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Is your money black?

Updated on: 10 Aug, 2023 11:20 AM

Have these thought often made you tensed, whether the income you have earned can ever be seized by income tax department?? Is Your Money Black money too?? What if anyone comes to know about your savings, jewellery and properties??

Relax, if you have purchased any asset from your legal income (income reported to tax department) and no contravention of laws has been made, there will be no adverse consequences too. But, if your income earned is not black money then what is it? Who has black money? How black money is created? Is there any penalty on withholding such income? We try to answer all your queries by means of this blog.

What is black money??

The income which you earn from your business, the salary you receive at the end of month or carrying your profession is not black money. Then what is it?? The meaning of black money can be well understood from its literal interpretation which reads as – income illegally obtained or not offered for taxation. Which brings out to our comprehension that black money is generated from following two routes :

  1. From illegal routes like gambling, trafficking, criminal activities etc
  2. By not paying taxes on income which you have really earned i.e. not disclosing your true income in the ITR .

Who are the people involved in generation of black money ??

The people involved in building black money normally depends upon the two routes discussed above for black money generation.

For the first instance they are people of criminal mind and nature who are involved in activities causing harm to society and people at a larger level i.e. national or international.

People involved in second category are no one special, they are just like you and me who knowingly or unknowingly through their routine activities are supporting to the heap of black money, unknown of the fact that it is causing themselves and society as a whole a great harm.

How does ordinary people contribute to originating of black money??

We as a common man knowingly or unknowingly contributes to creation of black money in numerous ways, especially through our day to day economic activities. Some instances are being quoted here which we need to understand to become a part of unethical activities from the next time.

  • Not disclosing income from all sources or all of your income to the income tax department while filing your ITR.
  • While selling or buying property taking cash above the stamp duty value, for which no legal records could be traced.
  • Making purchases and sales in cash. The seller dealing in cash can easily temper with the income.
  • Not taking invoices of goods purchased. Not taking bill of purchased articles gives an opportunity to the seller, save tax on goods sold to you.
  • Taking evidence of payment made on a mere handwritten improper piece of paper.
  • Jeweller might ask us to pay in cash and he will not collect taxes from us. And, We tend to pay in cash to lower the amount of total bill.
  • Practising professionals receive payments in cash which are can be easily mitigated.
  • Claiming false deductions on your income, while filing your income tax return.
  • Big government projects being financed and actual money utilised is shown inflated on records is also a way to building black money.
  • Taking bribes and promoting corruption also promotes black money creation.
  • Income which is not routed through banking channels, helps in building black money.

What are the consequences of holding black money under Income Tax Act??

To discourage the practice of withholding black money and willing or unwilling assistance to creation of black money the Income Tax Department levies serious penalties on person in possession of unaccounted cash or undisclosed income. These penalties can be better understood as under:

Penalty for under disclosure or making wrong declarations of income to the IT Authorities

Creators of black money report their income in ITR below the actual money they possess. Or they claim illegitimate expenses and deductions. Income tax department levies penalty under section 270A for defaults of under reporting and misreporting of income from A.Y 2017-18. Penalty imposed on under reporting of income amounts to 50% of tax payable. Whereas the penalty for under reporting of income along with the misreporting of income is 200% of taxes.

Till AY 2016-17, the penalty ranged from 100% – 300% of taxes u/s 271 on the discretion of tax authorities, now the law has been amended to levy concrete penalties upon defaulters.

Penalty for non maintaining proper books of accounts or documents as required by IT department u/s 44AA

People who tend to avoid taxes prefer not to maintain proper books of accounts. As per section 44AA professionals like

  • Accountants,
  • Doctors,
  • Lawyers,
  • Engineers,
  • Interior designers,
  • Architect,
  • Technical consultants etc require to maintain books of account.

Also people other than mentioned above carrying business or pursuing profession having income above Rs 1.5 lakhs or turnover/receipts above 10 Lakhs are mandatorily required to keep their transactions recorded in proper set of books.

From FY 17-18, the limit of Rs. 150,000 and 10,00,00 lakhs has been increased to Rs. 250,000 and 25,00,000 respectively.

Failing which penalty equivalent to Rs. 25,000/- shall be recovered from them u/s 271A of the Income Tax Act.

Penalty for receiving Rs. 2 lakhs or more in cash

You should not receive an amount of Rs. 2 lakhs or more other than by mode of account payee cheque/ draft, ECS through a bank account from a single person, on single day or for a single transaction or single event. Otherwise penalty u/s 271DA equal to the amount so received shall be attracted.

As government will not only keep a track on person spending illegal / black money, but also a watch will be kept over people receiving the same.

Penalty for repaying Rs.20,000/- in settlement of loan, deposits or other specified advances

People tend to settle loans taken in cash ( preferably from their black money) and feel the same will not be traced by the government. If you make any payment to another person in excess of Rs.20,000/- not via banking channels namely, ECS and account payee cheque or draft, then, penalty u/s 271E shall be recovered from you. Penalty u/s 271E will be exactly equivalent of the sum of money so repaid.

Penalty on professionals making false claims in reports

To keep a check that people alloted with requisite power do not work as helping hand to black money creation, penalty has been introduced for professionals. During the course of providing services professionals like accountants, valuer and merchant bankers certify many reports and declarations. The IT Act under section 271J has announced a liability on such professionals for certifying any incorrect information of Rs.10,000/- per incorrect report or certification. This penalty provision has newly come into effect from 01 April 2017.

General Note: No penalties would be imposed if person making such transaction can successfully explain the cause behind doing such act.

Hope we could put your doubts at rest. For any assistance with filing your Income Tax Return or any assistance thereto contact us.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.