I-T notices: High-value expenses must sync with bank withdrawals, e-txn

The Income-Tax (I-T) department recently issued notices to high-income individuals whose bank accounts reflect unusually low withdrawals. According to media reports, the department sought detailed breakdown of their monthly expenditures to identify possible tax evasion.

 

Why the scrutiny?

 

Tax experts say that when declared income is high but bank withdrawals are minimal, it raises concerns about unreported cash transactions.

 

“Such discrepancies may suggest that individuals are engaging in cash-based transactions that are not reflected in their bank statements,” says Suresh Surana, a Mumbai-based chartered accountant.

 

There is also the possibility that individuals may be engaging in digital transactions through undisclosed accounts.

 

Previously, scrutiny resulted from tracking undisclosed income or unexplained expenditure.

 

“Nowadays, the department has found a third way to identify undisclosed income, by tracking possible cash expenditure that is not supported by sufficient cash withdrawal from your bank account,” says Preeti Sharma, partner, global employer services, tax and regulatory services, BDO India.

 

Red flags for tax notices

 

Sharma highlights spending patterns that may trigger scrutiny: Paying car EMIs without corresponding fuel expenses that are reflected in cash withdrawals or online payment; booking airline tickets for a holiday but having record of cash withdrawals or online payments for hotel bills; making foreign remittances for education fee but not for living expenses.

 

Purchase of high-value items without corresponding withdrawals or online transactions can also arouse suspicion.

 

“Red flags that could trigger a tax notice include spending patterns that do not match bank withdrawals, lavish expenditures on luxury items, real estate, or high-end gadgets that are inconsistent with declared income,” says Shefali Mudra, tax expert at ClearTax.

 

How to respond to a tax notice

 

Taxpayers must respond promptly with a detailed reply, supported by documentation that justifies income and expenditures. Queries from the assessing officer (AO) must be addressed satisfactorily.

 

“If the replies are not satisfactory or do not justify the expenses, there could be an addition to the person’s taxable income, along with interest and penalty,” says Gaurav Jain, partner, direct tax, Forvis Mazars in India.

 

Failure to explain discrepancies can at times have severe consequences. “Penalties may include fines of up to 200 per cent of the amount of tax payable on underreported income. In case of wilful concealment or evasion, further legal actions, including audits of past returns and potential prosecution, could follow,” says Mudra. In extreme cases, even imprisonment is possible.

 

Avoiding tax scrutiny

 

High-income individuals can avoid unnecessary scrutiny by filing accurate and timely tax returns.

 

“Delayed or inaccurate filings can trigger scrutiny,” says Surana.

 

Taxpayers must disclose all income streams, including tax-exempt earnings, as concealing income sources can attract a penalty of 50-200 per cent.

 

“Ensure there is no discrepancy between the income reported in Form 26AS, annual information statement (AIS), Form 16, and the tax return filed,” says Sharma. She advises against making high-value purchases without corresponding withdrawals or electronic transactions.

 

Jain recommends that high-income earners maintain a statement of affairs for themselves and their family members based on bank statements.

 

“This could justify their and their entire family’s withdrawals. A qualified chartered accountant can come in handy while filing returns of income,” he says.

 

Surana suggests that taxpayers rectify missed or misreported income by filing a revised, belated, or updated return. 

Maintain records to handle tax notices 

Income proof: Keep TDS certificates (Form 16 for salaried, Form 16A for non-salaried), salary slips, employment contracts, bank statements, rental income receipts, and capital gains statements

 

Tax documents: Keep past Income Tax Return (ITR) filings, Form 26AS, Annual Information Statement (AIS), and Taxpayer Information Summary (TIS)

 

Investment records: Retain MF, stock, FD statements, property purchase or sale deeds, payment receipts, and loan documents 

Expense & deduction proofs: Store bills for medical, education, home renovation expenses, and tax deduction documents under Sections 80C, 80D, and 80E. Keep rent receipts and work-related expense logs

 

Digital and cash transactions: Preserve credit/debit card statements, UPI, mobile wallet, net banking records