As the dust begins to settle on demonetization and the taxman hunts for unexplained money, there is a lurking concern among practitioners and senior levels of the tax office as to how harshly the new law would be used.
Money borrowed from a friend, jewellery inherited from great grandmother, gifts, capital received by a small businessman, amount spent in daughter's wedding or in regular household expenditure can be questioned and taxed at a far higher rate if someone fails to offer a "satisfactory explanation" to the tax officer.
Indeed, a person may have to cough up as high as 83% -- as against 35% in the past -- if the I-T department doubts such 'income' or 'expenses'.
"We have discussed the matter among ourselves. It's a strong provision in the (Income Tax) Act and the department would find it handy in mobilising tax from black money. But there are chances that it may be misused," said a senior tax official in Mumbai which accounts for the highest direct tax collection. According to senior chartered accountant Dilip Lakhani, in a loan received the assessing officer can always question the credit worthiness of the lender or describe family jewellery (beyond 500 gms) as unexplained investment.
The law to tax funds or investments whose source cannot be substantiated had always existed. But the law was changed post demonetization to empower the tax office to impose a significantly higher tax and penalty. Now, amid notices and searches by the department, fears are that the law may be misused.
"Though the income tax amendment was bought in to penalize tax evaders who had deposited the demonetized currency to take shelter under section 115BBE of the Income-tax Act, 1961, in genuine cases, this section would become difficult to comply with. Unexplained deposits/credits can only turn into explained deposits/credits if source is clearly explained, which in several cases may become extremely difficult to do," said Amit Maheshwari, Partner Ashok Maheshwary & Associates LLP. Individuals rarely maintain regular books of account and may find tracing the source a very time consuming and difficult exercise, he said.
The relevant parts of the I-T Act are: Section 68 (dealing with unexplained cash credit, which is applicable to loans, gifts and share capital); section 69A (unexplained money, jewellery or valuable items); 69B (unexplained investment); and section 69C (unexplained expenditure.) Once section 115BBE is invoked, then the income (which is under question) cannot be set off against any other loss for the year or carried forward.
"The amendment prescribes penal rate of tax and is effective from April 1, 2016. The AO has been given wide subjective powers and the amendment could challenge the present government's objective to minimize harassment to taxpayers. The rate of tax should be brought down to 30%," said Lakhani.
If one is able to establish unexplained deposits, loans, or investments, can the Assessing officer still not be satisfied, asks Mitil Chokshi Senior Partners Chokshi and Chokshi. "While every effort will be made by AO to determine identified credits as unexplained, assesses will try to prove otherwise by adequate evidences, by establishing the identity, capacity and genuineness," he said.
Earlier, an assessing officer invoking Section 115BBE could impose a tax of 30% plus the surcharge; now, the tax payable will be 60%, along with 15% surcharge and 3% cess aggregating to 77.25%. In add, there could be a penalty of 10% of the tax - a total outgo of 83.25% for the assessee.
Money borrowed from a friend, jewellery inherited from great grandmother, gifts, capital received by a small businessman, amount spent in daughter's wedding or in regular household expenditure can be questioned and taxed at a far higher rate if someone fails to offer a "satisfactory explanation" to the tax officer.
Indeed, a person may have to cough up as high as 83% -- as against 35% in the past -- if the I-T department doubts such 'income' or 'expenses'.
"We have discussed the matter among ourselves. It's a strong provision in the (Income Tax) Act and the department would find it handy in mobilising tax from black money. But there are chances that it may be misused," said a senior tax official in Mumbai which accounts for the highest direct tax collection. According to senior chartered accountant Dilip Lakhani, in a loan received the assessing officer can always question the credit worthiness of the lender or describe family jewellery (beyond 500 gms) as unexplained investment.
The law to tax funds or investments whose source cannot be substantiated had always existed. But the law was changed post demonetization to empower the tax office to impose a significantly higher tax and penalty. Now, amid notices and searches by the department, fears are that the law may be misused.
"Though the income tax amendment was bought in to penalize tax evaders who had deposited the demonetized currency to take shelter under section 115BBE of the Income-tax Act, 1961, in genuine cases, this section would become difficult to comply with. Unexplained deposits/credits can only turn into explained deposits/credits if source is clearly explained, which in several cases may become extremely difficult to do," said Amit Maheshwari, Partner Ashok Maheshwary & Associates LLP. Individuals rarely maintain regular books of account and may find tracing the source a very time consuming and difficult exercise, he said.
The relevant parts of the I-T Act are: Section 68 (dealing with unexplained cash credit, which is applicable to loans, gifts and share capital); section 69A (unexplained money, jewellery or valuable items); 69B (unexplained investment); and section 69C (unexplained expenditure.) Once section 115BBE is invoked, then the income (which is under question) cannot be set off against any other loss for the year or carried forward.
"The amendment prescribes penal rate of tax and is effective from April 1, 2016. The AO has been given wide subjective powers and the amendment could challenge the present government's objective to minimize harassment to taxpayers. The rate of tax should be brought down to 30%," said Lakhani.
If one is able to establish unexplained deposits, loans, or investments, can the Assessing officer still not be satisfied, asks Mitil Chokshi Senior Partners Chokshi and Chokshi. "While every effort will be made by AO to determine identified credits as unexplained, assesses will try to prove otherwise by adequate evidences, by establishing the identity, capacity and genuineness," he said.
Earlier, an assessing officer invoking Section 115BBE could impose a tax of 30% plus the surcharge; now, the tax payable will be 60%, along with 15% surcharge and 3% cess aggregating to 77.25%. In add, there could be a penalty of 10% of the tax - a total outgo of 83.25% for the assessee.
Source:-The Economic Times
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