DEMONETIZATION –

TAX IMPLICATIONS

BY
C.A. N.S. SRINIVASAN
 Demonetization –
Regulatory framework
•
Initially carried out through notification u/s 26 and
24 of RBI Act, 1934 on 08.11.2016
•
This is still under dispute before SC
•
Now, ordinance passed to make it a law
•
Liability of RBI against old notes extinguished
•
Limited window for exchange of old notes available
for NRIs (being Indian citizens) upto 30.06.2017 and
that too upto Rs.25,000
•
Facility for exchange of old notes for residents upto
Other instances of Demonetization
•
Canada - $ 1,000 notes demonetized
from Sep 2010
•
Singapore - $ 10,000 notes demonetized
from July 2014
•
€ 500 notes will be stopped from 2018
•
US effected demonetization in 1969
•
India – done in 1946 and 1978
 Money laundering pursuant to
Demonetization
•
Through network of jewellers
•
Between jewellers and bank officials
•
Direct swapping of old notes with new notes
at hefty premiums and bribes
•
Through hawala operators maintaining bogus
cash balances in books of accounts
•
Through builders
(Contd.)
 Money laundering pursuant to
Demonetization
•
Through Jan Dhan accounts
•
Through friends and relatives upto the limits
specified in IT Rule 114E
•
Through deposits in non-credit co-operative
societies
•
Through deposits in own bank accounts and
offering as income of current year or past
years
 Changes in Tax laws, Rules,
Clarifications
•
Amendment to IT Rules 114B, 114C, 114D and
114E
•
Taxation laws (Second Amendment) Act 2016
•
Clarification through Press Note re: jewellery
holdings
•
CBEC Clarification re: increase in receipts
through digital transactions
•
Reduction in % of presumptive income
re: digital businesses
•
Amendment to Rules 114B and 114E
Notification No. 104/2016 dt.
•
Threshold for 18.11.2016
reporting cash deposits into
banks revised
•
For SB A/c More than Rs.2,50,000 between
09.11.2016 and 30.12.2016
•
For Current A/cs Rs.12,50,000 or more in
one or more accounts between 09.11.2016
and 30.12.2016

(Contd.)
Amendment to Rules 114B and 114E
Notification No. 104/2016 dt.
•
Hoped that within these limits, govt. will not
18.11.2016
question irrespective of profile of the
depositors
Eg: Individuals/ HUFs/ Households/
Professionals etc.
•
Hoped that upto Rs.2,50,000, no questions
will be asked even if per day
deposit>Rs.50,000 vide Press ad dt.
10.11.2016
 Reporting by Banks of Cash
•
Upto Rs.49,999 Deposits
cash deposits on a single
occasion, even PAN need not be insisted even
if PAN has already been furnished for those
accounts.
•
Upto Rs.2,49,999 cash deposits into SB A/c
between 08.11.2016 and 30.12.2016,
reporting not required.
•
Now similar reporting obligations extended for
period from 1/4/16 to 8/11/16.
•
What about reporting of cash deposits into SB
 Reporting by Banks of Cash
Deposits
•
Mere non-reporting by bank does not absolve
an assessee to explain the cash credit in his
ITR and also in any future proceedings
•
Whether the cash deposit is reported or not
reported, onus of proving the source is on the
assessee only
•
Same is the situation for cash deposits in
current A/cs
•
Last date for reporting is 31.01.2017
 Cash deposits by persons
authorized to receive demonetized
notes after 08.11.2016

•
Obliged to explain the genuineness of the
receipts with documentary evidence (Eg: Cash
bills/ receipts etc.)
•
If explanation not satisfactory to AO, could
entail tax u/s 115BBE and penalty u/s 271AAC
 Receipt of old notes after 8/11/16
by persons not authorised
•
Prima facie, illegal.
•
Receipt of the amount will not absolve the
payer of his liability.
•
If received for cash sale against old notes, the
buyer may face tax incidence u/s 56(2)(vii)
•
It will be better for the receiver to disclose the
amount under PMGKY.
POSSIBLE EXPLANATIONS FOR
CASH DEPOSITS
 Issues for consideration re: Cash
deposits
•
Notices to charitable institutions re: cash
balances on 08.11.2016
•
Can’t be explained as loans/ sale of property
(other than agricultural land) – vide Sec 269SS
•
Can’t be explained as sale of jewellery/
furniture etc. – vide Sec 206C
•
Can’t be explained as cash of another person –
Benami Act
(Contd.)
 Issues for consideration re: Cash
deposits
•
What about partner’s cash contributed as
capital to firm deposited into Firm’s Current
A/c?
•
What about cash contributions to chit funds?
•
Cash deposits by members into non-credit co-
operative socieities – 2,66,400 societies
•
What about share application money received
by companies? – reporting under Rule 114E
attracted if amount exceeds Rs. 10 lakhs
 Issues for consideration re: Cash
deposits
•
Cash deposits preceded by property sale in
recent past – implications
•
What happens if third party deposits cash
without the knowledge of the account holder?
•
Whether presumptive taxation would help?
•
What about seizure of demonetized notes
during search operations?
(Contd.)
 Issues for consideration re: Cash
deposits
•
Whether cash flow statement to be
maintained for persons not having books of
accounts?
•
Whether separate home chest cash to be
disclosed in books of accounts?
•
Whether it can be explained as cash received
from Debtors etc. after 08.11.2016? – Other
legal implications of this explanation
•
Clubbing implications of unexplained cash
 Issues for consideration re: Cash
•
In
deposits
the case of presumptive assessees, care to
be
taken to ensure overall receipts within 44AD/
44ADA limits
•
Explanation as CY business/ professional income
may be accepted if amount is reasonable. Also to
examine impact under other indirect taxes
•
Whether it can be explained as business/
professional receipts (even though unauthorized)
after 08.11.2016?
•
Cash deposits by Sec 11 institutions – Implications
 Issues re: Jewellery holdings
•
Press release dt. 01.12.2016 root cause of
confusion
•
While inherited jewellery will be spared, how
to establish the same as inherited?
•
Conversion into latest designs of inherited
jewellery
•
No reference to precious stones
•
How to prove past purchases out of tax paid
income?
 Issues re: Jewellery holdings
•
What about jewellery bought abroad and
brought into India?
•
Disclosure in Sch AL in ITR only for assessees
with > Rs.50 lacs income
•
Can it be disclosed in BS Schedule in ITR for
assessees with business/ professional income?
•
Disclosure in past WT returns – will it help?
Taxation laws second amendment Act, 2016

