QUESTION: I had purchased two plots of land one about ten years ago and another five years ago as investments. I have sold them now. While computing the surplus liable to tax as capital gains, my auditor asked for source of funds for acquiring the investments. Since I am keeping accounts only for business, I had not recorded the investments in my books. Was such omission a serious mistake? Since I cannot recollect the source of funding for acquiring the plots, should I offer the cost of such assets as income as advised by my auditor for the second plot purchased within the six-year time limit? I am of the view that the purchase of an asset not being at issue in the return on sale of the plot for the current year, it should not be necessary for me to offer any income as regards purchase, unless there is an enquiry. Please advice.
ANSWER: Income-tax law vests the assessing officer with power to bring any under-assessment to tax for the current assessment year and six earlier years.
The year of purchase of the first plot falls outside the time limit so that it is beyond the reach of income-tax law. The source for the second plot would require explanation. If it is not satisfactorily explained, the cost of such investment could be treated as income under Sec. 69 of the Income-tax Act. The fact that the purchase was not recorded in the books by itself need not make the reader vulnerable, if there is credible explanation for the source and not otherwise. When considering the computation of capital gains, the assessing officer may be expected to enquire about the date and source of such acquisition.
If he takes action as is possible for him under Sec. 147 of the Act, he may not only bring the amount to tax along with interest but also levy penalty for non-disclosure of the income in the relevant year. The failure to record the investment may well be an evidence of concealment to justify penalty. The advice of the auditor is, therefore, sound. A return for the relevant year can be filed along with tax and interest with a covering letter requiring the return to be regularised. In such cases, penalty should not be exigible.