The tax authorities have chosen to examine high-risk refund cases for the financial year 2023-24 (Assessment Year 2024-25) using statistical analysis of specific cases. Tax officers were notified of this decision through an internal directive dated October 3, 2024, which is not publicly available. This means that even if you have already received a tax refund for the financial year 2023-24, your case could still be selected for investigation if the tax department suspects any irregularities.
“Suspicious clusters, comprising of ITRs in which common email ID has been reported, has been identified based on certain rules. Details of such high-risk clusters are being disseminated to the respective CRU (Central Registry Unit) Nodal officer 1 for the purpose of verification of suspicion that false claims of refunds have been made in an organised manner or through a single key person,” said the Income Tax Department on the said internal order.
How does this impact you?
According to experts, this internal circular mainly affects taxpayers who have filed their income tax return (ITR) and have claimed a tax refund that seems suspicious to the tax department. However, not all tax refund claims are closely scrutinized by the tax department. The internal circular clearly states that only ‘High Risk Refund (HRR) cases’ will be investigated by the tax officers.
“The Income Tax Department is identifying cases where people have wrongly claimed refunds for AY 2024-25 (FY 2023-24). Notices will be sent to these taxpayers via email and registered post also, regardless of whether the tax refund has already been issued or not, if someone doesn’t respond or response is found to be non-satisfactory the department can ask that taxpayer to appear before the officer personally and taxpayer statement can also be recorded,” says Mihir Tanna, Associate Director- direct tax, S.K Patodia & Associates LLP, a CA firm.
Chartered Accountant Deepak Chopra, Chairman of the Direct Tax Committee at the Karnataka State Chartered Accountants Association (KSCAA) echoes Tanna’s viewpoint and says that this internal circular also pertains to those taxpayers who may have already received a tax refund for AY 2024-25. Now, the tax department may classify them as high-risk and start an investigation.
The income tax department said in the circular, “In the past, incidents were reported wherein wrong refunds had been claimed through various means such as wrong claim of TDS credit, under reporting of income, over stating of deductions, claim of bogus expenses, etc. Accordingly some cases have been identified based on certain rules….”
How will the tax department identify high-risk refund cases to investigate
The Income tax department has said the following in the internal circular:
● Kind reference is invited to the subject- High Risk Refund Cases A.Y. 2024-25 disseminated for investigation wing users at Insight-reg
● Email based clusters of High Risk refund ITRs for AY 2024-25, identified based upon certain rules are being disseminated to the PDsIT (investigation) for the purpose off verification of suspicion that false claims of refunds have been made in an organised manner or through a single key person.
● Upon receiving the cluster, the jurisdictional PDIT (Inv.)-1 may preferably allocate one or more cluster to a particular DDIT (Inv.)/ADIT(Inv.) for integrated and comprehensive inquiries.
How will the tax department’s investigation team identify false refund cases
● The IO concerned, who has been assigned the case, should first attempt to ascertain the identity of the natural person (Hereinafter referred to as the KEY PERSON) associated with the common email ID identified, by making use of the internal database available with the Department like Insight/ITBA/e-filing portals, etc
● If such KEY PERSON could not be identified from the internal database, the IO may call for information under section 131 (1A) or by issuance of letter…requesting to furnish:
1. The details and identity of the KEY PERSON whose e-mail id has been furnished in their respective ITRs (including contact details and address of the person), and
2. Submit supporting documents to substantiate the genuineness of claim made on account of exemption, deduction, expenses, etc.
● The information called for under section 131 (1A) or through the letter issued should mandatorily be delivered through registered post along with service of the same on all the registered e-mail ids. These details should initially be called for without requiring personal appearance of the taxpayers in office.
● If no compliance is observed and no reply is received, their personal attendance may be ensured, and identity of the KEY PERSON associated with the common e-mail ID may be identified along with proofs to substantiate claim on account of expenses, exemptions, deductions, etc…..
The income tax department, in the internal circular, said that despite the best efforts of the IO, is the ‘Key Person’ still could not be identified, then the IO can make requisite inquiries and if required, statements of taxpayers may be recorded to verify either the genuineness of claims made in the ITR or to strengthen the inquiry in terms of corroborative evidence for the false claim.
However, if the Key Person behind these suspected wrong tax refund claims is identified, then the tax department said, “Once the KEY PERSON behind common e-mail Id is identified, the IO, under section 131 (1A), may call for information / the documents from the KEY PERSON in support of the claim made on account of deduction, exemption, expenses etc….These details should initially be called for without requiring personal appearance of the KEY PERSON in the office.”
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What will the tax department do after the investigation is concluded
According to the internal circular, here’s what will happen:
Investigation finds genuine tax refund claims: “If, as a result of the enquiry made with the KEY PERSON behind common e-mail Id, the claim of expenses, deductions, exemptions etc, in the enquiry undertaken as per 4.II is found to be genuine, then the IO may close the enquiries and submit the feedback in the feedback functionality present in “High Risk Refund Cases- Inv” case type with the prior approval of PDIT(Inv.). If the Investigation reveals that the KEY PERSON has NOT indulged in fraudulent practices and the claims of expenses, deductions, expenses made in the ITR are genuine, No Negative Inference may be drawn against the KEY PERSON and the ITRs of the Cluster and the IO may close the enquiries and submit the feedback in the feedback functionality present in “High Risk Refund Cases- Inv” case type with the prior approval of PDIT(Inv.),” said the Income Tax Department.
