Explained | What to do about income tax notices on under-reporting/misreporting of income

There is much celebration about the widening taxpayer base. Out of the 6.77 crore income tax returns (ITRs) filed for the current assessment year (AY), 53.67 lakh ITRs by first time filers. Much of this can be credited to the government’s increased scrutiny of large cash withdrawals, overseas remittances, purchase of luxury car, gains from future and options trading, net income from online games etc, alongside sustained social media compliances.

However, the close watch is equally trained on the ITRs filed, resulting in more Income Tax department notices being sent out seeking documentary evidence for allowing deductions/ exemptions claimed by the taxpayers under the old regime before granting tax refunds. In July, as per reports, the income tax department has sent one lakh notices under Section 133(6) of the Income Tax Act, 1961, to those suspected for under-reporting and/or misreporting their income by way of claiming deductions and exemptions unlawfully, largely related to leave travel allowance, house rent allowance, donations to charitable institutions, monetary contribution to political parties, medical expenses, housing loans, etc.

Remarkably, not only did these notices seek documentary evidence on the claims made, but also the name, address, and contact number of the chartered accountant, advocate or income tax practitioner who has prepared and filed the relevant return on behalf of them, reflecting the seriousness of the issue. The author is also privy to some notices from the department even asking the assessee to furnish copies of earlier ITRs filed, along with documentary evidence of deductions claimed in them.

How to respond

On receipt of such a notice, the taxpayer is required to submit online his/her response with all the necessary documentary proofs sought within the prescribed time. For instance, if a taxpayer claimed to leave travel allowance, then copies of relevant travel tickets, invoices, and hotel-bookings.

Those who claimed HRA, must provide a valid rental agreement with rent receipts, and the property owner’s PAN if the rent paid was more than a lakh. The Income tax law does not prohibit an employee from claiming HRA for the rent paid to the family members, however, the same may come under the department’s scrutiny. In the absence of any rental agreement, cash payment rather than bank transfers, it will be difficult to justify. For the payment of the housing loan’s principal and interest, a taxpayer can produce the concerned bank’s statements and certificates obtained for this purpose.

For medical expenses claimed, concerned family doctors' or hospitals’ prescription, bills, payment records will suffice.

Consequences of not responding

On failing to reply or if the reply is not found satisfactory, the department will insist the taxpayer file a revised return with or without claiming such deductions and exemptions as the case may be. As per Section 272A(2) of the Income Tax Act, 1961, failure to comply with a notice issued under Section 133, may invite penal provisions of penalty of Rs. 100/- per day. In addition, misreporting of income and claiming wrongful deductions may attract interest at 12 percent per annum, a penalty of 200 percent of taxes evaded and prosecution may entail imprisonment

Voluntary rectification

A taxpayer who has not received such a notice but feels that there were instances of claiming such deductions and exemptions deceptively, he or she can still rectify it by filing a revised return or updated return within the prescribed due dates and escape the above mentioned consequences to a great extent.

Long and short, check for any notice in your mailbox. Don’t ignore it. Check its authenticity at https://bit.ly/38szmN6. Read it carefully and response in time. Take corrective action where needed. Preserve tax-related documents at least for 10 years. Given the strength of scrutiny tax evasion has become very difficult.