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An exempt income would require to be disclosed

The reader’s query is in the context of filing return. Since the income falls under Chapter III of the Income-tax Act and is totally exempt, there is no legal requirement to report such income in the return. In fact, if the income other than long-term capital gains does not exceed the exemption limit, there is no obligation to file return, since exemption limit applies for ‘total income’ of which such income exempt under Sec. 10 falling under Chapter III does not form part. The prescribed form of return also does not have a column for such exempt income. Only deductions under Chapter VI-A are required to be disclosed. This is a lacuna in the return form. Only agricultural income, though exempt under Chapter III, is required to be reported, because it is included for rate purposes under the Finance Act.

But then, where the assessing officer receives information regarding such transaction from stock brokers or stock exchanges, he may wish to verify the same. If the return does not have this information, enquiry would be necessary. It is only in Form No. 4 meant for those individuals and Hindu Undivided Families with proprietary business or profession are asked to reconcile a statement of source and application of funds, which requires all investments to be disclosed. Income under Sec. 10(38) should have been made part of the return, though exempt.

Even where the income itself may be exempt, the source of funds for acquiring the investments, whether it is share or any other investments, would be necessary. It is also possible that there could be honest differences of opinion between the assessee and the assessing officer as to whether the assessee holds it as an investment or had acquired it for resale. The fact that STT had been paid would not spare liability, if the assessee can be treated as dealer in shares.

Ordinarily, in such cases, the assessee having exempt income used to file annexures to the return voluntarily reconciling his real income with taxable income with appropriate notes.

Old returns used to have a schedule for reporting receipts which are not treated as taxable income by the assessee so that such issues could be sorted out. If the assessee wants to report the same so as to draw the attention of the assessing officer to such receipts, he cannot do so, since enclosures are not permitted now.

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