Feb 152012
 

Is the IT Department really watching you?

In recent times, lot of news coverage is being given to the proceedings by the Income-tax department in respect of their action against tax evaders. Very often we see Newspaper advertisements and TV commercials warning the tax evaders to comply with Income-tax filing and payment requirements. These advertisements/commercials will also have a caption saying “The Income-tax Department is watching” , “The Income-tax Department is having information of transactions” etc…, Given the lower Direct/Indirect collections, the Central Government turns to the Income-tax department with new targets to cover the shortage of its revenue from Direct taxes. Sometimes, due to ignorance of law, many Lower Income / Middle Income group assessees get into trouble by not declaring their correct income and the transactions. It is imperative that the small/medium income group assessees shall be aware of the sources of the information from where the Income-tax department gains access to these data. This will help them in planning their taxes and also to make necessary/correct declarations in their return of income , so that they are out of the mental agony/  pressure of attending the Income-tax office hearings. This article is aimed at providing details of various transactions, which are primarily accessed by Income-tax Department to get hold of the tax evaders.

Transactions watched by Income-tax Department

1)      Cash Deposits in Savings Bank Account

The primary source of information to the Income-tax Department is Savings bank accounts maintained by the account holders in the banks. All the banking companies to which the Banking Regulation Act, 1949 applies are compulsorily required to provide information to the income-tax department in respect of :-

CASH DEPOSITS AGGREGATING TO TEN LAKHS OR MORE IN A YEAR IN ANY SAVINGS ACCOUNT OF A PERSON MAINTAINED IN THAT BANK”

It has to be noted that Deposit of Cash in Savings bank account are only covered under this. Due to the advent of Net Banking/Core Banking facilities , many of the assessees tend to use the savings account to transact for their personal / business purposes.

How to play safe :-

  • Avoid frequent cash deposits into the Savings Bank account.
  • Where it is necessary to deposit cash more frequently, open a Current Account. Many banks offer the facility to open a current account in personal names also.
  • Always use the Cheque/Net Banking facility to transfer funds instead of cash deposits.
  • Never encourage to use your Debit Cards by third parties to with draw cash from your account on account of the payments due to them.
  • When the cash deposit is absolutely unavoidable,
    • ensure that the cash deposits during the year does not exceed 10 Lakhs in a year. (Apr-March)
    • make cash deposit in more than one Savings Bank account so that the threshold limit is split to two accounts and within the limits specified.
  • When the transaction is already done, don’t forget to declare the same in your Income-tax returns to have a minimum damage.

2)      Credit Card Payments

The other primary information is obtained from the Credit Card companies. Due to convenience the plastic money offers, more and more people are turning towards obtaining and using Credit cards to a greater extent. Nowadays , obtaining credit cards has become relatively easy. Same way the usage of the same is also increasing day by day. All the banking companies issuing credit cards are compulsorily required to provide information to the income-tax department in respect of :-

PAYMENTS MADE BY ANY PERSON AGAINST BILLS RAISED IN RESPECT OF A CREDIT CARD ISSUED TO THAT PERSON , AGGREGATING TO TWO LAKH RUPEES OR MORE IN THE YEAR

 How to play safe :-

  • Limit your transactions in the Credit card to less than Rs. 2 Lakhs in a year.
  • Where it is unavoidable, obtain additional card and try to split the transactions to more than one credit card from a different credit card company.
  • Never make any purchases for others using your card , as this is likely to get recorded in the books as your transaction.
  • When the transaction is already done, don’t forget to declare the same in your Income-tax returns to have a minimum damage.

3)      Purchase of Units in Mutual funds

Many assessees , particularly persons who are not interested in trading in securities on their own, prefer to invest in Mutual funds. This offers them the comfort of utlising the expertise of the Fund Managers and good returns at the same time. This is evident from the growth of the mutual fund sector in the last decade. This also serves as a source of information for the Income-tax department. A trustee of a mutual fund or such other person managing the affairs of the Mutual fund  is required to provide information to the income-tax department in respect of :-

RECEIPT FROM ANY PERSON OF AN AMOUNT OF TWO LAKH RUPEES OR MORE FOR ACQUIRING UNITS OF THAT FUND.”

How to play safe :-

  • Split the investments between your family members so that the overall limit is not exceeded.
  • Plan your investments in more than one scheme of the mutual fund schemes to escape from this limitation.
  • When investments are made during year end, split the investment between March & April so that you can take both the benefits of investment more than 2 lakhs and investment in the same name.
  • When the transaction is already done, don’t forget to declare the same in your Income-tax returns to have a minimum damage.

4)      Purchase of Bonds/Debentures issued by Companies

Due to the raise in the rate of interests and availability of large amount of funds, more and more companies are turning towards issue of Bonds/Debentures for mobilizing funds for their businesses. This is also evident from the increase in number of bond/debenture issues by many companies inIndiatoday. This is another source of information for the Income-tax department for gathering information regarding investments by assesses/ non-assessees. A Company (or) an institution issuing bonds or debentures is required to provide information to the income-tax department in respect of :-

RECEIPT FROM ANY PERSON OF AN AMOUNT OF FIVE LAKH RUPEES OR MORE FOR ACQUIRING BONDS OR DEBENTURES ISSUED BY THE COMPANY OR INSTITUTION.”

