Income Tax Notice for Crypto Trading under Section 148

The Income Tax Department had sent out notices to multiple crypto traders under Section 148A(b) of the Income Tax Act. The ITD issued income tax notices to taxpayers who had indulged in cryptocurrency trading but did not report them in the ITR and pay tax on cryptocurrency trading. Under the tax notice, the department asked the assessee to explain the transactions with supporting documents and books of accounts. The intention is to track the sources of income used for crypto transactions. This is a show-cause notice where the taxpayer needs to justify why the AO should not issue a notice to them u/s 148 for income escaping assessment. Let us understand the tax notice for crypto trading, how to respond, and the penalty if you have not reported crypto income in the ITR.

What is Section 148 of the Income Tax Act?

The ITD has issued notices under clause (b) of Section 148A of the Income Tax Act. Section 148A is the section for conducting inquiry and providing opportunity before issue of notice under Section 148. Clause (b) of Section 148A seeks to provide the taxpayer an opportunity of being heard by serving a show cause notice. The taxpayer needs to explain why the tax authority should not issue a notice under Section 148.

The tax authority issues notice under Section 148 of Income Tax Act where the income has escaped assessment. This is a time bound notice and the taxpayer needs to submit a response within the specified time period. The Assessing Officer i.e. AO can issue notice u.s 148 if:

  • The AO has information that the taxable income of the taxpayer has escaped assessment, and
  • The AO has taken prior approval from the specified authority to issue such notice

Tax Notice for Crypto Trading under Section 148A(b)

Tax notice under Section 148A(b) for crypto trading was issued to multiple traders for FY 2015-16, FY 2016-17, and FY 2017-18. The tax notice comprised of the following information:

  • Value of transactions in crypto trading
  • Relevant financial year
  • The income from crypto transactions was not reported as LTCG or STCG

The bitcoin traders were asked to do the following:

  • Attend the ITD office with books of accounts and other relevant documents.
  • To produce the bank statements of all bank accounts of themselves and family members
  • Submit computation of gain or loss arising out of investments done in the relevant financial year
  • Share investment details in India and abroad, the source of income, and trading details of bitcoin and other cryptocurrencies
  • Declare crypto wallet details in India and abroad, transactions through wallets, and source of money deposited in these wallets
  • Submit a response to the notice within the given time period

How does Income Tax Department know about my cryptocurrency trading?

The cryptocurrency exchanges ask for the PAN of the traders while setting up their accounts for crypto trading. The Income Tax Department collated and analysed this data of bitcoin users from major cryptocurrency exchanges in India. Later, they issued tax notices to crypto traders having significant crypto transactions.

Further, the Income Tax Department received data of crypto trading through the VRU/CRIU functionality on the Insight Portal of Income Tax. CBDT issued a circular on 10th December 2021 to commissioners of income tax to upload information on Insight portal. The Circular had instructions to upload information on VRU/CRIU functionality for issue of notice u/s 148 of Income Tax Act. VRU i.e. Verification Report Upload is a functionality on Insight Portal of Income Tax where information of income escaping assessment is uploaded. CRIU i.e. Case Related Information Upload is a functionality where information of bulk nature such as penny stock transactions, etc is uploaded. On the basis of this information, the ITD issued notices to multiple crypto traders under Section 148A(b) of Income Tax.

Penalty on tax notice for crypto trading u/s 148

A trader having income from trading cryptocurrency, NFT (Non-Fungible Token), or VDA (Virtual Digital Asset) is liable to pay tax at 30% u/s 115BBH. Section 115BBH was introduced in Budget 2022 and is applicable from FY 2022-23. Thus, a crypto trader must report income from crypto trading as capital gains in the ITR and pay tax of 30% on profits.

