Made false deduction claim in ITR? Income tax dept wants employees to rectify this and pay the due tax or be ready for penal action
Last year, the tax department caught some employees in Telangana and Andhra Pradesh for claiming false deductions and tax exemptions to lower their net tax outgo. This year the department seems to be following up with others. Chartered accountants report that the tax department is encouraging employers to warn their employees against making false claims for deductions or exemptions.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} "Several companies in cities like Bangalore, Hyderabad Mumbai have received information from the tax department where employees have claimed a refund in the tax return by claiming deductions in addition to what is mentioned in form 16. These claims may not be wrongful but are flagged off by the tax department system as being higher than the form 16 numbers. The tax department has been sending such intimations in the last one year as electronic filing of tax return has made it possible to identify the mismatches easily," says Aarti Raote, Partner, Deloitte India.
What is the income tax department telling employers through this advisory
As per Mihir Tanna, associate director, S.K Patodia & Associates LLP, a CA firm., the advisory from the tax department addressed to the employer specifically mentioned that it has observed that some of the company's employees have taken incorrect or suspicious tax deductions/exemptions."Our monitoring exercise and field surveys have revealed that a significant number of employees working with your Organization/ Company/Department have taken refunds based on deductions / exemptions claimed which appear to be suspicious / incorrect. These claims of deductions and exemptions are currently under verification by the I.T. Department," said the income tax department in one of the advisories sent to a client of Tanna.
"In the earlier years, during search operations by tax officials it was identified that many taxpayers have been found to have filed fraudulent income tax returns seeking refunds," said Tanna.
What problem will employees face because of this issue highlighted by the tax department
The entire tax liability calculation gets broken. The table below shows exactly how the TDS from salary calculation gets broken and, as a result, how much the tax shortfall amount is due to incorrect deduction claims.In the table below the shortfall in TDS is highlighted which occurred due to the employee claiming, deductions like Rs 1.5 lakh (80C), Rs 50,000 (80D), Rs 50,000 (80E), Rs 1 lakh (80G), which totals to Rs 3.5 lakh. For this example, we have taken the employee's salary as Rs 13.5 lakh.
Table 1
Source for table: CA Prakash HegdeAccording to Jasmine Damkewala, Senior Partner at Circle of Counsels and Advocate-on-Record, Supreme Court of India, as an employee, you may face issues if the tax department determines that there is a TDS (Tax Deducted at Source) shortfall due to wrongful deductions or exemptions claimed.
"The tax department may issue a demand notice to you (employee) for the shortfall amount, along with any applicable interest and penalties. If the deduction is accurate at the end of the company (employer) and the accurately deducted tax is deposited well within time, then the company can share the said details with the tax department and discharge its liability," says Damkewala.
"In layman terms, the companies shall be merely required to furnish the supporting documents submitted to them by the employees under section 192(2D), which may be relevant to the enquiry or proceeding going on against such employees," says CA (Dr.) Suresh Surana.
"There have been instances in the past, where incorrect exemption / deductions have been claimed by the employees and the company has deducted TDS on the basis of such incorrect declaration, which later when identified by the tax department have been brought to the notice of the deductee company," says Atul Puri, Managing Partner and Co-Founder, SW India.
How can you fix the mistakes and make good on the shortfall in tax payment?
As an employee, you cannot shift the responsibility for discharging the tax liability if you have claimed incorrect tax deductions/exemptions. So, it's important to come forward and voluntarily fix the mistakes before the income tax department catches you and applies penal provisions of the law. Do note that in tax evasion cases, you can even be jailed.Surana suggests ensuring that there is a time limit for submitting a revised ITR before correcting any errors, settling any additional tax liabilities, and moving forward. If the time limit to file a revised ITR is over, file an updated income tax return (ITR-U). For filing ITR-U you need to pay certain additional taxes.
"The additional tax shall be equal to 50% of the aggregate of tax and interest payable by a person on the filing of the updated return. However, in case the updated return is furnished after the expiry of the due date of filing of belated or revised return but before completion of a period of 12 months from the end of the relevant assessment year, the additional tax payable shall be 25% of the aggregate of tax and interest payable," says Surana.
The deadline for filing ITR-U for the respective assessment years are:
AY 2021-22: 31st March 2024AY 2022-23: 31st March 2025AY 2023-24: 31st March 2026
"If the deadline to file ITR-U is over, you may need to approach the tax department and seek guidance on rectifying the issue," says Damkewala from the Circle of Counsels and Advocate-on-Record, Supreme Court of India.
Once the Income tax department learns about a wrongful deduction claimed by an employee, it can always reopen/reassess the employee's income within the limitation period provided under the Income Tax Act.
Sanghvi from Khaitan & Co. emphasizes that even if you've stopped working for the company, the tax department can still hold you accountable if they discover any incorrect deduction or exemption claims from your previous employment. "Once the Income tax department finds out about the wrongful deduction claimed by an employee, it can always reopen / reassess income of the employee within the limitation period provided under the law," he says.
Who is legally responsible for paying the shortfall in income tax
As per Surana, the employer may not be penalised if they have diligently complied with section 192(2D) while computing tax liability for the employees.According to Sanjay Sanghvi, Partner, Khaitan & Co, employers are not legally liable to verify the authenticity or genuineness of a document furnished by an employee unless the same is prima facie found to be false or fabricated.
"The tax department should not raise any tax demand on the company for short / nil deduction of TDS from salary paid to an employee as long as the company acted in good faith and duly verified the supporting documents furnished by an employee in a manner which a man of ordinary prudence would do while processing salary payroll," says Sanghvi.
Usually, all tax demands are raised on the taxpayer, i.e., the employee in this case; however, in the instance, if the tax department recovers the tax demand from the employer, then also it is the employee's responsibility to pay up this demand. "If the tax department raises a demand on the employer for TDS shortfall due to wrongful deductions or exemptions claimed by employees, the employer is responsible for settling the demand. However, the employer may seek to recover the shortfall amount, interest, and penalties from the employees who claimed the wrongful deductions or exemptions. This typically depends on the terms of employment and internal company policies," says Damkewala.
As per chartered accountant Prakash Hegde, "Applying the general principles laid down by the courts, we can say that if the employer takes 'reasonable care' to collect the evidence for the deductions and exemptions claimed by the employees and ensures that the claims are legal, he can be absolved of the responsibility for additional tax, interest, and penalty."
"Every employee is required to submit Form 12BB with his / her employer, which serves as a formal declaration made by an employee to request tax deductions. As of June 1, 2016, it has become mandatory for salaried employees to submit Form 12BB to their employers to claim tax advantages and refunds related to their investments and expenditures. In case of any incorrect information or misrepresentation made in Form 12BB the onus for the same is on the employee and not employer," says Puri from SW India.
How does the tax department get to know about such incorrectly claimed tax deductions/exemptions?
As per Surana, under preliminary assessment of ITR, CPC validates the furnished tax return with its own records (i.e., Form 16/16A, Form 26AS, AIS, TIS etc.) and through data analytics cross-checks the arithmetical accuracy, validity of deductions/exemptions claimed etc."Subsequently, the taxpayer may be issued with a notice under section 139(9) in case their return has been declared as defective by the assessing officer on account of incomplete or inconsistent information. The tax return may be treated as defective due to various reasons," he says.
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This story originally appeared on: India Times - Author:Faqs of Insurances
