Purchased an imported watch recently? It may have cost you around Rs 5,000. However, this innocent act may have bought you under the radar of the income tax department.
Shopping buffs who give in to their urge to splurge can end up drawing the tax man's attention. 'Polite' letters may swamp your mailbox as the tax sleuths get on the 'track expenses' trail.
Where did you get that kind of money for your purchases? Have you disclosed that income in your returns? Does your return reflect the fact that your expenses are within your income? These are some of the unpleasant questions you may face very soon.
Which expenses are monitored?
It may sound silly, but buying a car worth Rs 3 lakh can invite income tax queries.
Besides this, there are a host of other expenses that can attract the tax sleuth's attention.
Your new modular kitchen, the frost-free refrigerator that makes ice faster than you can say 'ice', the diamond earrings your husband gifted you on your birthday, the 42 inch plasma television screen you bought so you could show off to your neighbours, the imported settee you couldn't resist the last time you visited the mall -- all of these can bring the tax man to your door.
Flying executive class frequently or throwing expensive parties can result in a detailed tax inquiry. Debit cards and pre-paid cards reveal overseas travel details.
Even buying an expensive cell phone could be a red flag to the tax man.
Expensive bills
Is your bill going through the roof? The income tax men will find this sufficient reason to pin you down. If your mobile bill crosses Rs 1, 000 per month, you could get a call from an inquisitive tax man.
Soaring petrol and electricity bills as well as landline charges can result in stiff questions. Credit card expenditure worth thousands in a month may spur the tax machinery into action.
Sections and spending
Section 69 -- C of the Income Tax Act comes down heavily on expenses. It states that if the source of expenditure is not explained or not answered satisfactorily, the sum is included as income and taxed. Any display of wealth is covered, including the expenses listed above. The scope of this clause is, thus, very wide.
Did you or your family spent a fortune for your daughter's/ sister's/ son's/ cousin's marriage? If you did, you need to know about Section 133 A (5).
Section 133 A (5) enables the income tax authorities to obtain information on the nature and scale of expenditure in connection with any ceremony, function or event. When it comes to large expenses, they can also get information from individuals.
Under this section, even an inspector of the income tax department is empowered to haul up a person. What's more, the investigation can be done after the function/ event too. Lavish spending at birthdays, weddings, anniversaries and parties can be booked under this Act.
Section 285 -- BA permits income tax officers to gather info about your buying a property, purchasing shares and credit card expenses.
Can I already hear you vowing never to buy expensive goods ever again?
Take heart, help's at hand. There are ways in which an individual can escape the evil eye of the taxman. Here are some expenditure tips that will come in handy.
Expenditure tips
~ See that credit card expenses do not cross Rs 16,000 a month. An annual expenditure of more than Rs 2 lakh in a year can result in an inquiry. Here's a tip: Get a add-on card for your spouse/ family member. The expenses, thus, get spread out.
~ If you plan to buy shares, do not spend more than Rs 8,000 a month on them. If you are careful and follow this, you will most likely not be investigated by the tax authorities.
~ Buy immoveable property worth Rs 29 lakh, not Rs 30 lakh. Buying property worth Rs 30 lakh and above could entail an investigation.
~ Opt for gold jewellery, semi-precious stones and silver utensils valued at Rs 14 lakh and no prying questions on wealth tax are hurled.
~ A man can also own gold. He can hold 100 grams of the shining metal. A married woman can safely have 500 grams of gold and an unmarried girl may hold 250 grams of gold.
~ An electronic gadget with Rs 25,000 or more always raises suspicions. Keep loan papers ready if you have borrowed money or show evidence that the big buy was made out of disclosed income.
~ Regarding wedding expenses, if you are able to prove that money is being spent out of income received on wedding occasion under Section 56 (2) (v), then income tax clauses are not attracted.
~ By taking a joint loan, like a housing loan for example, with your spouse, expenses can be shown by both the wife and the husband in their returns.
~ Income tax returns like Form 2 F ask for household expenses. But, remember, details are not necessary.
~ If your wife is working, many expenses can be shown in her return statement. Household expenses from dishwashers to monthly provisions may be covered under this.
~ Show a proper balance between income and expenses. If you have bought an air-conditioner, costing, say, Rs 15,000 and your income is Rs 20,000, an explanation may be required. But if you saved Rs 5,000 every month for three months, put them in a bank and then bought that consumer durable, tax quizzing can be escaped because then you are ready with your documentation.
Expense errors
Here are a few don'ts you must keep in mind while spending your cash; otherwise, be prepared to answer the taxman's queries.
~ Don't pay half the amount in cash to the dealer while purchasing any consumer durable item or property. Ultimately, the transaction can be traced back. The cash would be held as unaccounted income.
~ It's easy for income tax department to know about home theatre and plasma TVs purchases, as dealers may have noted your address for delivery. If you have paid by cash, be prepared to account for expenditure.
It is much better, instead, to make the payment through an account payee cheque.
~ Don't include monthly provision expenses as part of your business entertainment expenses. You can be easily found out.
Finally, if your branded suit is worth thousands, do remember to see it fits you and matches your returns; othewise, the income tax department may use your stylist or tailor to buttonhole you.
Meenakshi Subramaniam is a former IRS officer.
