RISK REVIEW OF AN ASSESSEE WHO DEPOSITS Rs. 500/- AND 1000/- OLD SERIES HIGH DENOMINATION CURRENCY IN BANK WITHOUT PROPER EXPLANATION OF THE SOURCE OF INCOME

Posted By on November 13, 2016

After the demonetisation of the old series High Denomination Currency Notes of Rs. 500/- and Rs. 1000/- by the Reserve Bank of India, there is large scale panic in the Public relating to the Cash held by them in the demonetised currency. Large number of persons who hold High Denomination Currency of the Old Series will try to deposit their Demonetised Currency into the Bank with an intention to declare the same as Income of the Current Year and pay taxes accordingly. Here, it is important to do a review of the Risk under various Enactments in respect of a Person who deposits such High Denomination Currency of Old Series in the Bank without a proper explanation and Audit Trail against the Source of Income during the current year. [NOTE – This article does not covers cash deposited in bank by ladies upto Rs. 2.50 Lakhs kept as their ‘PIN Money Savings’ as the government has already stated that they will not scrutinise cash deposit below Rs. 2.50 Lakhs].

The Penalty provisions under Section 270A of The Income Tax Act, 1961, reflects a limited prospective of Monetary Penalty that can be imposed under the Income Tax Act, 1961 on a Person who deposits Demonetised Currency and pays the Tax in accordance with the Income Tax Act, 1961 on such deposits. A detailed discussion on Section 270A can be viewed @ http://blog.ritulpatwa.com/precautions-in-depositing-high-denomination-cash-in-bank-to-avoid-penalty-of-200/.

However, the objective of this Article is to assess the Liability under following provisions of the Law:-

PART 1 : Prosecution Sections of The Income Tax Act, 1961;

PART 2 : Prevention of Money Laundering (Amendment) Act, 2012;

PART 3 : The Benami Transactions (Prohibition) Amendment Act, 2016;

PART 4 : Liability under Service Tax, Excise and/ or VAT Act

PART 1 : PROSECUTION SECTIONS OF THE INCOME TAX ACT, 1961

 

There are provisions under the Income Tax Act, 1961, relating to Lapses on the part of the assessee which are punishable through the courts. At time’s a person committs a particular offence, a wrongful act or he is guilty of a crime, that has been covered under the provisions mentioned below of the Income Tax Act, 1961, which enables the Department to initiate the proceedings before a magistrate.

BURDEN OF PROOF: The proceedings, before the magistrate shall be heard under the Criminal Procedure Code and as a standard Rule : The onus to prove the guilt before the magistrate shall fall, upon the department. The person shall be considered as innocent, unless he is proven guilty of the offence.

PROSECUTION: The punishment given by the department is of monetary nature whereas under the provisions mentioned below, punishment can be in the shape of imprisonment. But for that, the income-tax authorities have to launch the proceedings in a court of law.

SUMMARY PROVISIONS RELATED TO PROSECUTION UNDER THE INCOME TAX ACT, 1961

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34* We have considered only those sections that may be applied by the department in case of deposit of Demonetised High Denomination Currency Notes in Bank without proper documentary evidence of the source of Income. Following sections have not been covered under the above summary:- Section 275A, 275B, 276, 276A, 276AB, 276B, 276BB, 276CCC, 276D, 278A, 280.

 

Notes:-

  1. No person is punishable for any failure undersection 276A,276AB or 276B if he proves that there was reasonable cause for such failure (vide section 278AA).
  2. (a) Prosecution for offences undersection 275A,section 275B, section 276, section 276A, section 276B, section 276BB, section 276C, section 276CC, section 276D, section 277, section 277A and section 278 to be instituted with previous sanction of Principal Director General/Principal Chief Commissioner/Principal Commissioner/Director General/Chief Commissioner/Commissioner, except where prosecution is at the instance of the Commissioner (Appeals) or the appropriate authority (vide section 279).

(b) The offences under Chapter XXII can be compounded (either before or after the institution of proceedings) by Principal Director General/Director General or Principal Chief Commissioner/Chief Commissioner.

