TL;DR:
- The income Tax Department reassesses tax returns with claimed deductions for donations made to charitable trusts and political parties in FY19.
- Notices have been issued to individuals based on AI analysis of donation-to-income ratio.
- Reassessment notices are sent for higher donation claims, while erroneous deduction notices are raised for others.
- The reassessment period is within 10 years for incomes above Rs 50 lakh and within 8 years for incomes below Rs 50 lakh.
- Charitable trusts are required to obtain a unique identification number for Section 80G deduction eligibility.
- Individuals receiving notices must respond and provide proof of donation or pay the specified tax and penalty.
- Penalties range from 50 to 200 percent for non-genuine transactions or tax evasion.
- Individuals who wrongfully claimed Section 80G deduction can update their returns within two years, with a higher tax rate.
- Caution is advised when responding to notices, and individuals should verify the authenticity of the income tax portal.
Main AI News:
In a concerted effort to combat tax evasion, the Income Tax Department has initiated a thorough reassessment of income tax returns, with a particular focus on cases where deductions have been claimed for purported donations made to charitable trusts and political parties during the fiscal year 2018-19. This move comes as the department has issued a significant number of notices to salaried individuals between March 20 and June 10 this year, highlighting the severity of the issue at hand.
According to chartered accountants, hundreds of notices have been dispatched to individuals whose donation-to-income ratio for the aforementioned financial year appears suspicious. Paras Savla, a partner at KPB & Associates, a reputable chartered accountancy firm, emphasized the department’s employment of artificial intelligence in identifying individuals with disproportionate donation figures relative to their earnings. Under Section 80G, taxpayers are eligible for deductions ranging from 50 to 100 percent for donations made to political parties and charitable trusts.
But what exactly do these notices entail? Well, they have been issued under Sections 138 and 148 (A) of the Income Tax Act. In many cases, the notice merely flags an erroneous deduction made by the taxpayer. However, in instances where substantial donation amounts have been claimed, a reassessment notice is sent, indicating a deeper level of scrutiny. The reassessment of income tax returns can be carried out within ten years for those with an income exceeding Rs 50 lakh and within eight years for individuals earning less than Rs 50 lakh. For transactions conducted in FY19 (filed under assessment year FY20), reassessment can be pursued until March 31, 2029.
While it has been reported that these notices have predominantly targeted residents of Gujarat who made political donations, this claim could not be independently verified by Moneycontrol. The Income Tax Department relies on various mechanisms to identify the authenticity of donation claims. Through the computerization of returns, the department can cross-reference the data submitted by charitable trusts and political parties in their tax returns with the donation details provided by individuals. This process aids in distinguishing genuine claims from fraudulent ones. It is important to note that only an assistant commissioner or a deputy commissioner armed with concrete evidence of tax evasion can raise a reassessment notice.
In the Union Budget of February 2019, charitable trusts were mandated to acquire a unique identification number. Starting from April 1, 2020, only donations made to trusts with these designated numbers were considered eligible for Section 80G deductions. Initially, Section 80G donation details were supposed to be pre-filled in downloaded income-tax return forms using data sourced from charitable trusts. However, due to the COVID-19 lockdown, this measure was postponed.
If you happen to receive such a notice, it is crucial to respond promptly. Karan Batra, co-founder of tax advisory firm CharteredClub.com, advises individuals to submit a response to the notice issued under Section 148 (A). Those who possess evidence of the donation should provide it as part of their response. Alternatively, if proof is unavailable, the individual must pay the applicable tax amount mentioned in the notice, along with the associated penalty. Penalties of 50 to 200 percent may be levied if a transaction is found to be non-genuine or if the taxpayer is found to have evaded taxes. The proof must be submitted within 30 days of receiving the notice. It is crucial to avoid offering incorrect or misleading information, as such actions can attract penalties of 50 percent of the tax liability for under-reporting or 200 percent of the tax for misreported income.
For those who have not received a notice but have realized that they erroneously claimed a Section 80G tax deduction, there is an opportunity to rectify the situation. By updating their returns within two years, individuals can rectify the error, albeit at the cost of a 25 to 50 percent higher tax rate. The decision to receive a notice and pay the ensuing tax and penalties or to update the returns and accept a higher tax rate requires careful consideration. It is advisable to conduct a cost-benefit analysis weighing the pros and cons of paying a Rs 30,000 tax (excluding surcharge and penalty) on an income of Rs 1 lakh donated against filing an updated return and incurring a 25 to 50 percent higher tax liability, as Paras Savla highlights.
Furthermore, it is imperative to exercise caution when responding to notices and to avoid falling prey to fraudulent schemes. Taxpayers should verify the legitimacy of the income tax portal and refrain from clicking on suspicious links or disclosing sensitive information. By checking the portal, individuals can ensure the authenticity of any notice issued against their permanent account number (PAN). All relevant notices will be listed in the ‘Respond’ tab within their account.
Conclusion:
The implementation of artificial intelligence by the Income Tax Department to identify fake donations and issue notices to tax evaders demonstrates the government’s commitment to curbing tax evasion and promoting transparency in the market. This move is expected to increase compliance among taxpayers and reduce fraudulent practices. It also highlights the importance of accurate reporting and providing valid documentation for claimed deductions. Taxpayers need to exercise caution and respond promptly to notices to avoid penalties and legal consequences. Overall, this development reinforces the government’s efforts to establish a robust tax environment and maintain the integrity of the market.
