Demonitization and its tax impacts

Presented By:
CA. Ashish Kapoor
Presentation
on
Demonetization
and
How it impacts you?
ashish.kapoor@asija.in

Contents
1. Tax Impact on Demonetization
2. Demonetization vis a vis Benami Transaction and
its impact
3. Pradhan Mantri Garib Kalyan Yojana, 2016
ashish.kapoor@asija.in2

Demonetization in India – Purpose
What is Demonetization ?
 W.e.f. 8th of November, 2016, RBI has withdrawn the old `.500/- and
`.1,000/- notes as a legal tender and has asked every person to deposit such
currency in it’s Bank Account before 31/12/2016.
To tackle black money in the economy.
To eliminate fake currency and dodgy funds
which have been used by terror groups to fund
terrorism in India.
To lower the cash transaction with a hope to
bring all transaction from shadow economy to
accounted economy.
Reasons for
Demonetization

Who needs to worry?
Honest Taxpayers
If you have `. 500 and `. 1000 notes lying with you, there is no need
to panic if you can explain the source of the cash and prove its
legitimacy.
OR
The surprise move by government is a disaster for people who have
accumulated lakhs and crores of unaccounted cash.
Dishonest Assessees

Deposit
Enquiry by
the
Department
Explain the
source
Tax Impact
Flow Chart of Impact of Demonitisation

Deposition of Cash in Bank
As per Rule 114B (mandatory quoting of PAN) every person is required to
quote his PAN at the time of depositing cash in bank if:-
Cash deposits made in the bank/ post office exceeding `. 50,000 during
any one day.
Cash deposits exceeding `. 2,50,000 during the period 09/11/ 2016
to 30/11/2016 (inserted from 15-11-2016)
Penalty for non - quoting/ knowingly quoting a false PAN – `. 10,000

Enquiry by Department
All the banks and post offices shall furnish to Income Tax Department a
statement whereby they shall report the following transactions :-
 Cash deposits aggregating to `. 10 lakh or more in a financial year, in
one or more accounts (other than a current account and time deposit).
To be filled by 31/05/2017.
 Cash deposits in bank account or a post office account during the
period 09/11/2016 to 30/12/ 2016 :-
 aggregating to `. 12,50,000 or more in one or more current account of a
person or
 aggregating to `. 2,50,000 or more in one or more accounts (other
than current account) of a person. To be filed by 31/01/2017.
 Details of Cash Deposition can be asked directly from the assessee as per
section 133(6)

Explain the Source

Explanation - Sources of Cash Deposits
Personal Saving – cash which is set aside for non-immediate use or for unforeseen
emergencies.
Cash in Hand of Business or Profession or Charitable Entities
Stri Dhan – cash saved by a woman during her lifetime, from money received
from family & friend.
Minor Child Fund – Received from family or friend on various occasion.
HUF Fund – Cash Income of HUF or Fund received in marriage.
Loan Fund – From Relative , Friends or for Business Purpose

Explanation - Sources of Cash Deposits –
Risk Area
Assessee should be cautious while making claims of sources as loans or
advances towards property transactions as
Section 269SS (Advancing loan)
Section 269T (Repayment of loan)
prohibits cash transactions in excess of `. 20,000 for accepting or
advancing loans and deposits or in relation to transfer of an immovable
property, whether or not the transfer takes place.

bullion traders who make cash sales above specified limits (bullion
exceeding `. 2,00,000 and jewellery exceeding `. 5,00,000) and
by sellers who receive sale consideration in cash exceeding `. 2,00,000 for
sale of any goods.
a person involved in a Benami Trasaction - A transaction or an arrangement
in respect of a property carried out or made in a fictitious name
Provisions with regard to collection of tax at source under section 206C
and quoting of PAN of the buyers have to be borne in mind by :-
Explanation - Sources of Cash Deposits –
Risk Area

Sources of Cash Deposits – Tax Impact
Unexplained cash credit (Sec - 68), or
Unexplained investment (Section 69), or
Unexplained money, bullion, jewellery etc (Section 69A), or
Investment not disclosed in the books of account (Section 69B), or
Unexplained expenditure (Section 69C), or
Amount borrowed or repaid in Hundi (Section 69D)
in the books of the assessee, for any previous year and the assessee
offers no explanation about the nature and source thereof, or the
explanation is not satisfactory, the sum may be charged to income
tax of the assessee for that previous year
If there are -

