Income Tax Department Cracks Down on Fake Deduction Claims: A Nationwide Drive Towards Tax Compliance (Points where we need to be alert)….

Income Tax Department Cracks Down on Fake Deduction Claims..

New Delhi, India – In a significant move to curb tax evasion and ensure greater compliance, the Income Tax Department (ITD) has launched a nationwide crackdown on individuals and entities making fraudulent claims of deductions and exemptions in their Income Tax Returns (ITRs).¹ This intensified action comes after detailed analysis revealed widespread misuse of beneficial tax provisions, often orchestrated through organized rackets involving unscrupulous ITR preparers and intermediaries.²

The recent operations, which included large-scale search and seizure activities across multiple states like Maharashtra, Tamil Nadu, Delhi, Gujarat, Punjab, and Madhya Pradesh, have unearthed substantial evidence of fraudulent claims.³ The ITD is leveraging advanced technology, including data analytics and artificial intelligence (AI) tools, coupled with third-party financial data and ground-level intelligence, to identify suspicious patterns and pinpoint offenders.⁴

What’s Under the Scanner?

The scope of the investigation is broad, targeting a range of deductions and exemptions that have been frequently misused.⁵ These include, but are not limited to:

• Section 80GGC: Deductions for contributions to registered political parties.⁶ Investigations have revealed instances of bogus donations being routed through dubious entities.
• Section 10(13A): House Rent Allowance (HRA) exemptions, with concerns about fake rent receipts and landlords without PAN details.⁷
• Section 80D: Deductions for health insurance premiums and medical expenses.
• Section 80E: Interest on education loans.
• Section 80EE/80EEA/80EEB: Interest on home loans and loans for electric vehicles.
• Section 80G/80GGA: Donations to charitable institutions and for scientific research or rural development, respectively.⁸

The crackdown has identified a diverse group of taxpayers involved, including employees of multinational corporations (MNCs), public sector undertakings (PSUs), government entities, academic institutions, and entrepreneurs.⁹ Many were allegedly lured by promises of inflated refunds in exchange for a commission, often from intermediaries posing as legitimate tax consultants.¹⁰

Modus Operandi of Fraudulent Claims

Investigations have exposed organized rackets where certain ITR preparers and intermediaries filed returns claiming fictitious deductions and exemptions.¹¹ This involved:

• Creating temporary email IDs for bulk filings to avoid detection.¹²
• Submitting false TDS returns to claim excessive refunds.
• Arranging bogus donations or fabricating expenses without actual eligibility or valid documentation.

ITD’s Proactive Measures and Warnings

Before resorting to enforcement actions, the ITD had initiated a “NUDGE” campaign, extending outreach through SMS, email advisories, and physical programs. This campaign encouraged taxpayers to voluntarily revise their returns and withdraw any false claims.¹³ As a result, approximately 40,000 taxpayers have updated their returns in the last four months, voluntarily withdrawing false claims amounting to over ₹1,045 crore.¹⁴

However, many individuals remained non-compliant, prompting the current stringent actions.¹⁵ The ITD has made it clear that it will take stern action against continued fraudulent claims, including penalties and prosecution wherever applicable.¹⁶

Penalties and Consequences

Taxpayers found to have made fake claims face severe consequences:

• Penalty under Section 270A: Up to 200% of the tax payable on the under-reported income due to misreporting.¹⁷
• Interest: Tax and interest on the bogus amounts.
• Prosecution under Section 276C: For willful attempts to evade tax, leading to imprisonment.¹⁸ If the amount of tax sought to be evaded exceeds ₹25 lakh, the imprisonment can range from six months to seven years, along with a fine. For amounts less than ₹25 lakh, it can be three months to two years, along with a fine.
• Section 271AAD: Penalty of ₹10,000 or the tax evaded, whichever is higher, for false entries in books of accounts based on forged or falsified documents.
• Blacklisting of tax agents and professionals: Those involved in facilitating the scam may face severe disciplinary action and blacklisting.¹⁹

What Should Taxpayers Do?

Experts are advising taxpayers who have made incorrect claims, even unknowingly, to promptly rectify their filings. The option to file an updated return (ITR-U) under Section 139(8A) may still provide some relief if filed before a notice from the department is received.

Key recommendations for taxpayers include:

• Maintain proper records: Keep all bank statements, transaction proofs, and receipts to substantiate deductions.²⁰
• Avoid cash contributions: Ensure all transactions for deductions are routed through digital or banking channels.
• Be cautious of intermediaries: Do not engage agents who promise to “arrange” deductions or inflated refunds for a commission.
• Respond to notices promptly: Address any communication from the Income Tax Department immediately and seek professional advice if needed.
• Verify AIS & TIS: Cross-check your Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) before filing your ITR to ensure accuracy.²¹

The Income Tax Department’s recent actions underscore its unwavering commitment to fostering a transparent and compliant tax ecosystem. With increased technological prowess and a proactive enforcement approach, the era of casually inflating tax deductions is definitively over.²² Taxpayers are strongly urged to ensure the authenticity and documentation of all their claims to avoid stringent penalties and legal repercussions.

Avinash Bhatt
Email: Bhattavi93@gmail.com