Source: http://aiftponline.org/journal/2016/december-2016/demonetisation-tax-legal-issues/
Timestamp: 2019-04-24 03:20:20+00:00

Document:
The Chamber of Tax Consultants organized a lecture in the Public Interest on Demonetisation and Tax Amendments to spread information and awareness amongst the professionals and taxpayers across the country. In the lecture, each speaker gave his opening remarks and thereafter there was a panel discussion.
CA. Hitesh Shah, President of The Chamber of Tax Consultant, inaugurating the lecture, addressed the gathering by informing about the various activities of the Chamber and called demonetisation a game changing move by the Government of India.
Mr. Rahul Hakani, Advocate, the Chairman of the Allied Laws Committee, in his welcome address, pointed out that demonetisation was one of the few events in the life of the young India which will remain imprinted in their minds for decades to come. He stressed on the need of a panel discussion on the subject by experts as demonetisation has serious repercussions under several laws and analyzing the consequences of cash deposits on account of demonetisation only from the point of view of Income-tax could prove catastrophic as severe consequences are provided under several Acts such as PMLA, Benami Act, etc. He also stated that all the stalwart speakers coming under one roof emphasizes the importance of our democratic principle that institution is above the individual.
Demonetisation has raised many legal questions that require one’s attention. Two questions that this lecture seeks to answer are – firstly, about the legality of a trader/person accepting high denomination notes that have ceased to be legal tender, and secondly, the consequences for those who have been unable to exchange the high denomination notes by the cut-off date. Let us delve into some concepts first, and then proceed to the discussion on the above questions. It is to be noted that the following analysis does not take into account the applicability of tax and other laws which might have a bearing on the issue.
Tender is understood, in contract, as an act of attempted performance and a unilateral act of one of the party to the contract. As per ‘Chitty on Contracts’ (one of the leading textbook covering English Contract Law), a tender of money by the debtor to the creditor does not discharge the debt but holds a good defence against the latter’s claim for interest on the debt. This is in contrast to payment, which is a bilateral act requiring consent of both the parties to the contract. A tender of sum of money by a debtor and its acceptance by the creditor constitutes payment, thereby discharging the debtor from the debt and other obligations.
The definition of money depends on the context in which it is used. While it serves a purely abstract function as a unit of account, it is also as a store of value and a medium of exchange. The definition assigned to money, thus, are different in the economic and legal sense with the former being wider approach. In legal sense, money is understood as being a chattel issued by the authority of the law and denominated with reference to a unit of account which is meant to serve as universal means of exchange in the State of issue.
Examining the characteristics of physical money, it must be noted that the value of money is the sum or unit of account that is denominated on it rather than the intrinsic value as paper or metal. It is a fully negotiable instrument and therefore, the person receiving the money in good faith obtains a good title over it, irrespective of the history of the previous holder. It is fully fungible which allows one to exchange any unit of money with any other unit or combination of unit of the same denominated value. The natural consequence of this statement is that money being not a ‘good’ in itself is never bought or sold as a commodity. It is utilized, however, as a medium of exchange for buying or selling other commodities.
Money usually takes the colour of legal tender. Legal tender is understood to mean anything that has the ability to discharge debt, or is a valid medium of payment recognized or backed by law. A legal tender can also be used interchangeably with bank note or currency note.
The common law requires that a person shall always make a tender in the current coin or currency i.e., the currency recognized in law as a medium of exchange. However, there is nothing stopping parties to a contract from digressing from the requirement of common law. Therefore, while in absence of any specific terms governing the payment mechanism in a contract, one is bound to offer legal tender there is nothing in law stopping the party from accepting payment in the form of non-legal tender. As the Delhi High Court quotes Scheldon’s Practice and Law of Banking 10th Ed., “unless accepted unconditionally, any payment except in legal tender, is a conditional payment”.
Bank note indeed is a negotiable instrument, being a promise to pay the bearer the sum or unit of account in which it is denominated. However, section 4 of the Negotiable Instruments Act, 1881, (‘the NI Act’) excludes bank notes and currency notes from the definition of promissory notes, and hence the ambit of the NI Act.
J. M. D’Souza v. The Reserve Bank of India — AIR 1946 Bom 510. The High Court held that as soon as a bank note is issued, it becomes a legal tender and must be accepted by the public as such. Therefore, bank notes are entirely a creation of statute, thereby giving entirely governed by the law creating them.
Section 26(1) of the RBI Act gives bank notes issued by RBI the character of legal tender. Further, Section 26(2) of the Act empowers the Central Government, on the recommendation of the Central Board of the RBI, to declare a bank note to be not legal tender, by way of a notification. Such declaration of notes ceasing to be legal tender could be subjected to certain conditions. It is under this section, that the Central Government has notified the current demonetisation scheme.
Another relevant provision in the RBI Act is section 39 which imposes statutory obligation on the RBI to exchange notes and coins. Sub-section (1) provides that the RBI shall, on demand, exchange notes presented to it, for rupee-coins and vice-versa. Further, sub-section (2) provides that when presented with a bank note, the RBI shall exchange it for notes or coins of a lower denomination.
As an illustration – if a person goes to RBI today with a 2,000-rupee note, and asks for 2,000 one-rupee coins, it is obligatory on the part of RBI to tender such change. The RBI cannot refuse to do so. It is an express statutory obligation cast on the bank by the RBI Act, which cannot be abrogated save through another legislation.
India has witnessed demonetisation drives earlier also. In 1946, demonetisation was carried out by way of an ordinance. In 1978, a statute provided for the demonetisation. Provisions of both these legislations were largely similar, and hence we shall refer to the 1978 Act representatively. Section 3 of such Act declared certain high denomination notes as ceasing to be legal tender. Section 4 prohibits anyone from transferring or receiving such notes. Sections 6 and 7 then laid down a mechanism for declaring the demonetized notes and exchanging them. Section 10 provided for a punishment for the contravention of any provision of the Act.
A person who buys goods or receives services from a seller, contracts a debt to the extent of the consideration involved. Unless the contract provides for a specific medium of payment, the buyer may tender bank notes in discharge of such debt. The concept of ‘legal tender’, as discussed above, steps in here. The seller cannot refuse from accepting bank notes which are legal tender. If he so refuses, the buyer would stand discharged from his obligation to complete the contract, and the seller would have little remedy under the contract law. However, nothing prevents the seller from accepting anything other than legal tender and issue a valid discharge of the debt.
Further, there is nothing in the current notification that prohibits dealing in the demonetized notes, unlike earlier legislations. For example, section 4, read with section 10 of the 1978 Act provided for a punishment which could span up to three years to anyone who transferred or received the then demonetized notes. Such a prohibition or punishment is conspicuously absent from the current notification.
Therefore, the answer to our query would be – there is no violation of any law committed by a person who accepts the demonetized notes as consideration for goods sold or services rendered by him.
Should the RBI exchange old notes even after the cut-off date?
As seen earlier, section 39 of the RBI Act casts a statutory obligation on the RBI to exchange notes and coins. This obligation could be taken away through some legislative measure. For example, the earlier legislations precluded the operation of the RBI Act entirely with respect to exchange. This was done through a non-obstante clause.
In the context of the 1946 Ordinance, the Bombay High Court held similarly. Both these cases dealt with petitioners who were not banks. In case of banks, however, the earlier legislations did not override the RBI Act. The Calcutta High Court, in the case of a bank, distinguished between the exchange mechanism provided with respect to banks and non-banks, laying emphasis on the non-obstante clause. The court said that the obligation under section 39 of the RBI Act doesn’t stand abrogated due to the absence of the non-obstante clause in the provision laying down exchange mechanism for banks and Government Treasuries. A bank, thus, could demand exchange such notes from the RBI.
A reference here may be made to the Apex Court’s decision in Jayantilal Ratanchand Shah v. Reserve Bank of India, (1996) 9 SCC 650 : AIR 1997 SC 370, wherein the constitutionality of the 1978 Act was challenged. This decision does not affect the legal principles discussed above, as laid down by the High Courts.
section 39. Thus, section 39 would be applicable even beyond the cut-off date. Any person should be able to demand an exchange of the old demonetized notes from the RBI.
