Demonetization – What the Courts have to say?

The Government has decided to discontinue the legal tender character of ‘Higher Denomination Bank Notes’ (HDN) of Rs 500 and Rs 1,000 with effect from November 9, 2016.In other words, such notes will not be legal tenders from midnight of November 8, 2016. Old HDN can be exchanged or deposited in banks till December 30, 2016.After announcing such demonetization, people have started worrying about the tax implications even in the case of genuine savings deposited into the bank account.In this article, I intend to cover some of the key principles, which have emerged from various judicial precedents that would help tax payers with genuine savings deposited into their bank accounts.

Would penalty apply in the case of all deposits made?

The Supreme Court in a judgment pronounced in 1963 held that as long as an assessee is able to substantiate that the cash so deposited formed part of his cash balance with the source of such deposit being well explained, the question of treating such deposit as undisclosed income would not arise. Hence, in the current scenario, as long as a taxpayer is able to explain the reasons for maintaining such cash along with the source of such money, he would be well insulated.

Additionally, based on the current language of the penalty provisions, unless the Revenue authorities are clearly able to establish a “willful attempt” to evade taxes, such impact would not arise. Further, one could also argue that as long as the income reported by the taxpayer and the assessed income is the same, consequences of penalty and prosecution would not arise.

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