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SettingtheFieldtoSuitthePace
February20,2017 [2017]78taxmann.com236(Article)

There used to be a famous saying during the legendary Ashes

SeriesbetweenEnglandandAustraliainthe70s'Iflilleedoesn't
ThommodoesitandifThommodoesn'tLilleedoesit'.Thatwasa
referencetotheferociousFastBowlingofAussiesspearheadedby
the famed pair of Dennis Lillee and Jeff Thomson. Now
something similar threatens all the recalcitrant or delinquent
Taxpayerswhowerecaughtunawaresbythe8thNovember2016
midnight bombing of Highvalue Currencies. The Provisions of
S. IncomeTaxLawisnowfortifiedontheothersidebytherecently
SUNDARARAMAN amendedProhibitionofBenamiPropertyTransactionsAct,1988.
The very threat of these twin legislations acting in tandem could
CA bring many of these into taxnet. The Government through their
new legislative measures of Taxation Amendment Bill 2016
passed has tried to tighten the field for the Bowling and there
seemtobenoyawninggapsvisiblenow.

Introduction

On and from the stroke of Midnight of 8th November 2016, the

legaltenderstatusofRs.1000noteandthenprevalentnoteofRs.
500 was withdrawn. As widely reported these notes formed a
Whopping 86% of an approximate 17 Lakh Crore currencies in
circulation.TheCurrencyholdershadthreechoicesleftwiththem

(a) Exchange at the rate of Rs. 4000 (subsequently cut to

Rs.2000)perpersonfortheoldnotesofequalvalue
(b) Deposit the same in their respective Bank Account as
theirown
(c) Discardtheholding

InthecaseofExchangeofCurrenciesnotoriousforcreatinglarge
queues were sought to be abhorred by the Government when
evidences of unscrupulous practice of making proxies exchange
Cash numerous times. This led to a rule of marking Indelible Ink
on the fingers of the exchanging person. This avenue of trying to
hoodwinkwaseffectivelyshut.

PutthemintoBank

ThenextmodeofencashingtheOldNotesisdepositingthesame
intheBankAccountsoftheholder/OwneroftheCash.Hereagain
manyinstancesofattempttoghostdeposittheminotheraccounts
suchasJandhanAccounts,EmployeeAccountsorotherpersons'
accounts have come to light. In this connection the Government
issued a press release on 18th November warning such practices:
"Therearesomereportsreceivedthatsomepeopleareusingother
persons' bank accounts to convert their black money into new
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denomination notes for which reward is also being given to the

accountholderswhoagreetoallowtheiraccountstobeused.This
activityisreportedincaseofJandhanAccountsalso.Itishereby
clarified that such tax evasion activities can be made subject to
income tax and penalty if it is established that the amount
deposited in the account was not of the account holder but of
somebodyelse.Alsothepersonwhoallowshisorheraccounttobe
misused for this purpose can be prosecuted for abetment under
Income Tax Act. However, the (sic) genuine persons having their
own household savings in cash and depositing the same in the
bankwouldnotbequestioned."

ExplaintheCredit

The legal consequences of such transfer of credit from one to

another are twofold. The credit could be assessed by the
department as an unexplained credit under section 68 and tax
levied under section 115BBE. But as rightly pointed out in the
editorialviewofTaxmann.comsuchalevyisatoolavailableinthe
handsofthedepartmentandhenceissubjecttoanadditionallevy
of penalty which can extend upto 200% of the tax. In case the
assessee offers the credit in his bank account as a Gift under
Section 56, the department could insist on identification of the
party from whom such a gift was received. In the absence of
identification by the recipient, in the normal course the
department would at best have treated this as unexplained credit
undersection68andasnarratedabovetaxwouldbeleviedunder
section 115BBE. In the absence of difference in tax incidence no
penalty would have been leviable if proper advance tax had been
paid and the entire credit had been offered for assessment in the
incometaxreturn.

ResettingtheField

Inthemeanwhile,theGovernmentthoughtitfittolegislateonthis
pointandintroducedamendmentstoSection115BBEandPenalty
provisionsbyinsertinganewsection271AACprovidingforlevyof
penalty for Income determined under sections 68,69,69A, 69B,
69Cor69D.Theseamendmentsinanutshellprovidesthatincase
assessee offers such income under Section 68,69 etc., or if the
Assessing officer determines such income under those section the
taxrateonandfromtheAssessmentyear201718wouldbe60%.
For the assessment year 201718 there is an additional surcharge
of 25% on such tax. This coupled with Penalty under section
271AAC at the rate of 10% of Tax in case of Nondisclosure or
Nonpayment of tax within the relevant previous year. On an
aggregatethiscouldtouchupto83.25%.