A detailed analysis of various provisions of the laws applicable, and contrasting from the earlier demonetisation legislations, our queries stand answered as follows. There is no violation of law by a person on accepting payment in currency notes that have ceased to be legal tender. Further, in the absence of a non-obstante clause in the current notification unlike the 1978 Act and 1946 Ordinance, section 39 of the RBI Act would be applicable, and one can go to the RBI well after the cut-off date to exchange the old notes – RBI would be obliged to honour such exchange.
Dr. K. Shivaram, Senior Counsel, enlightened the professionals and the non-professionals attending the Lecture with the nectar of thirst quenching answers for issues related to Income-Tax Act, 1961.
Three issues were dealt with in detail, which are the recent amendments in the Taxation laws in 2016 being passed through a bill in November, 2016.
The Speaker congratulated Mr. Hitesh Shah and Mr. Rahul Hakani for conceptualizing the innovative lecture.
He mentioned the advantages of Demonetisation to the country stating that this move could eradicate counterfeit notes, reduce the circulation of black money, moving towards digitalization i.e., paper less economy, etc. He also added a factual but comic benefit for the Professionals which is increase in number assessees, possibly it may double which means there will be increase in litigation which one cannot imagine and this could probably be some extra ”Acche Din” for all tax professionals.
The Government was quick to act to amend the Act, when they were made aware through various sources that section 270A may not affect any assessee who would disclose their unaccounted money in their return of income. Accordingly the new Bill was introduced.
Moving forward with the lecture, the speaker explained the effects of the amendments constituting of 3 clauses i.e. Clause 2 being section 115BBE, Clause 4 being section 271AAC and Clause 3 being section 271 AAB.
The amended section 115BBE increased the tax rate from 30% to 60% + surcharge and cess bringing the tax rate to 77.25% (without expenses, deductions, set off of losses). It also attracts a penalty u/s. 271AAC @ 10% of the tax payable entailing the total payment to 83.25% tax rate.
The amendments shall give effect to penalizing the undisclosed amount found in search and seizure under section 132, shall be subject to a revised tax of 30% or 60% making it an effective tax rate of 107.975% or 137.975%.
If undisclosed income is detected before the assent of the President is received for the said Bill, then a penalty of 10% or 20% or 30% or 90% shall be levied making it 87.25% or 107.25% to 167.25%.
As per the website of the Department, explaining the provision of section 115BBE.
Eg. Cash deposited Rs. 2,50,000. Officer issues notice and return is filed . AO may assessee under sections 68 or 69 then as per the proposed provision the assessee may be liable to pay tax and penalty.
Another important question raised and answered by the speaker was, “Whether cash deposits during demonetisation period have been given blanket tax free status up to limit of Rs. 2,50,000?
Ans : No. Deposits up to Rs. 2,50,000 have not been given any blanket tax free status. They may not be reported to the Income-tax Department by Banks/Post Offices. If the assessment is selected for scrutiny, the Assessing Officer may ask for the source, if the source is not satisfactorily explained, the additions may be made under sections 68 or 69.
CIT v. Lily (2004) 266 ITR 401 (Pat.)(HC) and others.
Such income does not exceed maximum exemption limit, subject to the condition that such income is determined on the basis of entries made in the books of account and other documents made by the assessee on or before search.
Law was amended by Finance Act, 2002 with retrospective effect from 1-7-1995, not to treat amount which does not exceed maximum amount chargeable to tax.
The Court has upheld the constitutional validity of the Act, the Court also rejected the petitioners contention that the Act was unreasonable and violative of their fundamental rights.
The speaker suggests that, it is for the first time in the history of taxation in India an amendment is made increasing the rate of tax in the middle of year and for assessing the income as deemed income penalty is proposed .
The speaker emphasized on two main questions i.e., whether the legislature can increase the tax rate on deposits retrospectively and whether the penalty provisions be amended retrospectively to include cash deposits?
As per well established law provision regarding levy of penalty and increased rate are in the nature of substantive law and not adjective law. Charging section are to be strictly construed. Even machinery provisions are to be construed as would effectuate the object and purpose of the statute and not defeat the same. Therefore fresh inclusion of a circumstance in penalty provision and increase in rate of tax, even if construed as forming of the machinery provision are to be construed as substantial law which cannot be construed retrospectively.
The Apex Court held that penal statutes are generally considered prospective. Those penal statutes which create offences or which have the effect of increasing penalties for existing offences will only be prospective by the reason on Constitutional restriction imposed under Article 20 of the Constitution of India.
Govt. has the power to make the law retrospectively, subject to several restrictions.
The first is the requirement that the words used must expressly provide or clearly imply retrospective operation.
Second is that retrospective must be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional.
-Under Income-tax Act, liability in respect of previous year relevant to assessment year, the liability is fixed by the Finance Act which is applicable for complete financial year hence it may not be possible to change part of the year.
(i) A statute which affects substantive rights is presumed to be prospective, either expressly or by necessary intendment, where as a Statute which merely affects procedure, unless such a construction is texturally impossible, is presumed to be retrospective in its application, should not be given an extended meaning, and should be strictly confined to its defined limits.
(ii) Law relating to forum and limitation is procedural in nature, where as law relating to right of action and right of appeal, even though remedial, is substantive in nature .
(iii) Every litigant has vested right in substantive law, but no such right exists in procedural law .
(iv) A procedural statute should not generally speaking be applied retrospectively, where the result would be to create new disabilities or obligations, or to impose new duties in respect of transactions already accomplished.
In the year 2004, section 111A had been amended with an amendment brought in the middle of the financial year making the same applicable to the entire financial year, but it was specifically stated therein, “the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force” making the intention of the statute clear and unambiguous unlike the Tax Amendment in 2016.
One may recollect the when the Govt. has introduced the provision under section 245A of the Income-tax Act, fixing the cut off date of 31-3-2008 on which pre June 2007 i.e.
1-6-2007, applications would abate if not disposed off by the Settlement Commission. Where the orders were not passed abated the matter was challenged Bombay High Court said such a provision is ultra vires Constitution, which was affirmed by the Apex Court.
For an example an assessee passes the entry in the books of account and paid the advance tax and he would have liable to pay only 30% because of the Amendment Act if he is made liable to pay tax and penalty which is as per the new provision the Court may strike down the provision to that extent.
Another imperative question which the speaker dealt with an issue where the cash is deposited on different dates, then, can the Assessing officer make the addition on the presumption that cash declared did not consist of Rs. 1000 or Rs. 500 notes ?
Ans : No such adverse inference presumption can be made.
– Narendra G. Goradia v. CIT (1998) 234 ITR 571 (Bom) (HC), it is case where high denomination notes were deposited in the Bank and it has been held that assessee is required to prove in such case is the source of money and once he is successful in proving the same, he cannot be put to further proof of acquisition of such amount in currency notes of particular denomination. If the explanation shows that receipt is not income, the revenue cannot reject the explanation of the assessee to hold that it is income.
If the assessee is able to show sufficient cash balance, addition on account of deposit of high denomination was rightly deleted.
Assessee encashed high denomination notes during the year, affirming the order of Tribunal deleting the addition, the Court held that the cash balance of the assesse was sufficient to cover value of High denomination notes encashed.
Where the books of account was accepted as genuine, The fact that the sufficient cash balance is there in the books, no addition can be made. Order of Tribunal was reversed.
However, the Speaker stated that opening cash balance as on 8th November may be subject to Scrutiny.
Voluntary disclosure must be accompanied by deposit of 77.25% of the undisclosed income on or before the end of relevant previous year. i.e. Before 31-3-2017.
If tax is not deposited before 31-3-2017, in the case of current financial year, penalty of 6% (10% of 60%) tax rate statedin section 115BBE (1)(i) will apply, i.e., effective rate will be 83.25%.
in computing income referred in section 115BBE(1)(a).
Disclosure can be made before issue of any notice is issued by the department or before any search or seizure is carried out. Disclosure can be made in return of income filed under section 139, it may be original return, belated return or revised return.
