DISCIPLINED TAX MANAGEMENT

By Ameet N. Patel

Many people ask me for advice on how to save taxes. Nobody likes to pay taxes and we all
are on the lookout for ways of reducing our tax liability. Traditionally, we have had very high
tax rates in India and so, obviously, tax payers were always complaining that they are paying
taxes through their noses. This complaint has stayed with tax payers over the years despite
the fact that our tax rates have decreased considerably. Today, our tax rates compare
favorably with many other countries. Our tax law has been sought to be made simpler by
successive finance ministers. Most of the tax deductions have been abolished. The tax rates
have been reduced and the slabs too have been rationalized. In this scenario, it becomes
very difficult to do “tax planning”. Instead, what is becoming more and more important and
relevant today is tax management. Managing one’s documents, one’s data and one’s tax
related information is not only very necessary but is becoming extremely critical when one
deals with the tax department. It is therefore advisable for readers to follow a strict discipline
in their tax management.

Discipline is tax management would be best appreciated and understood if one begins with
the end in mind. Why do we file our tax returns? What does the Govt. do with our tax
returns? If we understand the answers to these questions before we begin, discipline in
managing one’s tax related documents will get ingrained in us naturally.

After we file our tax return, it is the duty of our Income tax Officer to determine whether all
the income that we have earned during the year has been duly reflected in the return of
income or not. Also, if any deductions and/or expenses have been claimed by us, whether
the same are genuine or not. Apart from these, obviously, the ITO would want to verify the
claim made by us in respect of the taxes paid i.e. whether the taxes claimed by us to have
been paid have actually been paid or not.

The documentation that we all need to maintain and preserve for about 8 years is
determined by the above basic inquiries that an ITO would make.

For filing the return of income of a salaried person i.e. a tax payer who does not have
business income and who may, in all probability, be having only interest and dividend
income and some capital gains apart from the salary income, I generally ask for the following
documents before I begin the task of preparing the tax return:

a) Bank pass books/statements for the entire year

b) Explanation for every entry in the said pass book/statement – both credits as well as
debits
c) Copies of all dividend and interest warrant counterfoils
d) Copies of share brokers’ bills / contracts in respect of shares sold during the year
e) Copies of share brokers’ bills / contracts for purchase of shares that are sold during
the year (to determine the date and cost of purchase)
f) Copies of mutual fund statements showing purchase and sale of units during the
year. This would apply even for those funds where there is a mere switch from one
scheme/plan to another scheme/plan
g) Copies of purchase/sale agreement in respect of any immovable property
bought/sold during the year
h) Copies of TDS certificates and advance tax challans
i) Copies of documentary evidence for all deductions proposed to be claimed under
various sections (for e.g. PPF/LIC/NSC/Mediclaim/Donations/Equity Linked Mutual
Funds etc.)

Most of us think nothing of destroying the dividend warrants, mutual fund statements, bank
deposit slip books, cheque book counterfoils etc. and do not feel the need to preserve these
for future use. We forget that without these basic documents, it is very difficult to explain to
an ITO what a particular credit in one’s bank account represents. Even if one does preserve
the bank statement/pass book and the deposit slip books, if proper details are not mentioned
in the deposit slip book, it would still be difficult to explain the various credits in the bank
account. Therefore, the first discipline that one needs to maintain is to write details of the
amount deposited into one’s bank account on the deposit slip. All the pass books/statements
and the cheque book counterfoils and deposit slip books need to be preserved in a
systematic manner on a year wise basis.

Similarly, if I were to claim that a particular amount deposited in my bank account represents
dividend income, my ITO would still be within his rights to ask me for proof to substantiate
that the amount so claimed to be dividend income is actually dividend income. For this, I
would need the dividend warrant counterfoils. One must appreciate the fact that dividend is
tax free in the hands of the shareholder. So, when we claim a particular amount to be
dividend income, we must understand that the ITO has every right to satisfy himself about
this claim. It is possible that many people try to pass off taxable income as dividend income
and not pay taxes thereon. Therefore, the second rule that we must all follow is to preserve
the dividend warrant counterfoils.

Similarly, long term capital gains on sale of listed shares and units of equity oriented mutual
funds are exempt in the hands of the investor. When we claim that a particular deposit in our
bank account represents sale of shares held for more than 12 months or sale or units of an
equity oriented mutual fund held for more than 12 months, we are claiming the income or
profit from that to be tax free. It is only natural that an ITO would want proof to substantiate
the fact that the credit in your bank account actually represents sale proceeds of
shares/units and also proof that these shares/units were actually held by you for more than
12 months. The most common mistake that most people make is to presume that merely
because the shares/units have been held for more than 12 months and consequently, the
profit therefrom is tax free, they don’t need to maintain any details of the same. This
approach is disastrous and is bound to lead to trouble during scrutiny of one’s tax return.
Readers must maintain full details of the purchase and sale of shares/units or any property,
for that matter. The onus of substantiating the cost and date of purchase and sale price and
date of sale is on the tax payer. Without proper documentation, it would be impossible to
prove these. Also, since most shares are now held in dematerialized format, it would also be
a good idea to preserve the demat account statements. Thus, Rule No. 3 is to preserve the
broker’s contracts/bills and mutual fund statements and the demat account statements to
explain the capital gains related facts.

