This is the Part - II of my post series relating to Demonetization of the Indian currency. If you have directly landed here to Part - II, I would strongly suggest you read Part - I here: Understanding Demonetization, and Penalties Attached Therein. Part - I, and then continue reading Part - II. With that said, let's take the case forward.
For the purposes of understanding the IIIrd and the IVth tweets by the Ministry of Finance, we need to dive a bit deeper into certain specific sections of the Income Tax Act, 1961. More specifically the Sections 271(1)(c) of the Income Tax Act, and the Sections 270A and Section 270AA in the Act introduced in the Finance Act, 2016 that shall come into effect from 01.04.2017. In other words, come Assessment Year 2017-18, the erstwhile Section 271(1)(c) of the Income Tax Act shall be replaced with Sections 270A and 270AA. [For those not in the knowing, Asst. Yr. 2017-18 relates to the Income Tax Returns filed for the period 01.04.2016 - 31.03.2017]. These provisions pertain to the levy of penalty in the matters of concealment and/or furnishing of inaccurate particulars of Income.
Under the new scheme as announced by the Ministry of Finance, the penalty matters shall be divided into two parts:
- Under-reporting of income: defined u/s 270A(2) to be read with sub section (6), and
- Misreporting of income: defined u/s 270A(8), and sub section (9).
Now, let's look at the blaring issues of penalty levied on under reporting and misreporting of income under the aforementioned sections.
I. Under-reporting of income.
When shall a person be considered to have under-reported his income?
A person shall be considered to have under-reported his income, if -
- where return has been filed with the income tax by an individual, and the Assessing Officer has assessed his income and come to a conclusion that his income (hereafter called as assessed income), exceeds the income determined by the individual.
- where return has not been furnished, and the assessed income is greater than the maximum amount not chargeable to tax (Rs. 2.5 lakhs, or Rs. 3 lakhs in case of senior citizen, or Rs. 5 lakhs in case of Super senior citizen).
- the income assessed has the effect of reducing the claimed loss, or converting such loss into income.
What shall be the amount of such under-reported income?
The amount of under-reported income shall be -
- if the return has been furnished, the difference between assessed income and the income furnished by the individual.
- if the return has not been furnished, the difference between the amount of income assessed and the maximum amount not chargeable to tax.
What is the amount of penalty on such under-reported income?
The amount of penalty on such under-reported income shall be 50% (fifty per cent) of the amount of tax payable on such under-reported income.
HOWEVER, the amount of income where the individual offers an explanation to the Assessing Officer, and the AO is satisfied with the same, such amount shall NOT be considered as under-reported income.
II. Misreporting of Income
What constitutes misreporting of income?
- misrepresentation or suppression of facts
- failure to record investments in books of accounts
- claiming an expenditure, not supported by any evidence
- recording false entries in the books
- failure to record material receipts in the books
What is the amount of tax payable on such misreported income?
Tax payable shall be -
- where no return of income has been furnished, and the income has been assessed for the first time, amount of tax calculated on [misreported income + maximum amount not chargeable to tax]
- where income has been determined, the amount of tax calculated on such misreported income.
What is the amount of penalty on such misreported income?
The amount of penalty on such misreported income shall be 200% (two hundred per cent) of the amount of tax payable on such misreported income.
IN LAYMAN'S TERMS, Section 270A states that the penalty of 50% or 200%, as the case maybe, can only be levied on the difference between assessed income and the total income. Therefore, what we can deduce from here is that, any unaccounted cash that has been deposited into the Banks, shall not attract ANY penalty from the government, PROVIDED applicable tax (upto 30% excl. surcharge and cess) has already been paid on the said amount. In other words, UNLESS you conceal material facts from the Govt., deposited unaccounted cash in the banks, and did not mention the same in your return of income, you WILL NOT attract any penalty whatsoever under the aforementioned sections.
Illustration
To further make sure we are clear about penalty impositions, let's take an illustration.
If you deposit Rs. 2 Crore unaccounted cash in your bank account, show it as an income in your return for Assessment Year 2017-18, and pay applicable tax on the same, there won't be any imposition of penalty as it is no longer an unreported or underreported income.
If on the other hand, you deposit Rs. 2 Crore in your bank accounts, but do not disclose the same in your return of income, it shall attract the relevant provisions of Section 270A, and you shall be liable to a penalty of 200% on tax on account of misreporting of income.
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| Source: Google |
I will conclude by saying that demonetization is a really historic move, that will instill a positive confidence in the people of India towards its government, and I just hope that India achieves the greatest heights that have been envisioned by the youth of the country, and their leader Shri Narendra Modi.
Thank you for reading :) Have a good day!