Receiving cash without any explanations? It will be taxed at 80%
Black money is basically, that quantum of income which was not disclosed to government and hence no tax was paid, although the source is legal. Black money becomes white and legal if tax and penalty at the prevalent rate is paid.
Corrupt money is the money obtained by bribes. The source is also illegal and it can’t become legitimate by paying tax. Any sum found credited in the books of the taxpayer, for which he offers no explanation about the nature and source thereof or the tax authorities are not satisfied by the explanation offered by the taxpayer, is termed as cash credit.
The provisions relating to tax treatment of cash credit are given in section 68 of the Income Tax Act.
What is Section 68 of the Income Tax Act?
Section 68 pertains to cash credits. According to Section 68, where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer (AO), satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.
Where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee shall be deemed to be unsatisfactory, unless:-
- the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited
- this shall not apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred in section 10(23FB).
- such explanation in the opinion of the AO aforesaid has been found to be satisfactory
In simple word, the Conditions to be satisfied for applicability of section 68 are:-
From the reading of section 68, following conditions can be stated to attract the applicability of section 68:-
1.Assessee has maintained ‘books’
2. There has to be credit of amounts in the books maintained by the taxpayer of a sum during the year
3. The taxpayer offers no explanation about the nature and source of such credit found in the books or the explanation offered by the taxpayer in the opinion of the AO is not satisfactory.
4. If the taxpayer is a closely held company and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such company shall be deemed to be not satisfactory, unless:
a. the person, being a resident in whose name such credit is recorded in the books of such company, also offers an explanation about the nature and source of such sum so credited; and
b. such explanation in the opinion of the Assessing Officer has been found to be satisfactory.
If all the above conditions exist, sum so credited may be charged to tax as income of the taxpayer of that year.
Lets us now refer to Section 115BBE which levies tax on unexplained items deemed as income
According to Section 115BBE, where the total income of an assessee:-
a. includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished under section 139; or
b. determined by the AO includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (a), the income-tax payable shall be the aggregate of:-
i. the amount of income-tax calculated on the income referred to in clause (a) and clause (b), at the rate of 60%.; and
ii. the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in point (i)
Further, penalty under section 271AAC will be levied
According to Section 271AAC, the AO may, in a case where the income determined includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D for any previous year, the assessee shall pay by way of penalty, in addition to tax payable under section 115BBE, a sum computed at the rate of 10% of the tax payable
It means penalty @10% is automatic once AO determines income referred to in section 115BBE
It is thus clear that once AO makes addition under section 68, tax will be payable at 60% of the addition made without deduction of any expenditure or allowance. In addition to this surcharge at the rate 25% of such tax ie 15% is leviable. Also, penalty @ 10% of tax payable in addition to tax (including surcharged) of 75% i.e 7.50%. Hence, total tax works out to be approx 80% of addition made under aforesaid section.
The Income Tax department has also repeatedly warned against violation of cash transaction rules. In fact, the department has put up warnings on its website regarding this. The move to curb cash transactions above a threshold is aimed at curbing black money and promoting digital economy.
It is advisable to accept payments through account payee cheque or demand draft which enables the taxpayer to know the identity of payer. Even if the payment is from bank drafts or account payee cheques it is essential to know the source of the same.
AO may ask for various details such as mode of payment, bank account of the lender evidencing the transaction/cash flow statement of the lender etc. It is advisable to collect address /PAN of the depositor in order to collate necessary documents as and when the need arises.