If voluntary disclosure is not made and disclosed income is detected in scrutiny assessment or reassessment or through survey (i.e., Any manner other than search) then penalty will be @ 6% (10 % of 60% tax rate stated in section 115BBE(1)(i) will apply under proposed section 271AAC, taking effective tax rate of 83.25%.
Filing of return in response to notice under section 142, or after survey is conducted will not be regarded as voluntary disclosure. Nor will disclosure in any return filed under section 148 be regarded as voluntary disclosure. In such a case assessee will be able to avail the benefit of section 115BBE with penalty of 6% (10% of 60%).
If undisclosed income is detected in any search which takes place on or after the date of the Bill receives Presidential assent, then penalty of 30% or 60% will be levied under the proposed new sub section (IA) of section 271AAB (i.e., 107.975% or 137.975%).
Section 273A : Power to reduce or waive penalty, etc., in certain cases section 270A is covered, however section 271AAC is not covered.
Section 278E. Presumption as to culpable mental state.
Explanation— includes intention, motive or knowledge of a fact or belief in or reason to believe fact.
(2) For the purpose of this section, a fact is said to be proved only when the Court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability.
This provision was also inserted by the taxation laws (Amendment & Miscellaneous Provisions Act, 1986, w.e.f. 10-9-1986.
It was argued in Selvi J. Jayallita v. UOI ( 2007) 288 ITR 225 (Mad) (HC) prosecuting some one for a crime without establishing his mental culpability would go against the principle of natural justice. Court held the provision is Constitutionally valid.
The speaker thanked everyone for giving an opportunity to study some of the provisions of the Bill in detail and for the opportunity provided to present his knowledge acquired for the benefit of the public. The tax professionals and assesees may consider making representation at least in respect of taxing deemed income under section 115BBE may be rolled back and accountability provision may be introduced in the next Finance Bill.
Mr. Pradip N. Kapasi, Chartered Accountant, explained Pradhan Mantri Garib Kalyan Yojna in a manner where any layman could understand its complexities and know the benefits.
The speaker decided to grapple with the wide scope of PMGKY by listing out the possibilities when cash would be deposited or received from known source of Income, received from authorised person, non-authorised person, unknown source of income, declared u/s. 115BBE, declared in PMGKY, declared in Search or not declared in the Search.
The Speaker dealt exclusively with PMGKY w.r.t. how it was introduced and under which sections has PMGKY been covered. He noted that as per the Statement and Objects of the Scheme, experts recommended that the Scheme be introduced specifically for stopping illegal ways of conversion, and provide an opportunity for assessees to come clean on payment of heavy duties and penalty and such funds so received would be used for welfare activities and used in formal economy. All the words and expressions undefined shall be as per Income-tax Act, 1961.
The scheme, as per the objects and reasons announced, will be followed by the rules, notifications and forms and further, circulars, clarifications and FAQs.
16-12-2016. This amendment has been passed to amend the Finance Act, 2016 and the Income-tax Act, 1961. Statement of Objects and Reasons are also accompanied which help us in understanding the scheme. Paras 3 and 4 are particularly important for us to understand the scope of the scheme. The object of introducing the scheme is to stop illegal ways of conversion of high denomination currency. To provide an opportunity to come clean scheme however is not limited to high denomination cases. The funds received under the scheme shall be used for irrigation, housing, primary education, etc.
All terms not defined under the scheme/yojna, shall derive the meaning provided to such terms under the Income-tax Act, 1961. The Central Government is authorized to notify the commencement and closure of the scheme. The terms ‘Income’ or ‘Undisclosed’ have not been defined anywhere. Even under Income Disclosure scheme theses terms were not defined.
Effective date for commencement and closure shall be from date of notification and the notification for the same is awaited. Charge of tax and penalty is under section 199D and E and is on the undisclosed income. Tax in respect of the undisclosed income is 30%. In addition surcharge @33% of tax shall be levied and in addition, 10% of the undisclosed income shall be levied as penalty, the aggregate of all the above would lead to an approximate of 49.90% i.e. 50% of the total undisclosed income declared, which is the cost of getting into the scheme. In addition to this, there is also a pre-condition that an amount of 25% of the cash, etc., which is being declared shall be deposited into a specified deposit scheme for a period of 4 years and would not carry any interest. Nothing has been provided as to whether one will be able to obtain a loan against the deposit given or use it as a collateral for some of the commercial transactions.
Charge is in respect of cash or deposits made with specified entities i.e. a deposit in the account in RBI, Bank, Co-operative Bank, Post Office, any other entity specified by Central Government. Scope of the scheme is for any year including for AY. 2017-18 i.e. the current fiscal year. Even a part of the year will also be covered.
Imp Questions: Should I be holding cash at the time of declaration? Should I be having the amount deposited as the cash/bank balance at the end of such year?
Usually this would not be practical for the reason that those whosoever had cash and they had deposited it in the bank even post 8-11-2016, one would see that the money which has been deposited is back to back utilized for making some payments, for acquiring some assets and therefore the question that needs to be addressed is that as on the date , the declaration which is made, is it representing any income in the form cash or any deposit or to begin with it should satisfy the requirements of the scheme that I had received the income in the form of “…..”. It is a case of undisclosed income for which a disclosure has to be made. Subsequent use post declaration should not be something which is to be decided but it has to be something which one has to be clear about before walking into the scheme of declaration.
The steps for computation of the amount of undisclosed income provided for is not, however, from the text of the scheme, it seems to suggest that no expenditure or allowance against income, shall be permitted and will be possible. No set off of losses, etc.
The declaration in the scheme of PMGKY is optional and no penalty shall be levied for not availing of such scheme. The prescribed form and verification are yet to be notified. The form shall be filed before a person who is a Principal Commissioner or a Commissioner and who has been notified by the Central Govt. in the official gazzette. The form shall be signed by a person who is authorized u/s. 140 of the Income-tax Act and shall be furnished on payment of tax, surcharge, penalty and after depositing 25% of the total declared income during the notified period.
A declaration by suppression or misrepresentation of facts, shall become void-ab-initio resulting in the application of all the sections of the Income-tax Act, 1961 including the deposits made as if such declaration was never made. Even if the deposits are made but the taxes are now being paid, the declaration shall become void ab-initio.
Any person who is a resident or a non-resident shall be entitled to avail the benefit of the scheme for declaring income in form of cash or deposit unless prohibited under scheme. One question arises as to whether the term ‘prosecution for offences’ means a person who is already prosecuted or against a person on whom the proceedings of prosecution have been launched or is it talking about a prosecution which is possible in respect of a person? Since the language is ambiguous, it may lead to dispute.
The immunity provided to the assessee extends to exclusion of declared income from total income for any assessment year for any of the proceedings. There shall also be confidentiality to the extent permissible u/s. 138 of the Income-tax Act, 1961 i.e., nothing shall be asked or shared to any other government authorities. However, if it is proven to be in public interest, the information may be shared.
The speaker stated that no immunity shall be available to a third person. This can be explained by way of an example which states, if money is given to a third party after the person giving the money declares it under the PMGKY scheme and pay all the required taxes. However, the person so receiving such money, if enquired, would have to explain the source of income and the authenticity of such source i.e. satisfy the 3 parameters i.e. the genuineness, the credit worthiness and the identity of the person who has lent the money.
No specific immunity is provided in respect of the penalties and prosecution under the Income Tax Act, 1961, Wealth Tax Act, Prohibition of Benami Property Transactions Act, Prevention of Money Laundering Act, FEMA, Indirect taxes and Others.
On the strength of making a disclosure, the declarent cannot demand any re-opening or claim any relief in any appeal or reference etc nor can he claim for the refund of tax, surcharge or penalty paid under the Yojna.
A total of 66 clarifications were brought incase of the Income Disclosure Scheme, 2016 when it was introduced and such circulars and clarification may help in clarifying the object of certain aspects of the current PMGKY Scheme since both the schemes aim at achieving a similar goal of curbing tax evasion, corruption, and illegal activities.
The speaker gave a Bird’s View to how to analyse the understand the scheme w.r.t. the text of the provisions and the probable notifications of Government in the near future.
