Some Income tax provisions to know, to avoid service of I-T notice at your door

CA Sunil Hukkeri

Central Processing Center of IT department is smart to detect small transactions also

CPC for electronic tax returns in Bangalore and CPC (Vaishali in Ghaziabad) for tax deducted at source (TDS) are working as the right hands of Government for detecting cases of incorrect income reported by tax payers knowingly or unknowingly. It was published by leading news paper that some of Assessee received notices for filing incorrect return of income or for not furnishing correct particulars of income like not reflecting income from other sources, claiming deduction twice and so on…………

Till now the mindset of tax payers towards income tax notice was “bite will not be followed by bark” but because of above matching concept it can be read as “bite will be followed by bark”.Therefore it is always better tofile return of incomeand also to know some provisions of income tax before the income tax notice is at your door.

File your return of Income Voluntarily before due date :-

The due date for filing return of income for assessment year 2018-19 is as follows.

If return is not furnished within the time then file belated return:-

Belated return of income: – If return is not furnished within the time allowed under section 139(1) or within the time allowed under notice issued under section 142(1), the person may before assessment is made, furnish return of any previous year at any time before the end of relevant assessment year.

Example 1: –

For financial year 2017-18 relevant assessment year is 2018-19. In case a person who has not filed the original return of income in pursuance of section 139(1) [i.e. before 31^stJuly-2018 extended to 31.08.2018], a belated return can be filed under section 139(4) on or before 31^stMarch 2019.

If a return is submitted after the due date, then following consequences gets attracted:

1. The assessee will be liable for penal interest under section 234A.

2. A penalty of Rs 5,000 may be imposed under section 271F for failure to furnish return of income before the end of relevant assessment year.However wef from A.y 2018-19Penalty u/s 271Fshall be replaced by late filing fees U/s 234F. The assessee shall be liable forlate filing fees under section 234Ffrom A.Y 2018-19 onwards. The late filing fees is explained in table below:

However if the total total income does not exceeds Rs 5 lakhs the amount of late filing fees shall not exceed Rs 1,000.

Example 2:-

If there is failure to file return of income on 31^stAugust 2018 then it can be filed on or before 31^stMarch 2019 along with interest and applicable fees u/s 234F.

Interest for late filing or non furnishing of income tax return. (Section 234-A)

For delay in furnishing income tax return, a simple interest @ 1% for every month or part thereof from the due date of filing of the Return to the date of furnishing of the return & in case return is not filed, it is up to the date of completion of assessment u/s 144. The interest is calculated on the amount of the tax on the total assessed income as determined under sub-section (1) of section 143 or on regular assessment u/s 143(3) as reduced by the Advance Tax, if any, paid and any tax deducted or collected at source.

Example 3:-

Interest under section 234A is not levied where tax has been deposited prior to due date of filing return even if return is filed after due date of furnishing return of income provided the return is not filed for reasons beyond the control of Assessee as was held in case CIT v. Pranoy Roy. In absence of information to file tax return this option seems to be good to save interest on tax.

If there are omissions or wrong statements in return of income then what to do.

A return can be revised provided it is filed first under section 139(1) or filed in response to notice issued under section 142(1). It means you cannot file revised return in other situations. Even the belated return filed above cannot be revised. Revised return of income can be filed within one year from the assessment year or before completion of assessment.However Wef from A.y 2017-18 belated return u/s 139(4) can also be revised. Moreover Wef A.y 2018-19, the return filed u/s 139(1)/139(4) can be revised at any time before the end of the relevant assessment year or before completion of assessment, whichever is earlier.

Example 4:-

A revised return can be filed only if omission or wrong statement in original return must be due to a bona fide inadvertence or mistake on the part of assessee. If you have filed original return knowingly false then in that case return cannot be revised [ Sunanda Ram Deka Vs CIT ]

Penalties for default in furnishing inaccurate particulars or concealing income particulars in return of income

Return of income filed concealing particulars of income or furnishing inaccurate particulars of income is liable for penalty

• Minimum penalty :- 100 % of tax sought to be evaded OR
• Maximum penalty: – 300% of tax sought to be evaded.

