Apex Income Tax body, CBDT highlights 7 red flags to identify post-demonetization cash deposit Scrutiny.

CBDT’s internal note to the Senior Revenue officers highlights taxpayers trying to build an explanation for cash deposits in their bank accounts post demonetisation by manipulating books-of-accounts and by filing revised/belated income tax returns; CBDT states that based upon risk-assessment criteria, many of such cases have been selected for scrutiny and lists down seven instances which might indicate that assessee had filed revised or belated return merely as a cover-up to explain the cash deposits in bank accounts; CBDT lists down strategies for the assessing officers to be kept in consideration during verification and framing of assessments; CBDT also adds that “manipulations made fictitiously merely to build an explanation for cash deposits in bank account(s), the revised return itself becomes questionable and therefore, the transactions disclosed in it which are over and above the original return are liable to be taxed under anti-abuse provisions of the Act” : Sources

CBDT has issued a detailed guidance to the senior officers of the Income Tax Department on important issues to be considered while framing scrutiny assessments pertaining to the filing of revised/belated returns by assessees post demonetization. CBDT has observed that taxpayers have tried to build an explanation for cash deposits in their bank account(s) by manipulating their books-of-accounts and filing revised/belated income tax returns and several of such cases have been selected for scrutiny in Computer Aided Scrutiny Selection (CASS) during this financial year based on the risk assessment criteria.

As per CBDT’s internal communication , the pre-requisites for revising tax return or filing belated tax return and highlights that “in situations where enquiries/verification in course of assessment proceedings suggest manipulations made fictitiously merely to build an explanation for cash deposits in bank account(s), the revised return itself becomes questionable and therefore, the transactions disclosed in it which are over and above the original return are liable to be taxed under anti-abuse provisions of the Act”. For belated returns files post demonitisation, CBDT states that “it would be crucial to examine the trend and business practices of a particular assessee while ascertaining the legitimacy of the transactions disclosed in a belated return”. CBDT accordingly has listed down 7 red-flags which might indicate that assessee had filed revised or belated return merely as a cover-up to explain the cash deposits in bank accounts. These instances include:

1) Unsubstantiated reduction in closing stock in the revised return vis-cl-vis the figures in original return;

2) Reporting of higher sales in the revised return;

3) Cash-in-hand as on March 31, 2016 or March 31,2015 was enhanced in the revised return;

4) Additional cash inflow claimed to be out of earlier year savings, receipt of loans/advances/gifts/repayments/sale of capital assets;

5) In some cases, cash outflow might have been reduced by paying some of the liabilities in cash;

6) Significantly lower closing stock as on March 31, 2015 or March 31, 2016 as compared to the earlier years in a belated return;

7) Significantly higher cash-in-hand as on March 31, 2016 or March 31, 2015 compared to the preceding year in a belated return.

CBDT has provided issues to be kept in consideration during verification and framing of assessments-

1) The claim of enhanced sales may be compared with the Central Excise / VAT returns;

2) Whether the parties to whom additional sales were disclosed have identity, creditworthiness and transaction was genuine or not;

3) Where the accounts are subjected to tax-audit, whether omission or wrong statement in the original return was pointed out by the audit or not;

4) The source of cash in hands of the person who had made payments to the assessee has to be verified carefully;

5) The past profile of the concerned assessee should be thoroughly analysed;

6) Where as a result of enquiries/investigations it emerges that figures in the revised/belated return are fudged, the figure of manipulated receipts/sales/stock etc. is liable to be taxed as a cash credit under section 68 and not merely on net profit basis;

7) Any undisclosed expenditure detected after reduction of cash in hand by the assessee may be verified carefully;

8) Unaccounted income so assessed in scrutiny assessment is liable to be taxed at a higher rate without any set off of losses, expenses etc. under section 115BBE of the Act;

9) In the scenario pertaining to Wealth tax returns of earlier years, it should be examined whether there is an attempt to build cash-in-hand or any other asset so as to justify deposit of cash, post-demonetization.

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