While filing income tax return (ITR), one should be very careful at the time of claiming tax exemptions and deductions. The income tax department can demand proof for the deductions and tax exemptions claimed in the ITRs while processing the ITR filed for the current year or even for previous years.
If individuals can provide the proof, they need not worry about the claims. However, if individuals are unable to provide the proof or the income tax department is not satisfied with the proof, the deductions and tax exemptions claimed would be considered unsubstantiated. In such cases, the income tax department can levy a penalty.
According to tax experts, claiming incorrect deductions leads to misreporting of incomes.
Divakar Vijayasarathy, Founder and CEO, business consulting group DVS Advisors, says, “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.
Recently it was reported that the income tax department has sent notices to salaried individuals demanding proof of the deductions claimed for the ITRs filed for FY 2021-22 (AY 2022-23).
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 misreporting of income
The income tax department can levy penalties and penal interest on misreporting of income if the taxpayer does not provide documentary evidence. Vijayasarathy says, “A penalty of an amount equal to 200% of tax payable on such misreported income shall be levied under Section 270A of the Income tax Act.
Points out that the penalty can also include interest.
It is important to note that there is a difference between misreporting and underreporting of income under the income tax laws. Soni says, “The difference between misreporting of income and underreporting of income is based on the facts of the case and interpretation of income tax law. In case of underreporting of income, the assessing officer can impose a penalty up to 50% of the tax due along with the applicable interest.”