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What to do when you get an income tax notice for claiming higher deductions in ITR?

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Did you claim a higher tax deduction or exemption while filing your income tax return (ITR) than what was reflected in your Form 16 or Annual Information Statement (AIS)? If you have done this, then this year you would have received an income tax notice from the income tax department.

According to a news report in The Economic Times, the tax department has sent about 22,000 tax intimation notices to individuals and other taxpayers. The tax notices have been sent as these tax filers have claimed higher tax deductions and exemptions than what was shown in their Form 16, AIS and others.

Why this tax notice is being sent

« Once the ITR is verified, the income tax department starts the processing of it. Under preliminary assessment, the Central Processing Center (CPC) validates the ITR with its own records using Form 16, Form 26AS, AIS, TIS etc., verifies the arithmetical accuracy, validity of deductions/exemptions claimed etc. After the ITR is processed, an intimation notice under section 143(1) of the Income Tax Act, 1961 is issued to the individual. This tax notice confirms if there is mismatch. A mismatch can either lead to income tax refund or additional tax demand, » says Dr Surana, founder, RSM India, a business consulting group.

It is important to note that the Central Board of Direct Taxes (CBDT) – via a press release dated September 5, 2023 – has sought additional information from 12 lakh ITRs.

« The individuals have received communication from the income tax department in instances where there is mismatch between data available with the tax department via AIS, Form 16 etc and data furnished in ITRs by taxpayers. For example, an individual may have claimed higher deductions in the ITR than the amount of deduction reported by the employer of such taxpayer in Form 16. This mismatch is flagged on account of the vast data now available with the tax department on account of digitalization and the use of data analytics, » says Mitesh Jain, Partner , Economic Laws Practice, a Mumbai based law firm.

How to respond to this tax notice?

« Individuals claiming higher deductions in their ITR or omitting financial information(s), may catch the income-tax department’s attention. If the taxpayers are unable to prove the claims made in their ITR, they would be subject to interest and penal consequences, » says Surana. Surana further explains the steps taxpayers should take after receiving a tax demand notice under section 143(1):

  1. Firstly, review such intimation notice. Here an individual should cross-check the PAN, name, address, and assessment year to which the intimation notice pertains.
  2. Secondly, individuals should read the intimation notice to ascertain where the mismatch is arising. Depending on the proof required, one should collect the documents pertaining to the ITR filed.
  3. Thirdly, the individual would be required to submit a response on the e-filing ITR portal.

There are two types of responses that an individual can submit:
a) request is correct,
b) disagree with demand (either in full or part).

Request is correct: If an individual agrees with the tax request, then a revised ITR needs to be filed and the additional tax must be paid along with criminal interest (if any).

Disagree with request: If an individual does not agree with the tax demand, then they may choose ‘disagree with demand’. After choosing this option, they may apply for reprocessing of such ITR or file a rectification application under section 154(1). However, all the supporting documents must be uploaded in case the individual has chosen to disagree with the tax demand notice.
An individual can choose the option ‘full’ or ‘in part’.

Choosing the full option would mean that the individual completely disagrees with the assessment proposed by the income tax department. However, choosing ‘in part’ means that the individual only partially agrees with the assessment proposed by the income tax department.

« The income tax department gives an opportunity to the individual to explain the disparity between the information, they reported in their ITR and what is indicated in their Form 16. It is only when the tax department is not satisfied with the response to the intimation notice that a tax demand notice under section 156 is sent, » says Sujit Bangar, founder, TaxBuddy, a tax filing platform.

What if an individual is yet to receive the notice?

An individual claiming deduction not appearing in AIS or Form 16, should ensure sufficient documentary evidence is available. The evidence will help the individual to validate their claims made in the ITR.

« However, in cases where individuals have mistakenly claimed excess deduction, they may rectify the mistake by filing a revised ITR. Further, they should also pay additional tax along with interest (if any) or reduce the refund claim amount (if any), » says Jain.

One should also note that the income tax department now has access to a larger volume of financial information about taxpayers. So, hiding any financial information from the tax department is now difficult.

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