Income Tax Department (ITD) has started asking for information on its e-filing website to people who have been identified as having deposited large amounts of cash in their bank accounts as part of the “Operation Clean Money” Drive. ITD has also said that it is reviewing responses received on the e-filing portal and basis the responses (and especially a case where response was not filed), it will start issuing formal notices.
In this post, I am taking up the issue of likely implications of such cash deposits and what pro-active steps can NRI take to minimize the negative effect of this exercise.
Image Credit: www.timesofindia.indiatimes.com
Important points and updates as on 01/03/2017
- ITD amended Rule 114B of Income Tax Rules to say that in case person deposits cash in a bank account > INR 2.5 lacs during period Nov. 8 – December 31, 2016, he will be required to quote PAN
- ITD also amended Rule 114E of Income Tax Rules to say that bank has to report any cash deposits during period Nov. 8 – December 31, 2016 in all accounts (except current account) taken together as exceeds INR 2.5 lacs
- In its data mining exercise, ITD had till now (01/03/2017) identified around 18 lakh taxpayers in its first phase who had made cash deposits during demonetization. These taxpayers were required to submit online response till 15th February 2017. The ITD is working on a second batch and will be releasing it soon – this initiative is termed as “Operation Clean Money”
- ITD has initiated verification of such accounts and responses received by taxpayers through the IT e-filing website. It has issued a Standard Operating Procedure for verification of cash transactions of taxpayers and an FAQ for taxpayers as well. Link – SOP Link – FAQ
Why banks were not accepting money from NRIs in their NRO account during demonetisation period?
NRI’s based out of India and in midst of conducting a property deals involving a “cash” component are most likely to be affected with demonetisation. The biggest problem faced by NRIs was that the banks were not willing to accept the money in their NRO/ NRE account. NRI may ask NRE is fine (it only allows credit from overseas), but why deny accepting money in NRO account.
The issue here was that FEMA Deposit Regulations allow bank to accept only select credits in NRO account which pertain to either current year income or withdrawals to be credited back to the account.
And that is why banks were either outright rejecting large amount of cash deposits in NRO, or asking for a proof of either the current income (in the form of rental agreement etc.) or allowing deposits only to the extent of withdrawals in last few months, as evidenced from the bank statement.
In this backdrop, many NRIs distributed money to relatives to be deposited in their accounts and also care was taken to ensure that the amounts were below INR 2.5 lacs which were advertised to be the limit below which Income Tax Department will not question the deposits.
Implications of such cash deposit by NRI
Following are some of the implications of the cash deposits by NRI in other person’s accounts:
#1: Cash Deposit may be treated as “Benami property”:
The biggest implication of such cash deposits is that these can be considered as “benami transaction” under the revamped Benami Prohibition Act. As a result of this, if an amount is found credited in the account of a person A which actually belonged to person B, both A and B face a jail penalty + confiscation of amount + 25% penalty on such amount. I have reviewed provisions of Benami Act in detail in this post: Benami Prohibition Act: An Analysis
#2: Deposit may be taxed as “unexplained income” under Income Tax Act:
If NRI is not able to give justification regarding source of income, it can be treated as unexplained income u/s 68 and taxed at a special rate of 83.25% under Section 115BBE read with Section 271AAC of ITA.
#3: Section 269SS violation under Income Tax Act:
The second implication of such cash deposits is that in case you are a seller of a property and had received an amount exceeding INR 20,000 from a person as advance for a property transaction, then you have violated Section 269SS of the Income Tax Act. In this case, there is a provision of penalty u/s 271D of an amount equal to the amount of deposit. Also note that under Section 269SS, the penalty is on the person “accepting” the deposit and not the giver of money. Also, it has been held that ignorance of law is not an excuse – Udaichand Santosh Kumar Jain vs. ITO  131 Taxman 184 (Indore)
#3: Violation of FEMA and other laws:
If you’re an NRI, you are not allowed to hold resident accounts as per FEMA deposit regulations. If you were still holding on to a resident account, you could have deposited money in a resident account. However, bear in mind that if the ITD questions the transaction and comes to know that you are still holding resident account despite being an NRI as per FEMA, it is well within its powers u/s 138 of ITA to pass the information over to RBI – under FEMA, you can be penalized for upto 3 times the amount involved if it is quantifiable, or INR 2 lacs if not quantifiable – I’ve written in detail on this issue here: How Resident/NRIs can resolve FEMA contravention
If you tell the ITD that money pertains to cash component in an already concluded property deal, the ITD can pass your information to the revenue authorities for stamp duty evasion by reducing agreement value – in such a case, you can also be liable to pay applicable penalties under the respective state’s stamp duty act.