The speaker wittily recalled an old English song having lyrics, “Black is Black, give my Baby Back”. He compared the song with the Government’s action which purported to reflect the Government’s motto as, “Black is Black, give my Taxes Back”. Indeed, the Government’s action does not stop short of tax collection. It extends to several other laws dealing with economic offences, viz., FEMA, PMLA and Benami Act. He took the listeners through informative yet dreadful aspects of what serious implications can ensue under the said laws if a person falls under the ambit of one or more of these laws.
Moving on with his presentation he addressed the issue whether, in the context of demonetisation, apart from the tax implications, which other laws would trigger. He then dealt with FEMA, PMLA and Benami Act and their far-reaching effects.
He pointed out that section 3 of the PMLA deals with the offence of money-laundering which in turn refers to crucial expression ‘proceeds of crime’ defined under section 2(u) of PMLA. Section 4 of PMLA specifies punishment for money-laundering. Section 19 of PMLA deals with the power to arrest. Section 2c of Criminal Procedure Code defines cognizable offence. He also mentioned that once the offence of money-laundering is established, other important sections of PMLA would become applicable.
The concept of offence of money-laundering covers three sets of direct and Indirect actions which can rope in a person into the act of money-laundering. The 1st set of actions comprises attempt to indulge in, knowingly assist someone in, knowingly become a party to or the actual involvement in any process or activity which is connected with “proceeds of crime”. The 2nd set of actions are concealment, possession, acquisition or use of “proceeds of crime” and the 3rd set of actions consists of projecting or claiming the “proceeds of crime” as untainted property.
“Proceeds of crime” is defined under section 2(u) as any property, value of such property and when property is held abroad, the value of property in India equivalent to the value of such property held abroad. The Schedule under PMLA describes several Acts linked to criminal activity that would be covered under PMLA.
A simple example was given by the speaker for any layman to understand about how other laws mentioned under the Schedule (e.g. Indian Penal Code, Drug Laws, Prevention of Corruption Act, etc.) would be applicable. He stated that he was consulted by a person having industrial units at Vapi and Ankleshwar. His company regularly received show-cause notices from Pollution Control Board alleging violation of the environment laws. The speaker explained to him, how not replying to the show cause notice or the show cause notice being eventually decided against him could make him liable to PMLA because of Environment Protection Act is covered by the PMLA Schedule. Another example given by the speaker was that of false declaration or documents filed under the Customs Act which is covered by the PMLA Schedule and thereby attract PMLA. As regards Indian Penal Code, the speaker explained in detail how cheating and dishonest execution of deed of transfer containing false consideration could attract the sections of IPC mentioned in the Schedule and thereby attract PMLA. Keeping in mind the time constraint, the speaker wound-up discussion on PMLA by condensing the vast ambit of various laws in the Schedule into a simple slide to enlighten the viewers/listeners.
The Speaker then moved on to The Benami Transactions (Prohibition) Act [Benami Act]. He compared the provisions of Benami Act with lurking danger hidden behind your living room sofa ready to attack!
Benami Act, among others, provides penalty for furnishing false document. He described such provision as innocuous trap. Such penalty would be triggered by a mistake by the assessee or a professional or a businessman, who may provide documents in course of proceedings under the Act that may be eventually found containing false information. In such cases, there will be no escape route for such person. The speaker highlighted the implications of two provisions which have far reaching serious implications. The first is that all offences under Benami Act are non-cognizable and secondly, the Benami Act overrides all other laws.
The Speaker explained the concept of Benami Transaction as consisting off our limbs. The first limb is Transaction of ‘Holding the Property for the benefit of another person’, the second limb is fictitious transaction, the third limb is a transaction where the owner is not aware of or he denies the ownership and the last limb is, transaction where ‘Payer is fictitious or is not traceable’. Section 53A of the Transfer of Property Act is indeed an exception to the 4th limb with the caveat that the stamp duty must have been paid and the registration must have been done where the ownership is with X and the possession is with Y.
The last phase of the event was Panel Discussion in which many important and practical questions were answered by the expert panel.
N Joy Pvt. Ltd. (owned by Mr. John 66 % and his wife 30% & sons 4%) is in the business of trading in industrial products like ball bearings and valves. He is subject to tax audit and regularly files his return of income. His average annual turnover is Rs. 100X. His average taxable income is Rs. 10X. He was advised on WhatsApp by some friends, that he should take benefit of the Scheme and immediately declare and deposit any cash that he has. Accordingly he has deposited cash of Rs. 40X. His collection in bank by way of normal sales realisations till Diwali 2016 is Rs. 75 X.
Having taken these steps, he is reading conflicting views in the media after the PMGKY Scheme has been announced. He has come to you for professional inputs since he is willing to pay Rs. 20 Lakhs as tax & penalty & deposit Rs. 10 Lakhs. He is however concerned about Indirect Tax impact.
Please advise about all possible consequences and the steps he should take.
(b) Facts:- Rs. 5 crores deposited, as a consequence of demonetisation notification, is alleged to be unaccounted/ undisclosed income.
i. Can such alleged undisclosed income be regarded as earned out of undisclosed sales or service and be taxed under Excise, VAT or Service Tax?
ii. Can department treat such alleged undisclosed income as trading margin and calculate turnover applying declared GP ratio to margin and demand tax, interest and penalty based on alleged undisclosed sales?
iii. Will department require to bifurcate alleged undisclosed sales/income in different taxable period? If yes, then what about turnover of time barred period?
v. If under Income-tax, such undisclosed income is returned/ assessed as income from other sources, can department treat the same as undisclosed sales/ professional fees?
Yes, the Supreme Court decision shall apply in respect of excise, customs or sales tax and accordingly the same shall not be applicable w.r.t. drawing any inference of percentage of estimated turnover. It can be done so for Income tax but not for sales tax, customs, excise, Service Tax etc. There are no Ifs and buts in the judgment of Girdharilal Nanelal v. Sales tax Commissioner (1976) 3 SCC 701. The Supreme Court was concerned with the issue as to whether it was legal to treat Rs. 10,000 item of cash credit standing in name of wife of one of partners of assessee firm as profit or income out of concealed sales. The Court held that no presumption arises that amount represents income of firm and not of partner or wife. The fact that neither assessee firm nor partner or his wife adduced satisfactory material to show source of that money would not in absence of anything more lead to inference that sum represents income of firm accruing from undisclosed sale transactions. The Court further held that it was necessary to produce more material in order to connect amount of Rs. 10,000 with income of assessee firm as result of sales and in absence of material mere absence of explanation regarding source of Rs. 10,000 would not justify conclusion that sum in dispute represents profits of firm derived from undisclosed sales.
Rs. 500 and Rs. 1000.
– Mr. S has approached you for advice on this transaction. He wants to know whether he can declare the total consideration as capital gain and pay tax thereon. If not how should the transaction be structured – since he is feels that he will not get a better offer for the property and he definitely wants to dispose off the property at the earliest.
– Should Mr. S enter into this agreement and sell the property?
– How should he pay the tax liability and file his return of Income for AY 2017-18.
One will have to read section 269SS of the Act, Explanation, (iv) “Specified Sum” means any sum of money, receivable, whether as advance or otherwise, in relation to transfer of an immovable property, whether or not the transfer takes place as per the section even earnest money also beyond Rs. 20,000 cannot be accepted as cash. If such money is accepted as cash he may be penlised under section 271D which is equal to the amount of loan, subject to discretion of Assessing Officer, as per section 273B of the Act.
On the facts the agreement value is less than the stamp valuation hence provisions of section 50C is applicable. He has to pay the capital gains on the basis of stamp valuation.
Or he may opt for 115BBE scheme by paying the tax at 72.5%.
One of my clients had surrendered tenancy rights in residential property in the Financial Year 2015-16 as per Agreement duly registered and got some cash, which remained to be deployed. The return for Asst. year 2016-17 has not been filed till today. Can he now deposit demonetized notes in bank which are much more than Rs. 2.5 lakhs. Will he be questioned by the Income tax authorities to explain the source of such deposit. The incoming tenant may not agree to the cash paid by him to my client.
