Verification of Cash Deposit by Income Tax Department

If an assessee has made large cash deposits after demonetization, the assessee may encounter tougher scrutiny from the income tax department and therefore it is important to properly maintain documents like bank statements, passbooks, land records and sales ledger. The income tax department may demand the assessee to make available the relevant documents to support claims of large cash deposits made either from income subject to exemption from tax like agricultural income or cash received from unidentifiable persons in the case of businesses or cash that is withdrawn from own bank accounts. In this article, we look at the standard operating procedure released by the CBDT for verification of cash deposits by assessing officers.

Operation Clean Money

Subsequent to the large cash deposits in bank accounts, the income tax department commenced Operation Clean Money to examine the source of all cash deposits to check if they were from legally declared income. The income tax department has data related to 10.9 million accounts where deposits ranging from Rs 2 lakhs to Rs 80 lakhs were made in the period between 10th November and 30th December, 2016. As of January 2017, approximately 14800 accounts have also been identified with deposits greater than Rs. 80 lakhs. The income tax department has sent notices to 1.8 million taxpayers who have made cash deposits of more than Rs. 5 lakhs that are not in connection with their income tax returns. The detailed standard operating procedure released by the Central Board of Direct Taxes (CBDT) lays down guidelines for assessing officers to confirm the source of the cash deposits as claimed by the taxpayer as part of Operation Clean Money. For example, if a business attributes the cash deposits to cash received from unidentifiable persons, then the assessing officer has been directed to verify if the transactions are in connection and harmony with the normal cash flow of the business. The officer can look for information such as monthly sales summary with the break-up of cash and credit sales, stock registers and bank statements to verify back-dating of cash sales or fictitious sales.

Role of Assessing Officers in Operation Clean Money

Assessing Officers have been requested to look out for an abnormal increase in cash sales in the November-December period, particularly to non-identifiable persons. Additionally, more than one deposit in the bank accounts towards the end of the demonetization period, non-availability of stock or inflated stocks by enabling fictitious purchases or bank transfers to other accounts or entities that are not in connection and line with the previous transaction patterns will be verified.
In the event, the deposits are attributed to cash withdrawn from bank accounts, the Assessing Officer will examine the pattern of withdrawals and how near they were to the announcement of demonetization. Also, in the event the deposits have been distinguished as agricultural income, the assessing officer will seek the land records to verify if the income declared is in connection with the landholdings.
The Income Tax department has launched a special drive that aims to verify high-value transactions (investments or deposits or expenditure) from persons who are not assessed to income tax or who have not furnished their PAN while entering into such transactions. In an instruction issued, the CBDT issued proforma for query letters and responses to be issued to the high-value investors or depositors or spenders.

PAN & Information Verification

Assesses may be requested to furnish their PAN if they already have one, or apply instantly for PAN to NSDL or UTIISL if they do not have one. The PAN information submitted by the assessee will also be essential to explain the source of the high-value investments, deposits or expenditure, and whether these are appropriately accounted for or explained in the income tax return filed by them. Persons who have not appropriately accounted for the high-value transactions, are compulsory to pay the taxes which are due for payment and file the income tax return within the due date mentioned in Section 139 of the Act. For individuals, the specified due date shall be July 31. For providing the information called for, a personal visit to the Jurisdictional Tax Officer (JTO) is not required. The required information can also be sent by speed or registered post. Also, there are penal consequences of not obtaining a PAN. The applicability of the penal consequences will extend to cases in which the assessee already has a PAN, but omits to mention the PAN information. For not paying proper taxes, there can be penalty levied up to 300% of the unpaid tax, and also the possibility of prosecution depending on the facts and circumstances of each case.

Field Visit

In some cases, the tax officials may also visit the premises of the high value investors or depositors or spenders. In such cases, the taxpayer must verify the identity of the tax official before furnishing information in the approved proforma. In the event of any grievance or complaint, the taxpayer should contact the Assessing Officer or the Additional/Joint Commissioner or the Commissioner concerned.

To know about the guidelines which are applicable to the selection of Income Tax Scrutiny cases, click here.

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Frequently Asked Questions

Common questions about Cash Deposit Verification in India by Income Tax Department.

Operation Clean Money is an initiative launched by the Income Tax Department to examine the source of large cash deposits made in bank accounts after demonetization, to check if they were from legally declared income.

The Income Tax Department has data on around 10.9 million accounts where deposits ranging from Rs 2 lakhs to Rs 80 lakhs were made between 10th November and 30th December 2016, as well as around 14,800 accounts with deposits greater than Rs 80 lakhs. Notices have been sent to 1.8 million taxpayers who made cash deposits of more than Rs 5 lakhs that do not match their income tax returns.

The assessing officers may demand relevant documents like bank statements, passbooks, land records, sales ledgers, stock registers, and monthly sales summaries to verify the claimed source of large cash deposits, such as agricultural income, cash from unidentified persons, or withdrawals from own bank accounts.

For cash deposits attributed to cash received from unidentifiable persons in businesses, the assessing officers will verify if the transactions are consistent with the normal cash flow of the business. They may look for information like monthly sales summaries with cash and credit sales breakup, stock registers, and bank statements to check for back-dated or fictitious sales.

If the deposits are claimed as agricultural income, the assessing officers will seek the land records to verify if the income declared is proportionate to the landholdings of the assessee.

In case the deposits are attributed to cash withdrawn from the assessee's own bank accounts, the assessing officers will examine the pattern of withdrawals and their proximity to the demonetization announcement.

The Income Tax Department has launched a special drive to verify high-value transactions (investments, deposits, or expenditure) made by persons who are not assessed to income tax or have not furnished their PAN while entering into such transactions.

The Income Tax Department may seek the PAN details of high-value investors or depositors, and information on the source of funds for such high-value transactions, including whether they have been appropriately accounted for in the income tax returns filed.

Failure to furnish information or pay due taxes can attract penalties of up to 300% of the unpaid tax amount, and the possibility of prosecution, depending on the specific case details.

Assessees can provide the requested information by sending it through speed or registered post to the Jurisdictional Tax Officer (JTO), without the need for a personal visit. In some cases, tax officials may also visit the premises of high-value investors or depositors.