Investigation finds fraudulent tax refund claims: “However, if after verification carried out, it is found that the claims made on account of expenses, deductions, exemptions etc. are not genuine or that the KEY PERSON has failed to furnish sufficient evidence to support the claim of refund, the IO may record the statement of KEY PERSON. The IO should verify the veracity of the suspicion that false claims of refunds have been made in an organised manner or through a KEY PERSON. Also, the FIRST SAMPLE along with as many other ITRs from the cluster as deemed fit, may be examined in detail and requisite enquiries may be made & if required, statements of taxpayers may be recorded, to verify either the genuineness of claims made in the ITR or to strengthen the enquiry in terms of corroborative evidences for the false claim,” said the Income Tax Department.
“Moreover, if any patterns in claim of deductions like bulk of the clients claiming similar deductions are observed, the same may be confronted with the key person and the circumstances under which such individuals came in contact with him / her should be recorded clearly in the statement. Care must be taken not to disclose the source of intelligence in possession of the Investigation Directorate….The IO must submit timely feedback within an overall period of 4 months from the date on which the case had been disseminated to the concerned CRU Nodal Officer in Insight Portal after thorough investigation,” said the Income Tax Department.
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“The tax department has found cases where people have wrongly claimed refunds by:
● Hiding income
● Claiming fake expenses
● Other false claims
To handle such cases, the department has identified suspicious groups using the same email address. They’re sending these cases to special teams for verification to see if those refunds are false and require further action,” says Chopra.
“To find these taxpayers who have claimed wrong tax refunds, the department is looking for groups of tax returns (ITRs) that have the ‘same email address or mobile number’, especially when the refund amount claimed is significant,” says Tanna.
Income Tax Department is also identifying wrong TDS credit claims leading to high tax refunds
According to another internal circular by the Income Tax Department dated October 3, 2024 the department said that it is disseminating identified high risk refund cases to income tax assessing officers (AO) for further investigation in regard to TDS credit claims. The tax department in this circular said the following:
• Kind reference is invited to the subject- High Risk Refund Cases pertaining to AY 2024-25 disseminated for TDS charge officers at Insight.
• TAN based cluster of High-Risk refund for ITRs for AY 2024-25, identified based upon certain rules are being disseminated to the CsIT (TDS) for the purpose of verification of suspicion that false claims of refunds have been made in an organised manner or through a single key person.
• Upon receiving the cluster, the CIT(TDS) may preferably allocate one or more cluster to a particular assessing officer (AO) i.e. DCIT/ACIT/ITO for integrated and comprehensive inquiries.
• AOs need to verify the cases and provide one of the following feedback in Insight Portal after verification: a) No Further Risk Assessment required b) Further risk assessment required
“It has been noticed that many return filers are claiming excess refunds through various means such as wrong claim of TDS credit, under reporting of income, over stating of deductions, claim of bogus expenses etc. Accordingly, some cases have been identified based upon approved risk rules for high-risk refunds. These cases consist of ITR filers, in which common employer Tax Deduction and Collection Account Number (TAN) have been reported. Details of such high-risk clusters are being sent to the respective jurisdictional CIT(TDS) for the purpose of verification of suspicion that whether false claims of refunds have been made in an organized manner or through a single key person,” said the Income Tax Department in the second circular dated October 3, 2024.
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How the income tax department will catch taxpayers who claimed wrong TDS credit
According to the second Income tax department internal circular cited above here’s how the tax department will catch taxpayers who claimed wrong TDS credit leading to high tax refunds:
• Allocate investigation officers: Upon receiving the cluster, the jurisdictional CIT(TDS) may preferably allocate one or more cluster to a particular assessing officer of DCIT/ACIT/ITO for integrated and comprehensive inquiries.
• Feedback on the investigation process: The Assessing Officer (AO) will get cases in Insight portal in Verification Module with a new case type- “High Risk Refund Cases-TDS”. The AO must submit timely feedback in Insight Portal after verification. The AO must give feedback as “No Further Risk Assessment required” or “Further risk assessment required” after verification.
• Outreach program if further investigation required: CIT(TDS) may run an outreach program with cluster TAN Deductor where the AO has given the feedback “Further risk assessment required”, to sensitize the deductee with respect to the claim of deductions by the taxpayers in variance with the claim of deductions as per TDS return filed by the deductor.
Which aspects will determine whether wrong TDS credit cases need further investigation or not
According to the second income tax department circular cited above, while verifying the cases the income tax AO will need to take care of the following aspects:
• To examine if the TAN of the TAN cluster has been flagged in High Risk Refund rules in 3 or more years out of 8/ available years as available in Insight portal. If “yes”, then feedback “Further risk assessment required” must be given.
• To examine if any penalty order has been passed or prosecution has been launched on the deductor for any TDS default in any of the latest 3 Penalty Orders/prosecution proceedings out of last 8 years as available in TRACES AO Portal. If yes, then feedback “Further risk assessment required” must be given.
• To examine if any demand u/s 201 was raised for 3 or more years out of last 8 years in TRACES AO Portal. If yes, the feedback “Further risk assessment required” must be given.
• To examine if the TAN of the TAN cluster has been reported in the TDS defaulter report in TRACES AO portal. If yes, the feedback “Further risk assessment required” must be given.
What should you do?
According to Chopra from KSCAA, “If any taxpayer has made a false refund claim and is on the list, he/she will face consequences. To avoid penalties and interests, such assessee should take immediate action:
● Revise tax return.
● Pay any owed taxes.
Failure to comply will trigger scrutiny, as the tax department’s advanced data analytics will detect discrepancies, resulting in severe penalties and interest charges.”
