Central Board of direct taxes has issued a notification/circular on 05th of March 2019 with regard to SOP for the handling of cases related to substantial cash deposit during the demonetization period in which notice under section 142(1) of the Income-tax Act, 1961 has not been compiled.
The Income tax department has issued notices to around three lakh persons in this regard seeking their income tax return for the assessment year which pertains to the period during which cash was deposited in their bank accounts during the period of demonetization. Out of these notices, around 87,000 persons have not filed their return of income so far in response to the notice issued under section 142(1) of the Income Tax Act, 1961.
CBDT has issued the standard operating procedure in these cases as to how the Assessing Officer should proceed with and pass the assessment orders in such cases:-
The various details related to the assessee shall be provided by the PDGIT(systems) to the Assessing Officer. This shows the use of technology by the income-tax department in making assessments. The Assessing Officer shall pass an order under section 144 of the Income-tax Act, 1961 as the best judgment assessment. The said assessment shall be in line with the provisions of the Income Tax Act and shall be monitored by the respective Range Head of the Assessing Officer. The Assessing Officer has to make suitable inquiries, gather material and evidence, obtain an address, and give the opportunity of being heard to the assessee.
The Assessing Officer shall also collect information about other persons and obtain data related to the flow of funds from the bank and other parties. The Assessing Officer shall issue notices u/s 133(6) of the Income Tax Act. He shall also form an opinion regarding the nature of transactions made during the period of demonetization after a complete analysis of all the records and also consider records of returns of income filed by the assessee. The Assessing Officer shall also issue notice and give the opportunity of being heard to the assessee so as to explain the facts of the matter. In matters where the ultimate beneficiary is someone else and the Assessing Officer is able to locate that person, then he shall forward all the materials collected to the Assessing Officer of the beneficiary entity. The issuance of notices and communications shall be made using electronic ITBA module. In the aforesaid type of matters, the Assessing Officers shall pass the assessment order by 31st March 2019 or latest by 30th June 2019.
CBDT had earlier issued detailed guidance to the senior officers of the Income Tax Department on important issues to be considered while framing scrutiny assessments pertaining to the filing of revised/belated returns by assessees post demonetization. CBDT has observed that taxpayers have tried to build an explanation for cash deposits in their bank account(s) by manipulating their books-of-accounts and filing revised/belated income tax returns and several of such cases have been selected for scrutiny in Computer Aided Scrutiny Selection (CASS) during this financial year based on the risk assessment criteria.
CBDT’s internal communication highlights the pre-requisites for revising tax return or filing belated tax return and highlights that “in situations where inquiries/verification in course of assessment proceedings suggest manipulations made fictitiously merely to build an explanation for cash deposits in bank account(s), the revised return itself becomes questionable and therefore, the transactions disclosed in it which are over and above the original return are liable to be taxed under anti-abuse provisions of the Act”. For belated returns files post demonetization, CBDT states that “it would be crucial to examine the trend and business practices of a particular assessee while ascertaining the legitimacy of the transactions disclosed in a belated return”. CBDT accordingly has listed down 7 red-flags which might indicate that assessee had filed revised or belated return merely as a cover-up to explain the cash deposits in bank accounts. These instances include:
1) Unsubstantiated reduction in closing stock in the revised return vis-cl-vis the figures in original return;
2) Reporting of higher sales in the revised return;
3) Cash-in-hand as on March 31, 2016, or March 31,2015 was enhanced in the revised return;
4) Additional cash inflow claimed to be out of earlier year savings, receipt of loans/advances/gifts/repayments/sale of capital assets;
5) In some cases, cash outflow might have been reduced by paying some of the liabilities in cash;
6) Significantly lower closing stock as on March 31, 2015, or March 31, 2016, as compared to the earlier years in a belated return;
7) Significantly higher cash-in-hand as on March 31, 2016, or March 31, 2015, compared to the preceding year in a belated return.
