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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. The income tax law does not impose any obligation for a person to disclose the source of his income as long as he returns the income and pays the tax. The very fact that there is a head of income, `other sources', different from other regular sources like salary, business, property and capital gains, would suggest that there could be `other sources', disclosable or otherwise. This is also a source known to income tax law and is often invoked by revenue to assess undisclosed income. It is not necessary to indicate what the precise source is, as long as the assessee returns such income as from other sources. It would mean that, in effect, there is a voluntary disclosure scheme in operation as long as current income is disclosed in the return under the head `other sources' and tax is paid.

The view that the assessee is not bound to disclose the source is also patent from the fact, that where the law requires that it should be disclosed, it has specifically provided so. While dealing with power of the Settlement Commission to grant immunity from penalty and prosecution under Sec. 245H, it is provided that the Settlement Commission may require disclosure of `the manner in which such income has been derived'. Hence, the requirement of disclosure of the source is necessary only, where an assessee comes before the Settlement Commission for settlement of concealed incomes for earlier years and wishes to avoid penalty or prosecution for past concealment.

(To be continued)

Correction

"Exemption for Terminal Leave Encashment": Many readers have pointed out to a mistake in the Tax Forum dated June 7, where the monetary limit for the exemption for terminal leave encashment was indicated as Rs. 30,000. The first proviso to Sec. 10(10AA) provides for the limit to be specified by a Notification, while the second proviso had specified a limit of Rs. 30,000. But Direct Tax Laws (Amendment) Act, 1987 with retrospective effect from July 1, 1986 removed the ceiling of Rs. 30,000 in the second proviso and made the limit under the first proviso applicable for the second proviso by substituting the words "shall not exceed Rs. 30,000" by the words "shall not exceed the limit so specified," so that the limit specified in the first proviso becomes the limit in the second proviso as well. Notification No. 588(E) dated May 31, 2002, which raised the limit from Rs. 30,000 to Rs. 3 lakhs with retrospective effect from April 1, 1998 would also be the ceiling under the second proviso. Hence, the overall ceiling is presently Rs. 3 lakhs and not Rs. 30,000 as indicated in the earlier Notification, which was referred in the answer under `Exemption for terminal leave encashment'. The correct answer, therefore, is retirees on or after April 1, 1998 are eligible for the benefit of enhanced ceiling of Rs. 3 lakhs.

S. Rajaratnam

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