Demonetization of currency notes by notification dated 8th November 2016 and on The Taxation Laws (Second Amendment) Bill 2016 – A brief analysis
By V D Aggarwal Chartered accountant
Introduction
I.INDIA's financial instruments and 'Hundies' traces its origins to the The Paper Currency Act of 1861 conferred upon Government of India thus the monopoly of Note Issue bringing an end to the banknote issued by Private and Presidency Banks. Government of India continued to issue currency notes till the Reserve Bank of India (RBI) was established on 1st April, 1935. Reserve Bank of India issued banknotes in January 1938 when the first Five Rupee banknote was issued bearing the portrait of George VI. This was followed by Rs. 10 in February, Rs. 100 in March and Rs. 1,000, Rs.5000 and Rs. 10,000 in June 1938. Rs. 1000 , 5000 & Rs.10,000 remained in circulation until demonetized in 1946.The George VI series continued till 1947 and thereafter as a FROZEN SERIES TILL 1950 when post independence banknotes were issued, with the Ashoka Pillar watermark. Banknotes Rs. 1,000, Rs. 5,000 and Rs. 10,000 were reintroduced in 1954 and all of them were demonetised in January 1978. However certain old high denomination notes in circulation were DEMONETISED due to extension of Indian laws to the State of J&K in 1956 through legislation by inserting section 26A in the RBI Act 1934.
Banknotes in the Mahatma Gandhi Series were introduced in 1996 and issued in a phased manner in the denominations of Rs.5, Rs.10, Rs.20, Rs.50,Rs.100, Rs.500, Rs.1000.
These old high denominated notes are now discontinued or Demonetised wef 9/11/2016 by way of Gazette Notification No 2652 dated November 08, 2016.
The Central Government would bring law to make it punishable offence to possess or transfer the notes after 31.03.2017. Hence it can be said that there is no legal bar in transferring demonetised notes from one person to another in satisfaction of a debt arising from past transaction/ fresh transaction till 31st December and even upto 31st March 2017, the last of depositing old currency, as announced by the honorable Prime minister of India on 8th November 2016.
₹500 and ₹1000 currency notes have been derecongised as legal tender w.e.f. 09.11.2016. The legal tender character of the notes and their cessation have been prescribed in section 26 of Reserve Bank of India Act, 1934. Section 26 of Reserve Bank of India deals with the subject matter of Legal tender character of notes as under :-
a.Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government.
b.On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification.
II.Purpose of demonetization
The prime purpose of demonetization is to eliminate black money, terrorist activities and abolish fake currency in circulation. Through this, PM intends to introduce plastic currency and also very keen to change the habits of habitants. A detail study on the subject is also done by NGO Arthkranti, which have given five points of action simultaneously as under :-
a.Scrap all 56 Taxes including income tax excluding import duty.
b.Recall and scrap high denomination currencies of 1000, 500 and 100 rupees.
c.All high value transaction to be made only through banking system like cheque, DD, online and electronic.
d.Fix limit of cash transaction and no taxing on such cash transaction.
e.For Govt. revenue introduce single point tax system I.e Banking Transaction Tax (2% to 0.7%) on only Credit Amount.
III.Airthkranti recommended for demonetization of even of note of Rs.100 and also forecast following advantages :-
a.Corruption through cash will the stopped 100%.
b.Black money will be either converted to white or will vanish as billions of 1000/500/100 currency notes hidden in bags without use will become simple pieces of papers.
c.Unaccounted hidden huge cash is skyrocketing the prices of properties, land, houses, jewellery etc and hard earned money is loosing its value; this trend will stop immediately.
d.Kidnapping and ransom, “Supari killing” will stop.
e.Terrorism supported by cash transaction will stop.
f.Cannot buy high value property in cash showing very less registry prices.
g.Circulation of “Fake Currency” will stop because fake currency printing of less value notes will not be viable.
IV.Consequences of demonetization
a.Currency crunch
1 / Total currency in circulation as on 8th November 2016 / 16.5 lack crore2 / Out of above 86% is of 500 and 1000 currency notes / 14.5 lack crore
3 / Currency available in chest on 8th November 2016 / 4.5 lack crore
4 / Currency Surrendered by 29th November / 8 lack crore
5 / Currency still in hand in public / 4 lack crore
6 / Currency estimated as which may not be surrendered / 3 lack crore
b.By 23 november the currency is released by bank to public to the extend of Rs. 50,000 crore. In other words we may say out of total currency in circulation of 16.5 lack crore, the currency in circulation is 15% only. (Rs 2 lack crore small currency and Rs 50,000 crore new currency). Due to this currency crunch, there is lot of discomfort to the citizen of countries although it is temporarily as honorable Prime Minister asked for 50 days for smooth functioning. Business houses are also effected due to currency crunch and people are searching ways once means to convert their black money in to white by fair or unfair means.
