Here are the tax risks of being a joint holder

It is well settled under the tax laws that even if the investment is made in the joint name with the spouse, the investment and the income arising therefrom shall be deemed to belong to the first named holder. In such cases there is no tax effect on the joint holder. It was only when the joint holder contributed towards the cost of the investment that, for tax purposes, the investment would be deemed to be held jointly by both in proportion to their respective contributions towards the cost of the investment.

Over the past few months, several tax reassessments have been initiated against joint holders for earlier years in which investments were made, allowing them without adequate opportunity to explain the source of such investments. Given the high cost of litigation in India, filing writ petitions against such notices is often not an option. Such revaluation proceedings then require hiring the services of a professional familiar with revaluation procedures, which makes it a costly and time-consuming affair.

Tax authorities are seeking to match PAN-wise information received about investments made through Specified Financial Transactions (SFT) details during each year with the information disclosed in income tax returns. The information includes the names of both the first named holder as well as the joint holder. Reassessment notices have been issued to joint holders on the basis of such SFT details where such tax returns have not been filed.

In the case of joint holders whose names have been added only for convenience, in most of the cases, the joint holder hardly has any taxable income, and hence is not required to file tax returns, and accordingly does not file tax returns is done. Many of these joint holders are non-residents with only one overseas address. In many cases, the email or telephone numbers of joint holders are not registered with the Income Tax Department, as they are not filing tax returns in India. The joint holder, in such cases, does not receive the initial tax notice proposing reassessment and hence is not able to respond to the tax notice.

Shouldn’t the tax authorities focus only on the first named holder, and initiate proceedings against him where the first named holder has not responded? In rare cases where he informs that the investment does not belong to him but to the joint holder, then of course, the tax authorities can certainly initiate proceedings against the joint holder.

Second, and more importantly, should revaluation notices be issued in a routine manner without resorting to easy means of verification? SFT is a process for online verification of transactions, where one can simply click on the link sent by the tax authorities and agree, disagree or partially disagree with the SFT information. This should be ideal. If notices are to be sent in physical form, time taken for delivery of such notices, especially to overseas addresses, should be taken into account while allowing them time to reply. This will save valuable time and efforts of both tax officials and investors.

In most of the cases, after wasting considerable time, effort and money of both the tax department and the taxpayers, a conclusion is reached in the reassessment proceedings that no tax is payable by the joint holder, as the investment has been made by the first named holder. . out of his disclosed funds or out of remittance made from his foreign funds.

What purpose is served by such a fruitless exercise of revaluation? Instead of issuing massive notices for reassessment, a better, simpler and cost-effective means of follow-up on such SFT notices certainly needs to be considered by the tax authorities.

Gautam Nayak is a Partner at CNK & Associates LLP.