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An idea to effectively monitor the Income tax returns of assessees

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Revanth Bharathwaj
य एषु सुप्तेषु जागर्ति

I am Revanth Bharathwaj M, a Chartered Accountancy final level student residing in Erode, Tamil Nadu. My areas of interest are Income tax, Internal Audit. For a couple of years, I have been in tax practice and internal audit assignment. I have come across this idea of demarcating a transaction in bank transactions after having been inspired by BJP government’s (The party) interest in taking the country towards Cashless Economy. The introduction of the following practice shall help the Income Tax department in matching the bank accounts and returns of the assessees.

Idea that is proposed:

“Demarcating a transaction while it occurs in a bank account”

In India, major part of business transactions happen through banking channels in the forms of cheques, bank drafts, online transfers etc. With the introduction of UPI, the government has stimulated the digital transactions as reported in the party’s press releases, website etc. Now my idea is to help Income tax department in this event.

Problem identified:

Now that Aadhaar and Udyog Aadhaar are gaining importance in the society, soon we shall witness 100% linking of all the bank accounts with Aadhaar. Now the department is able to probe into the bank account of any assessee by virtue of powers conferred to it by the constitution. By matching the income reported in form 26AS and bank account(s) of the assessees, the department faces the following variants:

  1. A credit transaction in the bank account is reported as Unsecured loan
  2. A credit transaction in the bank account is reported as Income
  3. A credit transaction in the bank account is reported as Advance for supply
  4. A credit transaction in the bank account is reported as repayment of Advance received for supply or as loan
  5. Cash deposit

Now the department has to admit unless validated by further external evidence, the assessee’s assertion as anyone of the following above (eg. When the true nature is Income the assessee may choose to declare it as Unsecured loan resulting in tax loss to the department).

Solution proposed:

This flexibility given to the assessees, especially unorganized assessees, result in declaring wrongful figure of income in the return, resulting in tax loss. Also, certain provisions in Income tax shall be evaded (eg 269SS of the income tax act) due to this flexibility. Now I propose the following idea as a solution, to some reasonable extent.

“Demarcate a transaction while it is made” – this shall be implemented in a phased out manner. In the initial phase, this shall be introduced to business accounts – current accounts to be precise. Every transaction (in the initial stage – outward remittances) should be defined as either of the following in the event of making the payment:

Proposed classification of outward remittances

  1. Expense to the assessee – for the supply of a product already concluded
  2. Advance by the assessee – for the supply of a product to be made
  3. Unsecured loan – made for the counter-party
  4. Unsecured loan – repaid that was earlier received from the counter party
  5. Advance repaid – that was earlier received for the supply of a product
  6. Gift made to the counter party – in rare circumstances
  7. Reimbursements – of expense paid by the counter-party 
  8. Undefined – a residuary section

Expected outcome:

Now in the event of both parties to the contract are assessees and their PANs are linked to the bank accounts, the Income tax department shall have the ability to match the counter-party’s books in the parameter of classification of a transaction in bank account and the matching of the respected value in the return. This shall be explained by the following example:

A remits total sum of Rs. 25,00,000 lakhs to B, having classified the transaction as “expense for supply of product”. Now intending to reduce the tax liability, B classifies the sum as Unsecured loan received (without compromising the section 269SS of Income tax act 1961 and section 28 of income tax act – capital receipts). Now the department has a proof by the bank account of A that this transaction is expended one while the B has obviously suppressed this one. This helps the department to initiate demand in a early time rather than to undergo normal assessment procedures. Thus income of the department is collected more effectively or this at least acts as a safeguard to income leakage.

 Challenges in implementation:

Indians are of three types – who welcome any change that progresses the nation or reluctant to change despite who introduces it or anti-nationals who paint any such introduction as oppressing the poor (though it shall ultimately benefit them). Hence, it is recommended to introduce the classifications as above for all the current/business oriented accounts and the default option for savings bank account holders as “undefined one”. This shall result in both welcoming by honest tax-payers and gagging the mouths of paid trolls and anti-social elements that has full time vocation as abusing the government for every drastic measure.

In a nutshell, by ordering every banking transaction in the nature of remittance of business concerns (regardless of the nature of the entity and including trusts and other non-business oriented non-individual assessees) should be classified as one among the ones listed above in italics above, the Income tax department shall be aided in effective processing of returns and curbing the practice of deferring the revenue.

Another major challenge, nevertheless the uncompromised opposition in the parliament is that, modification in the banking technologies. But this shall not pose a major problem, since the practice of narrating a transaction is already in existence. However, classifying a transaction is a better practice than narrating it.


In my knowledge, no other country in the world has such practice in existence. This shall set an example if implemented. I take immense pleasure in writing this letter since I am inspired by our Prime Minister by the relentless efforts he is making in making the nation a better place to live in. I am only concerned that in case our beloved PM gives a go-sign to implementing this idea, this shall hit the fraudulent assessees, who have been using the loop-hole of flexibility to defer/curb the tax liability.

Jai Hind!


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