In a bid to plug revenue leakage and take advantage of the exchange of information between the Income Tax Department and the GST wing, the government has issued a slew of notices to the industry under Section 69C of the Income Tax Act. These notices seek detailed explanations of expenditures incurred by the assessees and the source of funds for these expenditures.
According to sources, “A common practice prevalent in the industry is to book expenditures under various business heads. The tax authorities have now alleged that many of these expenses are unjustified or incorrectly claimed.”
Some sectors receiving these notices include real estate, insurance, metal, cement, and power, according to sources.
“It is understood this could mean over ₹1,000 crore worth of tax dues, which remain unpaid,” sources said. Several industry players have reportedly challenged these notices before various High Courts across India.
With advancements in technology and the use of Artificial Intelligence (AI), there has been increased sharing of information between different tax departments and government agencies, assisted by the Central Economic Intelligence Bureau (CEIB).
These notices have a significant impact, saddling industries with heavy tax liabilities and penalties despite evidence that establishes purchases made by them from suppliers.
Understanding Section 69C:
Section 69C of the Income Tax Act pertains to unexplained expenditure. If a taxpayer cannot explain the source of funds for an expenditure or the legitimacy of the expenditure itself, tax authorities may treat such expenses as income and impose tax accordingly. This section is often invoked in cases where there is suspicion that certain expenditures are either fabricated or inflated to evade taxes.
What experts have to say?
“Based on the information exchanged, recently, the Income Tax Department has been issuing re-assessment notices and passing orders under the Income Tax (IT) laws seeking to dispute and demand tax on the purchases of a recipient assessed. These proceedings are only based on the information pertaining to certain GST investigations undertaken against a supplier and shared by the CEIB—even before the GST issues are adjudicated and have attained finality. The Income Tax Department, without conducting any independent investigations on the evidence available, are rejecting the purchases, treating the same as “unexplained expenditure” under Section 69C of IT laws and imposing tax at a special rate of 60% on the entire purchase value,” says Abhishek A Rastogi, founder of Rastogi Chambers.
Adding, “The fundamental requirement of any income chargeable to tax escaping assessment is not fulfilled in such cases. When the sales of the products procured by the recipient assesses are not in doubt, the rejection of purchases defies logic. The Department’s case of any intentional ‘reduction of profit’ is unsustainable in law and may not stand judicial scrutiny. In any case, the Income Tax Department cannot tax the entire disputed purchases without disputing the corresponding sales. The tax has to be restricted to the extent of the profit element, as only the profit element can be treated as “income” under the scheme of IT laws,” explained Rastogi, who has challenged such re-assessment proceedings before the Bombay High Court on behalf of the recipient assessee.
Sandeep Bhalla, Partner, Dhruva Advisors, said, “Some of the challenges that the industry is facing due to these notices include, say for real estate and insurance sectors, where large transactions and expenditures are common, maintaining a clear audit trail and robust documentation is crucial. Taxpayers need to substantiate their claims with proper invoices, contracts, and other relevant documents to avoid the risk of being subjected to additions under Section 69C. This could include demonstrating the business rationale for expenses and linking them to specific projects or policies.”
Bhalla added, “the industry has to be cautious as notices of this nature may cause concern across the industry, especially when the scope of the inquiry is wide. However, each taxpayer’s response should be based on the merits of the individual case. Those with strong internal controls and proper record-keeping should be in a good position to defend their claims.”
Source: CNBC TV18
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