Back up claims with documents: How to respond to I-T notice post note ban

Be careful in your replies and keep documents to establish trail of banned notes you deposited

If you are among the 1.1 million of the 1.8 million who have not responded to the first round of emails and SMS messages of the Income Tax (I-T) department, the latter would have dispatched another letter to you. 

Media reports suggest verification notices may also be sent out to a new set of people this month. If your initial replies are found to be dissatisfactory, you may have to answer follow-up queries from the taxman. All this makes it essential that you understand how the taxman will verify your explanations, the level of in-depth enquiries he can conduct, and the need to frame appropriate replies. 

Adverse fallout   

If you have responded to the notice and the assessing officer (AO) finds your explanations satisfactory, he will mark your case as ‘acceptable’ and it will be closed. But, if he is not satisfied, he could ask for additional information, which can also be submitted online. If he’s still not satisfied, he could classify your case as ‘non-acceptable’. It will then get escalated to the Directorate of Systems and may be pursued as a possible case of tax evasion.

Not responding to the follow-up letter within the prescribed time frame can also be perilous. The tax officer will then view the information available with the department under Tax Deduction at Source (TDS), Annual Information Return (AIR) and Central Information Branch (CIB). In case the deposit is not in line with the person’s income tax profile, he can collect more facts under Section 133 (6). A survey can also be undertaken under Section 133A, or the case could be sent to the investigation wing.

Dealing with queries

If you don’t have any business income (and are not a minor), no verification query will be sent if your cash deposits don’t exceed Rs 2.5 lakh. For taxpayers above the age of 70, the ceiling has been relaxed to Rs 5 lakh. 

If your deposits exceed Rs 2.5 lakh, the AO will look at your income tax returns filed in the past, and the income disclosed therein. You could also submit your bank account statements to show the cash withdrawn to help the AO arrive at a judgement on whether the deposit is reasonable.

Deposit made out of money received from others: A mother could claim that the cash she deposited was what she had saved out of the money her working son gives her. “The AO will ask the son to confirm the payments. He could also look at the returns filed by the son in past years to assess his financial status. The son can also produce bank statements to show he withdrew money to give to his mother,” says Kuldip Kumar, partner and leader-personal tax at PwC India.  

A housewife could claim that the money she deposited during demonetisation was saving done out of the money given by her husband to meet household expenses. The AO will check how much money the husband gives. He may also try to estimate household expenses, and see if the deposits made are in proportion to possible savings. “Much will depend on the amount deposited. Ultimately, the AO should be satisfied that the money is from a legitimate source on which taxes have been paid,” says Kumar.  

Money withdrawn prior to demonetisation: This explanation, if offered, should be backed up by your bank statement. The AO could try to match the date and amount of cash withdrawals and deposits. According to the standard operating procedures for AOs issued by the Central Board of Direct Taxes (CBDT), the older the withdrawal (prior to demonetisation), the more suspiciously it should be regarded.  

Cash from agricultural income: Someone could claim that the cash he deposited is from a tax-exempt source like agricultural income. Experts say the I-T department can carry out in-depth investigation to corroborate whether your income is indeed from agriculture. It can check land revenue records to find out what is sown. 

“The tax officer can check the land’s level of productivity to see if it can provide the kind of income you are claiming. It can even cross-check with traders to determine if you sold your produce to them,” says Kumar. 

Business deposits: If the cash deposited is less than the closing cash balance as on March 31, 2016, as revealed in the tax returns, no further queries will be made. Business owners should avoid revising the return filed for last year. “If you revise your returns, the tax officer will look closely at what you have changed. Currently changing your tax return is not advisable since it will make the tax officer very suspicious,” says Preeti Khurana, editor, Cleartax.com. 

Some people could attempt to cook their records from April to September. The taxman will compare this year’s sales between April and September with earlier years’ trend. Any abnormal jump in sales activity will lead to suspicion. He could also compare sales with purchase and stocks. Any discrepancy between them will be treated with suspicion. 

If a businessman claims he made sales to another person (who has PAN), the AO can cross-check with the other person. In case he claims he made sales to unidentifiable persons during the period, he will have to back his claims with evidence. For instance, suppose he says he held a sale in Connaught Place, he may have to produce evidence of the rent paid on the premises.

Received a gift: If you make this claim, the taxman will check if you have paid tax on it, since gifts valued at above Rs 50,000 from strangers are taxable. “Gifts from relatives are exempt from tax,” informs Khurana.

Legitimate taxpayers need to collect relevant paperwork and provide circumstantial evidence to back up their claims. If their explanations can be verified, the matter will be closed. Finally, as Mumbai-based financial planner Arnav Pandya advises: “If you are unable to explain the source of your cash deposit, you should avail of the last window of opportunity available under the Prime Minister Garib Kalyan Yojana, which is open till March 31.”

Dos and don’ts for respondents

• If you did not reply to the verification notice initially and have received a follow-up letter, respond at the earliest 

• If you don’t respond at all, the assessing officer (AO) can decide your case based on information available with the department 

• A mother who receives money from her son and made a deposit out of that money should get the latter to confirm payments 

• If you withdrew the money from your bank account prior to demonetisation, show your bank statement as proof 

• Businessmen should not revise returns of past years as that could cause suspicion 

• If you can’t explain the source, avail of the Prime Minister Garib Kalyan Yojana