Since he has not filed the return of income for Asst. Year 2016-17, can he offer the amount u/s. 115BBE as per original section and pay tax thereon at 30% will he be asked to explain the source specially when the section itself says ‘unexplained cash credits’.
Will he be liable for penalty when he was already introduced the cash in the books and paid the maximum tax of 30% and interest u/s. 234A, 234B & C.
b) In view of the amendment will the assessee be compelled to prove the year of earning income?
c) Will the tax authorities reject the assessee’s claim of having earned income u/s. 115BBE in Asst. Year 2016-17 (Taxable @30%) and tax the said income in Asst. Year 2017-18 @ 60% since the amount is being deposited now.
If the return for the Assessment year 2016-17 can be filed it will be return u/s. 139(4), up to 31-3-2018. Section 115BBE is applicable to even for belated return. Hence the assesse can show in the return and pay the tax along with interest Rate of tax will be only 30% subject to interest. Penalty u/s. 270A is not applicable.
One will appreciate that under the Income-tax Act, intention to conceal is not offence. Under Indian Penal code, 1860, Section 120A. Criminal conspiracy is also an offence ie Intention to committee an offence is crime. Dealing with survey there are number cases where the return was not filed and the amount was not disclosed, the amount was disclosed in the return after survey courts have held no penalty can be levied.
CIT v. SAS Pharmaceuticals (2011) 335 ITR (Delhi) (HC).
ACIT v. Crescent Property Developers ITA No 2770 /M/ 2012 dt . 19-6-2014.
Shri Dilip M Shah v. ACIT ITA No 4413 /Bom/98 AY. 1994-95 dt 25-1-1999.
Q11. In case where the return of income has not been filed for an assessment year but the time for filing the same has not expired under section 139 of the Income tax Act, whether declaration under the Scheme can be filed for such assessment year ?
Ans : The declaration for the assessment year for which the return of income has not been filed can be filed under the Scheme even though the time for filing the return under section 139 of the Income-tax Act has not expired.
So the benefit of the clarification in FAQ. No 11 will be available only for the assessment year 2016-17.
On the facts of the querist the assessee can take advantages of 30% Revenue cannot tax the same at 60%.
1. Whether deposits up to Rs. 2.50 lakhs into bank account of minor son/daughter can be made out of gifts received by such minor from birth on various occasion such as birthday, festivals, marriages in family, anniversary of parents or near relatives, success in examination of schools/collaeges, wining in sports etc. which are accumulated and retained as savings?
As per new provisions u/s. 115BBE whether AO can treat the same as unexplained and levy the taxes and penalty?
If answer to above question is “YES” whether the aforesaid bank deposit could be linked with similar bank deposit by parents into their individual bank accounts and whether it can have any tax and penalty implication?
If the amount is reasonable and reasonable explanation is given it will be accepted. However it being un ususalit may be treated as undisclosed income of the parents. From Assessment year 1993-94 onwards only parents can declare the minors income. CBDT In repose to Query No. 3 clarification of VDIS, 1997 Circular No. 754 dt 10-6-1997 (1997) 226 ITR 8 (st) (9).
Where the minor child suffers from any disability of the nature specified in section 80U.
Answer to Q No. 31 of Circular No. 754, dated 25-7-1997 (Minutes of Assochem with CBDT (1997) 93 taxman 162 (Mag)).
On a combined reading of both the clarifications, the income of the minor should be declared by the parent to the extent it is liable to be clubbed under section 64(IA) of the Act and the balance should be declared in the minor’s own hands.
Where a Father passed away few months back without making his will and family found some cash lying in his locker or cupboard which is traced after 8th November 2016.
Rs. 2.50 lakhs and whether such cash deposit could be liable to tax and penalty since there will not be any evidence to prove that cash was left by their deceased father and what could be quantum of tax and penalty?
Depends upon the status of the father. It would depend on, how much income he was showing, if he was filing returns, how much withdrawals he has made etc. It may be desirable to have a joint declaration from the family members stating the fact and manner of distribution which may help the assesse to establish the source if need arises. When there is no will the distribution has to be as per section 8 of the Hindu Succession Act, 1956, Specified in class I.
The assessee has an Agricultural land. However, he was not showing any Agricultural income in earlier years. However, makes a deposit of Rs. 10 Lakhs and shows such deposit as an Agricultural Income. Consequences thereof?
Ans : Agricultural income is not chargeable to income tax. It is exempt under section 10 of the Act.
Due to demonetisation whatever may be the cash lying with the agriculturist may have to be deposited in the Bank. When the huge cash is deposited the Assessing Officer may issue the notice asking the source. the Assessing Officer may take the view that the amount deposited is not of the agricultural income it is undisclosed source hence he may try to tax under sections 68, 69, 69C etc. Tax will be of 60% plus penalty. It may be durable to keep the records like, details of sales, details of cultivation, certificate from competent authority like, village panchayat, etc.
Q7. Whether TDS credit will be adjusted towards 77.25%?
Ans: Yes. tax is part of the Income –tax Act hence adjustment can be made on undisclosed income disclosed u/s 115BBE.
Q8. Whether the income from illegal activities can be disclosed ?
Ans: Yes, there is no bar under the income-tax Act, however no exemption is available under other Acts.
Q9. Can an assessee disclose the amount u/s. 115BBE after issue of notice u/s 142 or 148, whether the levy of penalty is mandatory.
Ans. Yes, the assessee can disclose the income and pay the tax. However the levy of penalty is not mandatory. Assessing Officer may not levy the penalty after considering the explanation of the assessee.
Q10. Assessee proposing to disclose the amount if search or survey takes place whether the assessee can opt for the provision of section 115BBE.
Ans: Yes if the assessee is able to show the payment challan etc.
amount assessed under section 115BBE, can penalty be levied.
Ans: Levy of penalty is not mandatory, however the penalty can be levied at 10% on differential amount u/s. 271AAC(1). No penalty can be levied under section 270A, in view of section 271AAC(3) of the Act.
Q12. When an assessee discloses the amount u/s. 115BBE, can the Assessing Office ask the source of income ?
Ans. No. When the assessee is not able to satisfactorily explain the source the amount offered,the Assessing Officer cannot ask the assessee to explain the source.
Q13. whether the year in which the income arose need to be proved?
Ans: No .Undisclosed income will be taxed as income of the year in which it is disclosed in ITR or detected by the AO.
Q14. Whether any interest under section 234A or 234B or 234C shall be levied ?
Ans: Provisions are applicable in appropriate cases.
Q15. Whether gifts received from relatives and non relatives can be taxed under section 115BBE ?
Q16. If cash in hand is 5 Lakhs but only 2 Lakhs could be deposited into the bank account. Can the Assessing Officer ask the assessee as to why the remaining 3 Lakhs are not deposited?
Ans: No, the Assessing Officer cannot ask about what is not deposited. His question can remain limited to the amount deposited only.
Rs. 50 Lakhs p.a. On 8th November 2016, he has Rs. 25 Lakhs in currency notes of Rs. 1000 & Rs. 500.
Finding no other method to dispose of these currency notes, he proposes to deposit Rs. 2.5 lakhs + Rs. 2.5 Lakhs in two savings accounts that he holds in a PSU bank and Private Bank respectively. The balance sum of Rs. 20 Lacs, he intends to deposit in his wife’s savings bank account as her accumulated savings over the years. The bank record shows that out of his monthly salary, he regularly withdrew Rs. 30,000 to Rs. 40,000 p.m. for household expenses. This he was giving to his wife who managed the domestic expenses. The accumulated balance was the amount she had saved over the period of the last 10 to 15 years and retained with herself as an emergency reserve. He is advised that he need not file any declaration nor pay any tax on the said amount.
Do you feel this advice is correct?
Would your answer be different if it was mentioned that Mr. O is a retired IRS officer. He retired a year ago and is now employed as an advisor in a large corporate. Prior to that he was serving as a Revenue Department official for more than 20 years.
Rs. 3,60,000 in the last 3 years.
