The Hindu Business Line : Expanding the tax net — Track the big spenders-low I-T payers

If the Income-Tax Department does its homework diligently and gathers credible information on unexplained expenditure, several thousand people who spend lavishly and far in excess of the income they declare in their returns can be brought within the right tax bracket, says H. P. Ranina, pointing out that the solution to the problem of evasion lies in tracking big spenders.

YOU may conceal your income but your lifestyle will reveal all. All the more so if you spend your cash on granite and designer sanitary ware as they are permanent and visible.

As reported recently in the press, the Finance Minister, Mr P. Chidambaram, has drawn the attention of Income-Tax Commissioners to the fact that thousands of people incur expenditure far in excess of the income disclosed in their tax returns. Such expenditure is generally of a personal nature, pertaining to foreign travel, entertainment, leisure, and lifestyle purchases that cannot be substantiated by the level of income disclosed.

Tax administration in India has not been able to bring within the net thousands of such big spenders but low income-tax payers. While the one-by-six filing of return scheme has been in force for the last six years, very little has been done to make such filers pay income-tax. In some centres, the returns are merely stored in gunny bags and sometimes lost, misplaced or devoured by vermin.

Some experts suggest taxing agricultural income. This is constitutionally, and practically, not possible. But the truth behind this spending power seen in the rural areas is that, apart from what is earned by the rich farmers, there is a substantial amount of income earned by persons in rural areas which is, in fact, not agricultural income.

By definition, `agricultural income' is income derived from agricultural operations of tilling the soil, sowing seeds, raising crops or growing vegetables, fruits, and so on. A genuine agriculturist may get for his labour no more than 20 per cent of the price at which the agricultural commodities are actually sold in the free market.

The spread between the amount received by the agriculturist and the price paid by the final consumer is the unaccounted profit of the middlemen, namely, the wholesaler and retailer. Such profit earned by intermediaries can, by no stretch of imagination, be treated as agricultural income. Yet none of these persons are brought to tax.

Apart from distributors, wholesalers and retailers of agricultural produce, there are hundreds and thousands of money-lenders all over rural India who charge interest at 2-3 per cent per month. How many such persons have been taxed, and what is the income assessed?

Further, there are in the rural areas, suppliers of construction materials such as cement, steel and bricks, traders in fertilisers and pesticides, shopkeepers and retailers, transport operators and truck owners, civil contractors and other businessmen, whose number would collectively run into lakhs, considering the size of the country. All such persons have never been taxed.

The solution to the problem of tax evasion lies in tracking the expenditure of potential tax-payers. Section 69-C of the Income-Tax Act, 1961 (the Act) has been part of the statute since April 1, 1976.

This provision brings to tax any amount covered by expenditure where the assessee offers no explanation of the source thereof or the explanation offered is found to be unsatisfactory.

With effect from April 1, 1999, a proviso was introduced to this Section to enact that where unexplained expenditure is deemed to be income of the assessee, such amount would not be allowed as a deduction under any head of income. The implication of this is that the full amount of unexplained expenditure would be treated as income for the relevant financial year.

Courts have upheld assessments based on the provisions of Section 69-C. The nature of expenditure deemed to be undisclosed income cannot be enumerated. An illustration of such expenditure can be found in Rajendra Kumar Lahoty v C.I.T. (266 I.T.R. 621). The facts in this case were that there was a grahapravesh (housewarming), death of father and birth of grand-daughters, but that the assessee had not shown any expenses on these accounts. An expense of Rs 31,703 under Section 69-C of the Act was entered in the assessment.

Likewise, the assessee had shown expenses on the marriage of two sons at a ridiculously low figure of Rs 85,000 and Rs 95,000. The Assessing Officer made an addition of Rs 40,000 on that count. The Tribunal sustained the additions.

On appeal, the Rajasthan High Court held that when no expenses had been shown by the assessee for the housewarming ceremony, death of the father and birth of grand-daughters, an addition of Rs 31,703 was rightly made on the basis of appreciation of facts of the case.

Similarly, the addition of Rs 40,000 was sustained, looking to the status, as well as jewellery and cash found during a search. According to the Court, it was open to the Assessing Officer in such cases to make additions.

In CIT v Bhagwati Developers (P) Ltd. (261 I.T.R. 658), the Calcutta High Court held that if from the documents it appears that there was an expenditure, the source of which is not satisfactorily explained, it would be deemed to be income of the assessee for such financial year.

The question of addition depends on the satisfactory explanation of the source. It cannot be negated simply because the expenditure was actually incurred. On the failure to explain the source of the expenditure, it is liable to be added.

In Kedar Nath Modi v C.I.T. (200 I.T.R. 685), the assessee went to Kashmir for a holiday with his wife, five children and two servants and stayed in a houseboat for more than a month.

The total expenses, including air travel, expenses on car and driver and food were shown at Rs 1,863 in the books of account of the company. The company indicated in a letter that all the expenses of the assessee and his family during their stay in Kashmir were incurred by the assessee himself.

Since, during the month, the assessee had withdrawn only Rs 1,500 and his wife Rs 600, the Income-tax Officer held that the assessee must have met the holiday expenses out of his income from undisclosed sources.

The only plea of the assessee was that the entire trip was financed within the monthly drawings of the assessee and his family members. The Income-Tax Officer estimated the expenses and added Rs 10,000 to his income as income from undisclosed sources. The Delhi High Court upheld the assessment.

An important case on this issue is in R. Kanakammal v C.I.T. (244 I.T.R. 152). The assessee stated in a letter to the Tax Department that an amount of Rs 72,950, for which there was no proof regarding the source, may be treated as her income and assessed for the years 1967-68 to 1971-72 on spread-over basis.

By a subsequent letter in November 1973, she claimed that her husband had sufficient income in Singapore from which the monies were remitted to India. However, she did not produce any document to establish that there was, in fact, a remittance from Singapore to India, whether through banking channels or otherwise.

The Madras High Court held that the onus was on the assessee to establish that the monies had been received from Singapore for which absolutely no evidence was forthcoming. The Tribunal rightly observed that without any proof of the alleged illegal remittances, the case of the assessee — that Rs 72,950 had actually been received by her from her husband — could not be accepted. Hence, assessment of this amount was upheld.

In view of the aforesaid decisions, if the I-T Department does its homework diligently and gathers credible information on unexplained expenditure, several thousands of tax-payers who spend lavishly can be brought within the tax net. In cases of litigation, Courts would generally uphold the assessment if the assessee cannot discharge the onus of proving the source of funds, and the genuineness of such sources.

(The author is a Mumbai-based advocate. He can be contacted at ranina@bom2.vsnl.net.in)

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