senior chartered accountant Dilip Lakhani. “Most of the high-denomination notes were deposited with banks. The success of demonetisation thus rests on the ability of the I-T department in identifying the untaxed cash,” said senior CA Dilip Lakhani.
The email from Rohit Garg, director at the apex tax body Central Board of Direct Taxes (CBDT), to all principal chief I-T commissioners, points out the key factors that tax officers should keep an eye on while verifying the revised tax returns.
Unsubstantiated reduction in closing stock in the revised return vis-à-vis the figures in original returns (a person regularising his black money held in cash may show higher sales and lower closing stock);
Higher sales in revised return;
Increase in cash-in-hand as on March 31, 2016, or March 31, 2015, (showing higher cash in revised returns for last two financial years could help in regularising undisclosed cash deposited in banks);
Additional cash inflow claimed to be out of earlier-year savings, receipts of loans or advances or gifts or sale of capital assets;
Use of cash to lower liabilities;
Lower closing stock as on March 31, 2015, or March 31, 2016, as compared to earlier years in belated returns (filed after due date).
When assessing officers come across such seemingly suspicious entries in the books of accounts, they are expected to examine the veracity in different ways. For instance, they may compare the higher sales (shown by a businessman in his revised return to justify large cash deposits) with central excise/VAT returns; cross-check the identity, credit-worthiness and source of cash of buyers who had paid in cash; analyse past profile of assessees whose books raise suspicion; and monitor expenditure to match it against any change in cash-in-hand.
In September, CBDT told its officials to target and tax the .`3 lakh crore of unexplained deposits that are estimated to have been made after demonetisation was announced.