I-T Department clears air on Section 80P tax notices: What if you ignore the notice?

The Income Tax department, formerly known as X (formerly Twitter), publicly acknowledged that the notices dispatched to individual taxpayers for incorrectly claiming tax deductions under Section 80P were sent in error as reported in Moneycontrol.com. Responding to a query posed by Nirav Choksi, a chartered accountant, the tax department provided clarification by stating, “An email communication regarding this will be sent to you shortly.”

In the past week, a significant number of taxpayers have once again sought assistance from tax intermediaries and professionals, despite having promptly paid their taxes. The final deadline for e-verifying income tax returns had passed on August 31. This time, their reason for reaching out was to address notices regarding claims for deductions that they are not eligible to make.

Thousands of taxpayers in Maharashtra and Gujarat received notices under Section 143(1) of the Income Tax Act, 1961, prompting them to provide justifications for their claims of deductions under Section 80P. Deductions refer to the amounts individuals claim to lower their taxable income through investments or expenses.

This deduction is exclusively accessible to cooperative societies and is not applicable to individual taxpayers. According to Section 80P, if a cooperative society generates income from activities such as banking or credit services, agricultural endeavours and products, or cottage industries, they are eligible for deductions ranging from Rs 15,000 to Rs 20,000 when computing their total income.

Erroneous notices regarding potential adjustments under Section 143(1)(a) are being dispatched in relation to claims for Section 80P deductions. However, we have not made these deductions on behalf of our clients, as they do not meet the eligibility criteria for such claims. These notices are being issued not in reference to tax returns submitted by cooperative societies but rather for individual income tax returns.

Error in Income Tax server

The notices sent via email indicated that deductions under Section 80P cannot be applied or approved for the assessment year 2023-24. Consequently, individuals are required to address these notices within the specified 15-day timeframe. This presents an extra challenge for both individuals and tax professionals, as we do not charge any fees to clients for what appears to be solely a system-generated mistake that requires resolution.

What if you neglect to review the email notice or do not provide a response?

Failure to respond to the adjustment notice under Section 143(1) could result in an automatic offset of the mentioned deductions against any pending tax refunds owed to you. In addition to a reduction in your refund, you may also be subject to taxes, interest, and penalties, even if the issue is a system error.

Furthermore, there has been a notable increase in the issuance of scrutiny notices recently.

Many high-net-worth individuals have received scrutiny notices for the assessment year 2022-23. These notices are linked to individuals who have claimed multiple deductions that have raised red flags in the artificial intelligence software. The system detects deductions that appear implausible on the surface.

While Form 16 mentions several deductions, it also includes deductions like Section 80G and 80GG. While donations can help reduce tax liability, individuals are being asked to provide documentation to substantiate their claims.

Additionally, individuals with substantial investments both in India and abroad have received scrutiny notices, particularly those claiming losses. The tax department seeks to verify the origins of their previous investments and the documentation supporting their exemptions and deductions.

During scrutiny-related audits, the tax department may request various pieces of information, including cash flow statements.

Creating accurate cash flow statements entails the preparation of detailed accounts, which cannot be done hastily. The positive news is that with the tax department acknowledging the error, it is expected to send clarification emails to all taxpayers who mistakenly received the Section 80P notice.