IT Department ups the ante to check for ‘black’ money deposited during demonetization

Naysayers and so-called experts have already buried the exercise of demonetization, writing it off as a failure. One of the arguments being used since most of the money came back and was deposited in banks, there was very little black money in the system, or the system was gamed. Some even claimed that since the black money was deposited in banks, it had turned white at that very instance.

However, the Income Tax Department seems to have just started their investigations. Earlier this year, the Department had launched Operation Clean Money, involving e-verification of large cash deposits made during 9th Nov to 30th Dec 2016. In only the “first batch”, about 18 lakh persons had been identified in whose case, cash transactions don’t appear to be in line with the tax payer’s profile.

Data from banks, regarding accounts of companies whose names had been struck off by the Registrar of Companies, was also obtained last month. We had covered how the data showed some shocking irregularities, and how it is expected that the Income Tax Department would further investigate this matter.

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Earlier this month, the IT Department had stated via LETTER [F.NO.225/363/2017-ITA.II], DATED 15-11-2017, that a list of people was being generated, who had deposited substantial Cash in bank account(s) during the demonetisation period but had not yet filed Income-tax returns. Officers were told to issue notices to such people, in order to compute the tax payable by them.

Now, the IT Department has issued a fresh salvo against those who may have tried to cheat taxes on “black” cash deposited in banks. Technically, this cannot be called a “fresh” attack since via a press release dated 14 December 2016, the Department had warned tax payers about this.

The release had stated that some taxpayers may misuse the provision to revise old income tax returns, for manipulating the figures of income, cash-in-hand, profits etc. with an intention to show the current year’s undisclosed income (including the unaccounted income held in the form of demonetized currency in current year) in the earlier return, to avoid heavy taxes. In such cases, the department said, detailed scrutiny may be required so as to ascertain the correct income of the year and may also attract penalty/prosecution in appropriate cases as per provision of law.

Acting on the above, the IT Department now has issued detailed guidelines to tax officers, which are to be considered while ordering scrutiny assessments pertaining to filing of revised/belated returns by assessees, post-demonetisation period. Scrutiny assessments refer to the cases which are picked by the IT Department for detailed investigation, and verification with supporting documents.

The guidelines list out some of the possible methods used by tax evaders:

i. Unsubstantiated reduction in closing stock in the revised return vis-a-vis the figures in original return;

ii. Reporting of higher sales in the revised return;

iii. Cash-in-hand as on 31.03.2016 or 31.03.2015 was enhanced in the revised return;

iv. Additional cash inflow claimed to be out of earlier year savings, receipt of loans/advances /gifts/repayments/sale of capital assets;

v. In some cases, cash outflow might have been reduced by paying some of the liabilities in cash;

vi. Significantly lower closing stock as on 31.03.2015 or 31.03.2016 as compared to the earlier years in a belated return;

vii. Significantly higher cash-in-hand as on 31.03.2016 or 31.03.2015 compared to the preceding year in a belated return.

They communication further prescribes methods to investigate the above anomalies. Thus, the Income Tax Department is slowly shutting the doors for all the people who might have tried to play smart during the demonetization period. While critics of demonetization may turn a blind eye, the IT Department is not backing off.

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