Rs. 7,20,000 at the average rate of Rs. 5,000 p.m. Lastly, it is assumed that the aggregate of Rs. 10,00,000 so saved by wife has been held by her in cash and in high denomination notes and that she is not filing return of income or is not filing her balance sheet. Accordingly, the money held by wife popularly known as ‘pin money’ is duly explained and does not require any declaration in Yojna and could be deposited in bank without attracting any income tax issue. 11 Taxman 24 (Patna), 24 ITR 16 (Patna) and 26 ITR 706 (Patna).
g. By depositing it in bank account without any declaration or payment of tax and face the consequences as per the Income-tax Act.
In the event, the cash in the form of HDN is established to be out of the money received by Mr. O, while in the Government employment through illicit sources, he would not be entitled to file a declaration under PMGKY by virtue of clause (b) of section 1990 provided he has been prosecuted for any offence punishable under the IPC or the Prevention of Corruption Act, 1988 or any other law specified in clause (b). The wordings of clause (b) in relation to prosecution for any offence punishable are very vague. It may mean the offence is liable for prosecution. It may mean that the person is prosecuted for such an offence. It may also mean that the person is being prosecuted for such an offence.
Dr. Zee had Rs. 100 Lakhs in cash (Unaccounted)on 8th Nov. 2016 in demonetized currency notes. In the few days following the announcement, he sought advice from a tax professional about the best way to deal with the situation. Considering that each year Dr. Zee was declaring a taxable income of Rs. 30 to Rs. 35 lakhs; he was advised that since he was on cash basis of accounting, he could deposit the money immediately, saying that his debtors who had not paid long outstanding fees came and paid fees in the 15 days from 9th November and cleared their old outstandings in demonetized notes of Rs. 500 & Rs. 1000. He was advised that considering the provisions of S. 115BBE and S. 270A he would only have to pay tax and interest. As he would himself declare the income of the FY 16-17 in his return and no under-reporting would take place and no penalty would be leviable for AY 17-18. Following this advice, he deposited Rs. 100 Lakh on 25th November 2016 into his bank account. To minimise the impact of interest he paid the tax and interest on the said sum as Advance Tax. Thus he had approx. Rs. 69 Lakh out of this sum in his bank account.
Subsequent to the amendments in the Finance Act made in December 2016, he is in a dilemma. He wants to buy peace but would have to pay tax and Deposit under the PMGKY Scheme. If he does so in clear manner – he is advised by another tax consultant that he would have to pay a sum of Rs. 50 Lakh as interest and Penalty & would also have to pay Rs. 25 Lakh as Deposit as per PMGKY. Thus effectively he would be out of pocket and would have to pay Rs. 6 Lakh out of the rest of his income.
He has now approached you for advising the best course of action open to him.
i) Can he ignore the advance tax paid excessively by him and declare his FY 2016-17 income at the normal level of Rs. 36 Lakhs and claim refund of the excess advance tax paid by him – without risk of addition in assessment.
ii) Can he claim that since Rs. 30 Lakh was paid against taxes; the amount of Declaration was only the balance Rs. 70 Lakhs, and accordingly pay tax & penalty of Rs. 35 Lakh & make a deposit of only Rs. 17.50 Lakh.
Dr. Zee is feeling that he has got an unfair deal and that too only because he was prompt in depositing the cash in response to the PM’ s appeal to declare the black money. Dr. Zee genuinely believes that some relief is equitably due to him. Kindly advice.
This question can be answered only after one addresses the issue of validity of a transaction in HDN post 8-11-2016. It seems that there are two views about the validity of such transactions. One view is that, the recipient of HDN would not derive any value nor would he be entitled to deposit the notes in bank. The credit, if given would be withdrawn by bank 282 ITR 490 (Kar.) and 1997 AIR 370 SC and section 23 of Indian Contract Act, the other view is such transactions are valid Please see section 4 of 1978 Ordinance. Section 26 of RBI Act and the fact that notification is not backed by ordinance or enactment. Where such transaction is held to be valid, the tax consequences would follow. In such an event, one has to examine whether one has to choose between ITA and PMGKY. It appears that the person is entitled to choose PMGKY however it is not mandatory for him to do so. If he does not go for PMGKY, then application of ITA is mandatory. Coming to the question; payment of advance tax under ITA does not debar the person from opting to declare under PMGKY. Once he so opts, the income declared is not includible in the total income of any assessment year as per S. 199I of the Finance Act, 2016. He therefore need not fear any addition in regular assessment for A.Y. 2017-18. The advance tax paid in excess would be refunded in regular course. He however may seek permission from the government to adjust the advance tax paid against the taxes payable under PMGKY on the lines of IDS circular no 25/2016 dt. 30-6-2016.
Dr. Zee has to declare the amount of undisclosed income of Rs. 1 crore in full. No deduction for advance tax paid of Rs. 30 lakh would be allowed in PMGKY as per S. 199C(ii) or otherwise, generally.
Whether an assessee, during pending reassessment proceedings for an earlier year, claim therein that declaration made in PMGKY pertain to the same cash incomes which are sought to be taxed by the AO in the reassessment proceedings?
Whether the above position would change if such a claim is made before appellate authorities?
The first thing to be examined is whether a declaration can be made in respect of an assessment year other than A.Y. 2017-18 and if yes, can it be made in respect of any income. PMGKY permits declaration for any assessment year including A.Y. 2017-18. The income declaration as per S. 199C has to be in the form of cash or deposits with specified entities. Further, there is no bar on declaration in respect of an assessment year for which under S. 143(2) or 148 is issued like in section 196 of the Finance Act, 2016 relating to IDS. Accordingly, the assessee would be entitled to opt for PMGKY even during the reassessment proceedings provided the addition proposed is concerning the cash or deposit. The restriction contained in S. 199J is limited to demanding a reopening of any assessment or reassessment.
As regards, the claim before the appellate authorities, I am afraid, that it would not be possible to do so in view of express provision of S. 199J which prohibits a claim for any set-off or relief in any appeal, etc. in relation to any assessment or reassessment.
Brief Facts Holders of old notes have deposited the same in the bank accounts of their servants /drivers / assistants / relatives / friends with the objective of withdrawing the amounts subsequently.
The owner and the beneficial owner of the income is liable to pay income tax as per the ITA. Presently he has the option to pay tax under PMGKY or ITA. The benamidars are not liable to pay tax in respect of deposits not representing their income. This position is independent of consequences under the BPTA and the PMLA. The related question is will the owner be liable to pay tax on such deposits even where the benamidars have paid tax thereon. The simple answer is yes as the liability is of the taxes paid by the benamidars. Under the law of taxation the owner alone is liable to pay taxes unless otherwise provided for.
An architect in practice for the last 25 years was having substantial income in the name of his proprietary concern (Future Vision). Over the years, he had developed a system of depositing approximately 40% of his fees in bank account of Future Vision which was declared in his income return. He has another bank account in which he was the second holder (wife being first holder of the Savings account). This account was never reflected in his income tax returns. The balance (unaccounted professional fees) were mostly deposited in this savings account which was undeclared. Over the years, out of the accumulated balance in this account, he holds fixed deposits in various banks aggregating to Rs. 180 Lakh, and balance of Rs. 20 Lakh in the savings account itself.
a) Does he require to withdraw the cash and prematurely encash fixed deposits in order to avail of the benefit of the scheme. He also advised that he may not be able to withdraw that much cash to deposit in his Account before 30th December 2016.
b) Can he simply transfer by cheque (the amount of Rs. 50 Lakh in the PM Garib Kalyan Yojana deposit Scheme, pay tax of Rs. 100 Lakh) and transfer the balance to his other declared accounts and enjoy the benefit of the present scheme.
c) Would he be exposed to any liability under the Benami Properties Act or denied immunity under the PMGKY since the undeclared amount was in a bank account where his wife was the first account holder?
