Introduction
Recently, the Income Tax Department has launched an extensive crackdown on bogus claims of deductions and exemptions, primarily under sections such as 10(13A), 80C, 80D, 80G, 80GG, 80GGC, among others. These provisions pertain to benefits like House Rent Allowance, life insurance and investment-related deductions, medical insurance premiums, donations to charitable institutions, and political contributions.
The investigation revealed a pattern of fraudulent claims including fictitious HRA, non-genuine mediclaim policies, fake investments, and fabricated donation receipts. Many of these discrepancies were flagged where no corresponding TDS had been deducted, indicating an intention to evade taxes by inflating deductions and underreporting taxable income. The Department has accordingly initiated verification and penal actions in several such cases. This nationwide verification campaign of the department, which was done in 150+ locations, uncovered systemic tax evasion which involved fake inflated deductions, false TDS claims, resulting in wrongful refunds.
As this was often facilitated by intermediaries and unauthorised consultants, who firstly show as if he is helping taxpayer in getting maximum refund as very low rates, and out of them few are also involved in selling taxpayers sensitive data to cyber criminals resulting in frauds.
The department is using AI and data analytics to trace these networks and intends to pursue prosecutions, levy penalties, and dismantle these evasion channels, knowing this, around Rs. 1,045 crore worth of fake claims have already been voluntarily withdrawn by nearly 40,000 taxpayers, so that they could remain on safe side.
Now what made me excited to research on this topic and write this article?
I wrote this article after being curious that, is taxpayer solely at fault or is it the fault of the so-called “consultants” who promise huge refunds without verifying eligibility?
Few financially uneducated people have this wrong mentality, that “Income tax return is solely for refund, the better consultant is one who maximises my refund”, my question is, who are responsible for this mentality of taxpayers? Who will tell them that refund is dueto over deduction of tax at source, and it is mandatory to file return if the income exceeds Rs. 2.5 lac or Rs. 3 lac in old and new scheme respectively.
Taxpayers mistake is to rely blindly on temporary email accounts or unverified agents, leading to notices going unnoticed, now will a person go to a compounder for his surgery? No right
Let’s continue with this amazing case law
A Landmark Order of National faceless assessment centre (NFAC) upheld the natural justice in the case of penalty proceedings as per Section 271(1)(c)
Note: Section 271(1)(c) of the Income tax Act, 1961 prescribes two faults or omissions which exposes the assessee to concealment penalty. These are, concealment of particulars of income and furnishing inaccurate particulars of such income.
Background of the case
The above case pertains to a penalty of Rs. 37,127 levied under Section 271(1)(c) for Assessment Year 2015–16 against Smt. Suruchi Singh, who was an individual taxpayer.
The penalty arose from a reassessment under Section 147 on the grounds that certain deductions under Chapter VI-A were erroneously claimed based on incorrect declarations. The original return was filed on 19.08.2015 declaring an income of Rs. 3,07,410.
During reassessment, the total income was recomputed at ₹5,83,637. Consequently, penalty proceedings were initiated citing “furnishing of inaccurate particulars of income.”
Note: Section 147 of the Income-tax Act, 1961 empowers the Assessing Officer to reopen an assessment if there is a “reason to believe” that income chargeable to tax has escaped assessment for any assessment year. The provision allows for reassessment or recomputation of such escaped income, and during the course of reassessment, any other income that comes to the notice of the Assessing Officer can also be assessed.
This section forms the substantive basis for reassessment, while the procedural safeguards are laid down in Sections 148 and 148A. The AO must follow due process, including issuance of notice and providing an opportunity to the assessee before reassessing. As per the amended regime (Finance Act, 2021), reassessment can be initiated within 3 years from the end of the relevant assessment year. However, in cases where the escaped income is ₹50 lakh or more and is represented in the form of an asset, expenditure, or entry in books, the time limit extends up to 10 years. The AO is also mandated to obtain prior approval from higher authorities before issuing a notice under Section 148. The provision ensures that tax evasion cases are brought within the tax net, but also subjects the Revenue to judicial scrutiny on the condition of “reason to believe.”
Condonation of Delay
Under NFAC, the time limit remains governed by Section 249(2) of the Income-tax Act, 1961 which states that an appeal must be filed within 30 days from the date of service of the notice of demand (for assessment or penalty orders), or the date of service of the intimation of the order you wish to appeal but if the taxpayer demonstrates sufficient cause, then this delay could be condoned.
