credit card
A recent matter related to income tax is much discussed on social media. A chartered accountant said that a person received an income tax notice on credit card transactions. The matter was that the person had spent more than Rs 50 lakh from his credit card, but he had never filed the income tax return.
Investigation revealed that he used to pay his friends’ expenses through his credit card. He used to do this to get card rewards and cashback, which is commonly called card rotation. But when the system saw that such huge expenditure was visible and no income was recorded against it, the Income Tax Department became suspicious and the matter came under investigation. After this, the Income Tax Department considered the expenditure as expenditure without source and issued a demand notice.
Scrutiny on credit card payments is increasing
Nowadays such notices regarding credit card payments are becoming common. Generally, the reward discount received on purchases is not taxable, but if the cashback or reward is converted into money and its value exceeds Rs 50,000 in a year, then it can come under the ambit of tax. When credit card statements are collected during scrutiny, large cashbacks appearing in them can also increase tax problems.
How does the tax department get information?
Under Section 285BA of the Income Tax Act, banks and financial institutions have to inform the tax department about large transactions of more than Rs 10 lakh in a year. In this, information about the payment made through credit card is given, not what the expenditure was incurred on. This means that even if you make a payment for a friend, it gets linked to your PAN and the department assumes that you have incurred the expense, unless you prove otherwise.
When does section 69C apply?
If the credit card expenses do not match your declared income, the tax department can apply Section 69C. Under this, the expenditure whose exact source cannot be determined is treated as your income and taxed. In such cases, it is initially difficult to get relief and often the matter reaches the tribunal. Therefore, it is better to avoid such risks from the beginning.
Paying for friends may be expensive
If a person pays friends’ expenses with his card, then it is important for him to keep a complete record of every transaction. It will also have to be shown where the money came from. If the friend returns the money in cash, the chain of evidence is broken. Also, if an amount of more than Rs 50,000 is received from someone other than the designated family members, it can be treated as a gift and taxed. Therefore, it is not enough to just say that the expense was of a friend, it also has to be proved like a bill in the friend’s name, bank transfer and reimbursement records.