Understanding the Statement of Financial Transactions (SFT) under Section 285BA of the Income Tax Act

Introduction

The Statement of Financial Transactions (SFT) under Section 285BA of the Income Tax Act, 1961, plays a pivotal role in the Indian taxation system. This section mandates various entities, including individuals, government bodies, and financial institutions, to report specified financial transactions to the Income Tax Department. The overarching goal is to ensure transparency and curb tax evasion by keeping a close eye on high-value transactions.

This article aims to provide a detailed exploration of Section 285BA, delving into its provisions, reporting requirements, penalties, and the implications for taxpayers. We will also explore the procedural aspects and nuances that assessee must be aware of when dealing with SFTs.

Section 285BA: Legal Framework and Interpretation

Section 285BA of the Income Tax Act outlines the obligation of certain persons to furnish a statement of financial transactions or reportable accounts. The section is applicable to a wide range of entities, including:

• Assessees: This includes individuals, Hindu Undivided Families (HUFs), firms, companies, and others who are taxpayers under the Act.

• Government Offices and Authorities: Various government offices, local authorities, public bodies, registrars, and sub-registrars are required to report certain financial transactions.

• Financial Institutions: Banks, post offices, depositories, and other financial entities are required to report specified transactions.

Specified Financial Transactions (SFTs)

The term "Specified Financial Transaction" (SFT) is crucial to understanding the scope of Section 285BA. The section defines SFTs broadly to include:

• Purchase, sale, or exchange of goods, property, or rights.

• Provision of services.

• Execution of works contracts.

• Investments or expenditures.

• Acceptance or repayment of loans and deposits.

• Transactions in cash.

The Central Board of Direct Taxes (CBDT) has been empowered to prescribe specific transactions and their respective threshold limits. For instance, transactions like cash deposits, credit card payments, purchase of immovable property, and investments in financial instruments are covered under this section.

Reporting Entities and their Obligations

The entities obligated to report under Section 285BA are listed comprehensively. They include:

• An assessee.

• The prescribed person in the case of an office of Government.

• A local authority or other public body or association.

• The Registrar or Sub-Registrar appointed under section 6 of the Registration Act, 1908 (16 of 1908).

• The registering authority empowered to register motor vehicles under Chapter IV of the Motor Vehicles Act, 1988 (59 of 1988).

• The Post Master General as referred to in clause (j) of section 2 of the Indian Post Office Act, 1898 (6 of 1898).

• The Collector referred to in clause (g) of section 3 of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (30 of 2013).

• The recognised stock exchange referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).

• An officer of the Reserve Bank of India, constituted under section 3 of the Reserve Bank of India Act, 1934 (2 of 1934).

• A depository referred to in clause (e) of sub-section (1) of section 2 of the Depositories Act, 1996 (22 of 1996).

• A prescribed reporting financial institution.

• A person, other than those referred to in clauses (a) to (k), as may be prescribed.

Each reporting entity is required to maintain accurate records of the specified financial transactions and submit them in the prescribed form and manner within the stipulated time frame which explained hereunder.

Procedural Aspects of Filing SFTs

Form No. 61A and the Reporting Process

Form No. 61A is the prescribed form for filing the Statement of Financial Transactions. The form must be filed electronically, and it includes several sections where details of the transactions are reported. The form requires information such as the PAN of the transacting parties, the nature and value of the transactions, and the relevant financial year, etc.

The filing process involves the following steps:

1. Data Collection: Reporting entities must gather data on all transactions that meet the criteria outlined by the CBDT.

2. Data Validation: The data must be verified for accuracy, ensuring that all necessary details are included.

3. Submission: The form is submitted electronically using a digital signature. The Principal Director General of Income-tax (Systems) specifies the procedure and standards for secure data transmission.

Due Dates for Filing

The SFT for a financial year must be submitted by the 31st of May of the immediately following financial year. This deadline ensures that the data is available for the Income Tax Department to use in its monitoring and assessment processes ensuring compliance on the part of assessee’s whose transactions are being reproted.

Penalties and Consequences of Non-Compliance

Non-compliance with the provisions of Section 285BA can lead to significant penalties. The Income Tax Act outlines several scenarios where penalties may be imposed:

1. Failure to File SFT: If a reporting entity fails to file the SFT within the prescribed time, they may be served with a notice by the tax authorities. The entity must then file the SFT within 30 days of receiving the notice.

2. Filing a Defective SFT: If the SFT is found to be defective, the reporting entity has 30 days to rectify the defect. Failure to do so may result in the SFT being treated as inaccurate information, leading to further penalties.

