Demonetization and Section 68 unexplained cash Deposits & Section 69C unexplained expenditure

By | December 20, 2016

On 8th Nov 2016, our Honorable PM Mr. Narendra Modi announced the demonetization i.e. Rs. 500/Rs.1000 notes will no longer be accepted as legal tender. When that news came everyone was panicking and depositing the available cash in their bank accounts or bank accounts to dear and near ones.

But I guess it very important to each and every tax payer to know the impact of depositing cash of own/others in their bank account which does not have a valid explanation.

Now let’s spend some time here and try to understand the impact of same in the light of Section 68 and Section 69C of Income Tax Act. In brief Section 68 talks about unexplained cash deposits/credits in books of accounts maintained by assessee and Section 69C talks about unexplained expenditure/payments in books of accounts maintained by assessee.

Let’s do the detailed study of these two Sections

Section 68 – Unexplained cash deposits/credits

  • Applies to – this section applies to all assessee
  • Nature of transactions – all deposits in books of accounts are covered by this section, where assessee has no clarification about its basis of income to prove or it is not satisfactory basis
  • Consequences – If assessee fails to provide the solid/material proof for such deposits/credits in the books of accounts, then such deposits/credits will be treated as income of the assessee for the previous year and tax will be charged to him with necessary penalties and interest.

The onus is on the assessee to prove the correctness of such deposits/credits. While doing so he has to provide the additional details of the depositor like his identity, capability to deposit the amount, purpose of such deposit and confirmation. Mere submission of confirmation letter does not discharge the assessee from responsibility.

Assessee does not require proving the genuineness transactions from depositor side for his source of income. For example where assessee received gift from a person by demand draft/cheque/cash and person who has given such gift were able to produce necessary evidence to support the source for such gift then genuineness of gift could not be doubted and such gift could be considered as unexplained deposit/credits.

As per the proviso of Section 68 where the assessee being company clarifying such deposits as money received from shareholders as share capital, share application money or share premium or by whatever named called and such company failed to offer satisfactory explanations so prove the money so received from existing shareholders then concern Assessing Officer can invoke Section 68 and treat the receipts so received as income in the previous year in which such deposits/credits reflect in the books of accounts.

Section 69C – Unexplained expenses/payments

  • Applies to – this section applies to all assessee
  • Nature of transactions – all expenditure/payments in books of accounts are covered by this section, where assessee has no clarification about its source of such expenditure/payments
  • Consequences – If assessee fails to provide the solid/material proof for such expenditure/payments in the books of accounts, then such expenditure/payments will be treated as income of the assessee for the previous year and tax will be charged to him with necessary penalties and interest.

Payments/expenditure which may qualify for deduction under any provision of the income tax act shall be disallowed and no such deduction will be allowed to assessee in the previous year.

As like Section 68 the onus is on assessee to prove the genuineness/correctness of such expenditure/payments for the purpose of section 69C.

All the income added under section 68 and Section 69C above shall be chargeable to tax under the income from other sources at special rates under section 115BBE at the rate of 30%.

Government has made it very clear about their intention to curtail the black money. Governments in the recent times have issued multiple circulars and notification to clarify their stand on black money and corruption.

Income Tax Department has given ample opportunities to disclose their unaccounted cash/property by announcing Income Declaration Scheme 2016 & now with Pradhan Mantri Garib Kalyan Deposit Scheme, 2016. As per the statistics total Rs. 37219 crores amount of cash deposited in the Jan Dhan accounts between 8th Nov to 2nd Dec and during the searches conducted by income tax department between 8th Nov to 16th Dec total cash of Rs. 2600 crores of undisclosed income accepted by the tax payers.

In the light demonetization and above two sections it is very clear that income tax department will now make a good use of these two sections.

I request each and everyone to be Honest and lets give the clean, cashless and growing economy to coming generation.

 

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