Individuals have the freedom to self-assess income and pay taxes. However, that doesn't translate to the freedom to not pay taxes if one doesn't have a particular stream of income declared.
Tax evasion, an illegal activity, entails not filing income tax returns altogether or misrepresenting the amount taxable. It is different from tax avoidance, which is a legal activity. In tax avoidance, 'tax laws' help reduce the amount payable as tax.
Tax returns are scrutinised only if income tax authorities feel that tax evasion is involved. If they conclude that you have deliberately concealed income to reduce tax liability, you will be penalised.
What does scrutiny of income mean?
Income scrutiny essentially means evaluating the income tax return for its authenticity i.e. the income tax assessing officer will go through the returns filed and various other documents such as bank statement, the form 16, among other things, to check if there is any mismatch in tax liability assessed by the individual and the actual tax liability. The income tax officer will request all bank account statements, credit card statements, details of all family members, form 16 and other relevant documents as part of the scrutiny process.
In most cases, if a return is picked up for scrutiny, a scrutiny notice will be served within a period of one year from the month in which returns have been filed. So if you file your returns on 30th July, 2012, then you may get a scrutiny notice anytime on or before 29th July, 2013. The notice is in a standard format and it will contain relevant details of the tax payer and also will contain a date on which the tax payer needs to appear before the concerned income tax officer.
The tax payer need not attend this meeting in person. He can send across a representative to plead his case, which in most cases will be the chartered accountant of the tax payer.
How is an income tax return picked up for scrutiny?
There are various guidelines/thresholds in place which will determine the selection of income tax return for scrutiny. Some of them are:
- All assessments pertaining to search and seizure cases
- All returns where deduction claimed under chapter VI-A of the Income Tax Act is Rs 25 lakhs or above
- All returns where refund claimed is Rs 5 lakh and above
- Withdrawal of less than Rs. 50,000 per annum will be picked up for scrutiny. The logic here being that you may have access to black money which you may be using for your daily expenses and therefore withdrawals from the bank account are minuscule.
- In addition, cases are picked through a computer assisted scrutiny system (CASS) on the basis of specific instructions given to it.
What are the implications?
If the income tax officer figures that you have concealed income, a penalty will be levied which can be anywhere up to 3 times the amount of income concealed.
So if the tax evaded amount is Rs. 10,000, you can be charged a penalty of anywhere between Rs 10,000 to Rs 30,000.
What should you do to avoid such a situation?
Many salaried individuals believe since tax is deducted at source for salary and for other streams of income when it crosses a particular threshold, their tax liability is nil. That may not necessarily be the case.
There are several other streams of income, where tax may not be deducted at source. For example, post office saving deposit interest, interest on bank savings account, rent received from property among other things.
Also, if you have switched jobs during a financial year, it is likely if you haven't declared that your old organization has taken into consideration deductions under Section 80 while calculating TDS. In such a case, the amount of TDS charged by the new organization may be lower as they would consider the full quantum deductible under Section 80, resulting in you paying lower tax.
Therefore, make sure you consider all such factors while filing returns. It is better to take precautions while filing returns because if an anomaly causes your return to get picked for scrutiny, you will have to go through a lot of mental stress apart from a monetary shock.
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