Similarly, if the ITD finds that the money pertains to red money (i.e. proceeds of crime) like corruption, cheating, money laundering, drug trafficking etc., it can pass the information to such other authorities who can take action against you under the respective laws.
How can NRI ensure compliance regarding cash deposits
Following are some of the steps that NRI needs to take urgently to ensure that any negative implication is minimized:
#1: Ask relatives/friends to re-transfer money to your NRO account
First thing, to ensure that Benami provisions are not attracted, you should ask your relatives or friends to immediately re-transfer the money back to your NRO account. My interpretation of Benami law is that if on a particular date, my own money is reflecting in my own account, it will not come in purview of Benami Act and this will ensure that the draconian penal implications of the owner as well as benamidaar are not attracted. Also, if you have deposited in your own resident account, convert the account asap to a NRO account by writing a letter to the bank.
#2: Respond to cash transaction queries on website:
Both you and your relatives should watch out for the IT e-filing website for any new cash transaction query. The website is dynamically updated with new data for cash transactions. If you/your relative properly answer the questions as asked, there are chances that ITD closes the issue and not send a formal notice. In case you/your relative is not registered on the website, take immediate steps to register on it otherwise you will not come to know of the queries asked by ITD and in view of non-response, you can face a tax notice. In case the relative gets a cash transaction query on the website, he can select option “Cash received from identifiable persons (with PAN)” in the response. The cash FAQ also says this –“The taxpayer is advised to provide the details of identifiable person (with PAN) to reduce the chances of the case being selected for verification. Adopting other sequence may result in case being selected for verification based on risk criteria.”
The respective question in cash transaction FAQ as received by department are as follows:
- If I have deposited someone else’s cash in my bank account, where should I disclose such cash amount in the response form?
Ans: In this case, the name and respective details of the person to whom cash belongs must be provided in row B.4 or B.5 of the response form on e-filing portal.
- Is response provided by me final or do I need to file additional information to support the claim?
Ans: You may need to provide additional information if your case is selected for further verification. The response of taxpayer will be assessed against available information. In case explanation of source of cash is found justified, the verification will be closed without any need to visit Income Tax Office. The verification will also be closed if the cash deposit is declared under Pradhan Mantri Garib Kalyan Yojna (PMGKY).
#3: Take appropriate decision to disclose the undisclosed income
Now, as regards income represented by the deposit, depending on the year of generation of income, you can decide how to offer it in tax return. I have examined all possible scenarios in this post: How can NRI safely disclose his undisclosed income (black money) in India
Please check the post, find out which year the income pertains to, and then move ahead to disclose it. Note that the PMGKY window closes on March 31, 2017 so if you wish to take benefit of that, you better hurry up. I have written in detail about PMGKY here: Pradhan Mantri Garib Kalyan Yojana – Important Points
#4: Seek professional help if you receive a tax notice:
Now, in case ITD is not satisfied by your response, it can send a formal notice to you or your relative. It is being said that ITD is going to wait till March 31, 2017 to allow people to declare unaccounted income in PMGKY before starting to send the notices.
In such a situation, do not panic. Take help of a CA. Explain him your situation and request him to draft an appropriate reply. If possible, authorize him to represent you in case you cannot make it to India on short notice or seek a formal extension. In such cases, I believe honesty and transparency is the best policy to see through, pay the tax and come out of the scrutiny.
Hope the post has been of service to you. Please share your thoughts/feedback.