After the demonitisation 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 demonitised currency. There are reports/ messages circulating in the Print, Electronic and Social Media that the cash deposited in bank may attract a penalty of 200%.
It is important to understand the provisions of Law to avoid falling prey to any such media buzz and correctly assess ones position before depositing any such cash in bank. We are discussing below the penalty provisions under Income Tax Act, 1961 for self review of the impact of cash deposit and the precautions that may enable an assessee to reflect the correct position and avoid Penalty being imposed.
PENALTY PROVISIONS:-
The Finance Act, 2016 has introduced new Section 270A (http://incometaxindia.gov.in/pages/acts/income-tax-act.aspx), where in Penalty is imposed for (A) Under Reporting of Income [Penalty : 50% of the amount of Tax Payable (Sub Section 7 of Section 270A)] and (B) Mis- Reporting of Income [Penalty : 200% of the amount of Tax Payable (Sub Section 8 of Section 270A)]. The above section has replaced Section 271 (1)(c) of the Income-tax Act, 1961 under which Penalty was imposed for (A) concealment of particulars of income or (B) furnishing inaccurate particulars of income.
What is Under Reporting of Income?
Sub Section 2 of Section 270A defines under reporting of income as below:-
(2) A person shall be considered to have under-reported his income, if—
Provisions of Sub Section (7) of Section 270A that prescribes for a Penalty of 50% in case of Under-Reporting of Income are noted below:-
(7) The penalty referred to in sub-section (1) shall be a sum equal to fifty per cent of the amount of tax payable on under-reported income.
OUR VIEW ON UNDER REPORTING OF INCOME:-
In our view, if an Assessee has correctly disclosed his income including the High Denomination Cash deposited in the bank and paid the applicable Tax in accordance with the Law and at the time of assessment there is no mis-match in the Income Determined and the Income Assessed, there may be no penalty for Under-Reporting of Income.
WHEN IS THE PENALTY FOR MIS-REPORTING OF INCOME APPLICABLE?
Provisions of Sub Section (8) of Section 270A that prescribes a penalty of 200% on Mis-Reporting of Income is noted below:-
(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub-section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income.
Mis-Reporting has been defined under sub-section (9) as below:-
(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:—
| (a) | misrepresentation or suppression of facts; | |
| (b) | failure to record investments in the books of account; | |
| (c) | claim of expenditure not substantiated by any evidence; | |
| (d) | recording of any false entry in the books of account; | |
| (e) | failure to record any receipt in books of account having a bearing on total income; and | |
| (f) | failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply. |
OUR VIEW ON MIS-REPORTING OF INCOME
If we analyse the sub-section 8 of Section 270A, it states that the provisions of Mis-Reporting will be applicable only if the same has resulted in ‘Under Reporting’ of Income in accordance with the Sub-Section 2 of Section 270A. In our view, if an assessee has correctly disclosed the Cash Deposted in Bank and paid the Taxes accordingly and there is no mis-match in his income, then there is no case for invoking penalty for Mis-Representation of Income.
PRECAUTIONS & ISSUES THAT REQUIRE REVIEW BEFORE DEPOSITING CASH IN BANK
1. The Cash deposited in Bank should not be linked to a transaction of any preceeding year that may result in Under Reporting of Income of that Preceeding Year;
2. A proper explanation in respect of following acts that amounts to mis-reporting of income must be recorded:-
(a) Misrepresentation or suppression of facts; or
(d) Recording of any false entry in the books of account; or
(e) failure to record any receipt in books of account having a bearing on total income;
3. As far as possible, cash should be deposited by way of a single entry in the bank so that a fair intention may be established. Though there is no restriction on multiple deposit of High Denomination in Bank;
4. In order to safeguard against tax and penalty of 200% assessee should make sure that he has not Misrepresented or suppressed of any facts related to income or has correctly record entries in books of account (i.e. receipt of income is shown as income and also offer for tax while filing return of income) and not shown as balance sheet items and skipped while filing return of income.
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.