At this juncture, it would be appropriate to make reference to AIR statements.

What is AIR?
AIR is an abbreviation for the term “Annual Information Return”. The AIR has to be filed by
the prescribed person who is responsible for registering or maintaining books of accounts or
other documents containing record on any specified financial transaction under any law for
the time being in force. Such a prescribed person has to furnish an Annual Information
Return in a prescribed format.

Use of AIR
The purpose of collecting such information is to ensure that a person who enters into such
transactions duly accounts for all such transactions. Ultimately, the Income-tax Department
would try to cross verify the information which is independently collected from the specified
persons through AIR with the tax payer’s records.

Information obtained by the Govt. through the AIR

Following are the specified transactions which would require to be disclosed in the AIRs by
the various reporting agencies:
Type of Transaction To be reported by Details to be reported

Cash Deposits of Rs.10 lakh or more in Banks Name and Address of

any Saving Account the depositor and Bank
and its branches, PAN,
mode of deposit
(account no. is not
required)
Credit Card payments exceeding Rs. 2 Credit card Name and Address of
lakh per card companies (including the credit card holder,
banks who issue PAN, Amount paid by
such cards) the assessee using
various credit cards
bank wise and branch
wise (details regarding
the credit card no. and
particulars are not
required)
Purchase of Units of Mutual Funds of Mutual Funds Name and Address of
Rs. 2 lakh or more per Fund the mutual fund holders,
PAN and amount
invested in the Mutual
Fund (details regarding
the scheme of the
mutual fund are not
required)
Purchase of Bonds or Debentures for Company / institution Name and Address of
Rs.5 Lakh or more issuing such type of the investor/ debenture
bonds or debentures holders PAN and
amount invested in the
Bonds and debentures
(details of no. of bonds
or debenture held by the
investor are not
required)
Purchase of shares for Rs.1 lakh or Company issuing Name and Address of
more in an IPO shares through public the investor and PAN
or right shares and amount invested
(details of no. of shares
issued or held by the
investor are not
required)
Purchase or Sale of immovable Registrar or Sub Name and Address of
property for Rs.30 Lakh or more registrar the owner of the
property, PAN and
value of the property as
considered for stamp
duty purposes (details
regarding the
immovable property are
not required)
Purchase of RBI bonds for Rs.5 Lakh Reserve Bank of Name and Address of
or more India the bond holders, PAN
and amount invested in
the RBI bonds (details
regarding the no of
bonds held by the
 investor are not
required)

All the limits mentioned above are on an annual basis and apply to each person separately.
Thus, for example, if I invest Rs. 200,000 in the year 2010-11 in Templeton Mutual Fund’s
various schemes put together then Templeton Mutual Fund will report in its AIR for the year
2010-11 that Mr. Ameet Patel has invested Rs. 200,000 in its units. The Mutual Fund will
give date, amount and mode of payment in the AIR.

The following important points may be noted by the readers:

1. Often, the credit card expenses are borne by the employer in case of salaried persons.
Even if this is the case, in the employee’s return of income, the details must be provided by
him/her if the card is in his/her name. It is not relevant who pays the amounts.

2. In case of mutual fund investments, the limit of Rs. 2 lakhs applies to the aggregate
amount invested in all schemes/plans etc of a particular mutual fund. Also, switch-in from
one scheme to another is also considered as fresh investment and such items are also to be
included in the total amount for the purpose of deciding whether to report the investment in
the ITR form or not.

3. Only shares applied for in an IPO are to be reported (if the application money is in excess
of Rs. 1 lakh). Purchase of shares in the secondary market are not relevant for this purpose.
Also, it is not relevant how many shares are allotted – what is relevant is only the application
money.

4. In case of immovable properties, it is the stamp duty value that is relevant and not your
agreement value.

All the agencies that are required to furnish the AIRs are required to do so in electronic form.
Thus, all the information gets uploaded onto the Government’s database. This information is
available to the various Income-tax Officers on the basis of the PAN of each tax payer.

When a tax payer’s IT Return is selected for scrutiny, a copy of the information that the ITO
gets from the system for that tax payer (based on the PAN) is given to the tax payer and he
is asked to prove that all the information is shown in his accounts/return/records. If he is
unable to do so then the amount of the transaction which he is unable to prove is added to
his income as undisclosed or concealed income.

In the new Return Forms (ITR Series), the tax payer is required to give total amount of each
category of transaction that gets reported in the AIR in his/her Return of Income. The ITO
will then match this total information with the total information for each tax payer as per the
various AIRs received. If the two do not match then, in all probability, you will get a scrutiny
notice for that year.

Therefore, Rule No. 4 for disciplining yourself is to keep proper records of all the
transactions that you enter into. These records would be very crucial for reporting the
information in the annual tax returns that you file every year in July. If your records are
meticulous then whoever is helping you in filing your return will be able to give correct
information in your IT Return.

There are many more ways in which you can prepare better for your tax returns and tax
scrutinies. But, more of that in the next blog. For the time being, this is it.