Ignorance is not bliss, when it comes to tax and other laws of the land.
First – the story
We, the middle class people are in short supply of TIME. Everyone, especially in a city like Bangalore is busy throughout the year. Our to-do list only grows longer over time. During working days we are occupied at least 10 hours of the day (considering the time spent in office and on road) and during weekends we hardly find time to take up ‘that part – organizing the documents’ of our to-do list!! If we step out of home to attend a wedding, reception or shopping, write off that weekend!
Have you not noticed that time is flying! Don’t you curse that ‘oh, this tax filing has come again! So soon’. Every time you finish tax filing, you decide to organize the documents, but you will not find time to do that till the next year’s tax filing season. Again, in the next year, you will file the return with whatever information you could compile. The real headache comes only when you receive a ‘brown colour’ envelope from Income Tax department, asking you to appear before the officer with all the documents pertaining to your income tax return.
You will find a Notice inside the envelope. When you read the notice, among other things, you will find one line item by name ‘all bank statements for the entire financial year’ to be produced before the officer. This line item will make you alert!
‘All bank statements? Which means the department has information of all my bank accounts’ you murmur.
When you start looking at the bank statement, you realise that there are many credits (amount deposited into the bank account) such as Interest earned on Savings Bank account, interest earned on fixed deposit account, the sale of mutual funds etc. that are appearing there. ‘Have you shown this in the Income tax return?’ is the question Income tax officer is going to ask.
Now the story becomes little more complex. If these incomes are not reported, what can happen? If the department wants me to pay the taxes, how much will it be? Will there be any interest and penalty? Then you will finally say, “Why on earth did I miss it while filing the return? This is a pain now”
Second – the facts
Many a times we overlook certain things. One of them is our own bank account transactions. We are busy in earning money and spending it as and when the need arises. As you are aware, as per income tax act, all taxpayers are obliged to maintain the information about their income and expenses for 8 previous years. Secondly, income tax officer can ask for documents for verification of your income and expenses claimed by you. This process is called Scrutiny Assessment.
Let me limit this article to explain about the analysis of bank account –
Analyse the bank statement. If you can download the statement in excel format from bank site, kindly write your remarks beside all credits or else write (in pencil) the details against each transaction appearing in bank passbook
Loan: In case you have taken loan from your friend or relative, collect their PAN number and write in the remarks column. If the loan amount is over Rs.1 lakh, it is advisable to have a confirmation letter from him. Similarly, if you have given any loan, kindly obtain their PAN and confirmation letter. (The confirmation letter will also help to solve any internal dispute among you)
Cash deposits: If there are cash deposits, mention the source of cash. If the source can’t be explained, then the suggestion is ‘not to deposit such cash’. If such source is income, then declare such income to tax.
Other deposits to the bank account: Any amount credited to the bank, if in the nature of income, offer it for tax while filing your annual tax return
Advance payments made by you: Similar to credits in the bank account, payments made towards purchase of property, advance paid towards purchase of flat or plot, paid towards purchase of shares and stocks, loan given to your friend or relative etc are to be supported by adequate documents. Kindly keep all the relevant documentary proof pertaining to these transactions.
Suggestion: Despite your busy schedule, you have to find some time to organize documents, analyze bank statements and file all the relevant papers pertaining to each financial year in separate, identifiable folders. Secondly, declare all the income while filing the return. The department will give you a wakeup call after 2 years (for example: In September 2014 you may get a notice for the financial year 2012 -13)