DEMONETIZATION OF CURRENCY NOTES - OVERVIEW

The article discusses the government’s move to ban currency in 2016 to curb black money and nab income tax evaders. It further discusses the reasons for the move, the penalties imposed, and the remedies available to citizens after this sudden policy decision by the Modi Government.

Thu Jul 21 2022 | Govt. Agencies and Taxation | Comments (0)

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In a drastic move, on 8th November, 2016 the Prime Minister Mr. Narendra Modi  banned the higher denomination currency so as to curb  black money and the circulation of fake notes. This has given a push towards a digital economy that lowers transaction costs and fosters innovation and growth. The ban is intended  to restrain the flow of counterfeit money and to take aim at terrorist organizations that rely on unaccounted cash. Such a move is expected to help the government to clean up a system which has relied on cash for bribes and tax evasion .

This is the opportunity given by the government of India for the disclosure of the undisclosed income under the Income Declaration Scheme -2016. This declaration under the Scheme has been made in respect of any income or income in the form of investment in any asset, which is located in India or acquired from income which is chargeable under the Income Tax Act, for any assessment year prior to the assessment year 2017-18, for which the declarant has either failed to disclose the income to the concerned authority or failed to file an  Income Tax Return.

REASONS AND LEGAL POWERS BEHIND THE DEMONETISATION

The Reserve Bank of India (RBI) has  the constitutional authority to define money in India. Thus, it  is this power and autonomy of the RBI from the government houses (autonomy is also mentioned in the RBI Act) to define anything that is legal tender. So, a legal tender essentially means what legally cannot be refused by any individual if offered for payment against any debt. In  practical terms , legal tender is basically the acceptable form of payment in an economy (like India). Therefore, such debt may have arisen out of a purchase or otherwise simply a borrowing.

Furthermore, the RBI has the constitutional powers (as per the provisions of RBI Act) to define legal tender. On 8th November 2016, a press note  that was issued by the RBI, which stated  that :”With a view to curb  financing of terrorism through the proceeds of Fake Indian Currency Notes (FICN) and use of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India, and for eliminating Black Money, which casts a long shadow of parallel economy on our real economy, it has been decided to cancel the legal tender character of the High Denomination bank notes of Rs.500 and Rs.1000 denominations issued by RBI till now. This will take effect from the expiry of the 8th November, 2016” 

The value of the note thus is not derived by legislation but by the promise of  the government to pay back the bearer.

PENALTIES FOR UNDISCLOSED INCOME

Any person who deposits the currency notes of denominations of Rs. 500 and Rs. 1000, without being able to explain the source of income, may amount to willful attempt to evade tax and shall attract the penalty as per the provision of the Income Tax Act.

Section 270 A of the Income Tax Act, 1961 deals with the penalty for under reporting and misreporting of income which can range from 50% - 200% of the evaded tax. The penalty of 50% tax is for the cases of the under reporting and 200% is prescribed for the misreporting of the income. 

Section 271 (1) (c) of the Income Tax Act, states that such penalty will be levied for the concealment of the particulars of income or furnishing inaccurate particulars of income.

It is important to mention herein that the Section 270 A of the Act will be applicable on the cases pertaining to financial year 2017-18 onwards, whereas Section 271(1) (c) of the Act will be continued for the cases upto financial year 2016-17.

 Section 276 C of the Act, talks about the penalty which is provided for the evasion of tax under the reported income which exceeds Rs. 2, 50,000 (upto Rs. 2, 50,000 can be deposited in the bank amount as per the notification issued by RBI).  The offence is punishable with the rigorous imprisonment for a term which shall not be less than six months and can extend upto seven years along with the fine. However, for  other cases, imprisonment shall not be less than three months and can extend upto two year along with  fine.

REMEDIES

In the case of Underreporting of Income, as per section 270 AA (2) of the Income Tax, the application containing a full and true disclosure of his income which has not been disclosed, will be filed before the Assessing Officer for the grant of immunity from the penalties under section 270 A (discussed above) and the initiation of the proceedings as stated under Section 276 C or Section 276 CC of the Act. 

The conditions available for the grant of immunity:

The applicant has to pay the tax and interest as per the order of the assessment.

The limitation for filing the grant application is one month from the end of the month in which such order of the assessment was received.

The assessing officer is also required to pass an order with respect to the accepting or rejecting applications within a period of one month from the end of the month in which he has received an application. Such provision shall be applicable from the 1st April 2017.

 Once under  prosecution by the concerned authority, a person can approach the Income Tax Authority under section 279(c) of the Income TaxAct for compounding of the offences but discretion for compounding of offences always lies with the Income Tax department. 

As per Section 245 H of the Act, the Settlement Commission has  the power to grant  immunity from prosecution and penalty from the Income Tax Act. But the right to claim  immunity by approaching the Settlement Commission is not available, in a case where the prosecution for any such offence has been initiated before the filing of the application as under Section 245 C of the Act.

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