Wef A.y 2017-18, a penalty of 50 percent of the tax payable shall be charged on under-reported income and 200 percent of such tax in case of misreporting of income under section 270A

Example 5:-

Incorrect calculation of capital gains on basis of mistaken indexation cannot be treated to be an indirect concealment or a wrong furnishing of particulars [ Udayan Mukherjee v CIT 2007]

Few other examples which may help you:-

Example 6 Always be member of a recognized provident:-

An employee, who is member of recognized provident fund resigns from company having recognized provident fund before completing period of 5 years of continuous service, should join a Company which also has recognized provident fund. This will ensure that accumulated balance of provident fund with former employer will be exempt from tax, provided the same is transferred to the new employer who also maintains a recognized provident fund and balance period of 5 years is under gone under new employer.

The balance in recognized provident fund due or payable to salaried employee will be EXCLUDED FROM HIS TOTAL INCOME in the following situations.

a)Continuous period of service for 5 years :-

If the employee has rendered continuous service with his employer for a period of 5 years or more

b)Continuous service of 5 years not fulfilled beyond the reach of employee :-

If continuous service of 5 years is not rendered due to ill health or by reason contraction or discontinuance of employers business or due to some other reason beyond the control of employee.

c)Retirement and joining with company having recognized provident fund: –

After retirement if employee obtains employment with any other employer ensure that accumulated balance of provident fund with previous employers get transferred to his individual account in any recognized provident fund maintained by new employer.

d) If the entire balance standing to the credit of the employee is transferred to his account under NPS referred in section 80CCD and notified by the central government.

IF PROVIDENT FUND balance becomes taxable due to not complying with above conditions then total income of employee will be recomputed by income tax department as if the fund was not recognized from beginning.

TDS on EPF Withdrawal

TDS is deductible on withdrawal of the accumulated balance if the amount is not exempt in the hands of the employee, owing to the provisions of rule 8 of Part A of the Fourth Schedule i.e. any of the 4 cases mentioned above. TDS is deducted at the time of payment of the accumulated balance due to the employee.

TDS is not deductible if the aggregate amount of withdrawal is less than Rs. 50,000/-. It is deductible at the rate of 10%. However, if the PAN of the recipient is not available then TDS is deductible at Maximum Marginal Rate which is 35.880% for the A.Y 2019-20.

Consequences if above conditions (a) to (d) are not satisfied:-

Employer’s Contribution and Interest on Employer’s Contribution

The employer’s contribution and interest, thereon, would be taxable as profits in lieu of salary under the head salary income in the hands of the employee.

Employee’s Contribution

The employee’s contribution would be taxable to the extent of the deduction claimed under Section 80C in respect of such contribution, if any, under the Income-tax Act’1961.

Interest on Employee’s Contribution

The interest earned on employee’s contribution would be taxable under the head income from other sources in the hands of the employee.

Example 7More than one house for own residence:-

If employee has more than one house for his own residence, only one house as per his selection will be considered as self occupied property and other house will be treated as deemed to be let out property. For example employee owns two or more house properties meant for self occupation, he can select to treat one such house property as self occupied. The remaining houses shall be deemed to be let out properties. This option can be changed year after year in manner beneficial to assessee.

• Now next question is which house to be selected as Self occupied property:-

House with the higher gross annual value to be selected as self occupied property. By doing this automatically house with lesser gross annual value shall be liable to tax as deemed to let out property. In addition to this, one more aspect to be considered before selecting the self occupied property i.e. the amount of interest on borrowed loan in respect of each property can be claimed without any limit in case of deemed to be let out property as against restricted limit of Rs 200,000 in case of self occupied property.

Example 8Housing Loan from outside India :-

In case of interest paid on housing loan from outside India, benefit under section 24(b) is available only if the interest is paid after tax deduction. To get deduction for interest it should be ensured that interest is paid after deduction of tax.

Example 9Capital Gains :-

To minimize the tax incidence on transfer of capital assets, tax payers should plan to transfer the capital assets after 24/36 months in which indexation benefit is available. In case of share, securities, Units of UTI, the period of holding should be more than 12 months.

