By P. N. Shah
Chartered Accountant
I. Background
1.1 On 8th
November, 2016, the Central Government demonetised Rs. 500/1000 Currency Notes
(Old Notes). New Currency Notes of Rs.
500/2000 have been issued to replace the old Currency Notes. Old Currency Notes
of Rs. 500/1000 could be deposited in the bank account of the person holding
such old notes between 10th November to 30th December,
2016. Once the old notes are deposited in the Bank Account of the person he
will have to explain the source of such deposit to the Income tax Authorities
. The Government has stated in its
public announcements that an Individual or HUF may be holding some such old
notes out of their savings and kept them for household needs. Therefore, a
public assurance has been given that the Income tax Department will not inquire
about the source of such deposits if the total deposit during the above period
is less than Rs.2.5 lakh.
1.2 The
government felt that if large cash in the form of Old Notes was kept by some
persons out of their unaccounted income then they should pay tax at higher
rates and should also pay penalty when they deposit such cash in their Bank
Accounts. To achieve this objective the parliament enacted “The Taxation
(Second Amendment) Act 2016”. The Amendment Act amends some of the provisions
of the Income tax Act and the Finance Act, 2016. The above amendments provide
the Second Income Disclosure Scheme in the form of “Taxation and Investment
Regime for Pradhan Mantri Garib Kalyan Yojna, 2016”. In this Article some of the important
amendments by this Act and the Second Income Disclosure Scheme are discussed.
2. The Second Disclosure Scheme:
2.1 First Disclosure Scheme:
The Finance Act, 2016 enacted on 14/5/2016, contained “The
Income Declaration Scheme, 2016”. This Scheme allowed any person to declare his
undisclosed income (Indian assets, including cash) of earlier years during the
period 1/6/2016 to 30/09/2016. Under this Scheme the declarant was required to
file declaration about valuation of undisclosed Indian assets and pay tax of
45% (including surcharge and penalty) in instalments. It is stated that assets
worth about Rs.67000 crore were disclosed under this scheme before 30/09/2016.
2.2 Second Income Disclosure Scheme:
In order to give one more
opportunity to persons holding old currency notes the present scheme is
introduced. Sections 199A to 199R are inserted in the Finance Act, 2016. These
sections provide for a new Scheme called “Taxation and Investment Regime for
Pradhan Mantri Garib Kalyan Yojna, 2016”. The provisions of this Scheme are on
the same lines as the earlier Income Declaration Scheme, 2016, which ended on
30/09/2016. The Scheme has come into force on 17th December, 2016
and will come to an end on 31st March, 2017. Some of the important
provisions of the Scheme are discussed below:-
2.3 Declaration under the Scheme:
(i) U/s. 199C any person may make a declaration in
the prescribed Form No.1 during the period 17-12-2016 to 31-3-2017 as notified
by Notifications dated 16.12.2016. This declaration is to be made for any
undisclosed income held in the form of cash or deposit in any account
maintained with a specified entity. Thus the benefit of this Scheme can be
taken by an Individual, HUF, Firm, AOP, Company or any person whether Resident
or Non-Resident.
(ii) The
income chargeable to tax under the Income tax can be declared under the Scheme
if it relates to F.Y:2016-17 and earlier years. The above declaration can be
made in respect of the above undisclosed income which is held in cash or
deposit in a specified entity as under –
(a) Reserve Bank of India
(b) Any Scheduled Bank (including Co-operative
Bank)
(c) Any Post Office
(d) Any other Entity notified by the Central
Government.
No deduction will be allowed for any expenditure, allowance,
loss etc. from such income.
(iii) The amount of Undisclosed Income declared in
accordance with the Scheme shall not be included in the income of the declarant
for any assessment year. In other words, immunity is given under the Income-tax
Act and the Wealth Tax Act. In the Press Note issued by the Government on
16.12.2016 it is clarified that the above declaration shall not be admissible
as evidence in any proceedings under the Income tax Act, Wealth tax Act,
Central Excise Act, Companies Act, etc. However, no immunity will be
available under any criminal proceedings under the Indian Penal Code,
Prevention of Corruption Act, prohibition of Benami Property Transactions Act etc.,
as mentioned in section 199.0 of the Finance Act, 2016.
2.4 Tax Payable on such Income:
Sections 199D and 199E provide for payment of tax, cess,
penalty etc. It is provided that the person making the Declaration u/s.
199C shall have to pay tax, cess and penalty that is an aggregate of 49.90% of
the income declared under the Scheme as under:
(i) 30% of Undisclosed income by way of tax
(ii) 33% of above tax (i.e. 9.9%) by way of
Pradhan Mantri Garib Kalyan Cess.
(iii) 10% of undisclosed income by way of Penalty
2.5 Interest Free Deposit:
The declarant under the Scheme has also to deposit 25% of the
undisclosed income in the “Pradhan Mantri Garib Kalyan Deposit Scheme, 2016” as
provided in section 199F. This deposit will be for 4 years and no interest
shall be paid to the declarant on this deposit.