•
Received President’s assent on 15.12.2016
•
Amendment to Sec 115BBE
•
Amendment to Sec 271AAB
•
Insertion of Sec 271AAC
•
Introduction of Pradhan Mantri Garib Kalyan
Yojana, 2016
Amendment to Sec 115BBE
After Amendment
Amendment to Sec 271AAB
(Penalty in search cases)
Amendment to Sec 271AAB
(Penalty in search cases)
 Insertion of Sec 271AAC
•
Penalty on income as determined by AO u/s
115BBE @ 10% of tax payable
•
Then, penalty u/s 270A not leviable on such
income
Issues on Sec 115BBE, 271AAB and 271AAC

•
Whether any particular income disclosed in
ITR can be construed by AO as income u/s
115BBE?
•
Since 271AAC deals with 115BBE cases,
incomes covered by Sec 68 etc., even if
offered u/s 132(4) will be subject to penalty
u/s 271AAB only (Effective rate – 65.54%)
•
Of course, if in such cases, if income not
offered u/s 132(4), effective rate including
penalty will be 95.54%
 Issues on Sec 115BBE, 271AAB and
271AAC
•
Sub clause ( c ) of Sec 271AAB(1) deleted
•
Whether Sec 271AAC will render sub clauses
(b) and ( c ) of Sec 270A(9) otiose?
PRADHAN MANTRI GARIB KALYAN
YOJANA, 2016
Sec 199A to 199R of Finance Act,
2016
 PMGKY Rules 2016
Notification S.O. 4059(E) at
16.12.2016 of MOF, DOR
•
Declaration in Form I – To Principal CIT/ CIT
(Name, Address, PAN, Phone, E-mail ID, Aadhar
No., Assessment Status, Residential Status)
•
Payment of tax & PMGKYD to precede
declaration
•
Declaration can be revised
•
Certificate of declaration in Form – 2
 PMGKD Scheme, 2016
•
Will be held by RBI – Deposit can be made
with any specified bank
•
Deposit will be transferred to Government A/c
•
Deposit application in Form II – Name,
Address, PAN, Bank A/c details (PAN must),
Phone No., E-mail ID
•
Payment along with application
•
Payment by Cash/ Cheque/ DD/ NEFT transfer
(Contd.)
 PMGKD Scheme, 2016
•
Individual depositor to nominate in Form III -
variation of nomination through Form IV
•
Deposit holding certificate in Form I
•
Non-transferable except in the event of death
•
Payment only on maturity either to original
depositor/ nominee/ legal heir
•
Receiving bank can’t be changed
•
Whether nominee should necessarily be
related?
 Issues under PMGKY, 2016
•
UDI not defined – perhaps, definition is as per
Sec 271AAB( c )
•
No deduction against UDI
•
Tax, cess and penalty payable before
declaration
•
Amount paid not refundable if declaration
found invalid
•
Can declaration be made for minor?
(Contd.)
 Issues under PMGKY, 2016
•
Can it be adjusted against other tax dues?
•
UDI not includible in total income. Hence, it
wont entail SC for other incomes
•
No MAT implications
•
Valid declaration not admissible as evidence in
other legal proceedings except COFEPOSA,
Narcotics Act, PC Act, IPC etc.
•
Then, no adverse impact on VAT/ ST
assessments
 Issues under PMGKY, 2016
•
Can demonetized cash available be requested
to be used to pay tax on UDI? – Yes, vide Press
release dt. 22.12.2016
•
Can demonetized cash seized be requested to
be used to pay tax on UDI? Yes, if declared
under PMGKY vide FAQ circular no 2/2017.
•
No revision/ re-assessment possible at
assessee’s behest once declaration made
•
Can Department re-open assessment if
declaration found invalid? – Whether only tax
 When & by whom PMGKY can be
assessed?
Situation 1 – Deposited into bank A/c between
8/11/16 to 30/12/16 into own bank a/c.
•
Upto Rs. 2.50 lakhs in SB A/c - may not get
reported subject to other cash deposits upto
31/3/2017 being less than Rs. 7.50 lakhs
•
Upto Rs. 12.50 lakhs in current A/c – may not
get reported subject to other cash deposits
upto 31/3/2017 being less than Rs. 37.50
lakhs.
•
Onus on assessee to explain source of funds
•
Beyond that to opt for PMGKY, pay 49.9% tax +
penalty, deposit 25% and utilise balance 25%.
•
Otherwise, unexplained portion would entail
