CBDT (Central Board of Direct Taxes) officials said most companies on advice from their tax professionals had already latched on to this idea and started doing that, frustrating the government's efforts to increase revenues through presumptive penal taxation.

Income tax laws allow an assessee to declare any cash as income for the ongoing financial year or receipts due from previous years paid this year and pay 30 per cent advance tax by December 15.

While demonetising Rs 500 and Rs 1,000 notes, the government had said deposits of beyond Rs 2.5 lakh in old notes would be treated as concealed income and a presumptive 200 per cent penalty levied on them. Section 270 A of the I-T act has fixed the penalty in case of under-reporting of income flowing from deliberate misreporting. If it is not wilful misreporting, the penalty can be 50 per cent of the undeclared income.

However, tax experts have pointed out that this cannot be implemented and the government has been exploring alternatives without finding any solution. "The problem is that there is no real alternative under the current law unless we either change the law or declare a VDIS 2 (voluntary disclosure of income scheme) and make legislative changes to back it up," top CBDT officials said.

"Changing the law is possible and is being explored, but we cannot bring an ordinance as long as Parliament is in session. And in the current situation, Parliament is unlikely to rush through any amendment, which we bring," officials said.

Any change in the IT act will be a money bill, which cannot be rejected or amended by the Opposition-dominated Rajya Sabha. However, the Upper House can keep it hanging for 14 days, which will defeat the very purpose of the bill.

Officials said most of those depositing huge amounts are declaring them as income for the current year and paying advance tax. "We are witnessing a certain surge in advance tax payments, we are carrying out scrutiny."

However, the government believes more cash is waiting to be deposited by people who will be willing to pay higher taxes. The real challenge is to make people cough up more money when they can get away by paying an advance tax and the remaining taxes by March 31, taking the total tax payout to 35 per cent.

The government is toying with the idea of a voluntary disclosure of income scheme similar to the income declaration scheme earlier this year. However, officials maintain that such a scheme "might be a case of too little too late".

Earlier, there were provisions under Section 271(1)(c) of the income tax act that provided for a penalty for concealing the particulars of income or furnishing inaccurate details, where the onus of proving that the income was earned in the course of the year fell on the assessee.

However, from the last budget, the penal provisions were replaced by Section 270A, which imposes penalty only when the assessed income is larger than the declared income.

There is no provision for imposing penalty for concealing the particulars of income, a move widely welcomed by the business and taxation community as a progressive legislation, which did away with cumbersome paperwork.

However, this has now left open a loophole that does not allow the government to impose penal clauses on any cash stashes on which advance tax has been paid.