The taxman keeps watch

Explaining your financial transactions becomes easier if you opt for cheque payments.

A year before, Mumbai-based Abhay Deshpande received a notice from the income tax (I-T) department to explain how he funded his flat worth Rs 33 lakh — a purchase he had made three years ago. Deshpande was surprised as he had not expected a notice for a property worth just Rs 33 lakh. “I thought that my purchase should figure among the lowest priority for the I-T department. Everyone else seems to be purchasing properties at double the price,” says Deshpande.

But property purchases above Rs 30 lakh are considered ‘high-value transactions’. And, the registrar would notify the I-T department about such transactions, explain tax consultants.

The Reserve Bank of India, banks, mutual fund companies, registrars and companies issuing shares and debentures, all file third-party reports or annual information reports that reflect high-value transactions, such as deposits of over Rs 10 lakh in a savings account, purchase of bonds of over Rs 5 lakh, investment in mutual funds of over Rs 2 lakh, credit card expenses over Rs 2 lakh, purchase of shares worth Rs 1 lakh in a single company and purchase of expensive consumer durables.

The I-T department uses the report to verify the information disclosed by the individual in his tax returns. “On the basis of the third-party reports filed with them, the department generally picks up cases with high-value transactions and cross checks their source,” says Kavita Kanade, partner at tax consultants, M M Chitale.

One needs to have the supporting documents, such as bank statements, loan documents and returns for the last financial year, when such cases come under scrutiny. While taking personal loans from friends and family, one is advised to opt for cheque payments only, rather than cash, since the department may initiate further inquires to track the lender’s capacity to give such a loan.

“According to our tax laws, cash loans above Rs 19,999 attract a penal action, unless it is a cash gift from a relative. But again, this involves paperwork like drafting a gift deed, etc,” says Bhargav Vatsaraj, senior partner, Vatsaraj & Co. Besides taking a housing loan from a bank, Deshpande had also borrowed some amount from his relatives. Fortunately, it was a cheque payment that explained the source of money more easily.

If one has documents supporting the financial transactions mentioned in the third-party reports, it is no cause for concern.

But often, like in Priya Madhan’s case, we may transact on behalf of others. On several occasions, Madhan’s sister had deposited amounts above Rs 50,000 in Madhan’s savings bank account. Although the amount is withdrawn within a few days, she is worried if the frequent high-value transactions reflected in her account will catch the attention of the authorities.

Tax experts say Madhan need not worry as long as her sister discloses the deposited amount in her income. However, if the I-T authorities consider Madhan’s bank statement, the amount (despite the short duration for which it is parked in the account) will be termed as a short-term loan, and she may be asked to give an explanation with supporting documents. “It is best to avoid such transactions with persons who will not be able to give supporting letters at a later date,” says Kanade.

Also, accepting cash-in-exchange for using a credit card to make payments on behalf of others is a common practice, which should be avoided. If you already have done so, ask for a cheque rather than accepting cash payments. It will help to keep the transactions simple.