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Is the assessee bound to disclose source of income?

QUESTION: Just as the Income-tax Department assesses `income from undisclosed sources', can the taxpayer declare `income from undisclosable sources' in the return and pay the proper tax without inviting wrath and harassment from the Income-tax Department?

Such sources may be tips, bribes, smuggling, theft, robbery, successful cheating, on-money, black money transaction, arranging political favour, services as middlemen or contact men for legal or illegal activities, elections or so many other transactions by which men are known to make money.

The assessee under a gentleman's understanding not to reveal the identity of the payer normally receives such `undisclosable income'. He may also be under grave threat to his life if he reveals the identity.

In some cases the assessee is truly ignorant of the identity of the unknown shadow, tout or intermediary with whom he dealt with. As long as he gets his money, the assessee is also not interested in the identity of the payer.

ANSWER: The above letter from a former Chief Commissioner raises an important live issue. No doubt, if the assessing officer has got evidence to indicate that income relates to an earlier year, he can take action for that year without prejudice to assessees' offer of such income in a later year.

Similarly, if there is any evidence of income being larger than what is disclosed, he can adopt such larger income. There cannot be an estimate of larger income, unless there is evidence to justify it.

But even in the case of past income omitted to be disclosed, if the assessee files voluntary return for earlier years along with tax with a request to regularise the same by issue of notice under Sec. 147 or files revised return, if such revised return is in time, the position of law is the same in that the penalty which is otherwise attracted, because of the earlier return showing lesser income, is bound to be waived under Sec. 273A of the Act, since the assessee has voluntarily offered the same prior to detection and also promptly pays the tax of his own accord.

There cannot be better co-operation from the assessee, which is stipulated as a condition for waiver, than filing return voluntarily and paying the tax along with interest.

The Income-tax Department may not be happy with such disclosures and may like to fathom the real source, so that it can possibly check, whether the disclosed income is correct and complete and whether such source existed even in earlier years or will continue to exist in a future year. While such enquiry is not barred, no inference can be drawn, that there is such a continuing source merely with reference to such admission in the current year.

Assessment has to be made for each year with reference to information available for that year. Similarly, a larger income cannot be estimated in the year in which such income is offered, without evidence of such larger income. Sec. 68 and 69 would warrant addition only of such credits or investments for which no credible explanation is available as to the nature and source of such credits or investments. If the assessee himself treats such credit or investment as income, there is nothing more that could be done. If it had not been disclosed as taxable income in the return, he could have initiated penalty action in such cases. If the assessee himself offers it as income, penalty action cannot be exigible. Whether income from such undisclosable source is legitimate or not, it is better such income is declared as such, lest the amount, when it later surfaces, become subject not only to tax but also penalty.

It is best disclosed as and when earned as income from other (undisclosed) sources and tax is paid thereon. Concealment of such income for the fear of disclosure of source would expose the taxpayer to greater jeopardy.

There is, however, some risk of non-disclosure of source, where the source is bound to be disclosed as under Smuggler and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976, by persons convicted or penalised for economic offences like smuggling or foreign exchange violations listed under this Act or detained under Conservation of Foreign Exchange (Prevention of Smuggling) Activities Act, 1974.

This Act provides that such a person, his relatives and others connected with him, are bound to establish the source of their wealth at the cost of forfeiture of such wealth, if not proved to be from legitimate sources. This is a risk, which this class of persons run under that law, so that, where they come under jurisdiction of that Act, such person will have to show that the income is from a source, which is not vulnerable under that Act even for incomes disclosed in the income-tax return under `Other Sources' without disclosing the source.

The fear of harassment from the Income-tax Department, where the source is not disclosed, may be real, but where the assessee declares that he is unable to declare the source and revenue itself is not able to establish a larger income by its own enquiries, which may include survey and search, the Income-tax Department, will have to be content with offered income, if no evidence of larger income is found.

S. Rajaratnam

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