Why these small tax payers get IT notices?

Updated on January 1, 2023

Taxpayers generally receive I-T notices under Section 139(9), 143(1), 143(2), 143(3), 245, 144, 147, 148, 156 (notice of demand) of the Income Tax Act, 1961, due to non-filing of ITR, claiming of inauthentic tax refund, hiding of taxable income, computing excessive tax losses, long term capital gains (LTCG), scrutiny, among others.

Tax filing and tax payment are two distinct processes. Therefore, the tax department may send you an ITR notice under Section 142(1)(i) of the Income Tax Act, if you have only paid the tax and not filed any returns.

Your bank and Credit Card Company are supposed to report income tax department if your expenses or cash withdrawals exceed certain limits. Earlier, as per Rule 114B, PAN was mandatorily required to be quoted in case of a cash deposit exceeding Rs 50,000 in a single day; however, no annual aggregate limit for cash deposition was prescribed. Also, no limit was prescribed for cash withdrawal, which has also been prescribed now. The CBDT issued a notification on May 10, 2022, specifying new rules related to cash transactions i.e., deposits and withdrawals with a bank, post, and cooperative banks. The new rules make quoting of PAN or Aadhaar number mandatory. The new rules for cash transactions are effective from May 26, 2022. Similarly, investments by an individual who crosses certain thresholds limit like Rs.1 lakh in stocks, Rs.2 lakh in a mutual fund, in bonds over Rs.5 lakh, etc. will be notified to the income tax department as a high-value investor. If the tax department notices that your expenses/investments are much beyond your reported income, you are going to receive a notice from the income tax department.

It is quite common that some taxpayers to invest their money in Shares Fixed Deposits or other Assets in the name of a non-working spouse to avoid tax. As per the provisions of Sections, 60 to 64 of the Income Tax Act, revenue/interest earned on such investments is considered your own income and taxed at slab rates applicable to you.  This is because a person cannot divert his income to any other person and say that it is not his income. Inclusion of others Incomes in the income of the assessee is called Clubbing of Income and the income which is so included is called Deemed Income.

The rules are slightly different in the case of investments in the name of minor children (below 18 years). The earnings are treated as the income of the parent who earns more. However, interest earned up to Rs.1500 a year per child up to a maximum of two children is exempted from tax payment.

The gifts made to a spouse or a minor child do not attract tax. However, if that money is invested and income generated from such gift shall be clubbed with the income of the giver and taxed accordingly. Similarly, if you buy a house in your wife’s name, any income from that house, whether as capital gains when you sell it or as rent, will be treated as your income and you are liable to pay tax for the deemed income irrespective of spouse’s income is below the basic exemption.

Many people make a common mistake that they do not report interest income up to Rs.10000/- in ITR believing that interest income of up to Rs.10,000 a year is tax-free. In reality, the tax exemption of Rs.10000/- a year under Sec 80TTA applies only to the interest earned on the balance in a savings bank account.  Interest earned from all other sources like fixed deposits, recurring deposits, and even tax-saving bank deposits and infrastructure bonds is fully taxable.

Another common mistake is many senior citizens do not show interest earned from savings bank accounts along with deposit interest in the ITR believing that they are eligible for a tax rebate up to Rs.10000/- under section 80 TTA. Actually, Senior citizens who have received deposit interest (including SB and Recurring Deposits interest) up to Rs.50000/- in a financial year are exempted from tax under Sec.80TTB. With the introduction of Sec 80 TTB, Sec 80 TTA will not be applicable to Senior Citizens –i.e. SB interest exemption of Rs.10, 000/- is not separately available to senior citizens.

If you buy a house on loan, the principal portion of the EMI paid up to Rs.1.50 lakh for the financial year is allowed as a deduction under Section 80C of the IT act. But to claim this deduction, the house property should not be sold within 5 years of possession. Otherwise, the deduction claimed earlier will be added back to your income in the year of sale. It is riskier to keep the transaction under wraps because the buyer may seek tax benefits on the same property, therefore tax people may catch you if you have not reported the same.

In the same way, if you have ended a life insurance policy within three years of purchase, any tax deduction claimed earlier will be added back to your income in the year the policy is foreclosed.

If your total income is below the taxable limit, (tax on your total income is nil) you can submit Form 15G (person below the age of 60 years) or 15H (senior citizen) to the bank requesting the bank not deduct any TDS. Many investors try to avoid TDS by splitting their investments across different banks or submitting Form 15G or 15H so that their bank does not deduct TDS. If TDS is not deducted because the person has filed Form 15G or 15H, it is separately shown in part A1 of Form 26AS. Misuse of these forms is a serious offence. A false declaration not only attracts a penalty but the declarant can also be sentenced to jail for terms ranging from three months to two years.

If you buy a house worth and or stamp duty value of the property is more than Rs 50 lakh, you have to deduct 1% TDS from the payment to the seller. In case the seller is an NRI, the TDS will be higher at 30%. This amount should be deposited with the government on behalf of the seller using Form 26QB.  Many people have no idea of this rule. The rule is applicable even if you pay in installments. In such cases, the TDS needs to be deducted from each payment, and the money is deposited with the government within seven days. Every person responsible for the deduction of tax under section 194-IA shall furnish to the Director General of Income-tax (System) or the person authorised by him a challan-cum-statement in Form No. 26QB electronically within 30 days from the end of the month in which the deduction is made. CPC-TDS has also enabled the online functionality for correction in Form No. 26QB. No deduction under sub-section (1) shall be made where the consideration for the transfer of immovable property and the stamp duty value of such property, both, is less than fifty lakh rupees.

Original post: July 22, 2019