Income tax returns: Claiming tax deductions without proofs can backfire, warn CAs

Late-filing fee of Rs 5,000, penal interest await those who miss the July 31 due date for filing income tax returns

Consider this: You have missed submitting proofs for claiming exemption on house rent allowance (HRA) to your employer in January or February, when employees are required to file their investment declarations. As a result, your employer deducts excess tax (tax deduction at source) from your salary.

However, you have the opportunity of claiming a refund of this excess amount deducted while filling income tax return (ITR). You go ahead and do so, without submitting any proofs such as rent agreement or rent receipts as you are not supposed to attach these documents while filing returns.

So far so good, as long as you preserve the records of rent agreements and receipts.

Also read: ITR filing: Salaried tax-payer? Know how to choose between forms ITR-1 and ITR-2

No documentary evidence, no tax deduction

However, many salaried employees make requests to chartered accountants to help them file for refunds even when they don’t have documentary evidence to back their claims.

“There have been instances of salaried employees seeking advice on claiming refunds citing deductions under sections such as 80DDB, 80U and 80G. Upon being asked to produce documents to file returns, many are unable to comply,” says Hyderabad-based chartered accountant Nagachandra Reddy, Founder, Somu & Associates.

While Reddy says he has refused to entertain such cases, some employees could go ahead and file on their own in the hope of securing tax refunds. Section 80G offers deductions of 50-100 percent on amount donated to approved charitable institutions, while taxpayers with disabilities can claim deductions of Rs 75,000-1.25 lakh, depending on the degree of disability, under section 80U.

“There is a possibility that even such returns could be processed and tax refunds issued by the income tax department. However, such cases are bound to invite I-T scrutiny or notice, say, six months to one year down the line. Individuals who claim deductions without sufficient proofs could find themselves in a tight spot at that stage,” says Reddy. “Ideally, the I-T department should look at raising queries right at the ITR processing stage so that such activities can be nipped in the bud.”

It's a good practice to preserve your documents even after your income tax returns are processed as you could receive a notice in future seeking evidence to back your ITR data.

The Annual Information Statement (AIS), which displays information shared by entities such as employers, banks, mutual fund houses and registrars, makes it difficult for return-filers to tinker with details entered in their return forms.

“AIS captures details which many might have missed earlier – deliberately or otherwise. So, lack of transparency in disclosing income or claiming deductions can come back to haunt you later,” says Chetan Chandak, Director, TaxBirbal. It is best to be honest instead of attempting to exploit any loopholes in the system, say chartered accountants.

Also read: Income-tax shocker: Data on advance tax payments missing in prefilled return forms

Salaried individuals’ ITR now more complex

Growing popularity of financial investments – mutual funds and stocks – means that well-heeled, financially-savvy employees have capital gains and equity trading profits to declare. From the perspective of chartered accountants and other tax professionals, this has resulted in the return-filing process a more time-consuming affair.

“The AIS displays all incomes of the individuals. For example, earlier some would deny having earned interest on savings bank accounts or any capital gain on their shares or mutual funds, for instance. Now, all these transactions and income sources get captured. So, we ask for more detailed documentation after checking AIS. Often, the back-and-forth between the chartered accountant and the client results in a more tedious process,” explains Chandak.

Many salaried individuals have been, particularly over the last three years, actively trading in the stock markets’ futures and options (F&O) segment. This has triggered the need for detailed disclosures and use of form ITR-3, meant for individuals with income from business and profession.

“Now the process has become more complex due to salaried tax-payers’ multiple sources of income such as capital gains and trading gains from the F&O segment. Also, Forms-16 are issued by the employers only by June 15. This leaves us with just 45 days to complete the exercise. There is a risk of committing mistakes in a hurry. We have made representations to the government to consider extending the due date to August 31 several times, but it seems unlikely that our requests will be entertained,” says Reddy.

Tax compliance burden up despite extensive digitisation

While the ITR forms are pre-filled with data on incomes, tax deducted at source (TDS), deductions and so on, they are riddled with errors and hence cannot be relied upon entirely. Since many salaried individuals invest in mutual funds, sales of units during the year attract the capital gains tax.

“Financial transactions are mapped as per PAN, but there is a lot of duplication. For instance, a mutual fund house and CAMS could report the same transaction to the I-T department. This could be displayed as two separate transactions in AIS, which makes it important but difficult to reconcile the sale value as reported in AIS with capital gain reports of brokers and RTAs (registrar and transfer agents), especially in case of multiple accounts,” points out Chandak.

Also, capital gains data captured by AIS may not be in the uniform format. “The format of reporting capital gains is not common across entities such as brokers, CAMS and NSDL. For instance, the date format could be different, making it difficult for our software applications to directly import the data. So, we end up having to enter the data points manually for accurate capital gains computation, particularly in case of grandfathered long term capital gains” he says.

On one hand, the return-filing process is now more time-consuming due to increased compliance burden and rise in salaried individuals’ financial transactions, and on the other, the time available to complete the exercise has shrunk. Many chartered accountants are calling for an extension of the July 31 deadline, though it seems unlikely that the government will yield, going by the precedents in previous years.