  1. Where an offence under this Act has been committed by a person, being a company, and the punishment for such offence is imprisonment and fine, then, such company shall be punished with fine and every person, referred to in sub-section (1) ofsection 278B, or the director, manager, secretary or other officer of the company referred to in sub-section (2) ofsection 278B shall be liable to be proceeded against and punished in accordance with the provisions of this Act.
  2. With effect from 1-4-2008 undersection 278ABa person may apply to the Principal Commissioner/Commissioner for granting immunity from prosecution, if he has applied for settlement under section 245C and the proceedings have abated under section 245HA. The application shall not be made after institution of prosecution proceedings after abatement.

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 PART 2 : PROSECUTION UNDER PREVENTION OF MONEY LAUNDERING (AMENDMENT) ACT, 2012 (PMLA);

 

Query 1: What is Money Laundering?
As per Section 3 of the PMLA, money laundering has been defined as below:-

“Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of offence of money-laundering.”

Query 2: What is the Punishment for Money-Laundering?
As per Section 4 of PMLA, prescribes the punishment as below:-

Prosecution : 3 to 7 years [In case of offence under the Narcotic Drug and Psychotropic Substance Act, 1985 : The prosecution may extend upto 10 years]

Fine : No Limit

Query 3: Who owns the Burden of Proof under PMLA?
As per Section 24 of the PMLA:-

“In any proceeding relating to proceeds of crime under the Act,-

(a)    In the case of a person charged with the offense of money-laundering under section 3, the Authorities or Court shall, unless the contrary is proved, presume that such proceeds of crime are involved in Money-Laundering; and

(b)   In the case of any other person the Authority or Court, may presume that such proceeds of crime are involved in money-laundering.”

 

Query 4: Whether the offence under PMLA are Congnizable or Non-Conginzable?
As per Section 45 (1) (a), every offence punishable under this Act shall be Cognizable i.e. a police officer has the authority to make an arrest without a warrant and to start an investigation with or without the permission of a court.
Query 5: What is considered as a ‘Proceeds of Crime’ under PMLA?
Section 2 (u) of PMLA has defined ‘Proceeds of Crime’ noted as below:-

“(u) Proceeds of Crime means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a Scheduled Offence or the value of each such property.”

Scheduled Offences have been defined under Part A and Part B of the Schedule. The list can be checked at http://indiacode.nic.in/acts-in-pdf/022013.pdf

Query 6: Can the PMLA be invoked in case of Deposit of Demonetised High Denomination Currency Notes beyond explainable limit?
In our View, deposition of Cash in Bank Account primarily does not fall within the purview of PMLA as the same is invoked only in case of ‘Proceeds of Crime’ and unless the Cash Deposited is Linked to some Scheduled Offence within the meaning of Section 2 (y) the provisions of PMLA are not applicable.

However, provisions like Section 424 (which is a ‘Scheduled Offence’) of the Indian Penal Code (45 of 1860) – ‘Dishonest or fraudulent removal or concealment of property’ needs a deeper review:-

“Whoever dishonestly or fraudulently conceals or removes any property of himself or any other person, or dishonestly or fraudulently assists in the concealment or removal thereof, or dishonestly releases any demand or claim to which he is entitled, shall be punished with imprisonment of either description for a term which may extend to two years, or with fine, or with both.”

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 PART 3 : PROSECUTION UNDER THE BENAMI TRANSACTIONS (PROHIBITION) AMENDMENT ACT, 2016 (BTPA)

 

Query 1: What is a Benami Transaction?
As per Section 4 (9) of the BTPA, has defined a Benami Transaction as below:-

“(9) “benami transaction” means,—

(A) a transaction or an arrangement—

(a) where a property is transferred to, or is held by, a person, and the consideration for such property has been provided, or paid by, another person; and

(b) the property is held for the immediate or future benefit, direct or indirect, of the person who has provided the consideration,

except when the property is held by—

(i)                      a Karta, or a member of a Hindu undivided family, as the case may be, and the property is held for his benefit or benefit of other members in the family and the consideration for such property has been provided or paid out of the known sources of the Hindu undivided family;

(ii)                    a person standing in a fiduciary capacity for the benefit of another person towards whom he stands in such capacity and includes a trustee, executor, partner, director of a company, a depository or a participant as an agent of a depository under the Depositories Act, 1996 and any other person as may be notified by the Central Government for this purpose;

