Tax Authorities Divided as Realty Players Claim Cash Deals as Loan
Developers’ loan claim, without satisfactory explanation on transaction, aimed at reducing tax liability
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.”