Weekends usually bring a little respite from the otherwise hectic working schedules. But when one’s mobile and email inbox starts pinging messages and email alerts from the income tax (I-T) department, in such otherwise relaxing weekend, then it definitely becomes a bit of a concern and a spoiler.
Several taxpayers have received messages and emails from the I-T department, intimating them about some artificial intelligence (AI) identified mismatches in their interest and dividend incomes declared in their I-T returns for financial years 2021-22 and 2022-23, vis-à-vis, those reported in annual information system (AIS) by the banks and companies.
In order to reconcile the mismatch, an on-screen functionality has been made available in the Compliance portal of the I-T department’s e-filing website for taxpayers to provide their response. It has been clarified that such messages and emails are not notices.
But at the same time, the taxpayers who are unable to explain the mismatch have also been prompted to consider the option of furnishing an updated income tax return if eligible, to make good any under reporting of income. In order to declare any skipped interest or dividend income, an updated return can be filed within two years from the end of the relevant year by paying additional taxes of 25%/50%.
Last week, the I-T department has provided a much-needed respite by clarifying that in case the taxpayer has disclosed the interest income in the I-T return under the line item ‘Others’ in the Schedule OS, it need not respond to the mismatch pertaining to the interest income. The said mismatch shall be resolved on its own and will be reflected in the portal as ‘Completed’.
But apart from this reason, the alleged mismatch in the interest income may also arise from other similar practical reasons, wherein there is no under reporting of interest income as such, and there is a genuine and lawful explanation for such mismatch.
Many taxpayers engaged in business, make fixed deposits, which are intrinsic to such business. For instance, a fixed deposit may need to be made as performance guarantee, in order to obtain a business tender.
Similarly, the fixed deposit may need to be made for obtaining a letter of credit for procuring goods. The incidental interest income on such fixed deposits is usually accounted for as business income and is adjusted against the business expenses, and is not shown under the head ‘income from other sources’.
There are many favourable judicial rulings allowing for such treatment. However, the I-T department usually challenges such treatment in the notice for regular assessment. In such full-fledged assessment proceedings, the taxpayer gets an adequate opportunity to furnish its lawful explanation to treat the interest income as business income, based on the documentary evidences and binding legal precedents.
But in the present e-verification window, there is no scope for the taxpayers to furnish such detailed explanation and uploading any supporting evidences. The limited possible word count explanation given by the taxpayer, is most likely to be ignored by the AI tool of the department.
Another practical reason for such mismatch is the method of accounting being followed by the taxpayers. The non-corporate taxpayers can opt for the cash basis of accounting and reporting their interest and dividend income. As such the interest and dividend income will be shown by such taxpayers in their I-T returns, only in the year of actual receipt and not in the year of their accrual.
However, the respective banks and companies usually deduct TDS and report such interest and dividend pay-outs on accrual basis only. So, this different methodologies of cash and accrual basis of accounting and reporting, also is, one of the commonly recurring reasons for the AI generated red-flag, but with no possible lawful redressal in the e-verification window.
So, in such cases, in spite of there being no lawful reason to construe the interest or dividend income as under-reported income, the mismatch will continue to persist, and which may in future become the basis for reopening the entire case of such taxpayer by the assessing authority.
Thus, there is an urgent need for the I-T department to recognize and address the above practical reasons for the interest and dividend income mismatch also, just like their clarification on 26 February. Then only this redressal initiative of the I-T department will become a full tasty pie and not just remain a half-baked cookie.
Mayank Mohanka is the founder of TaxAaram India and a partner at S.M. Mohanka & Associates.
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A need to address interest and dividend income mismatch issue
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04.03.2024
Weekends usually bring a little respite from the otherwise hectic working schedules. But when one’s mobile and email inbox starts pinging messages and email alerts from the income tax (I-T) department, in such otherwise relaxing weekend, then it definitely becomes a bit of a concern and a spoiler.
Several taxpayers have received messages and emails from the I-T department, intimating them about some artificial intelligence (AI) identified mismatches in their interest and dividend incomes declared in their I-T returns for financial years 2021-22 and 2022-23, vis-à-vis, those reported in annual information system (AIS) by the banks and companies.
In order to reconcile the mismatch, an on-screen functionality has been made available in the Compliance portal of the I-T department’s e-filing website for taxpayers to provide their response. It has been clarified that such messages and emails are not notices.
But at the same time, the taxpayers who are unable to explain the mismatch have also been prompted to consider the option of furnishing an updated income tax return if eligible, to make good any under reporting of income. In order to declare any skipped interest or........
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