Tax Impact of Unexplained Cash Deposit
115 BBE Existing Provision
If there is any income in the form of any of the Sections
(68,69,69A,69B,69C & 69D), the income tax payable shall be the
aggregate of
 Tax @ 30 % which is the maximum marginal rate
No deduction of expenditure or allowance is available
No set off is available

Section 270A is applicable when there is difference between :-
Income as per order passed u/s 143(3) and
Income determined u/s 143(1)(a)
Penalty is provided at the rate of :-
a. 50% of tax if there is under reporting of income
b. 200% of tax if there is misreporting of income
Prosecution u/s 276C
The section has been amended to provide for rigorous imprisonment
(between six months to seven years) where the amount sought to be
evaded, or tax on under-reported income exceeds `. 25,00,000
Tax Impact of Unexplained Cash Deposit

Proposed Tax Impact of
unexplained Cash Deposit
1. Government has proposed amendment in Income Tax Act, 1961, through
Taxation Laws (Second Amendment) Act, 2016.
2. The Bill has proposed to amend section 115BBE to increase the rate of
tax in relation to unexplained money, etc. from the existing 30% to 60%.
3. An additional surcharge of 25% of this tax is also levied with respect to
payment of advance tax.
4. In case the undisclosed income is not VOLUNTARILY disclosed by the
assessee in its tax return and the tax thereon has not been paid, then a
penalty of 10% of the tax payable will be levied. (New Section 271AAC).
Thus may lead to impact of tax & penalty ranging from 77.25% to 87.25 %

Proposed Tax Impact of unexplained Cash
Deposit
5. In case of search cases, the penalty under section 271AAB of the Act has
also been proposed to be increased to 30% (earlier 10%) where the
assessee admits the undisclosed income, declares such income in tax
return and pays the tax thereon. In other cases, the penalty stands
increased to 60%. Thus may lead to impact of tax & penalty ranging from
107.25 % to 137.25%

BENAMI TRANSACTION
Vis a Vis
Demonetization !!!!!

Prohibition of Benami Property
Transactions Act, 1988 – Key points
This Act was introduced on 5th September, 1988 (having only 9 Sections)
The said Act has been DRASTICALLY amended with effect from 1st November,
2016. (Now having 72 Section)
Demonetisation was declared 7 days after the said amended act was notified!!!
The said act shall be monitored by Ministry of Finance GOI.
The “Initiating officer” & “Approving Authority” shall be officers of Income tax
Department.
“Adjudicating Authority” & “Appellate Tribunal” shall be off the Prevention of
Money-Laundering Act, 2002.

What is a “Benami Property” ?
Can Cash or Stock be treated as a Benami
Property ?
 “Benami Property” means any PROPERTY which is the subject
matter of a “BENAMI TRANSACTION” and also includes the proceeds
from such property. (Section 2(8)).
 “Property” means an asset of any kind, whether movable or
immovable (Thus, Cash is a Property and Stock in Trade is also a
Property as per this Act), tangible or intangible, corporeal or
incorporeal and includes any right or interest or legal documents or
instruments evidencing title to or interest in the property and where
the property is capable of conversion into some other form, then the
property in the converted form and also includes the proceeds from
the property. (Section 2(26)). ashish.kapoor@asija.in19

What is a “ Benami Transaction ”?
Benami Transaction - Section 2(9)
A. A transaction or an arrangement in respect of a property carried out or
made in a fictitious name;
For Eg: Sale of stock in trade is made to a fictitious person.
OR
B. A transaction or an arrangement in respect of a property where the
owner of the property is not aware of, or, denies knowledge of, such
ownership;
For Eg: A sum of ₹ 50,000 is deposited in the Bank Account of Mr A. But
Mr A is unware about such deposition or he denies ownership of such
cash so deposited into his account.