V.Remedial measures
a.Deposit available cash as per books. The available cash in hand in Books of Accounts should be deposited before 31st December 2016 in the Bank Account and upto 31st March 2017 with RBI with necessary disclosure.
b.Declare correct income and pay advance tax and deposit cash in bank account. It should be ensured whatever income is going to be disclosed should have sufficient evidences and in case if it is proved incorrect, under section 270A a penalty to the extend 200% may be imposed.
c.under the present law of income tax, income may be disclosed under section 115BBE and under this section tax is imposable at the maximum marginal rate, which is at present 33% but government is going to make necessary amendment to stop misuse of the law. Section 68, 69, 69A,69B, 69C and 69D are also covered for offering tax.
d.section 56(1) and 44AD are good for discloser of income. It should be remembered that all disclosure through section 56(1) and 44AD require evidence.
e.Shri Arun Jaitley, Minister of finance and Corporate Affairs introduced The taxation Laws (Second Amendment ) Bill 2016 through which section 115BBE is amended from assessment year 2017-18 and as per proposed amended provision is for flat rate of taxation @ 60% + surcharge @ 25% of tax, aggregating of both is 75 and that is incidence of tax. Section 68, 69, 69A,69B, 69C and 69D are covered for offering tax.
f.Section 271AAB is also proposed to be amended. Under existing law, penalty is imposable 10% of income, if admitted, returned and taxes are paid. In case of non admission 20% of income but returned and taxes are paid. Under the proposed amendment 30% of income, if admitted, returned and taxes are paid and other case 60% of income in any case.
g.Government proposed to introduce a new chapter IXA under head Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojna , 2016. The feature of this yojana are as under;-
1.undisclosed income in the form of cash and bank deposit can be declared by way of payment of 30% tax on undisclosed income +33% surcharge of tax and 10% penalty on declared income.
2.The aggregate of all three items is around 50% of income.
3.Apart form above 25% is to be deposited in interest free deposit scheme for four years known as lock period.
4.Thus 25% shall remain in hand for ultimate use at time of declaration and 25% will be received after 4 years.
5.The scheme is to be notified after the passage of the Bill in parliament and Presidential assent.
6.The amount of tax, penalty, surcharge and the deposit in the Pradhan Mantri Garib kalyan Deposit Yojna 2016 shall be made before the filing declaration of income under this scheme.
7.The other features of this scheme is almost similar to the recent Income discloser Scheme 2016.
h.People are trying to convert their unaccounted money to accounted money. Before doing this exercise, it is advised to taxpayer to take in to consider various legal judgments as stated as under :-
i.
The assessee can also take shelter of various legal pronouncements on the issue of share capital- CIT v. Lovely Exports P. Ltd. [2008] 299 ITR 268, CIT v. Divine Leasing and Finance Ltd. [2008] 299 ITR 268, CIT v. Geceral Exports and Credits Ltd. [2008] 299 ITR 268, CIT v. Orissa Corporation P. Ltd. [1986] 159 ITR 78 (SC), CIT v. Stellar Investment Ltd. [1991] 192 ITR 287, to support his case. But it may be seen that all these cases deal primary with the extent of onus to be discharged by the assessee and department and when the onus shifts to the other party. None of these cases deal with the present situation, where live and pulsating evidence seized from Jain brothers is linked to the credit entries recorded in the books of account, showing that credit entries could not stand the test of genuineness within the meaning of section 68 of Income Tax Act, 1961. Not only that, they also strongly support a conclusion of culpable mind attempting to bring black money into regular channels. It is relevant to quote the observation of the Hon’ble Delhi High Court in the case of CIT Vs Divine Leasing and Finance Ltd.
“There cannot be two opinions on the aspect that the precarious practice of conversion of unaccounted maney through the masquerade or channel of investment in the share capital of company must be excoriated by the revenue.”
VI.Legal pronouncement
a.Source of availability is to be proved. While depositing cash a due care is needed. The principle of preponderance of possibilities is not unknown to the department and now it is well established by the apex court in the matter of CIT v Mohankala (2007) 291 ITR 278 . The following legal pronouncement on the issue availability of cash and deposited in the bank by various high courts are also important and in favor of assessee as under :-
i.Narendra G.Goradia v. CIT 234 ITR 571 (BOM)
ii.CIT v Associated transport (P) Ltd 212 ITR (cal)
iii.Bat velbai v. CIT (1963) 49 ITR 130
iv.Laxmi rice mills v CIT 97 ITR 258
VII.A brief analysis on penal provision of section 270A
Section 270A provides penal provision liable for penalty on account of under reporting and misreporting. Under sub section 6 and sub section 9 penalty is imposibe by 50% and 200% of tax respectively of tax. Sub-section (2) provides the circumstances in which a person can be considered to have under-reported his income as under :-
a.If his income assessed is greater than the income determined in the return processed u/s 143(1)(a). It is a case where return of income has been filed.
b.In case where no return has been furnished, the income assessed is more than the maximum amount not chargeable to tax.
c.In case of re-assessment, if income reassessed is more that the income assessed or reassessed immediately before reassessment.
d.(a), (e) and (f) related to the cases where income is assessable under the provisions of section(s) 115JB or 115JC.
e.Where income assessed or reassessed has the effect of reducing the loss or converting such loss into income.
