All salaried and other non-corporate tax payers have to file their income tax returns by July 31, 06. The income tax return is for the assessment year (AY) 2006-07 or financial year 2005-06. These returns can be filed using Form 2E also known as Naya Saral till July 31, 06. After this date, a taxpayer can use the new Form 2F to file his returns. This form has generated considerable controversy mainly because the taxpayer is also required to provide a cash flow statement. The income tax department has, however, made the cash flow statement optional for AY 06-07. This means a non-corporate assessee can file a return in Form 2F without the cash flow statement. ET in the classroom demystifies the cash flow statement and the purpose for which it has been introduced.
What is form 2F ?
Form 2F is the new income tax return form for a salaried individual and Hindu Undivided Family (HUF). The assessee should not have any business income or agricultural income or capital gains (except long-term capital gains from transactions on which he pays a securities transaction tax). He should not own more than one house or claim relief on arrears or salary advance. This form nine schedules. Schedule 5 is the cash flow statement. No annexures need to be attached to this form.
What is a cash flow statement?
The cash flow statement is a summary of income, receipts such as gifts, loans etc, investments and expenditure of the tax payer during the year. In technical parlance, these are known as incomings and outgoings. The assessee has to give his cash balance and balance in banks as on April 1, 2005. The cash balance and bank balances of other family members have to be given in case their income is included in the assessees income.
On the expenditure side, the individual has to indicate investments made during the year. He has to declare deductions claimed under Chapter VI A of the Income Tax Act. This will include, say, income tax deduction on contributions made to the public provident fund (PPF), expenditure on school fees and so on. The amounts invested in immovable property, vehicles, jewellery, shares, units and other financial instruments also have to be included in the statement. Any other expenditure has to be accounted as other outgoings. A detailed break up of each item of expenditure or investment is not required. However, the aggregate amount received during the year has to match the aggregate amount spent at the end of the year.
What is the purpose of a cash flow statement?
The cash flow statement is essentially meant to check whether the taxpayer has made investments and met all expenses from his earnings and receipts during the year. If his expenses exceed receipts, then there is a possiblity that these investments could have been funded from undeclared sources. This is what tax authorities want to know. Simply put, the assets owned by the taxpayer should not be dis-proportionate to his known sources of income. If it is so, then he is evading taxes.
Can the cash flow statement be matched with the annual information returns (AIR) collected from third party sources?
Yes. The annual information returns (AIR) are filed by third parties listing out certain high-value transactions of individuals. Banks, for instance, provide a list of their customers with cash deposits exceeding Rs 10 lakhs. Credit card companies furnish a list of their clients who run yearly bills of Rs 2 lakh or more.
The PAN numbers of individuals making these high-value investments are furnished in these returns. The PAN wise data base enables tax authorities to match the information available in the AIR with income tax returns of the individual.
A cash flow statement will make the task easier as it contains a summary of receipts and investments made by the tax payer.
If total investments indicated in the cash-flow statement are lower than the aggregate investment collected through the AIR, then tax authorities can nail the tax payer for having undisclosed income.