He seeks advice in the matter.
a. Income is not defined in PMGKD Scheme, 2016. As per section 199C a declaration can be made under the scheme in respect to any income, held in the form of cash or deposit with any specified entity (RBI, Banks, Post Office or any entity notified by CG). However it is not mandatory to deposit cash in his account. He may transfer such money in his wife’s account or his own account and make a declaration under the scheme.
b. Yes, he may draw a cheque in favour of the scheme for paying taxes from deposits or savings account duly accounted. The payment from his bank account will be considered as valid payment and there is no need to transfer money from his now declared account, in case he does not want to do so. Sec. 199D for charge of tax and surcharge and sec. 199E for penalty does not specify any preference nor sec. 199F for deposit request payment out of income declared under PMGKY.
c. In the above case, the architect has kept money in the name of his wife in the bank account. As per sec. 2(9) of Benami Transactions Prohibition Act a transaction by an individual, in the name of spouse or children of such individual, where the consideration is paid out of the known sources, is not considered as a ‘benami transaction’. In the above case, deposit is not from the undisclosed source of income and therefore not covered u./s 2(9) of the BTPA. The querist is advised to declare the income in his name even where the investment is held in the single name of wife.
Business entities who are carrying on business which involves cash transactions only and they do not have bank account for such business and are filing their return of income under provisions of presumptive basis, i.e., section 44AD and 44AE. As per provisions no Books of Accounts are required to be maintained. How to defend the cash held by such Businessman assuming he had a turnover of Rs. 100 lakh and filed return of income declaring Rs. 8 lakh as business income however in fact he had a business income of Rs. 16 lakh.
The query can be addressed by answering the question whether excess of assets over the income declared u/s. 44AD, etc is liable to be taxed, voluntarily or otherwise. This set-of sections require an assessee to offer an income at a specified percentage of turnover or receipts OR a sum higher than that which is claimed to have been earned. A better reading of these provisions imply that an assessee who claims that he has earned an income higher than the presumed percentage for explaining the possession of assets would be required to pay tax on higher amount of income. Accordingly such an assessee with cash or deposits in excess of returned income is advised to opt for PMGKY.
1. Whether business entities having outstanding debtors as on 31-3-2016 can deposit cash amount against the said debtors who may not be willing to give confirmation since such debtors may not have cash on hand in their books of accounts for accounting payment to such creditors. What could be tax and penalty implication for such business entities for having credited cash amount against the debtors and deposited the same into bank account?
The assessee has cash but not recorded in Books. The assessee has made payment to creditors in cash & now he wants to write off the creditors in his books.
1. In this case the concerned debtors are refusing to confirm the payment in cash of the amount due by them. The recipient of cash would be put under the strictest proof and evidence of receipt by him. The burden of proof will be entirely on the recipient. 113 ITR 447 (Bom.), 84 ITR 307 (Cal.), 27 ITR 522 and 630 (Patna) and 47 ITR 634 (All.) Ordinarily a receipt from debtors does not result into an income in the hands of person following mercantile system of accounting.
Whether HUF can in its bank account deposit cash up to Rs. 2.50 lakhs without offering the same for tax in their return of income OR exceeding Rs. 2.50 lakhs by offering amount in excess of 2.50 lakhs in the return of income for the reasons that family members were regularly saving for emergency needs such as serious illness/hospitalization of any family member or for education/higher education of children in the family.
Neither PMGKY nor Income-tax Act, require an assessee to pay tax on capital. The tax is only on income. A savings out of taxable income or non taxable income is a capital and not an income and is not taxable even if it is held in the form of High Denomination Notes. Please see 234 ITR 541 (Bom.) and 80 ITR 181 (SC). However, the burden of proof to explain the source of savings would always be on the assessee. Please see 113 ITR 447 (Bom). Also see 42 ITR 689 (All.) and 35 ITR 97 (Orissa).
Mr. Geek who ran his own business had large amount of cash on hand as per books of accounts on 8th November, 2016. As soon as he heard the news of demonetisation, he contacted his neighbour Mr. Easy, who owned a jewellery shop. He persuaded Mr. Easy to sell him some gold jewellery. Reluctantly, the jeweller Mr. Easy, citing prevailing market conditions sold him the gold jewellery at Rs. 40,000 per 10 gms. Mr. Geek had thus acquired 2 Kg. of gold and disposed of all his cash by 10th Nov. 2016.
In the meanwhile, the jeweller was subjected to a survey u/s. 133 and data relating to all sales effected by him during the period 6th Nov 2016 to 25th Nov. 2016 has been obtained by the Income Tax Department. Owing to the survey at his shop and resultant tension, Mr. Easy, who suffers from high blood pressure has left for a holiday and is not contactable. In the meanwhile, upon the announcement of the Amendments, in the first week of December 2016, Mr. Geek has a dilemma. He is seeking to return the gold jewellery purchased from Mr. Easy, but the staff at Mr. Easy’s shop say they have no authority to purchase/repurchase such jewellery. Mr. Geek is not aware whether his name features as a purchaser of jewellery. To be on the safer side, he is willing to declare his previously undeclared income under the provisions of S. 199 of the finance amendment act, 2016. He is however not clear about how he can comply with the requirements of the scheme and buy peace for himself.
He seeks your advice on the abovementioned facts.
Yes, he can declare his undisclosed income under the scheme, provided the income is in the form of ‘cash or deposit in any specified entity’. In the above case, Mr Geek cannot declare his undisclosed income, in the form of gold purchased, under the scheme.
(a) Whether he can claim the benefit of basic exemption limit?
(b) Whether he/she will be eligible for claiming deductions under Chapter-VIA i.e. 80C, 80CC, 80CCA (1b), etc.
An individual/HUF assessee is ordinarily not liable to be taxed up to an income within the threshold limit. Any receipt of the income within such limit would not be taxed unless such an assessee is a benamidar for the owner of income in which case the owner alone would be liable to be taxed by inclusion of income in his hands.
In the given query, the facts admit that the assessee doe not have any income. The conclusion therefore would be that he is a benamidar or in the alternative would be in receipt of gifts that would be liable to be taxed as per section 56(2)(vii) in his hands. He will be entitled to the benefit of basic exemption and also would be eligible for deductions under chapter VI-A of the Income-tax Act. Ordinarily a receipt which is shown as income cannot be subjected to tax u/s. 68, etc of the Income-tax Act. See 27 ITR 602 (Patna), 278 ITR 152 (Del.), 97 ITR 252 (Patna) and 52 ITR (Trib.) 66 (Chennai).
Mr. O is a senior official in full-time employment. He regularly files his return of income, declaring his salary income as per his salary certificate & his investment income. Average returned income over last 3 years is Rs. 50 Lakh p.a. On 8th November 2016, he has Rs. 25 Lakh in currency notes of Rs. 1,000 & Rs. 500.
Finding no other method to dispose of these currency notes, he proposes to deposit Rs. 2.5 lakh + Rs. 2.5 Lakh in two savings accounts that he holds in a PSU bank and Private Bank respectively. The balance sum of Rs. 20 Lakh, he intends to deposit in his wife’s savings bank account as her accumulated savings over the years. The bank record shows that out of his monthly salary, he regularly withdrew Rs. 30,000 to Rs. 40,000 p.m. for household expenses. This he was giving to his wife who managed the domestic expenses. The accumulated balance was the amount she had saved over the period of the last 10 to 15 years and retained with herself as an emergency reserve. He is advised that he need not file any declaration nor pay any tax on the said amount.
The alternative query pertains to Mr O who is a retired IRS officer.
The relevant law applicable to this fact is Prevention of Corruption Act.
A reference to the definition of “public servant” in this Act shows that Mr O cannot be regarded as a “public servant” after his retirement. Therefore, apparently, the Prevention of Corruption Act will not be applicable to Mr O.
However, a reference to section 7, Explanation (cheating), section 12 (abetment), section 8 and section 9 (inducing or influencing a public servant) and section 14 (habitually influencing and inducing a public servant). All these four sections are applicable to Mr O even after his retirement.
Moreover, section 419 of Indian Penal Code (personation) will apply if Mr O does not disclose that he is retired. Also, section 120A of Indian Penal Code (criminal conspiracy) will apply.
Brief Facts Holders of old 500 & 1,000 notes (“old notes”) have structured arrangements to convert their unaccounted cash into gold / diamonds / real estate.
