Deposit of Rs 2,000 notes in the Bank account: Concern & Confusion of the Taxpayers
RBI has announced the withdrawal of Rs 2,000 notes from circulation under the “Clean Note Policy”. The objective of “Clean Note Policy” introduced in 1999 is to provide good quality currency notes and coins while the soiled notes are withdrawn out of circulation. RBI had then instructed the banks to issue only good quality clean notes to the public and refrain from recycling the soiled & damaged notes. Citizens are considering the withdrawals of Rs 2,000 currency as Demonetization 2.0 There is a lot of confusion and concern amongst the taxpayers while depositing the cash in the bank account. Let us visit few such doubts:
Demonetization 1.0 Vs Demonetization 2.0:
- The present withdrawal of Rs 2,000 currency notes is not at par with the demonetization of Rs 500 & Rs 1,000 done in November-2016. The purpose of demonetization of Rs 500 & Rs 1,000 notes was to unearth black & Unaccounted money. However, the present demonetization is pursuant to the clean note policy of the RBI.
- Rs 500 & Rs 1,000 was declared invalid & ceased to be a legal tender on the night of 8th November 2016 which is not so in the present case. It has been categorically mentioned that Rs 2,000 would continue to be legal tender which means that the citizens can officially use the currency of Rs 2,000 for all the purposes.
- All the citizens have been advised to deposit or exchange these notes till September 30th, 2023. Even though there is no limit for depositing these notes in a bank account, there is a limit of Rs 20,000 for exchange in one go.
Whether the shopkeepers or others can refuse the acceptance of Rs 2,000?
There are few people who are complaining that the shopkeepers/malls/ Restaurant etc are refusing to accept the Rs 2000 Currency Note. One may note that refusal to accept the currency notes of Rs 2,000 is illegal, impermissible & may attract the FIR under IPC. Since Rs 2,000 continues to be a legal tender, no one can refuse it. But one needs to keep the practical aspects in mind that there should be reasonableness & practicality in the transaction, for example, one may not offer Rs 2000 Currency for purchasing goods of Rs 10/- or Rs 100/-.
How is the information gathered by the Income Tax Department regarding cash deposit? Whether PAN is compulsory?
- PAN is required for depositing cash of more than Rs 50,000 in a bank account in a single day [Rule 114B of the Income Tax Rules-1962]. If the PAN is furnished to the bank as part of KYC then the bank can accept the amount exceeding Rs 50,000/- in cash without further asking for PAN. Otherwise, the bank may insist on the PAN or the declaration form at the time of depositing the amount in the account.
- The Income Tax Department is extensively using data mining and analytics to identify the potential tax evaders. At present, banks are required to report the cash deposits of over Rs 10 lakh in savings & term deposits & Rs 50 lakh in current account deposits in a financial year to the income tax department. It is required to be done by filing the annual Statement of Financial Transactions (SFT). The purpose of SFT is to gather data on a specific set of high-value transactions that a person undertakes in a financial year.
- During demonetization 1.0, specific reporting of cash deposits of an amount exceeding Rs 2.50 Lakh was made for banks. Presently, there is no such reporting requirement which has been made by the Government.
- One may note that Cash acceptance/sales of an amount exceeding Rs 2 lakh in a single day from one person attract a penalty of an equivalent amount.
Whether the Exchange / Deposits would attract Income Tax Notice?:
Exchange/Deposit of Rs 2,000 notes has caused confusion among the public regarding its tax implications. The most common question is whether the deposit in the bank account would attract income tax notice or would invite any penal consequences. Let us know about it.
- The depositing of Rs 2,000 note is not in itself a taxable event for the genuine transaction.
- Everyone keeps some funds in cash for contingency / rainy days. Housewife depositing a reasonable amount out of pin-money (saving out of household expenses) may not worry even if they are non-filers of the income tax return.
- Tax authorities may investigate cash deposits if there is a substantial deposit which may not match the income sources or business nature. If the deposit is out of the regular source of income or out of accumulated savings or out of the cash withdrawal done earlier then the same may not be the cause of worry for the taxpayers.
- Though there is no limit on deposit in the bank account, the person depositing the cash may be required to prove the source, genuineness of the cash deposit. Any failure to do so may result in income tax @ 78% [Section 115BBE].
- Few have received the Rs 2,000 envelope as a gift on the occasion of marriage or other occasion. Deposit of a reasonable amount according to the status of the recipient may not be a cause of concern while depositing it in the bank account provided the person keeps the list handy in case it is required to be proved.
- There are few important lessons from demonetization 1.0 which may be relevant for the businessmen depositing the cash in their business account:
a) Often, the source of cash deposit in the business account is out of the amount is received from debtors or out of the advance received, out of the cash sale, out of the amount withdrawn earlier, out of the regular cash in hand. Suspicious transactions and likely unaccounted deposits are going to be part of scrutiny by tax authorities.
b) Deposit of heavy sums in the bank account is likely to be compared with the deposits in earlier years.Divergent trends without any specific reasons or explanations may not be accepted by the taxmen. Comparative analysis will be done by the taxmen before accepting the deposits in the bank account as genuine.
c) Deposits out of the high opening balance will be required to be justified by the reasons & purpose for holding a high cash balance.
d) It is advisable for the person depositing high cash in the bank to maintain little more records, documents and evidences ready for justifying it like CCTV footage, stock register, sales invoices, confirmations from buyers, GST Returns, correlation of such cash sales with purchases, Name & PAN of the buyer of high value transaction, Name & Address of the person making payment, duly signed receipt/invoice of the buyer, etc.
e) There are few business houses which have announced mega schemes or offers to use the withdrawals of pink currency as a business opportunity. As a result of this, sales during this period may be higher as compared to earlier months or earlier years. Documents of advertisement, publicity, CCTV footage etc may be kept ready so as to justify the divergent trend of cash deposits in the bank.
Present withdrawals of pink currency may not pose much scrutiny and verification by the tax department as compared to demonetization 1.0. However, high value deposits may invite notice from the taxmen & so long as the depositor can adequately explain the source of the cash, the same may not result in additional tax liabilities.
CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
10, Laxmi Vyankatesh Apartment
Telephone Exchange Square
Central Avenue Road
Web : www.ssrpn.com
Phone Nos: (0712)2735479, 6549611
Cell No. : 094228-60300