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The truth about 200% penalty and losing all your money to taxes if you deposit old cash

There are some things the media just doesn’t understand. You may have seen various reports which range from the scary to the alarmist on the topic of demonetization of the Rs 500 and Rs 1000 notes. In fact, here social media warriors must also take the blame for spreading grossly exaggerated news. Yes, I am talking about the reports and memes which say that you will have to pay almost 95% tax on the old cash you deposit in banks. Some in social media even interpreted that the 200% penalty is on the income, thus you need to pay more than your income!

Is this completely false? No, there is a small grain of truth in this which makes believing such news even easier. But the fact is, to reach this stage where you have to pay 90% + as taxes, you need to go through a lot of stuff. And in the age of instant news and meme-worthy material, such nuances are always lost. So here is what should happen (in the normal course) to a person depositing excessive amounts of cash:

1. Say Mr A has Rs 1 crore in cash of old currency notes. He has time till 30th December 2016 to deposit the same in banks (extended till 31 March 2017 with additional documentation)

2. As soon as Mr A deposits this money, he needs to have an explanation ready for the source of this cash. Note here the explanation needs to be ready, neither the banks nor the Income Tax will ask for it as of now.

3. So the explanations can be any of the below or a combination of the below options, depending on each case:

a. Mr A’s cash is entirely “white”, on which he has already paid tax i.e. this is cash which has been declared in his books of accounts or he has withdrawn this from the bank. Can there be such cases? Any business which is heavily based on cash for business reasons can surely have such a balance of cash, depending on the day to day volumes.

b. Mr A’s cash is entirely “black”, so to speak, which means he has never paid any taxes on the same.

4. So once Mr A deposits such “white” cash, he has no problems what so ever since he has already paid taxes on the same. He just has to collect evidence of the source and keep it ready.

5. If the cash is “black” though, it becomes “white” as soon as he deposits it into the bank. Thus, now Mr A will have to include this in his annual income, and think of a source for it. Since he has added it to his annual taxable income, he has to pay taxes on that (assumed to be 30% for simplicity).

6. Once he pays the taxes, comes the year end in March 2017. He collates all his financial data, and files an income tax return by July or September 2017 depending on his volume of business etc. Here, he should make sure that the money he deposited is shown in the returns. Please note, in the ordinary course, the Income Tax Department will not bother you even till September 2017.

7.  Now since Mr A had huge cash deposits, his transactions would have been reported to the Income Tax Department by the bank. The IT Department will wait till Mr A files his returns, and will probably issue him a notice post September 2017 announcing that they want to scrutinise his books of accounts.

8. This notice will start a series of hearings, proceedings etc where Mr A has to prove things such as where in his tax returns are the cash deposits shown as income, what was the source of income etc.

9. If the officer is not satisfied with his explanations, he can then issue an order which levies a penalty on him. The penalty can be either 50% of tax amount (for under-reporting) or even 200% of tax amount (for mis-reporting) depending on the nature of default. If the officer wants to levy the heavier 200% penalty, the onus lies on the officer to prove that mis-reporting has taken place. Please note by the time this order will be passed, we would be well into 2018.

10. So is the end of the road? No. Mr A can appeal against the decision at multiple levels. He can appeal to the Commissioner (Appeals), the Income Tax Tribunal and even the Courts. Some of the legal means of avoiding penalty are given here.

So to lose 90% plus of your cash deposited in your bank accounts, all the above needs to happen, and as anyone in the industry will tell you, there are many a slip between the cup and the lip. Still, there are some important points to note here:

1. I am not an expert in Income tax assessment proceedings and the above article has been significantly dumbed down for public consumption. If you are in a Mr A type situation, please consult an expert with the exact facts of your case.

2. All of the above holds true in “ordinary course”. The IT Department can at any time decide to change the ordinary course by either taking a more harsh stand and investigating in advance, or a softer stand by framing a policy to let go a class of tax payers mildly.

3. This does not constitute legal advice.

4. Most importantly: Do not take tax advice from WhatsApp forwards.

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