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Today we are discussing on how to handle income tax scrutiny of hawala party transaction.Income tax is issuing notice to the person who made a purchase from parties which are declared as Hawala Parties by Sales Tax Department and levied a penalty U/s 271(1)(c).

If an assessee had made a purchase from party which is declared as hawala party by sales tax department then there is a chances of receiving Income Tax Notice under 142(1) or opening of Re-assessment proceedings.

Documents needed in income tax scrutiny of hawala party transaction:

Generally following types of documents can be asked by the Department:

Copy of Acknowledgement, Balance sheet, Profit & Loss a/c, Tax Audit Report, Deduction under chapter VI A proofs etc.
Debtors List showing Name, address, Tin No., closing balance.
Creditors List showing Name, address, Tin no., closing balance.
Purchase & sales register.
Stock Register.
Copy of VAT Audit -704 Report
Copy of VAT Return & Challans.
All Purchase bills of purchase made from Party which is declared as Hawala parties.
Copy of Bank Statements showing entries with Hawala Parties.
Details relating to sales of goods which is purchased from Hawala Parties

After producing all details or some of the details the Income Tax department may ask you to produce the Hawala parties before them.

Addition by income tax officer in income tax scrutiny of hawala party transaction –

If you are Fail to submit all documents or produce the Hawala parties then the Income Tax department can Make addition to your income. The additions can be calculated as 12.5% of the total purchase made from Hawala Parties.
Then After assessee has to pay tax, Interest & Penalties on such amount.

Department may also Serve a notice u/s. 271(1)(c) for asking the reason by penalty under section 271(1)(c) can’t be levied.

In this type of cases Penalty u/s. 271(1)(c) is not levied. The above statement is followed by the case M/s. Chempure vs. Income Tax officer ITA No. 451,452, & 453/Mum/2006 assessment year 1996-97, 1997-98, 1998-99 prounounced on 07/05/2010 wherein the tribunal has decided that no penalty can be levied in a case where assessee has made a purchase from hawala parties because it is not regarded as a concealment of income or furnishing inaccurate particulars of income.

Case law relating to income tax scrutiny of hawala party transaction:

1. Atharva Builders Pvt. Ltd. V. ACIT, ITA No. 5900/01/M/05.
2. CIT Vs. Aarkay Saree Museum [1991] 187 ITR 147 (Bom.)
3. Rajan H. Shinde Vs. DCIT [2006] 103 ITD 360 (Pune)(TM).
4. ITO Vs. Purnima Devi Gupta [2004] 83 TTJ 586 (Jd.)
5. JCIT Vs. VXL (India) Ltd. [2005] 94 TTJ 513 (Asr.)
6. H.P. State Forest Corporation Ltd. V. DCIT [2005] 93 ITD 442.
7. Mansukh Dass Soni Vs. ACIT [2006] 99 TTJ (Jd.) 894.
8. Shiv Lal Tak Vs. CIT [2001] 251 ITR 373 (Raj.)
9. CIT Vs. Metal Products of India, 150 ITR 714 (P&H)
10. Harigopal Singh Vs. CIT [2002] 258 ITR 85 (P&H)
11. ACIT Vs. Allied Construction [2007] 106 TTJ (Del) 616
12. Sahyog Sahakari Shram Samvida Samiti Ltd. V. ACIT, [2007 111 TTJ 340 (Lucknow).

Penalty U/s. 271(1)(c) is :

Minimum 100% of tax evaded and Maximum 300% of tax evaded.


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