When claiming tax exemptions and deductions on an income tax return (ITR), one should use extreme caution. During the processing of ITRs submitted for the current year or even for prior years, the income tax department may request documentation supporting the deductions and tax exemptions claimed in the ITRs.
People need not be concerned about the claims if they have the proof. However, the claimed tax deductions and exemptions would be fake if people cannot offer the proof or the income tax department is dissatisfied with the proof. The income tax agency may impose a fine in these circumstances. Tax professionals believe that making many deductions claims results in misreporting.
Divakar Vijayasarathy, Founder and CEO, of business consulting group DVS Advisors, added, “Claiming higher HRA exemption based on fake rent receipts or claiming deductions under Chapter VI-A without documentary evidence amounts to misrepresentation or suppression of facts and is considered as misreporting of income under the Income Tax Act, 1961.”
According to recent reports, the income tax agency has written warnings to salaried people requesting documentation of the deductions listed on ITRs submitted for FY 2021–22 (AY 2022-23).
Abhishek Soni, CEO, Tax2win.in – an ITR filing website – says, “The income tax department has observed that taxpayers are claiming fake deductions and exemptions to claim tax refunds while filing ITRs. Do note that the income tax department can track these fake deductions. For example, if a person has claimed deductions for HRA by claiming that rent is paid to parents. and if parents missed reporting this rental income in their ITR, the Income Tax department can identify such cases.”
Penalty For False Income Reporting
If the person doesn’t offer documentary proof, the income tax department may impose fines and penal interest for underreporting income. According to Vijayasarathy, “Under Section 270A of the Income Tax Act, a penalty in an amount equal to 200% of the tax payable on such misreported income shall be imposed.”
Soni adds that there may also be interest in addition to the fine. It’s crucial to understand that there is a distinction between underreporting income and misreporting it in terms of income tax rules. According to Soni, “The distinction between underreporting income and misreporting income is largely on the facts of the case and how income tax law is interpreted. The assessing officer has the authority to levy a penalty equal to up to 50% of the unpaid tax plus any applicable interest in cases of underreporting of income.