ITD defines guidelines for verification of suspicious bank accounts

In post-demonetisation India, things are a-changin’. Not only have the banks been instructed to levy charges on cash transactions above a certain limit, the RBI’s mandate to investigate unusual cash transactions will also be followed rigorously. The Income Tax Department has noticed several malpractices in cash deposits of 500 and 1000 rupee notes made before December 31st. A recent circular handed out by the Ministry Of Finance describes the SOP (Standard Operating Procedure) for Assessing Officers (AOs) while handling such cases.

So, who falls under scrutiny now?

Here’s a summary of the different scenarios that may warrant verification:

1.Cash deposited from earlier income or savings


  • Individuals (except minors) who have deposited cash up to Rs. 2.5 lakh have nothing to worry about. For senior citizens, this limit is Rs. 5 lakh. The income tax department will let these off the hook assuming these deposits are made from household savings, cash withdrawals, earlier income etc.
  • For individuals without a business income, any deposits above the mentioned limits will be verified by the AOs.
  • Businesses whose books of accounts show that the total savings is more than the closing cash balance as of 31st March 2016 (AY 2016-17) will also be investigated.
  • Bank accounts suspected of money laundering/tax evasion/entry operations in shell companies will not be given any leeway.

2. Cash out of receipts exempt from tax

  • Any excess cash out of receipts exempt from tax should be in line with earlier returns filed by the same person, or it will call for scrutiny.

3. Cash withdrawn out of bank account

  • Any cash deposits that do not match the suspected person’s bank statements will be called to question, even if the person claims that the cash was withdrawn out of bank account.

4. Cash received from identifiable persons (with PAN)  

  • The PAN details will be sent across to the AO and a verification is required only if the person holding the PAN does not confirm the transaction or if, a gift has been made in cash, which will then be taxed as per law (section 56(2)).

5. Cash received from unidentifiable person

  • If cash transaction or its quantum are not in line with the normal practices of a business, then the AO may ask for verifying documents like monthly sales summary, stock registers etc. To pinpoint instances of backdating of sales or fictitious sales, an AO may look at:
  • Abnormal increase in cash sales/percentage of cash sales during the period of Nov-Dec ‘16, vis a vis earlier periods
  • More than one deposit of demonetised currency late in Dec’16
  • Non-availability of stock or attempts to inflate stock
  • Transfer to bank accounts not used previously

*The same practices for verification will be used in case of donations or other cash receipts.

6. Cash disclosed/to be disclosed under PMGKY

  • Suspected cash transactions can be verified with disclosures made under PMGKY.


The process of verification – An overview

The IT dept. has set up an e-verification portal, which will be synchronised with the internal verification portal. The salient features of this portal are:

  • The online portal helps people under verification submit explanations without visiting the IT office. The PAN holder can view this information under the ‘Compliances’ section, using the ‘Cash Transactions 2016’.
  • Electronic communication will be sent through SMS and e-mail to all taxpayers under verification, hen they submit online responses. Registered taxpayers should ensure their communication details on the portal are correct to receive such communications.
  • While submitting responses, a person can make use of the guides and FAQs section for help.
  • Low risk cases will be closed centrally, while the AOs will take up the other cases.
  • AOs will be able to view all submissions, and ask for further verification proofs electronically as well. All supporting documents (and any additional documents required later) would be submitted online.
  • The AO can close a verification electronically if the information provided by the person check out.

Asking for help

If at any point during the process you find yourself stuck, you can find guidance in the ‘Help’ section of the e-filing portal. You can refer to the FAQs and the document titled ‘Cash Transactions 2016 User Guide’. You can also look at the ‘User Guide On Verification of Cash Transactions on ITBA-AIMS module’ – a document that AOs will be using as guidelines for verification.

Closure and approval

After verification, the AO can close a person’s records with due permission from the concerning authority. For tier 1 cities (Delhi, Mumbai, Bangalore, Kolkata etc.) the relevant authority would be the Addtnl./Joint CIT heading the range (for transactions below 10 lkhs), and for other cases, the AO will refer to the Pr.CIT.

Non compliance and penalty

In cases of non compliance, the AO can take necessary actions such as viewing ITS profile of PAN holders, exercising powers under section 133(6) with the approval of the prescribing authority, survey action under section 133A, and so on wherever needed.  

The AO can also consider initiating penal proceedings under the relevant sections if deemed necessary.

Our view

As you can see, the IT department has decided to take a helpful approach to the whole process of verification. By making the entire task paperless, and adhering to a timeline for each verification, they are trying to ensure that it does not affect a taxpayer’s daily life in any way. The circular from the IT dept. also mentions that the AO should take a holistic view about cash deposits and then form an opinion about the quantum of undisclosed cash. Communications from the AO are supposed to be polite without any element of threat or warning, and the entire process need to be completed online – even telephonic conversations are deterred. Taxpayers who have the fear of the taxman screaming down their doors can now relax – this verification process is a step in the right direction for all of us.

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