Such arrangement have been facilitated by assistance and guidance of consultants and bank officials.
Q i. Can provisions of PMLA be invoked against the structured arrangements by considering the converted assets and deposits in banks as ‘proceeds of crime’?
ii. Can such assets be attached under PMLA?
iii. Is there a scheduled offence in such cases? If so, under which law?
iv. Can the authorities commence action, suomotto, without filing FIR on receipt of information and issue notices for discovery & investigation based on suspicion?
v. Can any action be taken against consultants, bank officials, etc. under PMLA, and if so, what penal action will they face?
(i) The facts will have to be examined in detail to ascertain whether the converted assets and deposits fall within the parameters of “the offence of money-laundering” and “proceeds of crime” and whether any of the laws mentioned in the PMLA Schedule apply. If the result of such examination shows that there is enough evidence to allege that the offence of money-laundering as defined in section 3 has been committed,provisions of PMLA can be invoked.
(ii) If the converted assets all within the parameters of section 3 (offence of Money-Laundering) [read with section 2(u) (proceeds of crime) and the PMLA Schedule] the same can be provisionally attached under section 5 of PMLA.
(iii) A reference to the PMLA Schedule shows that there are various laws mentioned therein e.g. Indian Penal Code, Prevention of Corruption Act, Customs Act, Copyright Act, Trade marks Act, Environment Protection Act, etc. If the material before the authorities shows that any property is derived directly or indirectly as a result of criminal activity relating to any of such laws mentioned in the Schedule, it will be possible for the PMLA authorities to allege that the offence of Money-Laundering defined in section 3 has been committed.
(iv) Yes, without filing FIR, PMLA authorities can issue notice for discovery and investigation on the basis of the information in their possession if such information is sufficient to lead to their belief that the offence of Money-Laundering is committed. Section 44 of PMLA dispenses with the procedural aspects such as filing of FIR. Moreover, section 71 of PMLA states that the provisions of PMLA override all other laws.
(v) Yes, action can be taken against consultants, bank officials, etc., for having assisted or becoming party to the process or activity connected with the proceeds of crime. This is clear from the wordings of section 3 which defines the offence of Money-Laundering.
Q i. What would be the implications under Benami Act for account holders (benamidars) and for the beneficial owners of the amount deposited?
ii. In case of action under Benami Act against both, is it possible for the benamidar or the real owner to preserve the assets?
iii. Offences under the Benami Act is not mentioned in the Schedule under PMLA. Hence, can the PMLA authorities act, suomoto, on receiving information about violation of the Benami Act?
(i) The arrangement will be benami transaction. The servant, driver, etc. will be benamidar. The real owner will be beneficial owner. The 3 consequences will ensue.
(a) The deposited amount cannot be retransferred by servant, driver, etc to his employer. If already retransferred, such retransfer will be null and void.
(b) The balance in the account will be liable to confiscation.
(c) Benamidar, beneficial owner, abettor and inducer will be liable to rigorous imprisonment for 1-7 years. They will also be liable to fine of up to 25% of fair market value of property.
(ii) In view of confiscation, the question of preservation of the assets will not survive.
(iii) Normally, PMLA cannot be invoked in such case. However, if the PMLA authorities have evidence to establish with evidence that the offence of Money-Laundering has been committed [as defined in section 3 read with Schedule], they will be entitled to invoke the provisions of PMLA.
Whether deposits up to Rs. 2.50 lakh into bank account of minor son/daughter can be made out of gifts received by such minor from birth on various occasion such as birthday, festivals, marriages in family, anniversary of parents or near relatives, success in examination of schools/collages, wining in sports etc. which are accumulated and retained as savings?
Whether deposits in Minor A/c can be termed as Benami Deposit of parents?
If the amount deposited in minor’s account is unreasonably large, there may be enquiry. If the enquiry reveals that the source of deposit is unexplained, the minor will be regarded as benamidar, parent will be regarded as beneficial owner and the transaction will be regarded as benami transaction.
i. In cases of large cash deposits, can the authorities commence survey action, suo motu, without filing an FIR on receipt of suspicious transaction report (STR)?
ii. After receiving STR, does the ED have powers to commence search action, suo motu without filing FIR?
iii. Whether answer would be different if, pursuant to search conducted by Income-tax authorities and levy of penalty under S. 115BBE of the I.T. Act since currency/ assets were found during the search for which there was no disclosed or explained source?
iv. Can the Bank account in which such large cash deposits were made be provisionally attached under S. 5?
(i) On the basis of the information in STR, PMLA authorities can commence survey action suo motu without filling FIR. Section 16 of PMLA gives power of survey to the authorities. FIR will be dispensed with as provided in section 44 of PMLA.
(ii) Yes, after receiving STR, ED can exercise powers to commence search suo motu without filling FIR. However, before initiating the search, the procedure provided in section 18(1) Proviso will have to be complied with.
(iii) Section 115 BBE of the Income-tax Act provides for tax liability in respect of the income referred in sections 68, 69, 69A, 69B, 69C and 69D. If the material disclosed by STR with the PMLA authorities is strong enough to be the basis of the reason to believe that the offence of Money-Laundering has been committed pursuant to large deposits of old notes in bank, provisions of PMLA can be invoked notwithstanding that the search action was under Income-tax Act.
(iv) Once the PMLA authorities form the reasonable belief that large deposits of old notes have resulted in the offence of money-laundering, such large deposits can be provisionally attached under section 5 of PMLA.
Brief Facts In their earlier visits to India, many Non-residents took with them old notes which are now in their possession abroad. In some cases, the old notes were left behind by Non-residents.
Q : i. What happens to Indian currency that is held abroad by non-resident? Can he bring it back with him to India for depositing in bank account and if so up to what limits?
ii. If a non-resident holds currency abroad in excess of Rs. 25,000, (having taken the same out of India at the end of each of his earlier visits to India) how can he bring it back and deposit the same in India?
12-6-2014) Also, the permission therein appears to be to the individual to whom the money belongs.
(ii) Make personal visit to India or send with someone with Authority Letter as suggested in RBI FAQ 20. Though RBI FAQ states this, it does not appear to be supported by law [FEMA 6(R)] which allows bringing in of Rs. 25,000 (This ceiling was Rs. 10,000 till 12-6-14).
Brief Facts Due to close economic ties with Nepal, many Residents hold old notes in Nepal. Similarly, Nepalese residents hold old notesin India.
ii. What are the implications for the Nepalese Non-resident who holds currency notes in India? Can he deposit the same in his bank account in India?
(i) Not permitted as mentioned in Regulation 8(2) of FEMA Notification 6(R) dated29-12-2015.
(ii) Yes, see RBI FAQ 21. It is understood, however, that the amount to be deposited in the bank account is the legimate dues in India of the Nepalese Non-resident.
(ii) withdrawals from his bank account in India.
Q i. What happens to Indian currency that is held in India by Non-resident? Can he deposit the same in his NRO account as his legitimate dues in India and if so up to what limits?
(i) Yes, such action is permitted vide RBI FAQ 21. It is, however, understood that the amount of old notes to be deposited is the residue left with the non-resident out of the sources mentioned in fact (i) & (ii).
(ii) Yes, on the basis of the information, if any, gathered by PMLA authorities from various sources including, from the Income-tax Department.
The Chamber of Tax Consultants Acknowledges that Mr. Sashank Dundu, Advocate, has prepared the summary of the Public Meeting Proceedings for the benefit of the Public.
The Speech given by the speakers and the Panel discussion including all the above mentioned Questions and Answers are true, to the best of their knowledge, and that the information on this website/page is valid at the time of publication.
The Publisher/Speakers/Chamber of Tax Consultants make no warranty or representation in relation to content or accuracy of the material given as a Summary on this website or material contained in external websites linked to this website. The Publisher/Speakers/Chamber of Tax Consultants expressly disclaim any and all liability (including liability for negligence) in respect of use of the information provided.
The Publisher/Speakers/Chamber of Tax Consultants recommends you to seek independent professional advice prior to making any decision involving matters outlined in the Summary provided on this website or material contained in external websites linked to this website.

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