ASmallReprievefromtheRigour

As an alternative the Government has come up with an amnesty

scheme called "Pradhan Mantri Garib Kalyan Yojana 2016"
(PMGKY) which intends to reduce this incidence to 49.90%, in

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additiontocompulsoryretentionofdeposittotheextentof25%of
the declared Cash deposit for a period of 4 years on interest free
basis. This effectively means another erosion of about 7% (on 8%
discountingforpresentvalue)whichonanaggregateworksoutto
57%erosionofdisclosedincomeeitherasTaxorbywayoferosion
ofPresentValue.

BenamiTransactionProhibitionLaw

ThemajorchangethatwasbroughtabouttoBenamitransactions
prohibitionlaweffectivefrom11116couldhaveacripplingeffect
onsuchtransactions.Letushavealookatsomeoftheprovisions
of that law that could have impact here. Under the newly
introduced Section 3(3) of the Prohibition of Benami Property
Transactions Act, 1988, "whoever enters into any benami
transactiononanafterthedateofcommencementoftheBenami
Transactions (Prohibition) Amendment Act, 2016 shall,
notwithstanding anything contained in subsection (2), be
punishable in accordance with the provisions contained in
Chapter VII." Chapter VII seeks to punish any person entering
into a benami transaction in order to defeat the provisions of any
law or to avoid payment of statutory dues or to avoid payment to
creditors, the beneficial owner, benamidar and any other person
who abets or induces any person to enter into the benami
transaction, with rigorous imprisonment for term which may
extend to seven years and with fine which may extend to twenty
fivepercentofthefairmarketvalueoftheproperty.Section2(26)
definesPropertytomean"assetsofanykind,whethermovableor
immovable, 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(9) defines "Benami Transaction" to
mean

(A) atransactionoranarrangement
(a) whereapropertyistransferredto,orisheldby,
a person, and the consideration for such
propertyhasbeenprovided,orpaidby,another
personand
(b) thepropertyisheldfortheimmediateorfuture
benefit,directorindirect,ofthepersonwhohas
providedtheconsideration,
exceptwhenthepropertyisheldby
(i) a Karta, or a member of a Hindu undivided
family, as the case may be, and the property is
held for his benefit or benefit of other members
in the family and the consideration for such
property has been provided or paid out of the
knownsourcesoftheHinduundividedfamily
(ii) apersonstandinginafiduciarycapacityforthe
benefit of another person towards whom he
stands in such capacity and includes a trustee,
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executor, partner, director of a company, a

depository or a participant as an agent of a
depositoryundertheDepositoriesAct,1996and
any other person as may be notified by the
CentralGovernmentforthispurpose
(iii) any 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
knownsourcesoftheindividual
(iv) any person in the name of his brother or sister
or lineal ascendant or descendant, where the
namesofbrotherorsisterorlinealascendantor
descendant and the individual appear as joint
ownersinanydocument,andtheconsideration
forsuchpropertyhasbeenprovidedorpaidout
oftheknownsourcesoftheindividualor
(B) atransactionoranarrangementinrespectofaproperty
carriedoutormadeinafictitiousnameor
(C) atransactionoranarrangementinrespectofaproperty
where the owner of the property is not aware of, or,
deniesknowledgeof,suchownership
(D) atransactionoranarrangementinrespectofaproperty
where the person providing the consideration is not
traceableorisfictitious"

ApplicationofBenamiTransactionProhibitionLaw

Coming back to the issue on hand Cash deposited in a bank

account would constitute a property and the credit sought to be
explainedasaGiftfromunnamedsourcesorevenananonymous
credit without description of ownership through explainable
income source could fall within the definition of "Benami
Transaction" under section 2(9)(D) and in case of any obligation
being traced on the part of the recipient then Section 2(9)(A)
would also be applicable. The Consequences of this includes the
poweroftheCentralGovernmenttoConfiscatethePropertyapart
fromthePenalandcriminalproceedingsnarratedabove.

No Clarity on the application of Benami Transaction Prohibition

LawforopteesofPMGKY

Curiously even the Scheme does not grant immunity from the
ProhibitionofBenamiPropertyTransactionsAct,1988.Asperthe
newly inserted Section 199 O of the Finance Act, 2016 "The
provisionsofthisSchemeshallnotapply

** ** **

(b) in relation to prosecution for any offence punishable

underChapterIXorChapterXVIIoftheIndianPenalCode,
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
LaunderingAct,2002"

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However the phrase "in relation to prosecution for any offence

punishable" indicates that the reference is to prosecution of
offences contained in Chapter VII of the Prohibition of Benami
Property Transactions Act, 1988 and hence it could be contended
that the other chapters relating to Confiscation etc., may not
apply.

