1. Filing taxes can help you improve your credit score. 

2. You may be able to get a loan or line of credit in the future based on your tax returns. 

3. You may be eligible for tax breaks or credits. (Foregin Income Tax Credits)

4. Filing taxes can help reduce the amount of money you owe in future taxes. 

5. You can claim tax deductions

6. You can claim tax refunds

7. Helps to adjust your capital gains and losses

8. ITR receipt is a useful document for

. Hassle-free processing of bank loans

    . Aids in visa processing

   . Useful for applying government tenders

9.  Higher rate of TDS & TCS on certain transactions if ITR not filed for 2 previous years. 

(Purchase of property >50 Lakhs 1% TDS, if return not filed 5% TDS , purchase of car > 10Lakhs 1% TCS if return not filed 5% TCS)

Consequences of Not Filing Income Tax Returns

1.  You may lose your right to vote.              

2.  You may be subjected to heavy fine & Penalties

3.  Your business could be seized, and you could be charged with tax evasion.

4.  You could be imprisoned for a period of time.

5.  Your passport could be cancelled.

6.  You may have to pay back taxes, interest, and penalties that you may have avoided paying in the past.

7.  Your name may appear on a denylist of tax evaders.

8.  You could lose your job if you are guilty of tax evasion or fraud.

1. Not mentioning all income sources 

2. Using the wrong ITR form and choosing the wrong assessment year 

3. Not filing income tax returns when the gross income is less than Rs. 5 lakhs

4. Mismatch in Form 26AS Details and Other TDS certificates 

5. Not Claiming deductions correctly 

6. Not reporting exempt incomes 

7. Forgetting ITR verification 

With an aim to curb the black money mess and to track high-value cash transactions, the government has decided to implement new reporting guidelines w.e.f November 2016, March 2017 & Aug 2020. As per the govt’s notification, all goods & services providers have to report to the IT department about high-value cash transactions & cash receipts. 

List of Third parties who report High-value Financial Transactions

• Banks – They report High-Value transactions related to deposits credit card payments.

• Mutual Fund Companies

• Companies issuing bonds or debentures

• Companies issuing shares

• Sub-Registrar offices on real-estate deals.

How do third parties report?

To keep a watch on high-value transactions by taxpayers, the I-T department has developed a statement of financial transactions called Annual Information Return (AIR). On its basis, tax authorities will collect information on suspected high-value transactions during a year.

In the Financial year, 2019-20 many tax filers failed to report many significant and high-value transactions and had received messages from income tax about the same at the very end of the due date for filing the returns. Due to this many were not even in a position to file revised returns. So what happens after this???

This leads to underreporting of income as per income tax provisions and the penalties are huge.

For penalties read our next article.

The under-reported income shall be –

1. When an income tax return is furnished –

a. Income assessed is more than the income determined in return processed under section 143(1)(a).

b.  The amount of deemed total income assessed/ reassessed as per section 115JB (MAT) or section 115JC (AMT) is more than the deemed total income determined in return processed under section 143(1)(a).

2. When an income tax return is not furnished –

a. Income assessed is more than the maximum amount not chargeable to tax.

b. The amount of deemed total income assessed/ reassessed, as per section 115JB (MAT) or section 115JC (AMT), is more than the maximum amount not chargeable to tax.

3. Re-assessment –

a. Income reassessed is more than the income assessed/ reassessed immediately before such reassessment.

b. The amount of deemed total income assessed/ reassessed as per section 115JB (MAT) or section 115JC (AMT) is more than the deemed total income assessed/ reassessed immediately before such reassessment.

c. The income assessed/ reassessed has the effect of reducing loss or converting the loss into income.

Amount of penalty payable

1) Where under-reported income is in consequence of any misreporting 

Amount of penalty payable - 200% of the amount of tax payable on under-reported income. 

2)In any other case of under-reported income 

Amount of penalty payable - 50% of the amount of tax payable on under-reported income. 

Understanding the term misreporting of income

The penalty amount under section 270A increases in case the under-reported income is in consequence of any misreporting. The cases of such misreporting income shall be following –

• Misrepresentation/ suppression of facts.

• Claiming of expenses not supported by any proofs.

• Failure to record investments in the books of accounts.

• Failure to record receipt, affecting the total income, in the books of accounts.

• Failure to record an international transaction/ transaction deemed to be an international transaction / specified domestic transaction to which provisions of Chapter X apply.

• Recording of false entries in the books of accounts.

No law can exist without the penal provision. To ensure that the taxpayer does not default in paying taxes or disclosing the information, there are several penalties prescribed under the Income Tax Law. Some of the penalties are mandatory whereas few are at the discretion of the tax authorities. With each passing year, penal provisions are getting stricter & discretionary powers of authorities are shrinking. Let us know some of the most common penal provisions in the Income Tax Act-1961.

