“Black Money” for Income Tax Purpose

All payments made out of unaccounted funds, which have not borne the due tax liability, are black money transactions. Similarly, if the retailer decides to record only a part of his cash sales, he would also be generate income on which he would not pay any tax, and consequently such income would acquire the character of black money. Thus he would be in possession of disposable black money with which he would, in turn, buy goods and services in cash.

There is a thriving retail market and bustling cash economy in our country. The sheer size of it is mind boggling. When we go a shopping for groceries and other goods of daily use, we carry cash with us as most shopkeepers only accept cash payments. Even high value goods, like jewellery, watches, cameras, designer clothing, and electronic goods like computers, iPods, plasma TVs, cell phones, etc. are more often than not purchased in cash. Payments for services of plumbers, electricians, mechanics, housemaids, etc. are also made in cash. School and college fees for children are invariably paid in cash. Large payments to hotels, restaurants and travel agents may also be made in cash. Payments made in cash could be out of accounted or unaccounted funds.

We often hear a remark in the context of immovable property transactions, i.e. when we want to buy or sell a property. It usually goes thus — “How much by cheque or in Number 1 and how much by cash or in Number 2?”

Invariably, when the transaction for sale of property is between two private parties, i.e. in the secondary market, the sale consideration may partly be paid by cheque and partly by cash. This is the accepted norm and it is extremely difficult to carry out a transaction without being a party to this practice. The amount which is paid in cash, or the so called Number 2 component or the “on money”, remains unaccounted both for stamp duty purposes and income tax purposes. For the buyer, the source of the amount paid in cash cannot be questioned by anybody as it does not come on record. Since the sale deed is executed only on the amount paid by cheque, the stamp duty paid is less than what would be payable on the actual consideration. The seller also shows only the recorded price for capital gains purposes and thus evades income tax. In this manner, huge amounts of unaccounted cash or Number 2 money or black money change hands in real estate transactions and get invested in property.

Then we have the capitation fee business. It is well known that for admission to private colleges imparting technical education in the fields of medicine, engineering and management, huge amounts are paid in cash by way of capitation fee or donation by students who otherwise do not qualify for admission on merit. For admission to a private medical college, the amount to be paid is said to run into several lakhs of rupees, as we often hear. Even admission to private schools at entry level is bedevilled by the donation phenomenon. The amount paid is the unaccounted money or black money as it is paid “under the table”, without being disclosed to any authority. It is an illegal payment, barred by law. It also results in evasion of income tax both by the giver and the recipient.

Doctors, dentists and other medical practitioners running their own clinics, pathological and testing labs, imaging centres, nursing homes and private hospitals, etc. are known to charge hefty fees from the patients, and fees are almost always received in cash. If such cash receipts are not fully recorded in the books of account, black money is immediately generated as no taxis paid on such professional receipts, which are not recorded. Similarly, other professionals like consultants, advocates, chartered accountants, architects and interior decorators may not fully disclose their professional receipts for tax purposes, thereby contributing to the black money kitty.

Then we have the business segment. The manufacturers may suppress production of goods with a view to reducing their excise duty liability, which, in turn, also leads to generation of income which escapes income tax and thus acquires the character of black money. Service providers may not disclose their full turnover with a view to reducing service tax liability and thus contribute to suppression of income in the books and generation of black money. Traders, both wholesale traders and retail traders, are also not duty bound to fully record their turnover. They may keep some of their sales outside their books of account and thus generate unaccounted income. All such incomes, which are not recorded in the regular books of account and are meant to escape taxation become black money in the hands of the recipients.

Businessmen commonly resort to the modus operandi of inflating their expenses in the books of account. They often record more expenses than they have actually incurred; this helps reduce their taxable income and, in turn, the tax payable. Let’s say a person who undertakes job work for manufacturers has incurred expenditure of 15 lakh on wages paid to the skilled and semi-skilled workers; however, he chooses to record 25 lakh in the books. He will thus reduce his profit in his books of accounts by 10 lakh and would generate black money of an equivalent amount. Inflation of expenses under various heads like “salaries”, “wages”, “office expenses”, “travelling expenses”, “commission payments”, “advertisement and publicity”, “legal fees”, etc. are often adopted for reducing taxable income. In this manner, by claiming higher business expenditure, businessmen generate black incomes.

We keep hearing of the wealth stashed away in secret bank accounts in Switzerland, Mauritius, Cyprus, Bahamas, St. Kitts and other tax havens. These amounts taken out of the country to places where these cannot be detected easily, and where the taxes are almost negligible, may be the illegally earned black incomes of the corrupt and the unscrupulous.

There are incomes earned from sources such as smuggling, betting, gambling, prostitution, black marketing of goods and services, trading in protected wildlife, unauthorized sale of licenses, insider trading, etc., which, on account of their very nature, are not reported to the authorities. There are innumerable such examples where money earned from illegal transactions is not disclosed to the authorities. All such incomes from illegal sources are black incomes.

Then there are the bribes taken by corrupt officials and politicians, and the huge kickbacks from irregularly awarded contracts. Also the illegal money earned through frauds and scams or by manipulating the systems cannot obviously be brought on record. All such incomes, therefore, acquire the character of black incomes. In fact, corruption and black money are closely linked phenomena.

Black money accumulated over a period of time manifests itself in various forms like investment in properties, investment in gold and jewellery, opulent lifestyle, foreign travel, lavish expenditure on marriages and other social functions, investment in unaccounted stocks, deposits in unreported bank accounts, etc.

In reality, black money is a serious matter, not as sweet as made out in the above ditty. Its bitterness is known only when one is caught.

Various definitions of the expression black money have been attempted. Dictionary.com defines it as “income, especially from illegal activities, not reported to the government so as to avoid paying taxes on it.” Business Dictionary.com defines it as “unaccounted for and untaxed cash generated by dealings in a black economy, black market, or organized crime. Holders of black money try to convert it into legitimate money (clean money or white money) through money laundering.”

For income tax purposes, all such income which has been concealed and on which tax has been evaded, irrespective of the source of such income or the motive for earning such income, acquires the character of black money. Thus, all income which is not reported to the tax authorities becomes black income even though there may have been no illegality involved in earning such income.

A common perception that prevails is that only transactions in cash are black money tranactions whereas all transactions / payments / receipts by cheque cannot be treated as black money transactions. This is a misconception and needs to be dispelled. All transactions whether carried out in cash or through banking channels could be black money transactions if the amounts involved have not borne the due tax liability. The reverse is also true. Transactions made out of funds duly disclosed for income tax purposes, even if carried out in cash, cannot be treated as black money transactions. To cite an example, if a tax payer maintains a bank account in which he deposits interest receipts earned from his money lending business, the income from which has not been disclosed to the Income Tax Department, and a cheque is issued from such a bank account for making payment of LIC premium, it would be a black money transaction. On the other hand, if a trader makes payment towards LIC premium in cash out of the cash sales made by him, which are duly recorded in the books of account, it would not be a black money transaction. In this example, a payment by cheque is a black money transaction whereas a payment by cash is not. It is not the mode of payment but the source out of which the payment is made or received which determines whether it is a black money transaction or not.

Source : Income taxmanagement

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