3. Penalties under Section 271FA:  Section 271FA of the Income Tax Act imposes a penalty on entities that fail to furnish the Statement of Financial Transactions (SFT) within the prescribed time limit.
   
   Key Aspects:
   
   Penalty Amount:
   
   If an entity fails to submit the SFT by the due date, a penalty of Rs.500 per day of default is imposed. This penalty accrues daily from the date after the due date until the statement is actually filed.
   
   Notice Issued by the Income Tax Authority:
   
   If the Income Tax Authority issues a notice under Section 285BA(5) requiring the entity to furnish the SFT within a specified period (usually 30 days from the date of service of the notice), and the entity still fails to comply, the penalty increases significantly.
   
   Increased Penalty for Non-Compliance After Notice:
   
   If the SFT is not furnished even after the notice has been served, the penalty increases to Rs.1,000 per day of default starting from the day after the expiry of the period specified in the notice until the statement is furnished.
   
   Example:
   
   Suppose a bank was required to submit the SFT by May 31st but failed to do so. If the bank delays submission by 30 days without receiving any notice, the penalty would be Rs.500 × 30 days = Rs.15,000. However, if a notice was issued the bank delayed another 10 days in submission, the additional penalty would be Rs.1,000 × 10 days = Rs.10,000.

4. Penalties under Section 271FAA: Section 271FAA imposes a penalty for providing inaccurate information in the SFT. This is applicable to all reporting entities and particularly critical for financial institutions handling reportable accounts under international tax compliance regimes like FATCA and CRS.
   
   Key Aspects:
   
   Penalty Amount:
   
   A fixed penalty of Rs.50,000 is imposed if the reporting entity provides inaccurate information in the SFT.
   
   Circumstances Leading to the Penalty:
   
   The penalty applies if:

   • The reporting entity knew or believed the information was inaccurate at the time of furnishing it.

   • The reporting entity omitted necessary information that it was aware of.

   • The reporting entity did not correct the information after discovering its inaccuracy.

Sub-Section (2) Penalty for Reporting Financial Institutions:

Sub-Section (2) under Section 271FAA specifically addresses penalties for reporting financial institutions (as defined under clause (k) of sub-section (1) of Section 285BA) when inaccuracies arise due to false or inaccurate information provided by account holders.

Additional Penalty for Reporting Financial Institutions:

If the inaccuracy in the SFT is due to false or inaccurate information provided by the account holder(s), the reporting financial institution faces an additional penalty of Rs.5,000 for each inaccurate reportable account.

Recovery of Penalty:

The reporting financial institution is entitled to recover this penalty amount from the account holder(s) responsible for providing the false or inaccurate information. The institution can:

• Seek reimbursement directly from the account holder(s).

• Withhold or retain an equivalent amount from any funds held or received from the account holder(s).

Example:

If a financial institution reports incorrect PAN details due to false information provided by the account holder, and this affects five reportable accounts, the institution would incur a penalty of Rs.5,000 × 5 = Rs.25,000. The institution can then recover this amount from the respective account holders.

The provisions are stringent, reflecting the importance the Income Tax Department places on accurate and timely reporting.

Types of Transactions to be Reported

Under Section 285BA, the Central Board of Direct Taxes (CBDT) has specified certain transactions that must be reported by various entities. These transactions, often referred to as Specified Financial Transactions (SFTs), cover a wide range of financial activities. The reporting requirements apply to transactions exceeding certain thresholds, and they are designed to ensure that high-value transactions are transparent and traceable.

Below is a detailed breakdown of the specific transactions and the corresponding reporting entities:

1. Cash Payments for Bank Drafts, Pay Orders, or Banker`s Cheques

• Threshold: Cash payments aggregating to Rs.10 lakh or more in a financial year.

• Reporting Entity: Banking companies and cooperative banks.

• Purpose: To track substantial cash transactions, which could potentially be used for tax evasion or money laundering.

2. Cash Payments for Prepaid Instruments

• Threshold: Cash payments aggregating to Rs.10 lakh or more in a financial year for prepaid instruments issued by the Reserve Bank of India.

• Reporting Entity: Banking companies and cooperative banks.

• Purpose: Monitoring large cash payments towards instruments like prepaid cards, which could be used for illicit activities.

3. Cash Deposits and Withdrawals in Current Accounts

• Threshold: Aggregated cash deposits or withdrawals of Rs.50 lakh or more in a financial year in one or more current accounts.

• Reporting Entity: Banking companies and cooperative banks.

• Purpose: To monitor high-value cash flow in current accounts, often associated with businesses.