ReconciliationofCashBalanceandDeposit

The next issue that comes up is how do we reconcile the High

Denomination Notes (HDN) deposited with the bank with the
available Cash balance? The Supreme Court has dealt with this
issue in the case of Lalchand Bhagat Ambica Ram v. CIT [1959]
37 ITR 288 (SC). This case related to deposit of HDN during the
firstdemonetisationintheyear1946.Thebrieffactsasnarratedby
the SC was "In the books of account for previous years it was the
practice of the appellant to give details of the notes of high
denominations giving the distinctive numbers of these notes
receivedorpaidoratleastotherdescription,e.g.,"somanynotes"
of Rs. 1,000 each. In the assessment year, however, this practice
doesnotappeartohavebeenfollowedbutentriescontinuedtobe
madeofmoniesthusreceivedfromthebanks,differentbranches,
beoparees etc., without any such details being filled therein...
TheseentriesshowedthattherewaswiththeappellantonJanuary
12, 1946, an aggregate sum of Rs. 3,10,681139 (Rupee Anna
Paisa(supplied) and it was highly probable that the high
denomination notes of Rs. 2,91,000 were included in this sum of
Rs.3,10,681139.Thebooksofaccountoftheappellantwerenot
challenged in any other manner except in regard to the
interpolations relating to the number of high denomination notes
ofRs.1,000eachobviouslymadebytheappellantintheaccounts
for the assessment year in question in the manner aforesaid and
eveninregardtotheseinterpolationstheexplanationgivenbythe
appellant in regard to the same was accepted by the Tribunal.
Even though the Income tax Officer made capital out of the
interpolations and subsequent insertions in the books of account
and styled the evidence furnished by them as created or
manipulated evidence thus discounting the story of the appellant
in regard to the source of these high denomination notes, the
Tribunal was definitely of opinion that there was no other reason
to suspect the genuineness of the account books in which these
interpolations were found." Going further the Supreme Court
observed: "If the entries in the books of account in regard to the
balance in Rokar and the balance in Almirah were held to be
genuine,logicallyenoughtherewasnoescapefromtheconclusion
that the appellant had offered reasonable explanation as to the
sourceofthe291highdenominationnotesofRs.1,000eachwhich
itencashedonJanuary19,1946.ItwasnotopentotheTribunalto
accept the genuineness of these books of account and accept the
explanation of the appellant in part as to Rs. 1,50,000 and reject
the same in regard to the sum of Rs. 1,41,000. Consistently
enough, the Tribunal ought to have accepted the explanation of

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the appellant in regard to the whole of the sum of Rs. 2,91,000

and held that the appellant had satisfactorily explained the
encashmentofthe291highdenominationnotesofRs.1,000each
onJanuary19,1946.

The Tribunal, however, appears to have been influenced by the

suspicions,conjecturesandsurmiseswhichwerefreelyindulgedin
by the Income tax Officer and the Appellate Assistant
Commissioner and arrived at its own conclusion, as it were, by a
ruleofthumbholdingwithoutanypropermaterialsbeforeitthat
the appellant might be expected to have possessed as part of its
business,cashbalanceofatleastRs.1,50,000intheshapeofhigh
denomination notes on January 12, 1946,a mere conjecture or
surmise for which there was no basis in the materials on record
beforeit."

HenceitcanbededucedthatwhereasapracticeDenomination
wise balances are not maintained, it would be sufficient
complianceiftheCashBalanceasperBooksofaccountson08th
November 2016 was greater than and was reasonably relatable to
the HDN deposited into the bank after these ceased to be legal
tender.(SeeannexureforFlowchartrepresentation).

Conclusion

Shrewd minds seem to have gone into this exercise whereby the
Prohibition of Benami Property Transactions Act had been
amended and brought into effect just days ahead of the
detonation of demonetisation bomb. If anybody tries to act smart
then he is either caught by the Provisions of Section 68, 69, 69A,
69B etc., of the Income Tax Act, 1961 or by the newly amended
Prohibition of Benami Property Transactions Act, 1988. The new
amendments to Income Tax Act, 1961 through the Taxation Laws
AmendmentBillseemtobeaimedatpluggingthegapsinthefield
by the imminent threat of enhanced penalties/Tax and by the
dangling of the carrot of a not so rigorous taxation under the
PMGKY. The assessees who have been recalcitrant or delinquent
are bound to face torrid time in the days, weeks and months
ahead. When the Pitch is pacey and bouncy the coach tells the
batsmantoplaystraight.

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