What is a “ Benami Transaction ” ?
C. A transaction or an arrangement in respect of a property, where the
person providing the cash is not traceable or is fictitious.
For Eg: Where a sum of ₹ 50,000 is deposited into Mr A’s account. But the
depositor is either untraceable or fictitious.
OR
D. Where a property is transferred to, or is held by, a person, and such
property has been provided, or paid by, another person, and
the property is held for the immediate or future benefit, direct or indirect,
of the person who has provided the such property.

Exceptions to the Benami Transactions
Following transactions shall not be treated as “Benami”, any property held by:-
The karta /members of the HUF for his benefit or for the benefit of members and
such amount is paid out of the known sources of the HUF.
The person standing in ‘fiduciary capacity’ for the benefit of those for whom he
stands in this capacity and includes a trustee, executor, partner, director etc.
A person being an individual in the name of his spouse or in the name of any
child of such individual and the consideration for such property has been
provided or paid out of the known sources of the individual
Any property held by, any person in the name of his brother or sister or lineal
ascendant or descendant, where the names of brother or sister or lineal
ascendant or descendent and the individual appear as joint-owners in any
document, and the consideration for such property has been provided or paid out
of the known sources of the individual. ashish.kapoor@asija.in22

Exceptions to the Benami Transactions
Any transaction involving the allowing of possession of any property to be
taken or retained in part performance of a contract referred to in section
53A of the Transfer of Property Act, 1882 (4 of 1882), if, under any law for
the time being in force,
consideration for such property has been provided by the person to
whom possession of property has been allowed but the person who has
granted possession thereof continues to hold ownership of such
property;
Stamp duty on such transaction or arrangement has been paid; and
the contract has been registered;

Impact of Benami Transaction
Any person found guilty of offence under this act shall bear following
consequences:
• 100% of the Benami property will be confiscated (Sec - 5)
• Rigorous imprisonment for a term ranging from 1 year to 7 years
• Levy of fine amounting to at most 25% of fair market value of the benami
property (Sec - 53)
Any person who gives false information:
• Shall be punishable with rigorous imprisonment for a term ranging from 6
months to 5 years
• Levy of fine amounting to at most 10% of fair market value of the benami
property.
No prosecution shall be instituted without the previous sanction of the
Board.

Impact of Benami Transaction
 Prohibition on re-transfer of property by benamidar.
 No person, being a benamidar shall re-transfer the benami property held by
him to the beneficial owner or any other person acting on his behalf.
 Where any property is re-transferred in contravention of the provisions of
sub-section (1), the transaction of such property shall be deemed to be null
and void.
 The above provision shall not apply to a transfer made in accordance with
decleartion made under IDS (Income Disclousre Scheme) 2016.
 Prohibition of the right to recover property held benami.
 No suit, claim or action to enforce any right in respect of any property held
benami against the benamidar shall lie by or on behalf of the Beneficial
owner.

Taxation & Investment
Regime For
Pradhan Mantri Garib
Kalyan Yojana 2016
Yet another opportunity to all the Black Money
holders to come out clean by declaring their
undisclosed income and paying heavy taxes and
penalty under the scheme

What is Pradhan Mantri Garib Kalyan
Yojana, 2016?
Any person may make a declaration in respect of any income (in the
form of cash/deposit in any bank/post office account) chargeable to
tax under the Income Tax Act for the assessment year 2017-18 (or any
earlier assessment year).
 No deduction in respect of any expenditure or allowance or setoff of
any loss shall be allowed against the income so declared.

Step wise Process for Making Declaration
Payment of Tax,
Surcharge and
Penalty
Deposition of 25 % of
the disclosed income
in the PM Garib
Kalyan Deposit
Scheme, 2016.
File The Declaration

Amount payable by declarant
Tax @30% of income declared (Sec - 199D)
Surcharge @33% of Tax (Pradhan Mantri Garib Kalyan Cess)
Penalty @10% of income declared (Sec - 199E)

Pradhan Mantri Garib Kalyan
Deposit Scheme, 2016
1. The person making above declaration shall deposit at least 25 % of
undisclosed income in the Pradhan Mantri Garib Kalyan Deposit
Scheme, 2016 (Sec - 199F).
2. The deposit shall bear no interest and the amount so deposited
can be withdrawn only after 4 years from the date of deposit.
3. Further the depositor shall be required to fulfil such other
conditions as may be specified in the said Deposit Scheme 2016.