However, in the absence of any provision in the earlier years, many traders did not report income from crypto trading and did not pay tax. The AO has the authority to open the case for assessment or reassessment by issuing a notice under Section 148 of the Income Tax Act. The AO may also impose a penalty of 50% of tax payable in the following cases:

  • If the income assessed by AO exceeds the income reported by the crypto trader in the ITR
  • If the income assessed by AO exceeds the basic exemption limit if the crypto trader has not filed the ITR

In addition to the tax liability, the AO also has the authority to impose penalty on the failure of compliance at the taxpayer’s end. Below is a summary of penalty that the AO can impose.

Section Description Interpretation Penalty Imprisonment
Sec 272A(1) Refusal or failure to give evidence or produce books of accounts, etc in compliance with summons under Section 131(1) If assessee does not produce books of accounts and relevant documents as asked for by AO for notice u/s 148A INR 10,000 for each failure or default No Imprisonment
Sec 276CC Failure to furnish ITR in response to notice u/s 148 If assessee fails to file ITR in response to the notice under Section 148 No Limit 6 mth to 7 yrs – If tax liability exceeds INR 25 lacs
3 mth to 2 yrs – other cases

Reply to tax notice under Section 148 for crypto trading

The crypto trader must respond to the income tax notice within the stipulated time period. You can submit a response as per the instructions mentioned in the tax notice. Submit a response either through email or from the option of e-proceedings on your account on the income tax website.

Section 115BBH for taxation on virtual digital assets would be effective from 1st April 2022 i.e. FY 2022-23 onwards. Since there was no specified tax provision for tax on income from crypto trading for the earlier years, the taxpayer should consider the following while submitting a reply to the tax notice:

  • To submit response to notice under Section 148A, justify the nature of transactions and source of income. Further, provide the relevant documents and books of accounts to the tax officer.
  • Treat the income as Capital Gains or Business Income based on the trader’s intention and the frequency of transactions. Thus, if there were significant trading transactions or the intention is to earn profits, report the income as business income. However, if there were few transactions or the intention is to invest for long-term appreciation, report the income as capital gains.
  • If you had reported the crypto trading income in your ITR and paid tax on it, you can submit a response explaining the nature of transactions and their treatment in the ITR.
  • If you had not reported the crypto trading income in your ITR, you must now file an ITR in response to the notice under Section 148, report all your income, and pay tax on it.

FAQs

Is crypto trading legal in India?

In the Budget 2022 speech, Nirmal Sitharaman clarified that taxing cryptocurrencies do not give them legal status in the country. Thus, the legality of cryptocurrency in India is still under question. However, the government introduced Section 115BBH for the taxation of income from virtual digital assets. Thus, crypto traders must report the trading income in ITR and pay tax at 30% u/s 115BBH.

What is VRU/CRIU in Income Tax?

The income tax officers were asked to upload the information of the crypto trading transactions on the VRU/CRIU functionality on the Insight Portal. VRU i.e. Verification Report Upload is the functionality using which the AOs upload information and verification results for the taxpayers having income escaping assessment from AY 2013-14 to AY 2017-18.
CRIU i.e. Case Related Information Upload is the functionality using which the AOs upload information of bulk nature such as penny stock transactions, beneficiaries in case of entity operators, etc.

What happens if I don’t file my cryptocurrency taxes?

Income from trading in cryptocurrency is a taxable income and must be reported in the Income Tax Return. FY 2022-23 onwards, crypto income must be reported as Capital Gains and tax should be paid at 30% under Section 115BBH of the Income Tax Act. Further, crypto traders cannot claim a deduction of any expenses other than the cost of acquisition. They cannot carry forward the loss to future years.
In the earlier years, if you have not reported your income from crypto trading, the taxman may issue a notice under Section 148 for income escaping assessment.

Notice Under Section 148 of the Income Tax Act, 1961

Section 148 stands for the reassessment of income escaping assessment. The Assessing Officer could pick income tax return for reassessment by sending a notice under section 148 subject to some pre-defined criteria for income Escaping Assessment.

Issuance of Notice under Section 148

There are various reasons as well as terms and conditions under section 148 for the issue of Notice as follows:-

Before issuing any notice u/s 148 the assessing officer must have reason to believe that any income chargeable to tax has escaped assessment along with the strong evidence. Without any proof, the officer can’t produce a notice based on mere suspicion.

