CBDT issues awareness material on making a rightful claim of refunds in Income Tax Returns
It has been seen in past that salaried persons in particular, filed their Income Income Tax Returns (ITRs) claiming large amount of refund towards tax deducted at source. On scrutiny it transpired that the refund claim was made by claiming various deductions / exemptions to which the assessee was actually not entitled to. The excuse advanced by the assessee were that they are not tax literate and their tax consultant promised them to use his expertise and knowledge to get them large amount of refunds.
To make assessees aware, CBDT has issued an advisory/education material on making a rightful claim of refunds in their Income Tax Return as under:
Making a rightful claim of refunds in Income Tax Returns
Key points which assessees are required to know before filing their Income Tax Return for making right claim of refund in their ITRS
1. Filing of Income Tax Return
Every person who is having income above the basic exemption limit not chargeable to tax or who is required to claim any refund of pre-paid taxes or who is required to carry forwa rd losses to the next year are required to file the Income Tax Return within the due date prescribed u/s 139( 1) of the Income Tax Act, 1961 (‘the Act’)
2. New Tax Regime and Old Tax Regime
(i) The new tax regime for Individual and HUF introduced by the Finance Act 2020, has been made as the default regime from F. Y. 2023-24 onwards. (ii) However, lndividuals and HUF who do not have income under the head “Profits and gains of business or profession” may exercise their option for old tax regime for each AssessmentYear. (iii) As far as the new tax regime is concerned, only some deductions such as deduction u/s 80CCD(2) or 80CCH(2) or 80JJAA of the Act and standard deduction ofRs.75,000 u/s 16(ia) are allowable. (iv) Wrongful refund claims are noticed among certain employees who have opted for old tax regime.
3.TDS on Salary Income
As per Section 192 of the Act, TDS is required to be deducted by any person responsible for making salary payments (deductor/employer) at the prescribed average rate of tax on the estimated total income of the employee (deductee ).
If any employee is opting for old tax regime, the employer is required to obtain the details of deduction/exemption proposed to be claimed by the employee in Form No. 12BB along with the requisite documentary evidence and estimate tax liability after verifying the same and deduct TDS accordingly.
4. Wrongful claim of Refund in ITR
In certain instances, it is observed that subsequent to the deduction of TDS by the employers ,the employees either on their own volition or allured by others are filing their Income Tax Return with wrongful claim of deduct ion/exemption without any requisite documentary evidence whatsoever .As a result, total income and consequent tax liability are being reduced and the TDS deducted by the employer is being wrongfully claimed as refund
5. Tax Planning vs Tax Evasion
Tax Planning is a legal way to reduce tax liability. Making genuine claims of deductions u/s 80C, 80D, interest from house property u/s 24(b), exemption for house rent allowance etc.which results in reduction of tax liability are instances of tax planning which are allowable under the Act.
Tax Evasion on the other hand is an illegal way to reduce tax liability. Making wrongful claims of deduction u/s 80C for a LIC policy without even having a policy; bogus claims of deduction u/s 80D without even having a medical insurance policy are instances of tax evasion which are not allowable under the Act and may lead to adverse consequences under the Act.
6. Use of AI/ML and data analytics for risk analysis
Cases of wrongful claims in ITR involving high risk refund are being identified based on risk parameters using Information Technology tools like Artificial Intelligence/Machine Learning/Data Analytics and are being analysed by the Income Tax Department.
7. Adverse consequences of making unlawful refund claims
On analysis, there is a strong likelihood of such cases getting selected for detailed income tax scrutiny; such ITRs are subjected to de1ailed scrutiny wherein the employees are required to furnish the requisite documentary evidence for claim of such deduction/exemption.
In the absence of requisite documentary evidence of claim of deduction/exemption, such deduction/ exemption are liable to be disallowed during the income tax assessment/reassessment proceedings and tax demand is liable to be raised along with the applicable interest.
Penalty u/s 270A for misreporting of income@ 200% of the tax on misreported income may be levied.
Prosecution complaint may be filed in the Criminal Court in appropriate cases for tax evasion u/s 276C and/or false verification u/s 277 of the Act.
Prosecution – if tax on under reported income exceeds Rs. 25 lakhs – punishment can be of rigorous imprisonment for a term which shall not be less than six months but which may extend to seven years and with fine.
Prosecution – in any other case, punishment can be of rigorous imprisonment for a term which shall not be less than three months but which may extend to two years and with fine
8. Remedy available to avoid adverse consequences
Filing of Updated Return u/s 139(8A) of the Act withdrawing the wrongful claim of deduction and exemption and pay additional tax.
Time limit available for filing of Updated Return- within 2 years from the end of the relevant Assessment Year.
Additional Tax – @ 25% of tax and interest payable, if Updated Return is filed within 12 months; @50% of tax and interest payable, if Updated Return is filed after 12 months but before 24 months.
Employees who have made wrongful claim of refunds may utilise this opportunity and take corrective measures by filing Updated Return to avoid adverse consequences under the Act.
Don’t wait for notice from the Income Tax Department – since Updated Return cannot be filed once assessment / reassessment / revision proceedings are initiated by the Income Tax Department.
9. Key Takeaways
Please ensure filing of true, correct and complete Income Tax Return as making wrongful claims and consequent false verification may lead to penalty and even prosecution.
Consequent to deduction of TDS by the employer,the employee should not claim refund of such TDS deducted by making wrongful claim of deduction/exemption .
It’s important to claim rightful deduction/ exemption supported by requisite documentary evidence to stay compliant and also to ensure that refunds are processed smoothly and on time.
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