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Income Tax Department Prescribes Guidelines for Verification of Suspicious Bank Accounts

Updated on: Apr 20th, 2022


8 min read

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After the demonetisation, the banks are instructed to levy charges on cash transactions above a certain limit. Further, RBI has made it mandatory to investigate unusual cash transactions. This is because a lot of malpractices were noticed when cash deposits of Rs. 500 and Rs. 1,000 notes were made during the demonetisation period. A circular was passed by the Finance Ministry describing the standard operating procedure, for assessing officers, to be followed while handling such cases. There are specific cases when a verification warrant may be issued for your transaction:

What are Suspicious Transactions?

Banks and other financial intermediaries with the Financial Intelligence Unit of the government file the suspicious transaction reports.

Usually, all series of cash transactions that are related to each other which value individually less than Rs 10 lakh and have occurred in less than a month and sums to a monthly aggregate that exceeds Rs 10 lakh is considered suspicious. However, this is not the only example of a suspicious bank transaction. Reporting entities can report and raise suspicion on the basis of other grounds as well.

How do Banks View Probable Transactions of Suspicious Nature?

Value of transactions: Value when just below the reporting threshold amount can be an obvious attempt to avoid reporting. When the value is inconsistent in line with the client’s apparent financial standing.

Multiple accounts: Several accounts with a common introducer, account holder, or an authorized signatory with no rationale. Unexplained transfers between multiple accounts without a rationale.

Activity in accounts: Unusual activity has been recorded when compared to past transactions. Sudden activity has been seen in dormant accounts.

Client identity: Identification documents that could not be verified within a reasonable timeframe. On the basis of false identification documents. Accounts are opened with names that are similar to other established business entities.

Nature of transactions: Unjustified and are of unusual complexity. Recurrent purchase of drafts/other negotiable instruments via cash. The nature of transactions is inconsistent when compared to what has been expected from the declared business.

Who Can Be Put Under Scrutiny?

There can be many scenarios that call for scrutiny. Some of the scenarios are mentioned below: 

  • Cash deposited from earlier income or savings
    • Individuals who deposit cash above Rs.2.5 lakh and senior citizens who deposit cash above Rs.5 lakh may be scrutinised. Any amount within the specified limit will be excluded from scrutiny considering that the money is from household savings, cash withdrawals, earlier income, and so on.
    • In the case of individuals without business income, deposits above the mentioned limits will be verified by the assessing officers. Businesses whose books of accounts showing total savings that are more than the closing cash balance as of 31 March 2016 (AY 2016-17) will be investigated.
    • Bank accounts that are suspected of being misused for money laundering or tax evasion or entry operations in shell companies will be completely investigated.
  • Cash from tax-exempt receipts Any excess cash out of receipts that are exempt from the tax should be in line with the income tax returns filed earlier by the same person. In a case where it is otherwise, the assessing officer may call for relevant information.
  • Cash withdrawn from a bank account cash deposits that don’t match the individual’s bank statements call for suspicion even if he says the money was withdrawn from the bank account. The assessing officer may seek a copy of the bank statement to explain the cash deposits and withdrawals out of the bank account.
  • Cash received from identifiable persons In the case of cash received from identifiable persons (with PAN), the assessing officer will not call for further information from the taxpayer. Instead, the assessing officer will seek information from the assessing officer of such an identifiable such identifiable person. In the case of a gift, the assessing officer would verify whether the same is taxable in the hands of the recipient under section 56(2) of the income tax law.
  • Cash received from unidentified people In the case receipts from unidentifiable persons (without PAN), the assessing officer will verify whether the cash receipts are in line with the normal practices of the business of the taxpayer. If cash transactions are not in line with the normal practices of business, the assessing officer may ask you to submit documents, such as monthly sales summary and stock registers, for verification. In the case of other unidentifiable persons, the assessing officer will verify whether the cash transactions are in line with the normal business practices in accordance with the earlier return of income. The assessing officer may seek information such as monthly sales summary, relevant stock register entries, bank statement etc to pinpoint instances of backdating of sales or fictitious sales. To identify instances of backdating of sales, an AO may look into:
    • An abnormal increase in the percentage of cash sales during the period of November-December 2016 or earlier periods.
    • Multiple deposits of demonetised currency late in December 2016.
    • Non-availability of stocks or attempts to inflate stocks.
    • Transfer of bank accounts that are not used previously.
    • The same process will be used for verification of donations and other cash receipts.
  • Cash disclosed or to be disclosed under PMGKY In the case taxpayer discloses cash under Pradhan Mantri Garib Kalyan Yojana (PMGKY), the suspected cash transactions can be verified with disclosures made under PMGKY.

How Much Money Can You Transfer Without Raising Suspicion?

An individual who deposits cash above Rs.2.5 lakh; a senior citizen who deposits cash above Rs. 5 lakh may be scrutinised. An amount within the prescribed limit will not be scrutinised considering that the money is via household savings, earlier income, cash withdrawals, and so on.

How Does the e-Verification Process Work?

The online verification has been enabled on the e-filing portal which will be synchronised with the internal verification portal of the income tax department. The features of the portal are listed below:People under scrutiny can submit explanations online through their login on the e-filing portal. They do not need to visit the income tax office. PAN holders can view this information using the ‘Cash Transactions 2016’ under the ‘Compliances’ section.

An SMS and email will be sent to all persons under scrutiny directing them to submit online responses on the e-filing portal. Such persons who are not registered should register immediately under ‘Register yourself’ link. Registered taxpayers must update their e-mail address and mobile number on the portal are accurate to receive communication from the department.

Individuals can check the guides and FAQs section of the IT department’s website to submit their responses.

Low-risk cases can be closed centrally, while the other cases will be assigned to AOs for verification.

AOs will view all submissions and ask to submit further verification proofs online. The supporting documents must be submitted online.

If the documents and proofs submitted online are satisfactory, the AO will close the verification online.

What to do if You Are Stuck in the Process?

If you have any sort of questions or queries during the process, you can find guidance by referring to the ‘Help’ section of the e-filing portal. You can also refer to the FAQs to find a solution for your queries. Alternatively, you can refer to a document titled ‘Cash Transactions 2016 User Guide’. You can also learn from the ‘User Guide on Verification of Cash Transactions on ITBA-AIMS module’, a guidelines document AOs abide by during verification.

Closure and Approval

Assessing officers have the liberty to close a person’s records after verification with due permission from the concerning authorities. The relevant authority for tier-1 cities is Additional/Joint CIT heading the range for transactions below Rs.10 lakh. For other cities, the AO needs to refer to the Pr. CIT.

Non-compliance and Penalty

In the case of non-compliance, the AO can view the ITS profile of the PAN holders, exercise powers under Section 133(6) with the approval of the prescribing authority, survey action under Section 133A, and more. On the other hand, the AO can consider initiating penal proceedings under section 269SS or 269T of the Act.

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