The Insider View
So do you think the effective pay out by the declarant is 49.9% ?
NO
Its not just 49.9% tax of undisclosed income
• The notional loss he suffers due to the
 lock in period of 4 years due to deposit made under this
scheme; and
 The inflation rate
Makes the effective rate equal to about 57%.

An Illustration
Under Pradhan Mantri Garib Kalyan Yojna 2016 Amount
Undisclosed Income 10,00,000
Tax on Undisclosed Income (u/s 199D) (@ 30%) 3,00,000
Surcharge (@ 33% of tax) 99,000
Penalty (@ 10% of income declared) 1,00,000
Total Tax on above (@ 49.9%) 4,99,000
Deposit in Deposit Scheme (@ 25%) 2,50,000
Future Value of the Deposit account (Since, it is locked for 4 years &
average inflation of 8 %)
1,79,100
Indirect Loss as on this day 70,900 or 7.1%
Total loss( 49.9 % + 7.1 % ) 57 %

Declaration when void
Where a declaration has been made by:-
Misrepresentation or suppression of facts or
Without payment of tax and surcharge as specified u/s 199D or
Without payment of Penalty as specified u/s 199E or
Without depositing the amount in the Deposit Scheme as specified u/s
199F
such declaration shall be void and shall be deemed never to have
been made under this Scheme.
 Importantly, any tax and surcharge paid under this scheme shall
not be refundable. (Sec-199K)

Advantages of the Scheme
 The undisclosed income will not be included in total income of
the declarant for any assessment year.
 Nothing contained in any declaration shall be admissible in
evidence against the declarant for the purpose of any
proceeding under any Act (other than certain specified Acts as
detailed in slide 18).
 It would be the last chance to come clean for black money
holders. Any detection of black money by AO thereafter (other
than search cases) would attract 83.25% tax.
 The declaration can be made for the current year as well as for
any previous assessment years.

Disadvantages of the Scheme
 No deduction in respect of any expenditure or allowance or set-off of any
loss shall be allowed against the income in respect of which a declaration
is made.[Sec - 199C (2)]
 A declarant under this Scheme shall not be entitled, in respect of
undisclosed income, to re-open any assessment or reassessment made
under the Income-tax Act or the Wealth-tax Act, 1957.
 Any amount paid as Tax, surcharge or penalty, under this scheme shall
not be refundable.
 Declaration can be made only for Cash deposition and not for any other
assets.

Disadvantages of the Scheme
Immunity under Benami Transaction Act or other such law is
not being provided.
 No immunity against the tax and interest in case of other tax
laws like service tax, sales tax, etc is available.
 The provisions of Chapter XV of the Income Tax Act relating to
liability in special cases and Section 119, Section 138 and
Section 189 shall apply in relation to proceedings under this
scheme.

On whom does the scheme
not apply?
The deposit scheme shall not be available to persons involved in or
indicted in the specified manner in any illegal activity as covered
under the following Acts:-
The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974;
Chapter IX or Chapter XVII of the Indian Penal Code;
The Narcotic Drugs and Psychotropic Substances Act, 1985;
The Unlawful Activities (Prevention) Act, 1967;
The Prevention of Corruption Act, 1988;
The Prohibition of Benami Property Transactions Act, 1988 and the Prevention of
Money Laundering Act, 2002;
Any person notified under section 3 of the Special Court (Trial of Offences Relating to
Transactions in Securities) Act, 1992;

Any
Queries??Thank You
• DISCLAIMER:-
 This presentation has been prepared to provide a gist of the applicable law pertaining to Demonetization
and relevant sections of Taxation Laws (Second Amendment) Bill, 2016 was introduced in Lok Sabha.
 For detailed insight and for better understanding of the various provision of the said law, the said
presentation should be read along with related provision of Income Tax Act, 1961 and Income Tax
Rules,1962, Prohibition of Benami Property Transactions Act, 1988 (modified by Benami Transactions
(prohibition) amendment Act, 2016 and the Finance Act, 2016.
 We shall not be responsible for any decision taken on the basis of the said presentation, without
obtaining our professional guidance or consultation on the matter for which reliance was made on this
presentation.”

Demonitization and its tax impacts

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