MUMBAI: Tax Tribunal Rules Penalty for Non-Disclosure of Interest on Tax Refund Invalid
Summary:
- The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that the penalty levied for non-disclosure of interest earned on a tax refund is not valid.
- The ITAT bench emphasized that unless the refund is received, its interest element cannot be determined, and therefore, non-disclosure in the income tax return cannot be considered as underreporting of income.
- The case involved a senior citizen who had not disclosed the interest received on her tax refund in her income tax return for the financial year 2016-17.
- Under Section 244A of the Income Tax Act, the tax department is required to pay 0.5% interest per month on the refund amount. This interest is taxable under the head ‘income from other sources’.
- The taxpayer had voluntarily offered the interest on her tax refund during the scrutiny assessment, before the show cause notice for penalty was issued to her.
- The ITAT ruled in favor of the taxpayer, stating that mismatches between the income offered to tax and what is ultimately taxed cannot be considered as misreporting or underreporting of income.
- The ruling validates the position of the taxpayer and provides guidance for taxpayers facing similar challenges in their tax assessment.
Details:
The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has ruled that the penalty levied for non-disclosure of interest earned on a tax refund is not valid. The ITAT bench, comprising Amarjit Singh, accountant member, and Sandeep Singh Karhail, judicial member, emphasized that unless the refund is received, its interest element cannot be determined. Therefore, non-disclosure in the income tax return cannot be considered as underreporting of income.
The case involved a senior citizen, K Singh, who had filed her income tax return for the financial year 2016-17 and declared a taxable income of approximately Rs 1.9 crore. Her income tax return was selected for scrutiny assessment, and her income was held to be approximately Rs 2 crore. The difference of Rs 9.7 lakh was the interest received on her income tax refund, which she had not disclosed at the time of filing her return.
Under Section 244A of the Income Tax Act, the tax department is required to pay 0.5% interest of the refund amount per month or part of the month. This interest is taxable under the head ‘income from other sources’.
In Singh’s case, the income tax officer issued a show cause notice for imposition of penalty under Section 270A. Singh responded that during the scrutiny assessment, she had voluntarily offered the interest on her tax refund, much before the notice was issued to her. Therefore, it cannot be considered as underreporting of income. She also stated that at the time of filing her return, she neither had any information about the refund amount nor had she received any refund.
As her submissions were not accepted by the lower tax authorities, she filed an appeal with the ITAT, which ruled in her favor. The ITAT held that mismatches between the income offered to tax and what is ultimately taxed cannot be considered as misreporting or underreporting of income, which can be penalized.
Ketan Ved, partner at Deloitte India, who represented the taxpayer in this matter, stated that the decision of the ITAT validates the position of the taxpayer and provides guidance for taxpayers facing similar challenges in their tax assessment. He also mentioned that taxpayers can explain their genuine circumstances with appropriate documentary evidence and rely on this ITAT order to defend against the levy of penalties.
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