No need to explain source of deposits taxable at 50% under Pradhan Mantri Yojna

The Government has announced demonetization of existing currency of Rs. 500/1000 with effect from the 9th November, 2016. However, concerns have been raised that some of the existing provisions of the Income-tax Act, 1961 ('Act') could possibly be used for concealing black money. So, the Government has introduced Taxation Laws (Second Amendment) Bill, 2016 in the Lok Sabha to amend the provisions of Income-Tax Act. 

The Government has announced Pradhan Mantri Garib Kalyan Yojana 2016 (PMGKY) in the Taxation Laws (Second Amendment) Bill, 2016. As per this PMGKY black money deposited in banks or held in cash can be offered for taxation at 49.9% (i.e., 30% tax, 9.9% surcharge and 10% penalty).

The Revenue Secretary, Hasmukh Adhia said that Income-tax department will not ask for the source of funds deposited in banks if the entire income is declared under PMGKY. 

It would be the last chance to come clean for black money holders. Any detection of black money by Assessing Officer thereafter (other than search cases) would attract 83.25% tax. 

From bare reading of this statement of Revenue Secretary, doubts arise as to whether any corrupt official or corrupt member of political party or any criminal can also come clean by paying 49.90% tax under PMGKY.

No, any criminal or corrupt person cannot avail of benefit of this PMGKY as he is specifically excluded from purview of PMGKY.

Doubts also arise as to how Government will come to know that any corrupt person or any criminal is offering income under PMGKY as Income-Tax Act Department will not ask for source of funds deposited in banks?

Even if we assume that any corrupt person or any criminal has availed of benefit of this PMGKY, then also benefit of such PMGKY will be denied when such fact comes to notice of the department. In that scenario, action will be taken under respective provision of IPC and Prevention of Corruption Act and that person will be liable to pay tax at 83.25%.

Point of Sale (POS) Devices and Goods required for their manufacture exempted from Central Excise Duty till March 31, 2017.

The Government has demonetised the currency notes of Rs 500 and Rs 1,000 with effect from mid-night of 8th-9th November, 2016. Along with this, the Government has also laid increased emphasis on promoting digital payments.

Point of Sale (POS) devices are used for cashless transactions, both for making payments or disbursing cash. POS do not attract any basic customs duty. To further reduce the cost of such devices and thereby encourage digital payments, the Government has exempted such devices from Central Excise Duty. Consequently, these devices will also be exempt from Additional Duty of Customs [commonly known as CVD] and additional duty of customs [commonly known as SAD]. Simultaneously, to encourage domestic manufacturers of such devices, all goods required for the manufacture of POS devices have also been exempted from excise duty, and consequently from CVD and SAD. These exemptions will be valid till 31st March 2017.

Notification No.35/2016-Central Excise, dated 28th November, 2016 has also been issued in this regard.

TAX LIABILITY ON DEPOSIT OF HIGH DENOMINATION CURRENCY NOTES

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.

TRANSFER PRICING - COMPUTATION OF ARM'S LENGTH PRICE

SECTION 92C

Comparables and adjustments/Adjustment - Service fee : Where in course of appellate proceedings, assessee brought voluminous documents on record in order to prove genuineness of professional service fee paid to AE, since Commissioner (Appeals) without taking into consideration said evidence, confirmed adjustment made by TPO, impugned order passed by him was to be set aside and, matter was to be remanded back for disposal afresh.

[2016] 73 taxmann.com 393 (Chennai - Tribunal)

ALLOWABILITY OF BUSINESS EXPENDITURE

SECTION 37(1)

Onus to prove : Where assessee failed to produce necessary evidence in support of expenditure claimed to have been incurred, such expenditure was to be disallowed. 

[2016] 73 taxmann.com 390 (Hyderabad - Tribunal)

CHARITABLE OR RELIGIOUS TRUST - DENIAL OF EXEMPTION

SECTION 13

Sub-section (2)(a) : Where Assessing Officer rejected assessee's claim for exemption of income under section 11 on ground that certain properties had been purchased in names of individual members of assessee-society out of funds belonging to society, since impugned order was passed without examining as to whether those members held properties in fiduciary capacity for benefit of society or whether any benefits were available to members regarding utilisation of properties in question, same deserved to be set aside

[2016] 73 taxmann.com 391 (Jaipur - Tribunal)

Reference to TPO not invalid even if AO doesn't supply satisfaction note before making reference

Facts:

• Assessee filed the instant petition before the High Court challenging the validity of reference made by AO to TPO to determine ALP of international transaction.
• The petition was filed on following grounds:
• In terms of the Instructions No. 3/2016 dated 10-3-2016, the requirement of passing reasoned order on the objections of assessee (regarding whether a transaction is an international transaction or not) and the service of the order upon the assessee is a condition precedent to the Assessing Officer making a reference to the TPO.
• Non-compliance with either or both the above mandatory conditions render the reference to the TPO void.

The High Court held as under:

• The satisfaction recorded by the AO in the instant case contained sufficient reasons. He had indicated the relationship between the assessee and the other parties. He had made a comparative chart and alleged that the sales were under invoiced. That would be sufficient to refer the matter to the TPO. Whether the allegations are true or not must be tested before the authorities under the Act and not in a writ petition under Article 226. The challenge on this ground was, therefore, unsustainable.
• Another submission made by the assessee was that the the order recording satisfaction must be served upon the assessee. The purpose of this exercise of granting the assessee an opportunity of raising objections and the requirement of the AO to furnish reasons for the satisfaction is inter-alia to enable the assessee firstly to meet the case and represent against it to the TPO before the Assessing Officer on the ground that there is no international transaction and secondly in the event of his objections being overruled, an opportunity of challenging the same before the Disputes Resolution Panel or the Commissioner (Appeals) as the case may be, and thereafter before the Appellate Tribunal.
• An assessee is not entitled as a matter of right to invoke the writ jurisdiction at the stage of reference by the Assessing Officer to the TPO. His grievances can be raised in a challenge to the draft assessment order before the Disputes Resolution Panel or the final assessment order before to the Commissioner (Appeals).
• The contention of the assessee that the reference was void ab initio on account of the satisfaction note not having been furnished to the assessee before the reference of the transaction by the Assessing Officer to the TPO was, therefore, rejected. The failure to supply the satisfaction note before the reference to the TPO is at the highest a mere irregularity and does not prejudice the assessee in any manner whatsoever. In view of the above findings the writ petition was to be dismissed.

[2016] 74 taxmann.com 89 (Punjab & Haryana High Court)