Sunday, November 17, 2013
Let us assume for a moment that today is 31/07/2013—the last date for salaried employees like Mr. Sinha to file their income tax returns.
Mr. Sinha is a typical salaried employee in a senior position with an Indian conglomerate. He diligently files his returns and pays income tax due on his income.
Mr. Sinha is relaxed and satisfied that today he has fulfilled his duty of duly filing his income tax return having submitted the Form 16 to the agency appointed by his employer for bulk filing of tax returns. He is not averse to paying the tax on his income (from salary) and believes that since the tax due on his salary is being deducted by way of TDS, filing the return is just a formality.
Mr. Sinha was surprised to receive a demand notice from the income tax department. There was a difference in the total income as disclosed in the return and Form 26 AS (Annual statement of TDS) as compiled by the income tax department.
He approached us with all the relevant papers and requested us to reconcile the difference.
Upon scrutinizing the papers furnished to us, we discovered that the difference in income was on account of
· Interest earned on bank fixed deposits; and
· Capital gains on mutual fund investments and dealing in shares
The interest income along with capital gains(long term or short term) should have been separately reflected in the return and gross taxable income been calculated thereafter.
Since, Mr. Sinha travels extensively on office work; he chose to file his income tax returns through the agency appointed by his office which was convenient--and not through a personal financial and/or tax advisor for his taxation matters.
Mr. Sinha argued that bank had deducted TDS @10% just like his employer. We pointed out that since Mr. Sinha was subject to 30% tax bracket, the tax department was well within its right to send a demand notice.
We would like to point out here the penal provisions under the Income Tax Act. The income tax officer is empowered to levy a penalty of a minimum of 100% of the tax sought to be evaded and it can go as high as 300%. Mr. Sinha is not only liable to pay tax on income which was not reported—even though inadvertently—but also pays an equivalent amount more as penalties.
The penalty provisions can however only be invoked if the ITO is of the opinion that the assessee had furnished inaccurate particulars or concealed details of other income in his returns.
It is the duty of the assessee to record all transactions during a financial year so that true income can be declared in the returns every year. In absence of this, the income tax department is well within its right to levy such penalties as it deems fit.