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43.  Penalties for Cash Credits or Unproved Loans - HOW to Avoid ?

Where an assessee is not able to prove cash credits or satisfy the assessing officer about the genuineness of a loan appearing in his books of account, assessing officer is entitled to treat the unproved cash credit or loan as the assessee’ s income even if it’s below ` 20,000. Further, in certain situations and circumstances, the assessing officer may even start penalty proceedings against the assessee. This penalty can be levied by the assessing officer by additions to the total income of an assessee for unproved cash credits or loans.

However, there may be certain circumstances, where an assessee may not be able to prove the genuineness of the cash credits or loans to the satisfaction of the Income Tax Officer. Thus, even though the loans or cash credits may be genuine and no concealment of income might be involved, the unfortunate assessee may be subjected to penalty for alleged concealment, merely because the assessing officer has been successful in retaining the additions made by him to the total income of the assessee for unproved cash credits or loans, etc. The penalty for concealment or alleged concealment, under the provisions of Section 271(1)(c) of the Income Tax Act, can be equal to 100% of the income tax sought to be evaded by concealment of income or furnishing of inaccurate particulars of income. The maximum penalty in such a case could be up to 300% of the income tax sought to be evaded by the assessee. An innocent assessee may be subjected to such a penalty in certain situations. But he can avoid this penalty if he follows certain hints in furnishing particulars of his income or an explanation for the cash credits or loans, etc.


To illustrate further, where the assessee is of the opinion that certain items of income are not taxable, he should mention it in the return of income, with an explanatory note. If he takes this precaution and the assessing officer disagrees and makes an addition to the assessee’s total income, he would, however, not be able to impose any penalty under the provisions of Section 271(1)(c), as the benefit of doubt is with the assessee. As the assessee has afready furnished primary particulars along with the necessary explanation why a particular item of income is not taxable, this fact itself would exonerate the assessee from the levy of penalty. Similarly, an assessee might find that certain items of expenditure incurred by him are not allowable under the Income Tax Act. Thus, when there is a reasonable doubt about the allow ability or otherwise of a particular expenditure, the assessee could make a claim for deduction, by adding an explanatory note in a separate statement along with the return of income. If the assessing officer ultimately agrees with the assessee’ s view and wishes to impose any penalty, the latter could escape the penalty by submitting an explanation in response to a show- cause notice that he should not be penalised for the alleged inaccurate particulars of income because he had furnished accurate particulars and. the addition made by the Assessing Officer and sustained by the appellate authority, is because of the debatable nature of the item. Thus, where complete disclosure of income and expenditure in the income tax return and an accompanying statement have been made by an assessee, there would not be any chance of being subjected to a penalty for alleged concealment of income under the provisions of Section 271(1)(c) of the Income Tax Act.

There is a minimum of 10% penalty even where genuine cash, jewellery, etc. is found in a search prior to the last date for filing IT Return, if the same is not reflected in the accounts, etc.

From a practical angle to avoid penalty for unproved loans it is always better to take the loan amount only by account payee cheque. Do obtain a Loan Confirmation letter after the close of the accounting year. It is always better to obtain two copies of the loan confirmation letter and to file one copy of such letter with your Income Tax return together with the Permanent Account Number (PAN) of the person from whom
such loan has been taken. In case the person advancing the loan does not possess PAN, then it is advisable to obtain an explanation about the source of the loan amount. In case the loan amount is large, obtain also a copy of the lender’s bank account from where it can be seen that loan cheque was cleared only after having substantial funds of the lender which would be evident from the copy of such bank statement.

The unexplained cash credits would be taxed at the rate of 30%

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