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Thursday, January 26, 2017

What to do if you get an income tax notice after demonetisation

What to do if you get an income tax notice after demonetisation
The 50 days of demonetisation are behind us and so is the deadline to deposit and convert the demonetized currencies of Rs. 500 and Rs 1000. If you have deposited cash up to Rs. 2.5 lakh in your account, there is no cause for worry as per the government directive. However, if your deposit amount exceeds Rs 2.5 lakh, you may get a notice from the Income Tax Department.
Most of the people get queasy when it comes to deal with income tax department. This article is an effort towards discussing how to handle the income tax notice after November 8.
Who may get an IT CEnotice?
As per government’s directive, banks have been asked to furnish details of all individuals who have deposited more than Rs. 2.5 lakh in their savings account or opened fixed deposits. It has also asked banks for information on deposits of more than Rs. 12.5 lakh in current accounts. Banks send these details to tax authorities, which in turn may issue a notice if necessary.
At the same time, if you have bought big-ticket items such as gold or a car, you may get a notice from tax authorities. The government has asked all car dealers to furnish details of their transactions if there is a spike in the volume of business after the demonetization announcement. Similarly, jewellers have been asked to provide details of business transactions that transpired after November 8.
What tax payers should do in such cases
An “Income Tax notice” may sound scary to the layman, but taxpayers need not panic as these are not normal times. The tax authorities may send a notice to anyone who has deposited more than 2.5 lakh in their accounts as explained above.
Hence, the notice by itself is not an implication nor the beginning of an investigation. In most cases, the Income Tax notice could be just a request for disclosing the source of cash. Usually, the notice should come to only those people whose deposit may not match their income prima facie as per tax authorities’ assessment.
If you have relevant documents to explain the deposit and its source, you have no cause for worry. Moreover, if you haven’t done anything illegal and all your money is ‘white’, you don’t have to worry at all irrespective of how much you earn or deposit.
If you get an I-T notice, read it carefully. This could be simply asking you to provide the source of income for the cash deposited in the bank. The source of income should be supported by documentary proof. If the tax authorities are satisfied by your response, you get a clean chit and the matter gets closed.
If you are not able to explain the source of income or the answer is not satisfactory, there will be further proceedings. The outcome of this will depend on your responses and how valid they are found by the investigating authorities.
In the recent demonetization drive, the government has also made it mandatory to quote PAN number in case the deposit exceeds Rs. 50,000. If you haven’t filed returns for years and your deposit exceeds Rs 2.5 lakh, you may get a notice asking to explain the source and subsequent demand to file the returns. This will require detailed investigation.
What happens when you don’t respond?
Ideally, you should not abstain from responding. However, if you don’t respond, you may get a follow-up communication from the I-T Department. Additionally, the tax authorities will assess your income based on the deposit data and other available details and come out with the tax liability, and you may have to pay the difference.
Remember that a lack of response from your side may lead the tax authorities to believe or assume that you have no explanation for the source of your deposit or income, and you do have illicit wealth in your possession.
If required or in doubt, consult a practising chartered accountant or tax consultant for the optimal course of action. In addition, use oodles of practical sense in order to take a decision and make it a habit to preserve all documentation related to your finances. Also, follow up with the case officer or the I-T team until the matter is resolved. Do not allow any pending issue to fester.
Finally, cooperate with the tax authorities if you get a notice. Avoiding it, concealing relevant information, or trying to give wrong details in order to misdirect the authorities will only go against you. If you have played it by the book, you have nothing to worry. If you haven’t, it would be wise to get on the straight and narrow, pay your dues, and clear yourself.

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