In this case, dueto genuine medical hardships, the appeal was filed with a delay of around 70 days, which was adequately explained through medical records. Here, the appellant had undergone abdominal surgery on 04.09.2022, and the penalty order was served on 19.09.2022 that was within the post-operative period.
Moving forward, what were grounds of appeal of taxpayer?
The grounds of appeal were that, firstly, the penalty order under Section 271(1)(c) is arbitrary and not in accordance with law, Secondly, this default was unintentional and due to incorrect advice from a third-party tax preparer, Shri Sandeep Kujeer, who falsely represented himself as a Chartered Accountant.
Next one is, penalty order haven’t clearly mentioned any specific part of Section 271(1)(c) where the penalty was being imposed i.e. whether it was for concealment of income or for furnishing inaccurate particulars of income, also, there was no fresh addition or disallowance in reassessment the income was voluntarily offered, and lastly the penalty provisions are discretionary, not mandatory, as evident from the use of the word “may” in the statute.
Legal Analysis:
There was absence of mens rea which means that there was no wilful attempt to conceal or misreport income by taxpayer. Hence this error arose from a bona fide misunderstanding of law, not an intent to deceive, hence upon receiving notice under Section 148, the appellant filed the return offering correct income even before the reasons for reopening were shared.
Judicial Precedents
Here, I want to quote two similar case laws from which assessee representation before NFAC was formed:
First one is Archana Achyut Sail v. ITO, ITAT Mumbai (citations: ITA Nos. 5277 & 5278/Mum/2024), wherein penalty was deleted due to similar circumstances.
Secondly, As we saw above representation of assessee, they used CIT v. Dodsal Ltd. [(2009) with citations: 312 ITR 112 (Bom)], which held that the term “may” in penalty provisions implies discretion, not compulsion.
NFAC’s observations and ruling
After evaluating the facts and submissions, NFAC held:
The appellant was misguided by an unqualified individual. Her conduct throughout showed cooperation and voluntary disclosure. Hence, The facts in Archana Achyut Sail v. ITO, ITAT Mumbai were held to be directly applicable. There too, the assessee had relied on an unqualified TRP, filed a correct return under Section 148, and faced no disallowance, yet was unjustly penalized by department.
The Assessing Officer (AO) did not clearly mention whether the penalty was for concealing income or for furnishing incorrect details. This is a serious mistake, and many High Courts have said that such an error makes the penalty invalid.
Few cases of high court were CIT v. Manjunatha Cotton and Ginning Factory [citations: 2013 359 ITR 565 (Karnataka HC)] which stated that the notice issued under Section 274 must clearly state the limb under which penalty is initiated. Ambiguity in the notice renders the penalty proceedings invalid, other one is CIT v. SSA’s Emerald Meadows [citations: (2016) 386 ITR 13 (Karnataka) [2016] 286 CTR 585 (Karnataka) ITA No. 380 of 2015, decided on 23rd November 2015] where the high court confirmed that if the AO does not strike off the irrelevant part in the penalty notice, the penalty is liable to be quashed, etc.
Penalty provisions are discretionary as the use of “may” in Section 271(1)(c) gives latitude to the authority to exercise judicial wisdom, especially in genuine cases like the present.
When the assessee has already paid tax and interest exceeding Rs. 1.29 lakh, a further penalty of Rs. 37,127 would amount to double jeopardy, violating the principle of natural justice.
Hence, keeping above things in mind, NFAC deleted the penalty order completely, and the further appeal was allowed.
By this case, we learned that the taxpayer ignorance shall not be treated with equivalent to fraud, the tax authorities must distinguish between malicious intent and misguided ignorance, especially in the age of faceless assessments and widespread misuse of TRP.
Conclusion
The NFAC’s decision in Smt. Suruchi Singh showed us how tax matters should be handled with fairness, following both the law and past judgments. It reminds us that tax isn’t just about enhancing government revenue, but it is also about justice to all its taxpayers. This case is a good example for taxpayers and professionals, especially under the faceless system where personal interaction is limited, and penalty rules can seem unclear.
Author can be contacted at aman.rajput@mail.ca.in
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