Is Form 2F a test in book keeping?

While the govt aims to use information given in Form 2F to avoid 'intrusive investigation', the taxpayer has to stretch his accountancy skills.

Kanu H Doshi,
Chartered Accountant

Practical experience shows that the new information will be used as an instrument of harassment for the gullible salaried class

The Central Board of Direct Taxes (CBDT) has introduced Form 2F as a new form of return of income for individuals and Hindu undivided family (HUF) having salary income but not having any business income or agricultural income or capital gains filed after July 31, 2006. Form 2F replaces the existing Form 2E, also called Naya Saral. Form 2E will continue to be valid for filing returns of income up to July 31, 2006.

Form 2F has four pages in two parts and nine schedules. In these pages lie the turmoil for the harassed salaried taxpayer. The new form, in addition to details of income, requires disclosure of entire family finances.

Part A calls for factual information by way of name, status, addresses, telephone numbers, date of birth and PAN. The taxpayer will now have to also furnish information like his/her first return of income; number of dependents; name and address of the employer, whether government or otherwise; outgoings, whether in cash or cheque; cash and bank balances on March 31.

Part B calls for information on income under various heads and tax paid on such income. Schedule 5 is the controversial one inasmuch as it calls for an accounting capability of the taxpayer since it is virtually the cash flow statement requiring details like opening cash and bank balance on the first day of the financial year, including those whose income is clubbed with the taxpayer's, income received from all sources except exempt income, loans and gifts received etc.

On the outgoings side, details of all investments and expenses are to be stated, including household expenses. Above all, the taxpayer has to tally the opening and closing balances by adding the inflows and deducting the outflows.

If the taxpayer has more than one bank account, he will have to collate details from all the accounts. In effect, to give the data, he will have to prepare a receipts and a payments account.

The intention of the press note of CBDT says, "The main advantage of furnishing the cash flow statement is that the information collected from third-party sources through AIR can be verified with outgoings during the year. Therefore, this would substantially reduce the probability of scrutiny assessment or any other kind of intrusive investigation." However, in my view, practical experience shows that the net effect of the new information will be exactly the opposite and it will be used as an instrument of harassment of the simple and gullible salaried class. Ironically, information called for in the new form is not to be provided by taxpayers having business income and or capital gains, since they have to use Form 2, which has no such schedules.

Sanjiv K Chaudhary,
Partner, RSM & Co Chartered Accountants

Form 2F is only for this year and will be renotified for the next year with some modifications based on review and feedback

Form 2F has generated a lot of debate since it was notified by the CBDT. The question is "" Is Form 2F too complex? The answer could have been in the negative but for schedule 5, which requires the taxpayer to make a detailed cash flow statement for the year.

Looking first at the brighter side, the existing Saral form (Form 2E) can be used for filing returns up to July 31, 2006. It is optional to give details in respect of the cash flow statement for the year ending March 31, 2006. The form specifies that the taxpayer should not enclose any statement showing computation of income, TDS certificates, proof of payment of taxes etc. However, the taxpayer should retain these documents for verification by the authorities, if called for.

It is pertinent to note that the above changes are made in the New Saral form and not in Section 139(9) of the Income Tax Act, which still requires the assessee to file computation of income, TDS certificates etc. along with the return of income.

Coming back to the detailed cash flow statement, the taxpayer has to give details starting with opening balance with banks and cash in hand, details of exempt receipts, maturity of insurance policies, loans taken or gifts received etc. Also, details have to be given in respect of outgoings like household expenses, investments in respect of deduction claimed, etc. The following are some of the complications/ questions that remain unanswered -

1. If the taxpayer has more than one bank account, would a separate cash flow statement be required for each bank account or a consolidated statement would be sufficient?

2. In case of minor children whose income is clubbed with that of the taxpayer, whether similar details will have to be looked into?

3. In case of joint bank accounts of a husband and wife, how the two will be bifurcated to report their respective cash flows?

4. How should one deal with a situation when income of the spouse (from gifts given to her) is to be clubbed and a separate return is also filed for other income?

The salaried class will find it cumbersome and difficult to prepare this cash flow statement without professional help. It has been clarified that the existing Form 2F is only for this year and will be renotified for 2007-08 with some modifications based on review and feedback.

It is time that the CBDT concentrates on people who are not filing tax returns and where the potential of tax avoidance is greater, rather than making things difficult for the most honest category of taxpayers where the tax is already deducted at source.