4. Cash Deposits in Other Accounts (Non-Current Accounts)

• Threshold: Cash deposits aggregating to Rs.10 lakh or more in a financial year.

• Reporting Entity: Banking companies, cooperative banks, and Post Master General.

• Purpose: To trace large cash deposits in savings accounts, which might indicate unreported income.

5. Time Deposits

• Threshold: Time deposits aggregating to Rs.10 lakh or more in a financial year, excluding renewals of existing time deposits.

• Reporting Entity: Banks, Post Office Savings Bank, Nidhi companies, and Non-Banking Financial Companies (NBFCs).

• Purpose: To track large fixed deposits, which could represent substantial savings or unreported income.

6. Credit Card Payments

• Threshold: Payments aggregating to Rs.1 lakh or more in cash or Rs.10 lakh or more by any other mode in a financial year.

• Reporting Entity: Banks or any other credit card-issuing companies.

• Purpose: Monitoring large expenditures via credit cards, which could indicate significant spending not aligned with reported income.

7. Acquisition of Bonds or Debentures

• Threshold: Receipt of Rs.10 lakh or more in a financial year for acquiring bonds or debentures.

• Reporting Entity: Companies or institutions issuing bonds or debentures.

• Purpose: To trace investments in debt instruments, which might be a channel for parking undisclosed income.

8. Acquisition of Shares

• Threshold: Receipt of Rs.10 lakh or more in a financial year for acquiring shares (including share application money).

• Reporting Entity: Companies issuing shares.

• Purpose: To monitor substantial investments in equity, which could be indicative of capital gains or unreported financial activity.

9. Buyback of Shares

• Threshold: Buyback of shares aggregating to Rs.10 lakh or more in a financial year (other than shares bought in the open market).

• Reporting Entity: Companies listed on a recognized stock exchange.

• Purpose: To track buyback transactions, often used for financial restructuring or distribution of surplus funds.

10. Purchase or Sale of Immovable Property

• Threshold: Purchase or sale of immovable property valued at Rs.30 lakh or more, or as valued by the stamp valuation authority under Section 50C.

• Reporting Entity: Inspector-General or Registrar/Sub-Registrar appointed under the Registration Act, 1908.

• Purpose: Monitoring large transactions in real estate, a common avenue for investment of unreported income.

11. Receipt of Cash Payment for Goods and Services

• Threshold: Cash payments exceeding Rs.2 lakh for the sale of goods or services.

• Reporting Entity: Any person liable for audit under Section 44AB of the Income Tax Act.

• Purpose: To trace large cash payments, potentially indicative of tax evasion or money laundering.

Compliance Requirements for Reporting Entities

Entities required to report under Section 285BA must ensure that they are fully compliant with the procedural requirements, including:

• Aggregation of Transactions: When determining whether a transaction exceeds the reporting threshold, entities must aggregate transactions of the same nature across all accounts held by the individual.

• Digital Submission: Reports must be submitted electronically using the prescribed form (Form No. 61A) and verified by the designated officer.

• Timely Filing: The deadline for submitting the SFT is May 31st following the financial year in which the transaction occurred. Failure to file within this period can result in significant penalties.

Implications for Taxpayers

For taxpayers, the introduction of SFTs means increased scrutiny of high-value transactions. The data reported under Section 285BA is used by the Income Tax Department for data matching, identifying discrepancies between reported income and actual financial activity, and curbing tax evasion.

Taxpayers must ensure that their financial transactions are accurately reported in their income tax returns. Failure to do so may lead to inquiries, reassessment, and penalties.

Pre-Filling of Income Tax Returns

One of the significant developments in recent years has been the use of SFT data for pre-filling income tax returns. The information provided by reporting entities is used to auto-populate details in the taxpayer`s return, reducing the chances of errors and omissions. This also places the onus on taxpayers to verify the pre-filled data and ensure its accuracy. The pre-filling of returns is facilitated through under Rule 114E(5A). This rule was introduced to facilitate the pre-filling process by specifying certain transactions that must be reported for this purpose. The rule requires reporting entities to furnish information related to:

• Capital Gains: Information related to capital gains on the transfer of listed securities or units of mutual funds.

• Dividend Income: Details of dividend income received by the taxpayer.

• Interest Income: Information on interest income received from banks, post offices, or NBFCs.

Conclusion

Section 285BA and the associated rules and guidelines represent a robust framework for monitoring financial transactions in India. The obligations placed on various entities to report high-value transactions are a key component of the government`s efforts to increase transparency and prevent tax evasion.