• Penalty for underreporting and misreporting of income:
  Many times a taxpayer may try to reduce his tax liability by underreporting or misreporting of income. In such a case, penalty may be levied U/s 270A. Penalty amount in such a case shall be 50% of the tax payable on under-reported income. However, in a case where under-reporting of income results from the misreporting of income then the taxpayer shall be liable for penalty @ 200% of the tax payable on such misreported income. In short, the cost of penalty would be double the amount of legitimate tax.
  For levy of penalty, the following cases will be considered as misreporting of income:

• Misrepresentation or suppression of facts.

• Failure to record investments in the books of account.

• Claim of expenditure not substantiated by any evidence.

• Recording of any false entry in the books of account.

• Failure to record any receipt in books of account having a bearing on total income.

• Failure to report any international transaction or any transaction deemed to be aninternational transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

• Penaltyin case of Income Tax Raids [Search Case]:
  If the undisclosed income  is found in the income tax raids conducted by income tax department after 16.12.2016 then the penalty is leviable U/s 271AAB as under:
  a) 30% of undisclosed income if taxpayer admits the undisclosed income; substantiates the manner in which it was derived and pays the tax along with interest while filing income tax return of the year to which such undisclosed income pertains.
  b) 60% of undisclosed income if it is not covered by above case.

• Penalty incase of income from undisclosed sources:
  If during the course of the assessment, income tax officer make any addition U/s 68, 69, 69A, 69B, 69C or 69D (all this sections pertains to undisclosed income, investment, expenditure, money etc) then the penalty is applicable U/s 271AAC @ 10% of the tax payable under section 115BBE.

• Penalty to reply or make submission:
  If the taxpayer fails to comply with notices issued under various sections of the Income Tax Act then penalty is applicable U/s 272A@ Rs. 10,000 for each failure.

• Feefor default in furnishing return of income:
  Taxpayers who are required to file the income tax return fail to file it are liable for the late fee of Rs. 5,000 if return has been furnished after the due date prescribed U/s 139(1). However, it shall be Rs. 1,000 only if the total income of does not exceed Rs. 5 lakh. The late fee is not at the discretion of the tax authorities and is mandatory in nature.

• Penalty for failure to keep, maintain, or retain books of account, documents, etc., as required under section 44AA:
  Wherever the taxpayer is required to maintain the books of accounts fails to maintain it then such taxpayer shall be liable to pay penalty u/s 271A of Rs. 25,000.

• Penalty for ‘False Entry’ in the Books of Account:
  The Finance Act 2020 has introduced a new section 271AAD to provide for a levy of penalty if during any income tax proceedings it is found in the books of accounts maintained by the taxpayers that there is:
  a) A false entry; or
  b) Any entry relevant for computation of total income of such a person has been omitted to evade tax liability.
  The penalty amount shall be equal to the aggregate amount of false entries or omitted entry.
  Further, the person (may be an accountant, tax consultants, business facilitator, broker, etc) who guides or abets such false entries may also be liable for a penalty of an equivalent amount.
  For the purpose of section 271AAD, the false entry includes use or intention to use:
  a) Forged or falsified documents such as a false invoice or, in general, a false piece of documentary evidence.
  b) Invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both or
  c) Invoice in respect of supply or receipt of goods or services or both to or from a person who do not exist.

8. Failure to file Statement of Donation or issue donation certificate:
   Now, every trust who are registered U/s 80G are required to file the Statement of Donation received. Failure to file such a statement within the due date attracts a fee @ Rs. 200 per day. However, the fee cannot exceed the amount in respect of which the failure hasoccurred. Section 271K further empowers the Assessing Officer to levy a penalty of Rs. 10,000 to Rs. 1 lakh if such trusts fail to furnish the statement or fails to furnish a certificate.

9. Failure to getaccounts audited or furnish a report of audit as required under section 44AB:
   If taxpayers who are required to get their books of accounts audited U/s 44AB fails to do so then they are liable for penalty U/s 271B which can be ½% of the total turnover or Rs. 1,50,000, whichever is less.

These are some of the most common penal provisions which are used by the tax authorities for ensuring compliance with the tax laws.

1. Have legally valid rental agreement.

2. Have proper payment proof.

3. Make sure the owner has filed income tax returns.

In our past experience, many assessees have failed to provide the proof for HRA. Tax Authorities have rejected assessee claim of HRA and imposed interest and penalties on such HRA claims which is not backed with correct proofs.

Can I choose the old tax regime back next year if I opt for the new tax regime this year? Are the rules the same for consultants and professionals? What other points should I keep in mind while choosing the new tax regime?

Individuals having income (other than income from business & profession), can change their option of being taxed under the old tax regime or the new tax regime every year. This option must be exercised when filing the income tax return and can be changed every year, provided the income tax return is filed within the due date.

However, for individuals with income from business and profession, the tax regime opted for in the previous tax returns also applies to the subsequent years. The tax regime can be changed only once in their lifetime by submitting an application in prescribed Form 10IE, on or before the due date of filing the income tax return under Section 139 (1) of the Act.