Guidelines Prescribed by Income Tax Department for Verification of Suspicious Bank Accounts

Transactions that may invite scrutiny

There could be various transactions carried out by people, which may invite scrutiny of such transactions by the assessing officer. They are enlisted below:

i) Cash deposited out of earlier income or savings

Say you do not have business income and had earlier saved a certain amount or had a certain income from earlier years in cash. Due to demonetization, you had to deposit such savings/income in your bank account. Then a maximum of INR 2,50,000 shall be considered reasonable and will be excluded from scrutiny. However, any deposit over and above INR 2,50,000 or INR 5,00,000 in the case of a senior citizen aged 70 years or more shall be subject to scrutiny.

A business entity with more savings than the closing balance as of 31 March 2016 shall be subjected to investigation for fraudulent transactions.

AO will thoroughly investigate any transaction signaling tax evasion, money laundering, and investment in shell companies.

CBDT, through its guidelines, directed the AO to obtain an explanation and details regarding income earned during past years, including its source, income declared in the return of income(ROI), whether a deposit is in line with cash withdrawals made from accounts, etc.

ii) Cash is withdrawn out of bank account

If a person explains that the cash deposits are out of the money withdrawn, but the same is not in line with the bank statements is a suspicious transaction. Therefore, such transactions may warrant scrutiny.

CBDT has directed the AO to seek relevant information, i.e., a copy of the bank statement/passbook, to form an appropriate view and quantify unexplained deposits. CBDT has further directed the AO to verify the bank statement/passbook to confirm the–

• name of the account holder;
• date and amount of cash withdrawals and
• cash deposits in the bank account

to verify whether the claim that the cash deposited is out of cash withdrawn from the bank account is acceptable.

CBDT further instructs AO to take a balanced view considering the human behavior reasonability of such transactions and the specific circumstances of the case.

iii) Cash is explained to be out of the income exempt from tax

Suppose the person demonstrates that such cash deposit is out of the exempt income, which is not in line with the earlier ROIs. In that case, AO is directed to consider the explanation provided by the person and obtain relevant information (e.g., in the case of agricultural income- land records, etc.) to form an appropriate view and quantify unexplained income.

iv) Cash received from identifiable persons

• Where cash is received from identifiable persons (with PAN):
  The AO shall call for no additional information. CBDT has further added that in case of cash received as a gift, AO may see whether such gift is taxable in the hands of the recipient u/s 56(2) of the Act.
• Where cash is received from identifiable persons (with PAN):
  After considering the explanation provided by the taxpayer, the nature of the business, and earlier history, the AO will verify whether the cash receipts are in line with the standard practices of the concerned business, as mentioned in their earlier returns of income. Suppose such cash receipts are not in line with standard practices. In that case, the AO may call for additional information and documents such as monthly sales summary (giving a bifurcation of cash sales and credit sales), stock registers, bank statements, etc., to identify suspicious cases of back-dating of cash sales or booking of fictitious sales, etc. and look out typically for the following:
  • Any abnormal rise in the percentage of cash sales during the period November-December 2016 or any past periods.
  • Demonetised currency was deposited multiple times during December end of 2016.
  • Unavailability of stocks or attempts to inflate stocks.
  • Transfer of bank accounts that they did not use in the past.

Note: The same process shall be carried out for verifying donations and any such cash receipts.

v) Cash disclosure under PMGKY

CBDT has directed the AO to verify the transaction based on the evidence of disclosure made under PMGKY (Prime - Minister Garib Kalyan Yojna). If the disclosure process is pending, verification may also be kept pending till the evidence is furnished.

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The online verification process

CBDT, through a circular, clarified that the entire process of online verification would be managed such that the person under verification will not be required to attend the income tax office personally at any stage during the verification process.

The online verification shall be facilitated on the e-filing website of the income tax department, under compliance section which shall be synced with the records and profile of the person already available with the department. Such verification shall be limited to the particular issue of cash transaction under verification. The AO cannot verify any other issue. The outcome of the verification should be limited to 'acceptable ' or 'non-acceptable’.

The process of verification is as follows:

1. Cases identified as having low risk will be centrally closed and will send the remaining cases to AO for verification
2. An SMS and e-mail shall be sent to the registered mobile number and e-mail address of all individuals under scrutiny, requiring them to fill in their responses online. The queries raised by the AO shall be limited as it is only a preliminary verification.
   Note: - To fill in their responses, one must ensure they register themselves on the portal using the 'Register yourself' link.
   - People can refer to the FAQs and guides on the income tax department’s website for submitting their responses.
3. AO views all responses and communicates the requirement of additional information electronically within five days of receiving the response. The information request will be communicated to the taxpayer with a hyperlink for uploading information. The individual must submit such additional information within the given time limit. If not, the cash deposit under verification will be deemed as undisclosed, and the case will be marked as 'non-acceptable.'
4. In case the documents and explanation provided are satisfactory, the AO concludes the verification process. If not satisfactory, i.e., non-acceptable category, then the AO shall escalate the case to the Director of systems, and the case shall be marked as involving possible tax evasion.

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Closure of the case

The AO shall close the case after concluding the verification process with the prior approval of the following:

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Non-compliance and penal consequences

Suppose an online response is not submitted even after the service of a letter. In that case, the AO may exercise its power under section 133(6) and collect information from banks, other income tax officers or any other person and survey action under Section 133A may be initiated. However, the AO can also initiate a penal process as per Section 269SS or 269T of the Act.

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