With the end of December, the period for completion of income-tax assessments for the fiscal year ended 31 March 2008 comes to an end. If you have been subjected to a scrutiny income-tax assessment recently, you would have definitely faced questions by the tax officers regarding information in the tax system regarding certain financial transactions carried out by you during the year, and as to how these are reflected in your bank statements or accounts.
Collation of information
This information is now collected by the income-tax department from various sources through annual information returns (AIR). The information is collected from the registrar/sub-registrar regarding purchase or sale of immovable property of value exceeding Rs 30 lakh; from mutual funds in relation to purchase of mutual fund units exceeding Rs 2 lakh in a year; from companies in relation to payments exceeding Rs 1 lakh received in a year for public or rights issue of shares; from credit card issuers for payments made in settlement of credit card bills exceeding Rs 2 lakh in a year; and from companies/institutions (including Reserve Bank of India) in relation to payments exceeding Rs 5 lakh received during the year for issue of bonds or debentures. All this information is filed by the relevant entity in the form of an AIR giving the relevant details of persons who have carried out such transactions along with their permanent account number (PAN).
All this information, along with information of income and tax deducted thereon as disclosed in the tax deducted at source (TDS) returns filed by various entities is aggregated in the income-tax department’s system using PAN. Therefore, by looking at all transactions in relation to your PAN, the details of all such financial transactions carried out by you would be immediately available. Further, when you file your tax return, there is a requirement in the form to disclose such transactions, besides disclosing your income from various sources. The information as disclosed in your tax return is then cross verified with the information gathered from the system, and if there is a mismatch, you have to explain the difference.
Illustration: Shyamal Banerjee/Mint
Practical problems in verifying information
In theory, the system is excellent and should result in easy detection of tax evasion. However, in practice, the system does result in harassment of honest taxpayers as well.
Mistakes in data entry by taxpayer: It is quite common to find that there are mistakes made while entering the PAN or the amount by the person filing AIR or TDS returns, and you are then asked to explain transactions that are not yours but of some other person or for an incorrect amount. You then have to run around trying to get clarification from the person who has filed the AIR or TDS return confirming that he has made a mistake. Often, the difficulty is that you may not even know that person and he may not respond to your request.
Mistakes in data entry by income-tax department: At times, there are mistakes in data entry at the income-tax department. For instance, in 2007-08, Prudential ICICI Mutual Fund changed its name to ICICI Prudential Mutual Fund. Investors in that mutual fund during that year were asked to explain identical amount of investments made by them on identical dates in both Prudential ICICI Mutual Fund as well as ICICI Prudential Mutual Fund. Ultimately, a certificate had to be obtained from the mutual fund clarifying that there was just one investment on that date and not two.
Joint holders: Another major problem faced is that the full value of the transaction is reflected in the PAN of each of the joint holders, where the investments or property are held in joint names. Generally, the names of joint holders are included for mere convenience and the transactions are reflected in the income-tax returns of the first holder. Unfortunately, each of the joint holders has to explain in his income-tax assessment as to how the transaction relates to the first holder, and prove that the first holder has reflected this transaction in his return of income and that he has made or received the entire payment.
It is high time that the tax authorities consider streamlining the system so that the verification is carried out in relation to the first holder only. Only if the first holder claims that the entire transaction or part of it does not belong to him but to the joint holders should cross verification with the income-tax returns of the joint holders be carried out.
Similarly, where the taxpayer denies that the transaction relates to him or states that the information is incorrect, the onus should be on the tax authorities to get the details of the relevant information from the concerned person who has filed the AIR or TDS return. Only then should the taxpayer be responsible for any further clarification. This will ensure that tax evasion is checked without undue harassment of honest taxpayers. I am sure that most taxpayers will appreciate this small simple change far more than the entire complicated exercise of introduction of a new Direct Taxes Code.
Gautam Nayak is a chartered accountant.