Income Tax Returns (ITR) filing revised after demonetisation? Here is what you really must worry about

Published On: 05, Dec 2017 | Source:

Unearthing and curbing of black money was one of the key objectives of demonetisation last year. There were reports of increase in suspicious transactions such as multifold increase in sale of gold and other valuables, increase in cash sales of businesses and other methods by which demonetised currency was being converted into new currency.
Since then, income tax returns, especially revised returns and belated returns of past years, filed post demonetisation have been on the radar of the income tax department. The department believes that various taxpayers might have filed these revised/ belated returns to regularise their demonetised cash and unreported money to make provision for cash purchases/ sales/ deposits during the demonetisation period.

The government has been issuing various statements cautioning against such practices and had in fact given an option to such taxpayers to come clean and declare their unreported income and demonetised cash under the Income Disclosure Scheme announced after demonetisation.
CBDT’s latest guidelines

The government, however, believes that there still may be various instances where taxpayers may have filed revised/belated returns post demonetisation to create necessary room for regularising their unreported money post demonetisation.

The Central Board of Direct Taxes (CBDT), the apex direct tax authority, has now issued detailed guidelines for detailed scrutiny and closer examination of revised/ belated returns filed post demonetisation.

Indicators of suspicion

In these guidelines, CBDT has identified some key indicators which will show that taxpayers had filed revised or belated return merely as a cover-up to explain the cash deposits in bank accounts, such as unsubstantiated reduction in closing stock in the revised return vis-a-vis the figures in original return, reporting of higher sales in the revised return, cash-in-hand balances as on March 31, 2016 or March 31, 2015 enhanced in the revised return, significantly lowering of closing stock as on March 31, 2015 or March 31, 2016 as compared to the earlier years in a belated return, significantly higher cash-in-hand as on March 31, 2016 or March 31, 2015 compared to the preceding year in a belated return.

Scrutiny, higher tax rate

Some of the important scrutiny measures identified by CBDT for detailed examination of such returns are: Whether claim of enhanced sales may be verified with returns/data filed with other government departments (such as Central Excise/VAT departments), whether customers to whom additional sales were disclosed have necessary identity and creditworthiness, whether such claims/ transactions match with past profiles of taxpayers or not.
The CBDT has also clarified that any additional or unexplained cash credit on account of manipulated receipts/sales/stock etc., shall be taxed on gross basis without any deduction of expenses or set-off of losses and will be taxed at higher rate of 60% under Section 115BBE of the Income Tax Act plus applicable surcharge and penalty, making the effective final tax rate to be around 83% of such unexplained income/ cash credit.
With these detailed guidelines, the government has again made it clear that it does not intend to spare taxpayers manipulating their accounts or tax returns to make room for their unreported black money. At the same time, it is expected by the taxpayers that such guidelines will be used by tax officials judiciously and rationally merely to catch tax evaders and will not be misused as a tool for harassment of taxpayers.
The upcoming scrutiny or assessments of such tax returns shall make it further clear how effective are these guidelines and how these will be used by tax officers on the field to judiciously nab tax evaders only.

The writer is director, Direct Taxation, Nangia & Co LLP