There must be a direct nexus between the material coming to the notice of the assessing officer and the belief of AO that there has been escapement of income.

The material for formation of belief must be relevant and not vague based on any superficial reasoning and understanding.

The assessing officer must record reasons in writing before issuing notice under section 148. Merely a change of opinion cannot constitute a reason to believe. 

Mere a reason recorded that there is concealment of income without any specific evidence or material will not constitute a valid reason as it is vauge.

The Assessment officer cannot issue a notice based on the facts and information gained by reading the documents and information that assessee has already submitted during the course of the assessment.

The Assessing Officer can only issue a notice if and only if he/she has been presented with the new information and not by reading it by himself/herself.

If any fact or information arises, which has been disclosed previously relevant to the assessment in question, the assessing officer can immediately issue a notice under Section 147/148, even if the information has come to notice in a later period.

Who can issue a notice under Section 148

As per section 148 of the Income Tax Act 1961, the following persons can issue a notice to the assessee who has escaped assessment or reassessment of taxable income under the following conditions:-

  • Assessing Officer who ranks below the rank of Assistant Commissioner or Deputy Commissioner cannot issue a notice under Section 148. AO can issue notice only if Joint Commissioner is satisfied, on reasons recorded by such AO, that it’s a fit case for issuing such notice.
  • AO cannot issue notice to associate assessee following the expiration of a four-year period from the conclusion of the assessment year in question. Unless the Chief Commissioner is satisfied that the explanations given by the Assessing Officer are valid enough for the sending of a notice to the assessee.

Time limit to issue a notice under Section 148

As per section 149 of the Income Tax Act, If the income escaped doesn’t exceed INR 1 lakh the notice under section 148 can be issued within a period of 4 years from the end of the relevant AY (assessment year).

If the income escaped is more than INR 1 lakh the notice under the said section can be issued within a period of 6 years from the end of relevant AY subject to provisions contained in section 151.

If the income escaping assessment relates to assets located outside India the notice under section 148 can be issued within a period of 16 years from the end of the relevant AY.

Further, if an assessment has been completed under section 143(3) or 147 no further action can be taken under section 147 after the expiry of 4 years from the end of relevant AY unless income chargeable to tax has escaped assessment for such AY due to failure on assessee’s part to file the return under section 139 or 142 or 148 or fully and truly disclosing all the material facts required for the assessment for that AY.

Replying to notice under Section 148

In case assessee receives the notice under section 148, he should follow the below-mentioned pointers:

Firstly, check the notice for reasons to believe which are recorded by the assessing officer for issuing the notice under section 148. If the notice doesn’t include the reasons, then the assessee can request the assessing officer to send a copy of the recorded reasons.

In case the assessee is satisfied with the reasons recorded by the assessing officer, he/she should file the return at the earliest. If the return is already filed, he/she send the copy to the assessing officer.

In case the assessee files the income tax return in response to notice issued under section 148, it is necessary to ensure that the assessee files it carefully by declaring all the incomes and expenses to avoid unnecessary penalties.

Assessee can challenge the validity of notice before the assessing officer or higher authorities if notice isn’t served validly or reasons provided for opening assessment under section 147 aren’t proper. However, in case the decision doesn’t go in favour of the assessee, then the assessing officer could proceed with the reassessment.

FAQs

What assessee needs to do after receiving notice under section 148?

The assessee needs to produce the details of his/her income tax returns within 30 days duration that has been specified by the assessing officer in the notice given.

Who can issue a Notice under Section 148?

Assessing Officer currently who does not ranks below the rank of Assistant Commissioner or Deputy Commissioner can issue a notice under Section 148.

What happens if the assessing officer does not files his IT return after receiving notice u/s 148

The assessee shall be liable to pay interest under Section 243(3) for late filing of Income Tax return or for not filing of Income Tax return,