With Covid Restrictions Gone, Demonetisation Cash Deposits Back under the Taxman's Scanner

The taxman is back knocking on the door. In the past one month several individuals have been summoned by the investigation wing of the income tax (I-T) department for depositing large amounts of cash with banks immediately after demonetisation was announced on November 8, 2016.

Chances are amid a dip in tax collection there could be more I-T notices in the coming days. Indeed, on September 18, in a communique to senior I-T officials, the apex body Central Board of Direct Taxes (CBDT) removed the restrictions - introduced in the wake of Covid-19 - on issuing adverse communication to assesses.

Tax assessments for 2016-17 were completed by December 31, 2019 when it became time-barred. But in cases where tax returns were not picked up for scrutiny, or where new evidence has emerged, the persons concerned are being told to produce documents to show the source of cash that was held in banned Rs 500 and Rs 1,000 bills.

People in the know said the recent notices are based on suspicious transaction reports (STRs) received by the department from banks and financial intermediaries.

"The tax department can invoke the provisions of reassessment under Section 148 of I-T Act within a period of 6 years if they have information which could lead to a belief that income chargeable to tax has escaped assessment," said senior chartered accountant Dilip Lakhani.

"The information about cash deposit during demonetisation can be construed as such information. However, if the case of the assessee is scrutinised and the claim is accepted then the department has to bring on record additional evidence to initiate reassessment proceedings," he said.

While physical notices were issued in cases related to cash deposits following the note ban, future notices would largely be through the I-T business application (ITBA) portal. "...all the proceedings," according to the September 18 CBDT note, "may be carried only through ITBA portal and without requiring physical presence of the taxpayers or authorised representatives to the extent possible keeping in view the Covid-19 situation."

Confirming the notices pertaining to the demonetisation cash deposits, an I-T official said, "If these assesses are unable to give satisfactory explanation on the sources of cash, they will have to file revised returns and pay tax with interest." The last date for issuance of such re-opening notices (for FY 2016-17) is March 31, 2023.

The department has suffered more than 20% decline in net direct tax collections in the second quarter. "With CBDT lifting the embargo, there could be a spurt in notices," said the official.

Assessments cannot be reopened if facts of the case are unchanged and assessments have been done based on those facts. But, even four years after demonetisation, I-T department isn't the only arm of the government which is still trying to pull up those who managed to launder their cash.

According to Nirav Jogani of RSM Astute Consultech , the Directorate General of GST Intelligence, the investigation wing of the GST Department, has also been issuing summons and notices for cash deposit during demonetisation using the power given under section 70 of CGST Act. As such no time limit is specified for issuance of summons, but a period of limitation of 5 years is applicable for initiating any judicial proceedings. Since DGGI is a special investigative wing, they receive information from Income tax as well as banks and other financial institutions.

"Based on such information, they can initiate inquiry against any assessee. Regarding demonetisation cases, it is observed that when there are large additions made to the income of jewellers and other assesses, the said information has driven the enquiry by DGGI," said Jogani.