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Beware: Taxman is watching your big spends
May, 07th 2007

The income tax department has made it mandatory for specified "persons" such as banks, mutual funds, companies and financial institutions to file Annual Information Returns (AIR) in respect of big spends on notified transactions.

As per the provisions contained in Rule 114(E) of the Income-tax Rules, 1962 certain transactions above specified values have now to be reported to the Income-tax department.

To this end, Finance Minister Chidambaram has instituted the system of AIR, i.e. Annual Information Returns. As per the AIR system, banks, mutual funds, companies, financial institutions, etc., as the case may be have to report the following transactions to the Income Tax Department:

Cash deposits aggregating Rs 10 lakh (Rs 1 million) or more in a year in any savings account of a person maintained in that bank.

Payments made by any person against bills raised in respect of a credit card issued to that person, aggregating to Rs 2 lakh (Rs 200,000) or more in the year.

Receipt from any person of an amount of Rs 2 lakh (Rs 200,000) or more by a mutual fund for acquiring units of that fund.

Receipt from any person of an amount of Rs 5 lakh (Rs 500,000) or more for acquiring bonds or debentures issued by a company or a financial institution.

Receipt by a company from any person of an amount of Rs 1 lakh (Rs 100,000) or more for acquiring shares issued by the company.

Purchase or sale by any person of immovable property valued at Rs 30 lakh (Rs 3 million) or more.

Receipt from any person of an amount or amounts aggregating to Rs 5 lakh or more in a year for bonds issued by the Reserve Bank of India.

The object of AIR is to identify large financial transactions in respect of certain items. Once the AIRs are submitted to the Tax Department by different categories of persons who are liable to send these returns, the I T Department might like to verify these financial transactions with reference to the tax returns filed by the taxpayer and assets belonging to him/her.

How to keep clear of tax tangles

Thus, as a result of the provision for filing AIR in respect of the specified financial transactions, details will be readily available with the Income-tax Department, together with the name, address and PAN number of the assessee.

These details will be checked by the Tax Department to find out any possible utilization of unaccounted money by the taxpayer. To avoid any problem at a later stage, it is always safe to enclose some additional details with your income tax return, which will help do away with a routine issue of notice to enquire about any investment you might have made. Likewise, this would minimize the chances of scrutiny of your tax return.

Typically, most individual taxpayers do not file balance sheets with their income-tax returns. While it is true that this is not a legal requirement, but keeping in view the new concept of AIR it is suggested that as far as practicable, individual taxpayers should file a balance sheet along with their Income-Tax Returns.

Preparation of such a balance sheet is a simple and easy affair. In case the balance-sheet is enclosed with the income-tax return, even if there is a departmental enquiry about the source of any of the reported financial transactions entered into during the year, the Tax Department can very easily verify the veracity of such transactions at a glance with the Income-tax return of the assessee.

So, beware, and take special care in the case of such investments or expenditure. In a nutshell, make all your investments out of proved sources of income and established wealth so that you don't have to face the music of scrutiny or questioning by the IT Department at a later stage.

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