Taxpayers Beware! 6 transactions which may invite penalty, prosecution under Income Tax Act


If you think that only a big tax default or high-value transaction may invite income tax scrutiny, then think again. For, even small transactions – if they are against the income tax rules – can sometimes invite the wrath of taxmen.

“There are many transactions which seem normal, but have harsh consequences under the Indian tax laws. Taxpayers would be well advised not to undertake such transactions,” says Ashok Shah, Partner, N.A Shah Associates LLP.

Some of such common transactions are:

# Taking or giving a loan or deposit in excess of Rs 20,000 in cash

If a person takes, gives or repays a loan in cash in excess of Rs 20,000 in cash, then penalty equal to the amount of loan received, given, repaid can be levied. As per the income tax rules, you should also not repay or receive a sum of Rs 20,000 or more in cash for transfer of immovable property. Contravention of the provisions of Section 269SS will attract penalty under Section 271D.

# Paying more than Rs 10,000 in cash relating to expenditure of business/profession

If you pay more than Rs 10,000 in cash relating to expenditure of business or profession, then no deduction will be allowed in respect of such expenditure in the profit and loss account.

# Donating more than Rs 2,000 in cash to a political party or registered trust

If you do this, then you won’t be able to claim deductions u/s 80G of the I-T Act for such donations. Also, appropriate action would be initiated against political party or the trust for encouraging money laundering.

# Not depositing TDS with the government

There are many transactions, where a taxpayer is required to deduct tax at source (TDS). “Different consequences arise if tax is not deducted and tax deducted is not paid. Consequences of deducting tax but not paying to the government are far serious, exposing the taxpayer to greater probability of prosecution,” informs Shah.

Consequences of not deduction / not depositing TDS are as under:

1. Penalty equal to the amount of TDS default

2. Interest on delay in payment @ 1.5% p.m.

3. Disallowance of corresponding expenses @ 30% for payment to resident / 100% for payment to non-resident (if not paid before due date of return).

4. Further, the I-T Department has started issuing prosecution notices in case the default of TDS amount is more than Rs 5,00,000.

# Transaction in excess of Rs 2,00,000 in cash — for buying of a flat, jewellery etc — even if you have withdrawn cash from a bank

Receipt of cash above 2,00,000 may result into a penalty equal to the amount received. The limit of Rs 2,00,000 is per transaction/ event even if payment is made on difference dates / by different persons.

# Allowing your name to be used for any transaction by a third party.

In case you allow your name for other party transaction, the I-T Department may tax the amount of transaction in your hand. Further, giving wrong statement may result in a penalty and prosecution.

# Filing tax return without payment of due tax

Consequence of non-payment of due taxes are as under:

1. Filing of tax return without payment of due taxes will result in levy of interest @1% p.m.

2. In addition, penalty may be levied to the extent of the amount of default. This will apply even if taxes are paid before the issue of notice.

3. The I-T Department may issue a prosecution notice if taxes due as per the IT return are not paid.

What to do if you receive a tax notice?

After you have received an income tax notice, the first thing to do is to verify the facts. Quite often such notices are issued as requisite documents are not available with the tax department or there is some mismatch between the return submitted by you and the data available with the tax department.

“You can submit explanation to the tax department online with requisite evidence. If the matter is serious or requires professional inputs, you should consult a tax professional. However, you should not try to bluff your way out of such a situation or decide not to respond. You will be caught as now all such notices are system-driven and the tax department has tools to cross verify your claim,” says Shah.

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