Frequent large cash deposits, withdrawals can lead to tax scrutiny

Frequent deposits and withdrawals of large amounts can lead to an income-tax (I-T) notice during assessment of return. Recently, when a tax official scrutinised the details of a taxpayer, he found the taxpayer had frequent deposits of large amounts — ranging from Rs 2.11 lakh to Rs 98 lakh. The total cash deposited in different banks totalled Rs 1.35 crore. Despite all the required documents to prove the genuineness of the transactions, the official was not satisfied. He treated the deposits as unaccounted sources of money, and added it to the income of the taxpayer under the head — income from other sources.

The taxpayer approached the I-T tribunal, which ruled in her favour as she had the documents to back her claims. “While the taxpayer was prudent to maintain all documents, it’s not the case with many of us. It’s always better to deal through banking channels, instead of using cash as the end-user can be clearly established,” says Arvind Rao, a chartered accountant and founder of Arvind Rao & Associates.

Tax experts say frequent cash transactions usually raise red flags with the department. It’s not uncommon for them to send a notice in such cases, and ask for a detailed explanation. “The onus of proving the source of the funds lies on the taxpayer. And, if the officer thinks the funds are unaccounted, he/she will most likely pass an order against the taxpayer,” adds Rao.

But what are large-cash transactions? “It is mandatory for all banks to report cash deposits of Rs 10 lakh or more in a financial year in a bank account. This is done through the annual information return, which captures high-value cash transactions,” says Naveen Wadhwa, a chartered accountant with Taxmann.com. In such cases, the department sends a notice seeking explanation.

The government has also increased scrutiny on transactions to curb black money. An individual is not allowed to carry any transaction above Rs 2 lakh in cash. For property purchase and loans, the cap is Rs 20,000.

Beyond these limits, the officers also see the pattern of the deposits and withdrawal. When a person purchases a property, it’s common for an officer to ask the taxpayer for his bank statement. If there are large withdrawals in the same year, the officer would ask to file a detailed cash flow statement. Such pattern establishes that the taxpayer could have paid a portion of the consideration for the property in cash. It’s not just the deposit but also the withdrawals that need explanation, according to tax experts.

In the above case, the officer looked at both the transactions. He suspected the money was unaccounted as the taxpayer had enough cash on hand, and didn’t need additional money. But as the tax officer could not prove the funds were unaccounted, the taxpayer got relief. The tribunal observed that mere doubt and suspicion on any transaction could not be a valid basis to treat genuine transactions as non-genuine. Also, there is no law which prevents the citizens from frequently withdrawing and depositing their own money.