How to play safe :-

  • Split the investments between your family members so that the overall limit is not exceeded.
  • Plan your investments in more than one scheme of the Bond/Debenture schemes to escape from this limitation.
  • When the transaction is already done, don’t forget to declare the same in your Income-tax returns to have a minimum damage.

5)      Purchase of shares in Public/Rights Issue

Many investors turn to the equity markets for their investments in order to diversify their investments and also to gain more from the equity markets. This has resulted in more and more companies coming out with Public/Rights issue of their shares. This serves as another source of information for the Income-tax department. Every company issuing shares through a public or rights issue shall provide provide information to the income-tax department in respect of :-

RECEIPT FROM ANY PERSON OF AN AMOUNT OF ONE LAKH RUPEES OR MORE FOR ACQUIRING SHARES ISSUED BY THE COMPANY.”

How to play safe :-

  • Split the investments between your family members so that the overall limit is not exceeded.
  • Plan your investments in more than one scheme of the Bond/Debenture schemes to escape from this limitation.
  • Please note that in case of investments through ASBA mode , where the amount was actually blocked and post allotment , shares are allotted, it will be considered as receipt for the shares even though the allotted shares are of less than Rs. 1 Lakh value. Hence it is important to note that application for shares through ASBA mode shall also be for less than Rs. 1 Lakh.
  • Another point to be noted is that allotment of shares to the extent of 1 lakh is not necessary to get covered under this provision. Even an application for shares for Rs. 1 Lakh or more will cover this provision.
  •  When the transaction is already done, don’t forget to declare the same in your Income-tax returns to have a minimum damage.

6)      Purchase or Sale of Immovable Property

Real estate Investments are considered as one of the best investment avenue to tame the effect of inflation. The return on investment in the real estate investments have also proved this. This sector offers vide range of investment opportunities for investors. The main and lucrative source of information is obtained from this sector by the Income-tax department. The source for this information is none other than the Government department itself. Every Registrar or Sub-registrar appointed under Section 6 of the Registration Act , 1908 shall provide information to the Income-tax department in respect of :-

PURCHASE OR SALE BY ANY PERSON OF IMMOVABLE PROPERTY VALUED AT THIRTY LAKH RUPEES OR MORE.”

How to play Safe :-

  • Always register properties with the value not less than the Guideline value as notified to avoid disputes at later stage.
  • Never enter into undisclosed Real estate transactions which may result in trouble.
  • Ensure that the transactions entered by you in real estate are declared in your books of accounts with proper sourcing for funding these transactions.
  • Never transact real estate transactions through power of attorney. Remember that ,as per records, the Power of attorney holder is transacting on your behalf and the money received / paid by him is considered as your transaction. In such a case, declare the transaction in your books of accounts.
  • Maintain complete records in respect of all real estate transactions. (Copies of Purchase Deeds, Sale Deeds , Construction agreements, Power of Attorneys, etc..,)
  • Pay the relevant Capital Gains tax if applicable. Avoidance of this is a temporary relief. But the penalty levied for non-disclosure is more than the Capital gains.
  • Try to plan your Capital Gains Tax. But do not try to evade the tax. There are many ways you can avoid capital gains tax. Use them wisely.
  • Also note that purchase of agricultural land, industrial land, plots, flats, Residential properties and all other types of real estate transactions are covered under this provision.

7)      Purchase of Bonds issued by RBI

Another source of information for the Income-tax department is the Bond market. Reserve Bank ofIndiaissues many bonds from time to time. Every officer of the Reserve Bank ofIndia, who is authorized by the RBI shall provide information to the Income-tax Department in respect of :-

“RECEIPT FROM ANY PERSON OF AN AMOUNT OR AMOUNTS AGGREGATING TO FIVE LAKH RUPEES OR MORE IN A YEAR FOR BONDS ISSUED BY THE RESERVE BANK OF INDIA.”

How to play safe :-

  • Split the investments between your family members so that the overall limit is not exceeded.
  • Plan your investments in more than one scheme of the Bond schemes to escape from this limitation.
  • When investments are made during year end, split the investment between March & April so that you can take both the benefits of investment more than 5 lakhs and investment in the same name.
  • When the transaction is already done, don’t forget to declare the same in your Income-tax returns to have a minimum damage.

8)      Other Sources of Information

Apart from the above, the following are the other sources from which the Income-tax Department is tracing high value transactions :-

a)      Street Surveys by the Income-tax Department

b)      Form 15G/15H submitted to banks/financial Institutions for Non Deduction of tax at source.

c)      Payment of huge capitation fees to Educational institutions for securing a seat for Higher Professional Education.

d)     Huge TDS in a particular name not corresponding to the declared income.

e)      Purchase of Jewellery in Cash for higher values.

f)       Receiving data from builders, Investment consultants & others regarding high value transactions.

g)      Frequent Purchase of Demand Drafts for higher values.

Conclusion :-

Due to the vide source of information available to the Income-tax Department, it is very much true that the Income-tax Department is watching all the high value transactions. Hence it is better to be aware of these transactions and plan your tax filings accordingly. A proper planning along with suitable declarations will make you feel safe and  make you avoid sleepless nights.

 

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