ITD examining ITR of salaried assessee claiming refunds – Precautions for Tax Consultants

ITD examining ITR of salaried assessee claiming refunds – Precautions for Tax Consultants/ Tax Practitioners 

Income Tax Department is scanning allowances and deductions claimed by Salaried Taxpayers claiming refunds

Recently, the Income Tax Department caught an Income Tax refund scam in Andhra Pradesh and Telengana. The scam amounts to Rs. 40 crores.

The modus operandi in all such cases was that Tax Consultants and the assessee collide to claim heavy refund of the tax deducted at source from salary and the consultant gets a hefty percentage of the refund obtained.  The return is filed claiming fraudulent exempt allowances (including Housing Loan interest, House Rent Allowance etc.) and various deductions under Chapter VIA (i.e. section 80C – insurance premium etc., , 80D – Medical insurance, 80G – donations, 80CCD – Pension funds etc.).

Under e-filing of return there is no requirement to attach proof of the deductions/allowances so claimed. Also processing of ITR at CPC Bengaluru  is not designed to examine deductions/allowances so claimed. The examination takes place only when the return are selected for scrutiny which is barely 1 percent of the returns filed.

In view of the above scam, the Income Tax Department has decided to examine allowances / deductions claimed particularly by salaried persons by way of calling information/ documentary proof of such claims. The Department is also seeking information of the tax consultants who have filed the return of the assessee.

The information is called under section 133(6) of the Income Tax Act, 1961 which authorises Income Tax Officers to call information from any person. The failure to comply with notice can  cause a penalty of Rs 500 per day under section 272A.

Though the Tax consultant is not required to examine/verify the various claim of the client, some precautions should be taken before filing a return of income of the client.

The Tax consultant must get the computation of income and taxation signed by the client specifically stating that :

(i) That the computation of income and taxation of the client has been made on the basis of information given and the Tax Consultant has only filed the return on the basis of computation made and not verified the claims of allowances/deductions.

(ii) That the client shall be solely responsible for any mis-statement made or wrong information given for the computation of income made.

• Penalty for late supply of goods allowable deduction u/s 37 being not a crime or prohibited activity
• Interest received from Cooperative banks allowable deduction u/s 80P to a Cooperative Society
• SC to decide distinction in employees & employer contribution to PF, ESI for allowability u/s 43B
• No liability to collect TCS u/s 206C (1C) from person involved in illegal mining – SC
• Receipts mentioning that it was towards corpus, donation assumed to be for corpus of trust