Income Tax Taxation

How does Income Tax Department trace your High Value Transactions?

Did you ever wonder how income tax department gets information regarding your high value transactions? Well, we all know that they are not unaware about such transactions, but how do they get information about this. If you are looking for an answer for this question, then this is the place where you would want to be.

Tracing High Value Transactions- Overview

So to first answer your question, the income tax department gets information about particular transactions through its sources. Based on such information, they match it with the information provided in the income tax returns by the taxpayer. The third-party information helps the department to find out the taxpayer who is looking to escape the tax liability or reporting requirements.

With a view to widen the tax net, the IT department has employed the assistance of analytics to scrutinize the data to identify people who haven’t filed income tax returns or have underreported income despite performing a high value transaction.

There isn’t any specific definition of such transactions. Various entities report transactions above a threshold done by a taxpayer, which is compared by the tax department with the income tax returns filed.

Tracing High Value Transactions: Source of information

Form 26 AS or TDS/TCS statement

The tax department gets information from reports of tax deducted at source and tax collected at source. The tax deducted at source (TDS) on income or payment obtained by the taxpayer is reported to the department of income tax. For instance- interest on term deposits, fee from professional or technical service, salary etc. When tax is deducted at source on those payments, it is imperative that it is reported to the department of income tax through TDS returns. Such return has the deductees’ PAN number and transaction details. 

Likewise, when a seller collects tax at source on goods like motor vehicle, scrap etc., the seller files the Tax collected at source return, reflecting in the 26 AS of the buyer. Therefore in case of a mismatch in your income details provided in the income tax return and 26 AS Form may invite notice from the income tax department.

The idea behind capturing such transactions is to assess the income source and to know if it is reflected in the income tax return or not. 

Statement of Financial Transactions

Statement of financial transactions refers to a report filed by specified persons under section 285 BA^[1]. It contains transactions exceeding the threshold limit, including expenditures and investments done by taxpayers in a financial year.

Specified entities such as banks, mutual funds, bonds issuing institutions and registrars or sub-registrars should file Statement of financial transactions.

The limit of different financial transactions in a financial year to be reported under the Statement of financial transactions is provided below-

• Cash deposit in the savings account of 10 lakh rupees or more;
• Cash deposit or withdrawal aggregating 50 lakh rupees or more in the current account in a year;
• One or more time deposits aggregating 10 lakh rupees or more;
• Mutual funds units acquired for more than 2 lakh rupees in a year;
• Investments in bonds or debentures for 10 lakh rupees or more in a year;
• Payments by credit card that aggregate 1lakh rupees or more in cash/10 lakh rupees or more in any other mode;
• Sale or purchase of immoveable property for 10 lakh rupees or 30 lakh rupees (stamp duty value) or more;
• Equity shares acquired for 10 lakh rupees or more of a company;
• Cash payment of 2 lakh rupees or more for goods or services sale to the person who is liable for tax audit according to the income tax act.

The statement of financial transactions contains the PAN number of the person making specified transaction.

The aforementioned details are not exhaustive as there are other ways also in which the income tax department can trace your transactions. There are many transactions like payment of 50000 rupees to a hotel or a restaurant and a deposit of more than 50000 rupees in a bank where you would be required to provide PAN details. 

A seller has to keep a record of sales more than 2 lakh rupees against which PAN has to be quoted. In case the income tax department wishes, it may also reach out to the PAN holder and inquire of the source of income. Therefore keep these transactions in mind while filing income tax return.

Tips for taxpayers

Here are some tips that can help you avoid getting notices from income tax department.

• It is better to file your income tax return before the due date;
• Cross check all the TDS entries in Form 26 AS. You can repeat this once in a quarter;
• Check Form 26 AS if any transactions are reported under the AIR section;
• Keep your PAN details up to date;
• Disclose your entire and correct income earned during the financial year in your ITR;
• Keep a record of all your high value transactions, investments and expenses.

Conclusion

In order to keep a check on tax evasion, the income tax department has beefed up its vigilance when it comes to monitoring your high value transactions. Therefore be aware and follow the compliances to avoid any future legal actions.

Read our article: The Concept of Tax Evasion and Tax Avoidance: Definition and Differences