In view of above provision it is clear that if the deposit of specified notes are made by a person in his bank account and the same has been returned in the income as income assessable under the head “income from the sources” and on which income tax has been paid as per provision of section 115BBE, than no penalty under section 271A would be leviable on such deposit as being be no under-reporting of the income in accordance with provision of sub-section (2) of section 270A ,which is condition precedent for levy of penalty under the provision of section 270A (1). There is no change in this section, hence scope for declaring income under 44AD and under 56.
VIII.Amendment in Income Tax Act with retrospective effect
Assurance was given by Finance Minister that no retrospective amendment will take place but it appears this proposed amendment is not being considered as retrospective amendment being amendment in the financial year itself, although Finance Act determine the liability for the entire financial year. However since amendment is moved in parliament and more over it is also supported by apex court decision in the matter of Pyare Lal vs M.D J&K Industries AIR 1989 SC 184 held that “It is the basic principle of natural justice that no one can be penalized on the ground of a conduct which was not penal on the day it was committed.”However, it is one of the settled principles that because of plenry powers, the legislature, if it is otherwise competent to legislate on a topic, can pass legislations prospectively as well as retrospectively subject to several recognized limitations. The first is the requirement that the words used must expressly provide or clearly imply retrospective operation. The second is that the retrospectivity must be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional. The followings are further following important pronouncements:-
a.National Agricultural Co-operative Marketing Federation of Indian Ltd. Vs. UOI (2003) 260 ITR 548 (SC).
b.Hitendra Vishnu Thakur vs. State of Maharashtra. AIR 1994 SC 2623, 2641 (SC). In this case their lordships after examining the several decisions on retrospective operation of a statute have observed as under:-
“From the law settled by this Court in various cases, the illustrative though not exhaustive, principles which emerge with regard to the ambit and scope of an Amending Act and its retrospective operation may be called out as follows:
A Statue which effects substantive rights is presumed to be prospective in operation, unless made retrospective, either expressly or by necessary intendment, whereas a Statute which merely affects procedure, unless such a construction is texturally impossible, is presumed to be retrospective in its application, should not be given an extended meaning, and should be strictly confined to its clearly defined limits.
i.Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right to appeal, even though remedial, is substantive in nature.
ii.Every litigant has a vested right in substantive law, but no such right exists in procedural law.
iii.A procedural Statute should nor generally speaking be applied retrospectively. Where the result would be create new disabilities or obligations, or to impose new duties in respect or transactions already accomplished.
iv.A Statute which not only changes in procedure but also created a new rights and liabilities, shall be construed to be prospective in operation, unless otherwise provided, either expressly or by necessary implication.”
v.on the subject of misuse of the provision by the taxpayer by way depositing cash showing accumulated cash income as current year income. The decision of supreme court decided in favor of revenue in the case of Padmasundra Rao V. State of Tamil Nadu 255 ITR 0147 (SC) (five judges). It is observed that the courts only interpret law and cannot legislate. If a provision of law is misused and subjected to abuse of the process of law, It is for the legislature to amend, modify or repeal it, if deemed necessary. It is well settled principle in law that the court cannot read anything into a statutory provision, which is plain and unambiguous. A statute is an addict of the legislative intent. The language employed in the statute is determinative factor of legislative intent. The legislative casus omissus cannot be supplied by the court except in the case of clear necessity and when reasons for it found in the four corners of the statute itself but at the same time casus omissus should not be readily inferred and for that purpose all the part of the statute or section must be construed together and every clause of a section should be construed with reference to the context and other causes thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute. This would be more so if literal construction of a particular clause leads to manifestly absurd or anomalous results which could not have been intended by the legislature.
vi.On the subject cash credit entries etc. the legal pronouncements are very clear and it is established tainted money shall always be tainted.
vii.In view opinion expressed in para v and vi above, Finance Minister has moved amendment though The Taxation Laws (Second Amendment ) Bill 2016
IX.Applicability of Prevention Money Laundering Act
There is no applicability of PMLA Act here being immunity is granted for the unclosed income, which is on account of unpaid tax. The applicability PLMA will only on the income, which is generated through ill-leagal means. Hence this topic is not dealt with in detail here.