On 8th November, 2016, the Central Government has demonetized INR 500 /1000 Currency Notes. The Government has made arrangements to enable persons holding old currency notes for INR 500 / 1000 to convert them into new currency notes of INR 500 / 2000 denomination. This can be done by converting small quantity of old currency notes into new notes in a physical form. For larger amounts old notes will have to be deposited in the Bank Account of the person holding the old notes on or before 30th December, 2016.
Once the notes are deposited in the Bank Account of the person he will have to explain the nature of such deposit to the Income tax Authorities during the course of assessment proceedings. The Government has announced that such deposits upto INR 2.5 Lakhs will not be reported to the tax authorities and no enquiry will be made by the tax authorities about the nature and source of such deposits. These will be considered as deposits out of savings made for household expenses.
In view of the above, a question will arise as to what will be the tax implication about the deposit of old notes in excess of INR 2.5 Lakhs. The Banks have been directed to report deposits made by a person between 10.11.2016 to 30.12.2016 in excess of INR 2.5 Lakhs to the tax department. Therefore, the tax department will call upon such persons who have deposited old notes worth more than INR 2.5 Lakhs. Such persons will have to prove the source of such holding of old notes at the time of scrutiny by the tax department. If no satisfactory explanation is given by such person the assessing officer can treat this amount deposited in the Bank as unexplained cash credit under section 68 and levy tax at 30% u/s 115BBE of the Income tax Act. He can also levy penalty upto 200% of tax (i.e 60%) u/s 270 A. He has also power to prosecute such persons.
If the person depositing old notes in large numbers in his Bank Account is not in a position to given satisfactory explanation about the source of such deposit, it will be possible for him to declare this amount as income of the current Financial Year (2016-17) (A.Y. 2017-18), as “Income from Other Sources”.
He will have to pay Income tax @ 30% plus applicable Surcharge and Education Cess. It will be advisable for him to pay advance tax due on 15.12.2016 for the current year with interest. Total advance tax payable upto 15.12.2016 is 75% of total tax payable on his total income for the current Financial Year.
A question which is now being debated is whether penalty u/s 270 A of the Income tax Act will be leviable with reference to the amount deposited in banks in the form of old notes during the period 10.11.2016 to 30.12.2016 for which the assessee is not able to give satisfactory explanation. Conflicting views are being expressed in difference quarters. In this note an attempt is made to analyze the penalty provisions under the Income tax Act as applicable to such a situation.
Let us take an example of a case of Mr. “A” who is carrying on business. He deposits INR 50 Lakhs in the form of old notes during the period 10/11/2016 to 30/12/2016 in his Bank Account. He is not able to explain the source of this deposit, and therefore, he declares this amount as his “Income from Other Sources”in his return of income for A.Y. 2017-18.He declares his income as under:
(i) Income from business - 20,00,000
(ii) Property Income - 2,00,000
(iii) Interest from Bank and others - 3,00,000
(iv) Income from other sources (Bank Deposits) - 50,00,000
Ch. VI A Deductions - 2,00,000
Total Income INR - 73,00,000
He pays advance tax upto 75% of Tax on 15.12.2016 and balance tax by 15.3.2017.
In this case, the total income determined by the CPC u/s 143 (1) (a) will be INR 73,00,000/-, if no other adjustments are made.
New Section 270 A has been inserted in the Income tax Act by the Finance Act, 2016, w.e.f. A.Y. 2017-18. This section provides for levy of penalty on under-reported income. Old Section 271 (1) (c) providing for levy of penalty in the case of concealment of income or furnishing inaccurate particulars of income applies only in respect of A.Y. 2016-17 and earlier years.
Section 270A provides that if a person has under reported his income, penalty @ 50% of tax is leviable on such under-reported income. If the under reported income is of the nature of Misreporting of Income, as defined in section 270A (9), the penalty will be 200% of the tax. Reading Section 270A it makes it clear that for levy of penalty at 50% u/s 270A (7) (under reporting of Income) or at 200% u/s 270 A (8) (Misreporting of Income) the A.O. will have to establish that there is under reporting of Income. Section 270A (2) states that the assesse shall be considered to have under reported his income if -
(i) The income assessed is greater than the income determined in the return processed u/s 143 (1) (a).
(ii) If no return is furnished the income assessed after deducting the maximum amount not liable tax.
(iii) Income assessed in reassessment proceedings is greater than the income assessed before such reassessment.
(iv) Book Profit assessed u/s 115JB / 115JC is greater than Book Profit determined u/s 115JB / 115JC in the return processed u/s 143 (1) (a).
(v) Income assessed or reassessed has the effect of reducing the loss or converting loss into income.
Section 270 A (3) provides for determination of under-reported income. Under this section, this amount is to be determined by finding out the difference between the assessed income and the income determined u/s 143(1) (a). If no return is filed this amount is to be determined by reducing from the assessed income the maximum amount on which no tax is payable.
Section 270 A (7) and 270A (8) prescribe the rates of Penalty leviable in case of under reporting or misreporting of income. These sections read as under.
(i) Section 270A (7) : The penalty referred to in subsection (1) shall be a sum equal to fifty percent of the amount of tax payable on under reported income .
(ii) Section 270 A (8): Notwithstanding anything contained in subsection (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 percent of the amount of tax payable on under-reported income.
Section 270 A (10) explains how tax payable in respect of under reported income is to be determined. This section provides as under:
(i) Where no return is filed and the income has been assessed for the first time, the amount of tax calculated on the under reported income as increased by the maximum amount not chargeable to tax as if it were the total income.
(ii) Where return is filed and the total income determined u/s 143(1) (a) or assessed, the amount of tax calculated on the under-reported income as if it were the total income.
From the wording of sections 270A (7) 270A (8) and 270A (10) it is evident that penalty of 50% or 200% is leviable only on “the amount of tax payable on under reported income”. If we refer to section 270 A (2) it is clear that the amount of under reported income is to be determined by comparing the income assessed and the income as determined u/s 143(1) (a). If there is no difference between these two figures, no penalty u/s 270A (7) (50%) or 270 A (8) (200%) can be levied.
Now, if we revert to example given in Prara 6 above, we will find that the total income declared in the return of income is INR 73 Lakhs and the income determined u/s 143 (1) (a) is INR 73 Lakhs. Therefore, if the A.O. makes some addition while making the assessment u/s 143 (3) and the income assessed is INR 75 Lakhs the difference between the assessed income and income determined u/s 143 (1) (a) will be only INR 2 Lakhs. This amount will be considered as under reported income for the purpose of levy of penalty u/s 270A. In other words, INR 50 Lakhs deposited by the assessee during the period of 10.11.2016 to 30.12.2016 in the form of old INR 500 / 1000 Notes will not be considered as under reported income and no penalty can be levied on this amount which is declared as Income from other sources.
From the above analysis, it is evident that no penalty can be levied under the existing section 270A if the old high denomination notes are deposited by an assessee in his Bank Account between 10/11/2016 to 30/12/2016 and offered for tax as Income from Other Sources in the return of income for A/Y:2017-18. It will be advisable for him to pay advance tax in two instalments on 15/12/2016 (75%) and 15/03/2017 (25%) with interest due u/s 234C of the Income tax Act.
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