Tax Au­thor­i­ties Divided as Re­alty Play­ers Claim Cash Deals as Loan

De­vel­op­ers’ loan claim, with­out sat­is­fac­tory ex­pla­na­tion on trans­ac­tion, aimed at re­duc­ing tax li­a­bil­ity

The Economic Times - - Companies & Economy - Su­gata.Ghosh @times­group.com

Mum­bai: Tax au­thor­i­ties in In­dia are split down the mid­dle on how to treat cash deals of builders — cash re­ceived from home buy­ers, cash used to buy land, and most im­por­tantly, cash shown as ‘loans’ taken for con­struc­tion from un­named mon­ey­bags.

In many cases, builders and de­vel­op­ers are es­cap­ing tax and penalty by show­ing cash as ‘loans’ with­out ad­e­quately sub­stan­ti­at­ing the trans­ac­tion. In Ma­ha­rash­tra alone, cash ‘loans’ worth about ₹ 10,000 crore are await­ing ver­dict from the lo­cal benches of the In­come Tax Set­tle­ment Com­mis­sion (ITSC). The mag­ni­tude of such cash loans could be ₹ 50,000 crore for the en­tire coun­try, ac­cord­ing to se­nior tax of­fi­cials.

“Dif­fer­ent ITSC benches are tak­ing dif­fer­ent stands. In re­cent months, one bench in Mum­bai held that since the lender (to the builders) did not con­firm, the trans­ac­tion can­not be al­lowed as loan. The bench, there­fore, ruled that tax and penalty should be im­posed on the amount. But in an­other case, the other bench in Mum­bai al­lowed cash in­flow to a builder as loan as it felt no con­fir­ma­tion from the lender is nec­es­sary — only his name and PAN is enough. Such cash loans have been hap­pen­ing for years and builders are a pow­er­ful lobby... A spe­cial bench was set up to look into the is­sue of cash loans,” a top tax of­fi­cial told ET.

ITSC is an al­ter­na­tive dis­pute res­o­lu­tion fo­rum to set­tle in­come and wealth tax mat­ters in­volv­ing con­tentious is­sues be­tween tax­pay­ers and the I-T de­part­ment. Ap­pli­cants ap­proach the com­mis­sion be­fore the as­sess­ing offi- cers pass an or­der; they can also come for­ward to dis­close ad­di­tional in­come in the course of pro­ceed­ing. Though all kinds of as­sessees move ITSC, a pre­dom­i­nant num­ber of ap­pli­cants are builders and de­vel­op­ers whose search and sur­vey by tax of­fi­cials had re­vealed ev­i­dence of re­ceipts as well as bor­row­ing and lend­ing in cash. “Some builders of­fer smaller cash loans as in­come in their ap­pli­ca­tions be­fore the com­mis­sion. But in many cases, par­tic­u­larly for large loans of ₹ 50 crore to as high as over ₹ 1000 crore, they take a plea that since th­ese cash loans are sup­ported by seized doc­u­men­tary ev­i­dence, they can­not be treated as ‘in­come’ and it is not the re­spon­si­bil­ity of builders to prove that th­ese are cash loans..” said an of­fi­cial from the set­tle­ment com­mis­sion.

“It’s a tricky sit­u­a­tion. Such a plea can be made to even laun­der money. What stops a builder to serve as cash ware­house for politi­cians and keep this cash out of the tax net by le­git­imis­ing it as loan en­tries or fake re­ceipts show­ing cash in­flow?” said the of­fi­cial.

Con­sid­er­ing the dif­fer­ences of opin­ion on the is­sue, a spe­cial bench was con­sti­tuted by the chair­man of ITSC in March 2018 to ad­ju­di­cate on the point whether cash loans have to un­dergo the sat­is­fac­tory ex­pla­na­tion (as pro­vided in section 68 of the In­come Tax Act) or they can be ac­cepted as gen­uine sim­ply on the ba­sis of the seized doc­u­ment. In May 2018, the spe­cial bench stated that while cash loans need to be sub­stan­ti­ated, each bench was al­lowed to take a view as to what con­sti­tutes “sat­is­fac­tory ex­pla­na­tion.” The am­bi­gu­ity has opened the scope of ma­nip­u­la­tion. The con­fir­ma­tion from lenders are not sub­mit­ted by builders for the ob­vi­ous rea­sons that th­ese cash loans have not been ad­vanced from ac­counted funds and they rep­re­sent black money in the hands of lenders. Thus, by not in­sist­ing on con­fir­ma­tion, th­ese ‘loans’ are nei­ther be­ing taxed in the hands of lenders nor in the hands of bor­row­ing builders.

“The I-T de­part­ment does not al­ways pur­sue si­mul­ta­ne­ous ac­tion against such lenders or in­sist be­fore the com­mis­sion that th­ese cash loans, be­ing un­sub­stan­ti­ated, should be treated as in­come in the hands of de­vel­op­ers. I tend to be­lieve that de­spite the crack­down on black money, one of the rea­sons cash con­tin­ues to flour­ish post de­mon­eti­sa­tion is due to the absence of uni­for­mity in tax­ing cash loans which can be huge and spread all over the coun­try,” said the ITSC of­fi­cial.

Some in the tax sys­tem strongly be­lieve that tax au­thor­ity CBDT should is­sue a cir­cu­lar, come out with some stan­dard op­er­at­ing pro­ce­dures for of­fi­cials, or gov­ern­ment should con­sider amend­ing section 68 (deal­ing with un­ex­plained credit) of the I-T Act to deal with tax leak through cash loans. As per th­ese of­fi­cials, the scheme of al­ter­na­tive dis­pute res­o­lu­tion is be­ing mis­used by many builders who file untrue pe­ti­tions be­fore ITSC benches. “As per section 271D of the Act un­der which cash loans of ₹ 20,000 can be taxed is rarely used, let­ting many builders use un­ac­counted cash in the garb of loans,” said a source.

As per se­nior char­tered ac­coun­tant Dilip Lakhani, “Many as­sessees re­ceiv­ing gen­uine loans by cheque, which are re­flected in their reg­u­lar books of ac­counts, are told by as­sess­ing of­fi­cers to es­tab­lish the iden­tity, credit wor­thi­ness and gen­uine­ness of trans­ac­tion. Of­ten their cases are re­jected on flimsy grounds and tax is de­manded at 60%. In such an en­vi­ron­ment, it is un­fair to ac­cept the claim of a builder who has no proof that a cash in­flow is ac­tu­ally a loan.” Per­haps, only when the in­come dis­closed is suf­fi­ciently large com­pared to the loan, the as­sessee’s claim that the said loan amount is an ap­pli­ca­tion of in­come may have a merit as a per­son can­not be taxed twice.”

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