Income Tax department has started to crackdown on false claims of deductions by taxpayers. The Income Tax department has been vigilant in detecting and penalizing taxpayers who have filed false or inflated claims of deductions and exemptions in their tax returns. The department has been using technology to monitor the filings and issue notices to the defaulters.

Common areas of fraudulent claims

Some of the common areas where taxpayers have made fraudulent claims are:

 – House Rent Allowance (HRA): Some taxpayers have submitted fake rent receipts or inflated the rent amount to claim higher HRA exemption. The department may ask for proof of rent payment, such as bank statements, rent agreement, etc. If the taxpayer fails to submit any proof, the exemption will be disallowed and penalty will be levied.

 – Chapter VI-A deductions: Some taxpayers have claimed deductions under Section 80C, 80D, 80G, etc. without making the actual investments or donations. The department may ask for documentary evidence of the investments or donations, such as receipts, certificates, etc. If the taxpayer fails to submit any proof, the deduction will be disallowed and penalty will be levied.

 – Exemptions under Section 10: Some taxpayers have understated their taxable income by claiming exemptions under Section 10 for various allowances, such as travel allowance, medical allowance, etc. The department may ask for a break-up of the exemptions claimed and supporting documents. If the taxpayer fails to submit any proof or falsifies the information, the exemption will be disallowed and penalty will be levied.

Consequences of fraudulent claims

The Income Tax department treats fraudulent claims as a case of tax concealment or misreporting of income. Under Section 270A, misreporting of income attracts a penalty of 200% of the tax sought to be evaded . The penalty cannot exceed the amount of tax in arrears. The taxpayer will also have to pay interest on the tax due.

The department may also initiate prosecution proceedings against the taxpayer under Section 276C. The punishment for wilful attempt to evade tax is imprisonment for a term ranging from 3 months to 7 years and fine.

How to avoid fraudulent claims

The best way to avoid fraudulent claims is to file an honest and accurate tax return. The taxpayer should:

 – Keep all the documents related to income, deductions and exemptions handy while filing the return.

 – Verify the Form 16 and Form 26AS for any discrepancies or errors.

 – Claim only those deductions and exemptions for which he has valid proof and eligibility.

 – Disclose all sources of income, including exempt income.

 – File the return within the due date and pay the tax due, if any.

If the taxpayer has already filed a faulty return with fraudulent claims, he should:

 – Revise the return before the end of the assessment year or before receiving a notice from the department, whichever is earlier.

 – Pay the correct tax due along with interest and fee.

 – Cooperate with the department and submit the required documents if asked.

 – Seek professional help if needed.

Filing a false or inflated claim of deduction or exemption is not only unethical but also illegal. It can invite severe penalties and prosecution from the Income Tax department. Therefore, taxpayers should be careful and honest while filing their tax returns.

For any queries on tax you can reach us at elangovan@enaca.in