2.6 Time for payment of Tax and Deposit (Section 199H)
The above Tax, Cess and Penalty is to be paid before filing
the Declaration u/s. 199C. Similarly, the above Interest Free Deposit is to be
made before filing the Declaration u/s. 199C. The Declaration along with proof
of payment of tax etc. and proof of deposit is to be filed before 31st
March, 2017. Any amount of tax, cess or penalty paid under the scheme is
not refundable.
2.7 By a Notification dated 16.12.2016, the
CBDT has notified the “Taxation and Investment Regime for Pradhan Mantri Garib
Kalyan Yojana Rules, 2016”. These Rules have come into force on 16.12.2016.
Briefly stated, these Rules provide as under:
(i) The declaration of undisclosed income for F.Y.
2016-17 and earlier years held in the form of cash or deposit with the
specified entity stated in Para 2.3 above can be made in Form No.1 during the
period. 17.12.2016 to 31.3.2017.
(ii) It may be noted that in Form No.1 the declarant
has to give particulars of Name, Address, PAN, Income declared, the details of
such income held in cash or deposit with specified entity, Tax, cess and
penalty payable, date of such payment, details of Interest free Deposit of 25%
of declared income made u/s. 199 F etc.
(iii) The above tax, cess and penalty is to be paid
and Interest Free Deposit is to be made before filing the declaration in Form No.1.
(iv) The Declaration is to be furnished to the
designated Principal CIT or CIT electronically or in print form physically
(v) If the declarant finds any mistake in the
declaration filed earlier, there is a provision to file a revised declaration
on or before 31.3.2017.
(vi) The Principal CIT or CIT will have to issue a
certificate in Form No.2 within 30 days from the end of the month in which
valid declaration is filed.
2.8 From the above, it
is evident that under this scheme a person can make declaration about the
undisclosed income held in cash or deposits with specified entities. The
declaration cannot be made if the declarant is holding such income in any other
form such as jewellery, ornaments, or immovable properties etc. This
undisclosed income may be relating to any year i.e. F.Y. 2016-17 or earlier
years. Therefore, the Scheme does not refer to only cash in the form of Rs.
500/- and Rs. 1000/- notes deposited in the Bank Account between the period
10.11.2016 to 30.12.2016. Such income may have been deposited in the bank or
with other specified entity prior to 10.11.2016 or even between 31.12.2016 to
31.03.2017. Hence, if a person has earned income in F.Y. 2015-16 or any earlier
year, which has been held in cash or deposited in the bank, but not disclosed
in the Income tax Return, he can make a declaration under this Second Income
Disclosure Scheme on or before 31.3.2017. He will have to pay 49.90% by way of
tax, Cess and penalty and make interest free deposit of 25% of such income for
4 years.
2.9 By another
Notification dated 16.12.2016, the Central Government has issued the “Pradhan
Mantri Garib Kalyan Deposit Scheme, 2016”. This scheme has come into force on
17.12.2016 and is valid upto 31.3.2017. Briefly stated, this scheme provides as
under:
(i) The Scheme applies to persons making
declaration of undisclosed income under the Second Income Disclosure Scheme.
Under this Scheme 25% of undisclosed income is required to be deposited in the
interest free deposit for 4 years.
(ii) This deposit is to be made with the
Authorised Bank in Form No.II giving particulars of Name, Address, PAN, etc.
in cash, cheque or by electronic transfer drawn in favour of Authorised Bank.
The amount is to be deposited in multiples of Rs.100/-.
(iii) The above deposit is to be made before the
declaration of undisclosed income u/s. 199C of the Finance Act, 2016 is filed.
(iv) The certificate of holding of Deposit will be
issued to the declarant in Form No.1 as holder of Bond Ledger Account with
R.B.I.
(v) Bond Holder can appoint one or more Nominees
to receive the refund in the event of his death in Form No.III. Such nomination
can be cancelled in Form No.IV and another nominee can be appointed.
(vi) No interest is payable on the above deposit.
The Bond issued by the RBI for the above Deposit is not transferable and cannot
be traded in the market. In view of this the declarant may not be able to take
a loan against the mortgage of this Bond.
(vii) The amount of the deposit under the scheme
will be refunded by RBI after 4 years on the date of maturity.
2.10 Persons who cannot make a Declaration under the Scheme:
Section 199-O provides that the following persons cannot make
the Declaration under the above Scheme.
(i) Any person in respect of whom an order of detention
has been made under the conservation of Foreign Exchange and Prevention of
Smuggling Activities Act, 1974. Certain exceptions are provided in section
199-O (a).
(ii) Any person in respect of whom prosecution for
an offence punishable under Chapter IX or Chapter XVII of the Indian Penal
Code, the Narcotic Drugs and Psychotropic Substances Act, 1988, the Prohibition
of Benami Property Transactions Act, 1988 and the Prevention of Money
Laundering Act, 2002 has been launched.
(iii) Any person notified u/s. 3 of the Special Court
(Trial of Offence Relating to Transactions in Securities) Act, 1992.
