Select Your Location
The Central Government
had scrapped high-value currency notes of Rs. 500 and Rs. 1,000 denomination on
8th November 2016 and urged people to deposit these notes in their respective
banks by 31st December that year, after which they were rendered as
void. The step was mainly aimed at checking black money and the people had no
recourse left, but to unhide all their black savings. Thereafter, the income
tax department started the process of cross-checking and evaluating the
fairness of high-value deposits with the income tax returns filed by
individuals. Indeed, the high-value cash
deposits made by a few jewellers during the demonetization period were
carefully scrutinized by the tax department officials. The suspected
cases of fraudulent cash deposits during demonetization were asked to explain
the source behind such deposits.
A standard operating procedure as
prescribed by the Finance Ministry was followed by the Assessing Officers while
investigating the cases of unusual cash transactions and malpractices noticed
during the demonetization period.
The income tax department has sent demand notices to lakhs of taxpayers asking them to give an explanation for the sources of income behind cash deposits during demonetization and has even started prosecution in some cases. On the receipt of such tax notices, the taxpayers have been juggling with finding out ways to give answers to the tax officials so as to escape tax payment.
Indian Government invalidated high-value currency notes in 2016, many jewellers
have been detected by the tax authorities to have made hefty cash deposits
during that tenure and for which they failed to offer a justification.
The income tax returns for the Financial Year 2016-17 and Assessment Year 2017-18 were selected for scrutiny by the tax officials via e-proceedings for all those assessees, who had made cash deposits during demonetization amounting to more than Rs. 2.5 lakh. Such scrutiny cases have resulted in huge tax demands according to the orders passed by Assessing Officers. For determining the level of cash transactions during demonetization period and examining deposits made with banks, the department directed the concerned assessees to furnish cash books, sales books, ledger accounts of creditors from whom the cash was received, purchases books, cash accruals throughout the year, cash accruals during the demonetization period, cash transactions for the same period for the immediately preceding financial year, etc.
The application of data analytics by the department revealed that extraordinarily huge deposits were made by a few jewellers during the immediate period after demonetization, in comparison to their cash deposits of earlier years. Moreover, such high-value bank deposits did not reconcile with the income disclosed by such jewellers in their tax returns.
The tax officers are reporting that the income tax department has been taking stringent measures to levy taxes on sales of previously undisclosed stock. Post the government announcement on Nov 8, 2016 to the effect that Rs. 500 and Rs. 1,000 currency notes shall cease to exist as legal tender, many jewellers with an annual income of merely a few lakhs were reported to have deposited crores of cash in huge multiples after a few days of such announcement.
Amid the income tax assessment proceedings against several cases of undisclosed cash deposits made during the demonetization period, a large number of taxpayers (the majority being jewellers) are facing tax demands of significant value from the department. This is pursuant to their inability to provide valid and legitimate grounds of such high-value undisclosed cash deposits during demonetization. Further, such exorbitant deposits failed to go in tune with the volume of their normal course of business. Also, to hide such unreasonable profits in their books, they undertook an array of illegitimate means.
In cases where it is found that black money was involved behind the generation of massive cash revenue by jewellers at the time of demonetization, steps of tax demand are initiated by the income tax authorities. There were many instances where jewellers accepted black money of customers in lieu of selling gold commodities to them at exceptionally high premiums. With a view to meet a sudden huge demand for gold at that time and to earn unreasonably high-profit margins in comparison to those of routine times, the jewellers were suspected to have sold their products for an unlawful consideration, i.e., a consideration backed by black money.
To cover up
the recording of these huge deposits in books, the practice adopted by assessees
was to show them as sale proceeds or loans taken or advances received from
anonymous customers in lieu of purchases effected a month before
demonetization. The unaccounted cash transactions were given the name of
proceeds from sales of gold or silver made on credit to certain fake and
unregistered dealers. However, on scrutiny conducted by the tax departments,
the assessees failed to produce complete invoices of such purchases.
Many jewellers are also suspected by the department to have accepted the annulled notes much after Nov. 8 and to backdate the purchase receipts or invoices. This was done so as to falsely portray that the purchases of gold or silver by customers were effected at the time when the bills were still legal tender.
Moreover, it cannot be denied that the taxpayers hold an option to file an appeal against the orders of tax demands. But apparently, their probability of winning shall directly depend upon the strength and genuineness of each case, along with the supporting documentation furnished by the taxpayers.
authorities may exercise the right to scrutinize the past income of an assessee
and make additions to assessable income. This can be done by virtue of Section
68 and 69A of the Income Tax Act.
Section 68 (Cash Credits) states that “where any sum is found credited in the books maintained by an assessee for any previous year, and the assessee fails to offer an explanation about nature and source thereof or the explanation provided by him is not satisfactory in the opinion of the Assessing Officer, then such sum can be charged to tax as the income of the previous year”.
Many assessees were found to be accepting the currency notes
which were banned, i.e., not legal tender and which could be deposited into
banks only on grounds of factual reasons and good faith. However, when
questioned about such cash deposits during demonetization, they failed to offer
an explanation to the satisfaction of the Assessing Officers.
The unexplained cash deposits during demonetization are taxed under the Income Tax Act, 1961 at a flat increased rate of 60% (plus surcharge and education cess of 25% and 4% respectively). This levy is by virtue of Section 115BBE of the Income Tax Act. Moreover, a penalty of 10% is also imposed on fraudulent taxpayers under Section 271AAC.
To shore up the fiscal revenue and boost the economy’s growth, the tax officials have been taking serious steps of scrutinizing the past incomes of taxpayers to meet the government’s annual tax targets. Moreover, to accelerate the drive for speedy collection of revenue, the government has also extended an amnesty scheme (called Vivad se Vishwas scheme) to settle direct tax disputes stuck in litigation to March-end this year.
Also, Read: Effect of Demonetisation on NBFCs and MFIs.
A CA together with MBA (Fin) and M Com, she relishes taking interest in insightful writing in the domain of taxation and finance. She has gained experience as a full-time author and has also served an accounting role in industry.
The objective of the enactment of the Prevention of Money-laundering Act, 2002, i.e. PMLA (the...
Tax planning is a continuing effort and a management strategy for ensuring the minimization of...
On 18th May 2023, the Securities Exchange Board of India (SEBI) released a Consultation Paper o...
Infrastructure and real estate have been regarded as India's "sunshine sector" since the turn o...
On 22nd May 2023, the Central Board of Direct Taxes (CBDT) issued a new circular under secti...
Anyone can have different sources of income. With globalization and the opening up of economies...
The Reserve Bank of India (RBI) is crucial in regulating NBFC, including branch openings and cl...
In India, Non-Banking Financial Companies are subject to certain restrictions from taking publi...
It's usually a good idea to diversify the assets in your financial portfolio, especially during...
A nation is being built by the non-banking finance company through the development of wealth, t...
Are you human?: 7 + 4 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
With a view to further digitize the interaction between the taxpayers and income tax authorities, the Indian govern...
21 Jan, 2021
Recently, the MCA (Ministry of Corporate Affairs) has implemented new rules for the takeover of unlisted companies....
31 Mar, 2020
Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.
Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.
Stay updated with all the latest legal updates. Just enter your email address and subscribe for free!
Chat on Whatsapp
Hey I'm Suman. Let's Talk!