Scrutiny of revised-belated returns post-demonetisation-important issues

Scrutiny of revised-belated returns post-demonetisation-important issues. CBDT list instances indicating abuse of Income Tax provisions

CBDT in its latest instruction has cautioned all PCCITs and DGITs regarding revised/belated returns filed by assesses post-demonetisation and issued guidelines for important issues to be considered while framing scrutiny assessments in such cases.

Under the provisions of the Income-tax  Act, 1961, the instruction highlights that revision of income-tax return is allowed only if any omission or wrong statement is discovered therein by the concerned assesse. Such omission or wrong statement should have occurred due to a bonafide inadvertent error or a mistake on the part of the assesse.

As per the instruction, post-demonetisation, it was found that some of the assessees in order to justify or explain cash deposits made in their bank account(s), manipulated their books-of-accounts and accordingly filing revised/belated income­ tax returns.

In this regard, the instruction refers to a Press Release of Finance Ministry dated 14th December 2016 that post-demonetisation, provisions of Income-tax  Act, 1961 pertaining to filing of revised/belated return should not be misused. The Press Release cautioned tax payers that any instance coming to the notice of Income-tax Department reflecting manipulation in the amount of income, cash-in-hand, profits etc. and fudging of accounts may necessitate not only the scrutiny but may also attract penalty/prosecution.

The instruction mandates that in situations where enquiries/verification in course of assessment proceedings for scrutiny of cases selected in Computer Aided Scrutiny Selection (CASS) during the current financial year suggest manipulations made fictitiously merely to build an explanation for cash deposits in bank account(s), the revised return itself becomes questionable and therefore, the transactions disclosed in it which are over and above the original return are liable to be taxed under anti-abuse provisions of the Act.

Similarly, it is instructed that in case of a belated return, it is crucial to examine the trend and business practices of a particular assessee while ascertaining the legitimacy of the transactions disclosed in a belated return, filed post-demonetisation.

Instances indicating revised or belated return are merely a cover up

For quick reference, the instruction list out some instances which might indicate that assessee had filed revised or belated return merely as a cover up to explain the cash deposits in bank accounts as under:

(i) Unsubstantiated reduction in closing stock in the revised return vis-a-vis the figures in original return;

(ii) Reporting of higher sales in the revised return;

(iii) Cash-in-hand as on 31.03.2016 or 31.03.2015 was enhanced in the revised return;

(iv) Additional cash inflow claimed  to  be out of earlier year savings, receipt   of loans/advances/gifts/ repayments/ sale of capital assets;

(v) In some cases, cash outflow might have been reduced by paying some of the liabilities in cash;

(vi) Significantly lower closing stock as on 31.03.2015 or 31.03.2016 as compared to the earlier years in a belated return;

(vii) Significantly higher cash-in-hand as on 31.03.2016 or 31.03.2015 compared to the preceding year in a belated return

The Instruction further list out the following issues to be kept in consideration during verification and framing of Assessments under those circumstances:

(a) The claim of enhanced sales may be compared with the Central Excise/VAT returns;

(b) Whether the parties to whom additional sales were disclosed have identity, creditworthiness and transaction was genuine or not;

(c) Where the accounts are subjected to tax-audit, whether omission or wrong statement in the original return was pointed out by the audit or not;

(d) The source of cash in hands of the person who had made payments to the assesse has to be verified carefully;

(e)The past profile of the concerned assessee should be thoroughly analysed ;

(f) Where as a result of enquiries/investigations it emerges that figures in the revised/belated return are fudged, the figure of manipulated receipts/sales/stock etc. is liable to be taxed as a cash credit under section 68 and not merely on net profit basis;

(g) Any undisclosed expenditure detected after reduction of cash in hand by the assesse may be verified carefully ;

(h) Unaccounted income so assessed in scrutiny assessment is liable to be taxed at a higher rate without any set­off of losses,expenses etc. under section 115BBE of the Act;

(i) In the scenario pertaining to Wealth tax returns of earlier years, it should be examined whether there is an attempt to build cash-in-hand or any other asset so as to justify deposit of cash, post-demonetisation.