tax u/s 115BBE, penalty u/s 271AAC &
prosecution.
Situation – 2: Cash deposit into
own A/c in excess of threshold
•
Implication same as situation 1 except that
enquiry from IT will be immediate.
•
Hence, to decide on PMGKY immediately.
Situation 3 – Cash deposits/ bank
deposits into own A/c between
1/4/16
• to 8/11/16
Irrespective of the amounts deposited,
implications same as in situation 1.
•
If cash deposits are less than threshold,
reporting may not happen.
•
But it does not absolve the onus to prove
source of funds.
Situation 4 – Cash seized between
8/11/16 and 30/12/16
•
Entire seized cash has to be explained
(whether old notes or new notes).
•
Unexplained cash can be offered under
PMGKY.
•
Out of seized cash, tax can be requested to be
adjusted out of amount of old cash. But
cannot be placed in PMGKD.
•
If not under PMGKY, can consider offering u/s
132(4), then penalty u/s 271AAB.
Situation 5 – Whether cash/ bank deposits
prior to 1/4/16 (neither accounted nor
seized) can be offered under PMGKY?
•
Yes
•
Whether such cash can be used to explain
investments/ expenditure in cash of those
years? Both yes and no.
•
If yes, whether such cash investments in
assets can be explained as cost when those
assets are sold?
Situation 6 – Cash/ bank deposits prior to
1/4/16 which are seized either before or
after 1/4/16 but before 8/11/16
•
Can be offered under PMGKY.
•
If not offered, consequences u/s 271AAB
would apply.
•
Pre – amended 271AAB for seizures before
1/4/16 would apply.
•
Amended 271AAB for seizures on or after
1/4/16.
Situation 7 – Old notes used for
statutory payments after 8/11/16
•
Eg: Property taxes, stamp duty, IT ( for current
year or past years), IT re: IDS 2016.
•
Onus to prove source of funds continues.
•
Amount used for payment of tax re: IDS 2016
but source not explained will declaration
under IDS 2016 be held invalid?
Situation 8 – Undisclosed amounts
with other persons transferred to
bank
• account
Can be of declarant.
declared under PMGKY vide query no 3
of FAQ.
•
Whether Benami Act will hit both the
persons?
•
Cash advance for goods or services got back –
can be declared under PMGKY vide query no
12 of FAQ.
•
TCS u/s 206C(1F) to be borne in mind.
 Issues under PMGKY based on FAQ
replies
•
Whether deposits in overseas bank accounts
of Indian banks remitted under LRS can be
declared – vide query no 7?
•
Whether Jan dhan account holders can
declare deposits in their accounts under
PMGKY – Yes, vide query no 2.
•
Whether these Jan dhan account holders will
be hit by Benami Act? No immunity from that
Act vide Sec 199O(b) of Finance Act 2016
•
Whether deposits of cash of relatives not hit
by Benami Act can be declared – Yes subject to
PC Act 1988
•
Legal sanctity of circular no 2/2017 – No
power u/s 199 of Finance Act, 2016
•
Even cash holdings / bank deposits upto
31/3/2017 can be declared – however if cash
is in the form of new notes, it should be
explainable.
 Benami Transactions Prohibition
Act
•
Applies to all assets, immovable and movable.
•
Even if assets converted into another form, it
applies.
•
Benami holdings in the name of spouse and
children alone spared.
•
Benami holdings in the names of even other
relatives prohibited. (Eg:- Parents/siblings)
unless the beneficial owner is joint owner
(Contd.)
 Benami Transactions Prohibition
Act
•
If detected, both benamidars and beneficial
owners will be penalised and prosecuted.
•
Fine can go upto 25% of market value of
assets.
•
Imprisonment can be upto 7 years.

(Contd.)
 Benami Transactions Prohibition
Act
•
Amended Act notifies all the concerned
authorities, viz., the initiating officer, the
Approving authority the administrator and the
Adjudicating authority.
•
IT authorities will be mainly handling these
cases.
Questions?
 CA N.S. SRINIVASAN
vandvchennai@gmail.com
98413 48713