Old notes sales after 08-11-2016 and deposited in bank later-Implications. Such sales may be rejected and added u/s 68, notes being not legal tender

Old notes sales made after 08-11-2016 and deposited in bank later-Implications. Such sales may be rejected and added u/s section 68, notes being not legal tender-CA Ashutosh Lohani

Old notes sales after 08-11-2016 deposited in bank

Sales in Old notes made after 08-11-2016 and deposited in bank later

The unprecedented and revolutionary step by the Government in declaring the old bank notes of Rupees 500 and 2000 as no legal tender from the midnight of 8th November, 2016 is indeed a welcome step.

This step of the Indian Prime Minister could give the much required fatal blow to the domestic black money but at the same time it is the onerous duty of the Government to ensure that proper arrangements are being made so that suffering of the poor people is put to an end. So far as there is no sign from the Govt. that it even acknowledges the great inconvenience caused due to its ill managed demonetisation scheme. Indeed the scheme is unprecedented and so does the audacity of the Government.

Since yesterday night businessmen are in a tizzy and asking never ending questions on the implications of the step. One of the most frequently asked question is ;

Can sale be made in old notes after 08-11-2016 and subsequently be deposited in bank at a later date?

The question appears to be very simple and there does not seem anything amiss in replying in “affirmative”. After all, a businessmen can be very much tempted to not to compromise with his sales especially when the time allowed to deposit such old bank notes is for 50 days (up to 30-12-2016)

However, the obvious answer to the above question is a big “No”.

We must bear into mind that the old bank notes of Rs. 500 and Rs. 2000 have not only been withdrawn but declared as no longer to be “legal tender” from midnight of 8th Nov, 2016. Legal tender is a medium of payment recognized by a legal system to be valid for meeting a financial obligation. Therefore, once this recognition has been withdrawn, it is no more a legally recognised method of payment.

Section 26 (2) of the reserve Bank of India Act, 1934, the Central Government acting on the recommendation of the Central Board of RBI may, by notification in the Gazette of India, declare any series of bank notes of any denomination w.e.f. specified date as no more a legal tender.

As far as the RBI Act is concerned, it does not seem to prescribe any penalty for dealing with bank notes declared no more to be legal tender. However, it is the provisions of the Income tax Act, 1961 and Rules made thereunder what might trouble those accepting old bank notes against sales of goods/services.

Complications in Income Tax matters/other Laws

As we all know the primary purpose of withdrawing the old bank notes and declaring them as not a legal tender, is to curb and unearth the black money and the Income Tax Department is one of the important tool in the hands of the Government to unearth such black money.

If the question as above is replied in affirmative (Yes), the following complications may arise considering old notes no more a legal tender:

1. The cash reportedly received against sale of goods/services after midnight of 8th November, 2016 and recorded in the books of account may be rejected as amount received in consideration of sales.

2. Such cash may be however added to the income of the assessee under section 68 of the Income Tax Act, 1961 as cash credits found in the books treating the explanation of the assessee not satisfactory.

3. Such cash may be subjected to tax under the provisions of section 115BBE with the proposed amendment at a flat rate of 60%+25% surcharge on tax , total = 75% of income so assessed.

3. Penalty proceedings may be initiated against the assessee under the newly inserted section 270A for under reporting and misreporting of income or under proposed section 271AAC until such income is declared u/s 115BBE in the return of income (ITR) filed u/s 139 and taxes are paid by the assessee before the close of the relevant previous year.

Please note that unlike the previous section for concealment penalty u/s 271(1)(c), Assessing Officer is not required to record satisfaction before initiating the penalty proceedings.

4. And once the cash received and stated to be related to business transaction undertaken after 08-11-2016 is rejected to be recognised as sale proceeds, then apart from the rigors of the income tax, action under other Acts dealing with corrupt practices can not be ruled out.

However, the opinion of the AO stands on the lowest echelon of the authorities and his opinion is always open to appeal and judicial review.

Related Matters:
Old bank notes of 500 2000 no more legal tenders Click Here >>
FAQ on withdrawal of High Denomination 500 and 1000 Bank Notes Click Here >>

Notification for withdrawal of High Denomination 500 and 1000 Bank Notes Click Here >>
Features of New Bank Notes Click Here >>

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