(iv) The Scheme is not applicable to any undisclosed
foreign income and asset which is chargeable to tax under the Black Money
(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
2.11 Other Procedural Provisions:
Sections 199G, 199J, 199L, 199M, 199N, 199P to 199R deal with
certain procedural matters as under:-
(i) Person who can sign the declaration (section
199G)
(ii) Undisclosed Income declared under the Scheme
not to affect any concluded assessments (section 199J)
(iii) Declaration not admissible as evidence in other
proceedings (section 199L)
(iv) Declaration will be treated as void if it is
made by misrepresentation of facts (section 199M)
(v) Provisions of Chapter XV, sections 119, 138 and
189 of the Income-tax Act to apply to proceedings under the Scheme (section
199N).
(vi) Benefit, concession, immunity etc. under
the Scheme available to declarant only (section 199P).
(vii) Central Government will have power to remove
difficulties under the Scheme within 2 years (section 199Q).
(viii) Power to make Rules for administration of the
Scheme given to Central Government (section 199R).
3. Some Clarifications by CBDT:
By a circular dated 18.1.2017, CBDT has issued some
clarifications about the above Scheme. Some of the important clarifications are
as under:
(i) Where a notice u/s. 142(1), 143(2), 148, 153A
or 153C of the Income-tax Act is issued by the ITO for any year, the assessee can
make a declaration under the scheme for that year.
(ii) A person against whom a search or survey
operation is initiated will be eligible to file a declaration under the Scheme
in respect of undisclosed income represented in the form of cash or deposits
with Banks, Post Office etc.
(iii) Undisclosed income utilised for repayment of an
overdraft, cash credit or loan account maintained with a bank can be declared
under this scheme.
(iv) Cash sized in any search and seizure action by
the department can be adjusted against payment of tax, surcharge and penalty
(i.e. 49.9%) payable under the scheme. For this purpose the person from whom
cash in seized will have to make application to the department. However, this
seized amount of cash cannot be adjusted against the Deposit of 25% to be made
under the Pradhan Mantri Garib Kalyan Deposit Scheme.
(v) If Mr. “A” has given advance in cash out of
undisclosed income for purchase of goods (other than immovable property) or
services to Mr. B, who has deposited the money in his Bank Account, and later
on “B” has returned the money as goods are not supplied or services are not
rendered, Mr. “A” can declare the undisclosed income under the scheme.
4. To Sum up
4.1 We should
congratulate the Government for the bold step taken to demonetise old high
value currency notes. This is a right step to deal with the problem of black
money, corruption, fake currency in circulation etc. .
4.2 The Government
recognised that the existing Income tax Act did not permit tax authorities to
levy any penalty on persons who would convert large amount of black money
through banking channel. Therefore, the Taxation (second amendment) Act 2016
was passed and section 115BBE was amended and section 271 AAC for levy of
penalty was introduced.
However, small income earners who had some high value notes
kept at home out of their savings to meet expenditure in emergency cannot be
considered as holding their unaccounted income. The Government had promised
that if such persons deposit in their Bank Account amount upto Rs. 2.50 lakh no
enquiry will be made by the tax Department. This promise has not been honoured
while passing this Amendment Act. It is, therefore, necessary that the CBDT
issues a Circular to the officers not to raise any doubt if an assessee gives
an explanation that amount upto Rs. 2.5 lakh is deposited out of household
savings.
4.3 The Second Income
Disclosure Scheme is welcome. Persons holding unaccounted money in cash will
take advantage of this scheme as the tax rate is 49.9%, and 25% of the amount
is blocked for 4 years in Interest Free Bonds. However, persons who decide to
offer such amount in their Return of Income for the current year will be at a
disadvantage as they will have to pay tax, surcharge and education cess u/s. 115BBE
at 77.25% of such income.
4.4 It may be noted that under the First Income Disclosure
Scheme announced in May, 2016, immunity was granted from proceedings under the
provisions of (i) Benami Transactions (Prohibition) Act, 1988, (ii) Foreign
Exchange Management Act, (iii) Money Laundering Act, (iv) Indian Penal Code etc.
There was also an assurance that the secrecy will be
maintained about the contents of the Declaration under the Scheme. It is
unfortunate that the present Scheme does not provide for such immunity or
secrecy. Therefore, the assessees will have to be very careful while making the
Declaration under the Scheme.
4.5 It appears that the Second Income Disclosure Scheme as
announced by the Government is with all good intentions. It is advisable for
the persons who hold unaccounted money in cash to come forward and take
advantage of the Scheme and buy peace. Let us hope that this Scheme gets the
desired response.
4.6 The amendment in section 115BBE punishes
those assessees in whose cases additions are made for cash credits, unexplained
investments, unexplained expenses etc. Tax rate is now increased from
30% to 60%. Further, there will be additional burden of 15% surcharge and 6%
penalty. Such cases have no relationship with demonetisation of high value
currency. It is difficult to understand the reason for which such additional
burden is put on such assessees.
