A Wake-Up Call for Tax Professionals: Why Promoting Fake Deductions and Wrong Refunds Is a Legal and Ethical Disaster
Introduction
In July 2025, the Income Tax Department launched an aggressive crackdown across 200+ locations in India, unearthing massive fraud related to fake deductions and bogus refund claims. The operation targeted salaried individuals, agents, intermediaries, and professionals allegedly involved in manipulating returns with inflated House Rent Allowance (HRA), fabricated political donations under Section 80GGC/80GGB, and fake deductions under Sections 80C, 80D, and more.
While taxpayers are receiving notices, a critical question arises:
> What role are professionals playing in facilitating or failing to prevent such practices?
This article delivers a strong warning, lists red flags, and emphasizes the ethical and legal responsibilities of Chartered Accountants, tax consultants, and return preparers.
The Trusted Role of a Tax Professional
As tax professionals, we are more than just ITR filers — we are trusted advisors. Our responsibilities include:
Interpreting tax laws for clients
Advising on eligible deductions
Verifying documents
Ensuring compliance and accuracy in filings
However, the credibility of this role is being eroded by professionals who:
Submit inflated deduction claims to “maximize refund”
Issue fake rent receipts or donation certificates
Partner with refund-based apps that guarantee money back
Such practices not only hurt the taxpayer but expose professionals to serious legal and ethical consequences.
Legal Consequences for Professionals
Tax professionals involved in aiding or allowing fraudulent refund claims are not immune from the law. Here’s how the Income Tax Act applies:
Action Relevant Section Consequence
Misreporting of income Sec. 270A Penalty up to 200% of tax evaded
Assisting tax evasion Sec. 276C Imprisonment up to 7 years
False verification Sec. 277 Prosecution and jail
Professional misconduct ICAI Code of Ethics Cancellation or suspension of membership
Even if your intent wasn’t malicious, negligence in verifying deductions can trigger scrutiny.
July 2025 Crackdown – What Really Happened
Here are some facts that emerged from recent searches:
₹1,045 crores worth of fake refund claims are under probe
15+ professionals and intermediaries are being investigated for issuing fake receipts and misrepresenting deductions
The IT Department has already issued 40,000+ notices to revise or justify returns
Bogus political donations, fictitious HRA claims, and forged 80C/80D proofs were commonly found
Sources:
ET Report on 200+ Raids
Mint on Political Donation Scam
TOI: Refund Racket Uncovered
Red Flags for Professionals – Warning Signals You Should Never Ignore
From Clients:
“Just show rent to my mother, I don’t actually pay.”
“I want the highest refund possible—do what it takes.”
“Please claim a ₹1 lakh donation. I’ll give you a blank receipt.”
From Peers/Agents:
“We’ve got a fixed format for rent receipts—use it.”
“No one checks small amounts, so claim LIC or 80D.”
“Let’s file through this app that promises ₹20,000+ refunds.”
If you see or hear this — stop immediately. These are clear signs of tax fraud.
Ethical Duties Under ICAI Code
Chartered Accountants are bound by the ICAI Code of Ethics to:
Maintain integrity, objectivity, and professional behavior
Refuse to associate with any statement that is false, misleading, or incomplete
Exercise due diligence and professional skepticism
Maintain proper documentation and working papers
Violation of these principles can lead to disciplinary action, suspension, or permanent removal from practice.
Due Diligence: What Every Professional Must Do
To protect both yourself and your client:
1. Verify Every Deduction Claimed
Match rent receipts with bank transfers
Ask for landlord PAN if rent > ₹1,00,000/year
For 80GGC or 80G donations, ensure payment was made via banking mode to a registered party
2. Avoid “Refund-Based” Schemes
Never promise a guaranteed refund
Don’t link your fees to refund amounts
Avoid agents or intermediaries with shady practices
3. Maintain Communication Records
Document all client instructions and advice provided
Send an email disclaimer for deductions not supported by proof
4. Train Your Staff
Junior staff must be trained to recognize and escalate suspicious claims
Use a compliance checklist for every return
Real-Life Case Study: Fake HRA & Refund Reversal
A taxpayer claimed ₹1.5 lakh as HRA paid to his mother without actually paying rent. His consultant filed the return without proper rent receipts or landlord PAN. During AIS matching, no corresponding income was declared by the mother. The claim was disallowed.
Consequences:
Refund was reversed
₹36,000 penalty under Sec. 270A
Consultant blacklisted from ITR filing portal for negligence
Warning for CAs, TRPs, and Freelance Filers
Whether you’re a full-time CA, a TRP, or a part-time return preparer, remember:
You are accountable for the returns you file
Filing false information—even under client pressure—can result in criminal prosecution
ICAI and Income Tax authorities are increasing scrutiny on tax professionals
Final Message: Let Honesty Be Your Brand
Your membership number, signature, and reputation are more valuable than any temporary gain from unethical filings. One wrong return can:
Destroy your credibility
Invite legal action
Cost you your entire career
You are not just helping clients save tax — you are upholding the law.
Summary: The Right Way Forward
Claim only genuine deductions
Verify every proof provided
Educate your clients on compliance
Refuse unethical clients
Maintain professional integrity, even under pressure
Need Help with Compliance Tools?
If you need help with:
A professional ITR checklist
Drafting client disclaimers
Responding to IT notices or revising flawed returns
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By: Shubham Tripathi, CA Finalist | MBA (Finance) | 📩 Write to me at shubhamtripathi492@gmail.com
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