After identifying these issues, CBDT has provided issues to be kept in consideration during verification and framing of assessments-
1) The claim of enhanced sales may be compared with the Central Excise / VAT returns;
2) Whether the parties to whom additional sales were disclosed have an identity, creditworthiness and transaction was genuine or not;
3) Where the accounts are subjected to tax-audit, whether omission or wrong statement in the original return was pointed out by the audit or not;
4) The source of cash in the hands of the person who had made payments to the assessee has to be verified carefully;
5) The past profile of the concerned assessee should be thoroughly analyzed;
6) Whereas a result of inquiries/investigations it emerges that figures in the revised/belated return are fudged, the figure of manipulated receipts/sales/stock etc. is liable to be taxed as a cash credit under section 68 and not merely on net profit basis;
7) Any undisclosed expenditure detected after reduction of cash in hand by the assessee may be verified carefully;
8) Unaccounted income so assessed in scrutiny assessment is liable to be taxed at a higher rate without any set off of losses, expenses etc. under section 115BBE of the Act; The effective rate of income tax shall be 60% tax + 25% surcharge on tax + 3% cess on total of tax & surcharge = 77.25% as against 30.90% earlier (with Cess);
9) In the scenario pertaining to Wealth-tax returns of earlier years, it should be examined whether there is an attempt to build cash-in-hand or any other asset so as to justify deposit of cash, post-demonetization.
The Income tax department had earlier also come out with 21 days notice for non-filers identified by their Non- Filers Monitoring System. The Finance ministry on 22nd January 2019, identified and requested the Non-filers to assess their tax liability for AY 2018-19 and file the Income Tax Returns (ITR) or submit an online response within 21 days. In case no ITR filed or no response is provided, the Income Tax department will initiate the proceeding under the Income-tax, 1961. It is opined that the department has identified recording of the transactions in which assessee has incurred the following transactions but haven’t filed the return, Such cases might have fallen to the line.
1. Cash Payments in the following events in a financial year:
- For purchase of bank drafts or pay orders or banker’s cheque, totaling Rs. 10 Lakh.
-For any pre-paid instruments like smart cards, magnetic chip cards, internet accounts, wallets etc issued by RBI and totaling to Rs. 10 Lakh.
-Cash deposit/withdrawal totaling to Rs. 50 Lakh or more.
-Cash deposits in one or more accounts amounting to Rs. 10 Lakh by an individual except for deposits in current accounts.
-Cash Payments for the sale of goods or services made by any person of Rs. 2 Lakhs
2. Any Deposits amounting to Rs. 10 Lakhs or more in a single financial year.
3. Any of the following payment in a single financial year by any person:
up to Rs. 1 Lakh or more in cash;
-Rs. 10 Lakhs or more by any other mode, against credit card bills of one or more card
4. Receipt from any person aggregating toRs. 10 Lakhs or more in a financial year for acquiring bonds or debentures (other than on renewal) issued by the company or individual.
5. Payment towards shares to a company, amounting to Rs. 10 Lakhs in a financial year.
6. Buy Back of shares by any person, totaling Rs.10 Lakh or more in a financial year.
7. Receipt of money for acquiring units of mutual funds (in one or more schemes) acquired by any person totaling to Rs. 10 Lakhs or more in a financial year.
8. Receipt for sale of foreign currency involving credit or expense in such currency through a currency card or debit card or credit card or through traveler’s cheque or draft or any other instrument – an amount ~aggregating to Rs. 10 Lakhs or more during a financial year by any individual.
9. Immovable property bought or sold by any person of an amount of Rs. 30 Lakhs or more or valued at Rs. 30 Lakhs or more by Stamp Authorities.
10. Cash deposits during the interval of 9th November 2016 to 30th December 2016 which sums up to-Rs. 12,50,000 or more, in one or more current account of a person; or Rs. 2,50,000 or more, in one or more accounts of a person (other than the current account)
11. Cash Deposits between 1st April 2016 to 9th November 2016 in respect of accounts that are reportable as above for Cash deposits during the interval of 9th November 2016 to 30th December 2016.
12. Form 26AS showing details of tax deducted by a person.
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