Further, it is always beneficial for the tax payer to transfer long term capital asset at the beginning of the financial year instead of at end of the previous financial year. By doing so tax payer can claim cost inflation of next yearwhich will be higher than cost inflation of previous year.

Example 10Deduction in respect of life insurance premium:-

In case of Individual a policy may be taken on his own life, life of spouse or any child (child may be dependent / independent, male / female, minor / major or married or unmarried).

In case of Hindu undivided family, policy may be taken on the life of any member of the family.

Minimum period of holdings is two years for life insurance premium. In other words if life insurance policy is terminated before completion of two years then the quantum of deduction already taken in the preceding years would be deemed as income of tax payer in the year in which LIC is terminated.

Similarly minimum holding period of different periods is applicable for Unit Linked insurance plan [five years], Cost of purchase of residential house property [five years], Time deposits in post office [five years], Deposit under senior citizen saving scheme [five years].

Tax payer has to ensure that premium paid in any year during the term of policy should not exceed 10 % of actual sum assured for 80C deduction.

Example 11Exemption for sum received from LIC: –

Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy shall be exempted, other than the following points:

a. Any sum received under sub-section (3) of section 80DDor sub-section (3) of section 80DDA; or

b. Any sum received under a Keyman insurance policy; or

c. Any sum received under an insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured other then on death of a person, or,

d. Any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured other then on death of a person.

However where the policy, issued on or after the 1st day of April, 2013, is for insurance on life of any person, who is—

(i) a person with disability or a person with severe disability as referred to in section 80U; or

(ii) suffering from disease or ailment as specified in the rules made under section 80DDB,

Then any sum received under an insurance policy in respect of which the premium payable for any of the years during the term of the policy exceeds 15% per cent of the actual capital sum assured.

Example 12Lowering of tax incidence on retirement benefits:-

Incidence of tax on retirement benefits like gratuity will be lower if they are paid in beginning of the financial year. Therefore try that retirement, termination, or resignation takes place in beginning of financial year.

Example 13Perquisites other than electronic items, cars, computers:-

If employer gives perquisites in respect of movable assets (other than electronic items, cars, and computers) after using it for 10 years or more are not taxable.

Employee can get these benefits without paying any tax on perquisites.

Example 14 Capital gains account scheme:- (herein after called as “CGAS”)_

There are few sections [** see below] under head “Capital Gains” where capital gains are exempt if such gains are re-invested in purchasing eligible assets within time limit prescribed in those sections. In cases where the purchase of these eligible new assets is not made before the date of furnishing the return of income then the unutilized amount is required to be deposited in account called “CAPITAL GAINS ACCOUNT SCHEME”

[**] For example section 54 [transfer of residential house], section 54B [transfer of land used for agricultural purpose] section 54F [transfer of long term capital asset other than house property]

• IMPORTANT NOTE 1 for CGAS: –

Deposit in CGAS shall be made before filing return of income or within the due date for furnishing the return of income whichever is earlier. In case if return is not filed then assessee should ensure to deposit unspent amount in CGAS on or before 31^stJuly-2018.

• IMPORTANT NOTE 2 for CGAS: –

The deposit shall be made in an account with a bank or institution approved for purpose.

• IMPORTANT NOTE 3 for CGAS: –

The amount deposited to be withdrawn for utilization in accordance with scheme for specified purpose & the copy of proof of such deposit should be always be kept with you.

• IMPORTANT NOTE 4 for CGAS: –

If the amount is not utilized fully for reinvestment of eligible assets within the prescribed period mentioned in section 54, 54B, 54F then amount not so utilized shall be treated as gain of previous year in which the time period given for reinvestment in eligible assets expires.

Last but very important:- Always keep the backup of documents, receipts, tax challans and some other documents based on which benefit is claimed in return of income because later on some surprise notice are expected from department.

The above content is general information and is not intended to be advice on any particular matter.

Reader should seek appropriate professional advice before acting on basis of above information.

(Author may be contacted at via email – hukkerisunil@gmail.com)

(Republished With Amendments)

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