(iii)                  any person being an individual in the name of his spouse or in the name of any child of such individual and the consideration for suchproperty has been provided or paid out of the known sources of the individual;

(iv)                   any person in the name of his brother or sister or lineal ascendant or descendant, where the names of brother or sister or lineal ascendant or descendant and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; or

(B) a transaction or an arrangement in respect of a property carried out or made in a fictitious name; or

(C) a transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership;

(D) a transaction or an arrangement in respect of a property where the person providing the consideration is not traceable or is fictitious;

Explanation.—For the removal of doubts, it is hereby declared that benami transaction shall not include any transaction involving the allowing of possession of any property to be taken or retained in part performance of a contract referred to in section 53A of the Transfer of Property Act, 1882, if, under any law for the time being in force,—

(i)                      consideration for such property has been provided by the person to whom possession of property has been allowed but the person who has granted possession thereof continues to hold ownership of such property;

(ii)                    stamp duty on such transaction or arrangement has been paid; and

(iii)                  the contract has been registered.

Query 2: Is Cash Deposited in Bank covered under the Definition of Property?
Yes, cash is covered in the Definition of Property as the immovable properties u/s 4 (26).

 

Query 3: What is an Offence and Prosecution under BTPA?

 

Section No. Nature of Transaction Prosecution Fine
3 (2) Any person who enter into a Benami Transaction Upto 3 Years No Limit
53 (2) Where any person enters into a benami transaction in order to defeat the provisions of any law or to avoid payment of statutory dues or to avoid payment to creditors, the beneficial owner, benamidar and any other person who abets or induces any person to enter into the benami transaction, shall be guilty of the offence of Benami transaction. 1 Year to 7 Years Upto 25% of FMV of the Property
54 Any person who is required to furnish information under this Act knowingly gives false information to any authority or furnishes any false document in any proceeding under this Act 6 Months to 5 Years Upto 10% of FMV of the Property
55 No prosecution shall be instituted against any person in respect of any offence under sections 3, 53 or section 54 without the previous sanction of the Board.

 

Query 4: Whether the offences under PMLA are Congnizable or Non-Conginzable?
As per Section 61, Notwithstanding anything contained in the Code of Criminal Procedure, 1973, an offence under this Act shall be non-cognizable i.e. a police officer does not have the authority to make an arrest without a warrant and an investigation cannot be initiated without a court order. The police can file a First Information Report (FIR) only for cognisable offences.
Query 5: Who all can be prosecuted under BTPA?
Any person who enters into a Benami Transaction or any person who knowingly induces or facilitates a Benami Transaction.
Query 6: Can the Provisions of BTPA be invoked in case of unexplained Cash deposited by a person in his Bank Account on which he has paid the Tax and shown in his return of Income?
In our view, if the Money that has been deposited in the Bank belongs to the person who has deposited the money, the provisions of the  BTPA should not be applicable as the same cannot be a Benami Transaction;

However, if this is proven by the facts of the case and the trail of Income that the Money belonged to some other person and the same has been deposited to facilitate / benefit such other person on a future date, the provisions can be invoked.

 

PART 4 : LIABILITY UNDER SERVICE TAX, EXCISE AND/ OR VAT ACT

 

The Government has linked Income Tax Returns with the Information furnished in/to the Service Tax, Excise and/ or VAT Department. This process is going to be seamless after the implementation of the Goods & Service Tax (GST) Regime.

It is critical to understand that every person who shows Cash Deposit in his Bank Account as his Income – will have to disclose the source of such Income. In most of the cases, such Income would be subjected to Service Tax and/or VAT in accordance with the Explanation provided by the Assessee. This position would be irrespective of whether the Income Tax Department accepts the explanation provided by the Assessee or not as the Service Tax Officials and VAT Officials would not deny the position stated by the Assessee.

Every assessee who intends to disclose the Cash Deposit in Bank Account as his Income of the Current Year must comply with the respective position under the Service Tax/ Excise/ VAT or any other Law Applicable and should deposit the Tax accordingly. Further the compliance in relation to the filling of returns under the respective Laws must also be ensured.

 

NOTE – The content of this document are solely for information purpose. It is suggested to consult a professional for understanding the applicability of this article in the respective scenario based on the facts of the specific case.

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