Key Points to Claim Refunds in Your Income Tax Return

The Income Tax Department has issued an awareness message concerning the rightful claiming of refunds in Income Tax Returns (ITR). It outlines the requirement for filing ITRs for those above the basic exemption limit, claiming refunds, or carrying forward losses. The message notes the default new tax regime and the option for the old regime for certain taxpayers, highlighting instances of wrongful refund claims, particularly by employees in the old regime. These wrongful claims often involve unsubstantiated deductions or exemptions made in the ITR after TDS has been deducted by employers based on Form 12BB submissions. The department differentiates between legal tax planning, which involves genuine claims with evidence, and illegal tax evasion through bogus claims. Using IT tools like AI/ML, the department identifies high-risk refund cases for analysis. Consequences of making wrongful claims include detailed scrutiny, disallowance of claims, tax demands with interest, penalties up to 200% for misreporting income, and potential criminal prosecution with imprisonment and fines. Taxpayers who have made wrongful claims can file an Updated Return (u/s 139(8A)) within two years to correct the ITR, withdraw the incorrect claims, and pay additional tax (25% or 50%) to avoid these adverse consequences. The message emphasizes filing true and complete ITRs with documented evidence for all claims.

Income Tax Department

Central Board of Direct Taxes

AWARENESS ABOUT RIGHTFUL CLAIM OF REFUNDS IN THE INCOME TAX RETURN

Are you making right claim of refunds in your Income Tax Return — Here are the key points which you are required to know before filing your Income Tax Return!!

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 forward 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(hereinafter referred to as ‘the Act’).

New Tax regime and Old Tax regime:

> 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.

> However, Individuals 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 Assessment Year.

> 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 of Rs.75,000 u/s 16(ia) are allowable.

> Wrongful refund claims are noticed among certain employees who have opted for old tax regime.

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 (dedicator/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.

Wrongful claim of refunds in the 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 deduction/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.

Tax Planning v Tax Evasion:

> Tax Planning:

• It 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:

• It 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.

Use of Al/ML and Data Analytics for risk analysis:

> Such 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.

Adverse Consequences of making wrongful claim of refunds:

> On analysis, there is a strong likelihood of such cases getting selected for detailed income tax scrutiny; such ITRs are subjected to detailed 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.

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!!

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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