The Income Tax Department has tightened scrutiny of income tax refund claims after uncovering large-scale misuse of deductions through organised agent networks. Official investigations have revealed that a section of intermediaries and return-filing agents were filing Income Tax Returns (ITRs) on behalf of taxpayers in exchange for commissions, while claiming inflated or entirely fake deductions under various provisions of the Income Tax Act to secure wrongful refunds.
According to senior tax officials, thousands of such cases have been identified using advanced data analytics, artificial intelligence tools and third-party data matching systems. These cases showed significant discrepancies between the deductions claimed and the taxpayers’ actual income profiles, financial transactions and supporting documents. The probe also found that a substantial portion of the fraudulent claims were linked to donations purportedly made to Registered Unrecognised Political Parties (RUPPs) and certain charitable institutions.
Commission-driven Agent Networks under Scanner
Departmental sources said the investigations point to a well-organised, pan-India network of intermediaries operating on a commission basis. These agents allegedly lured taxpayers with promises of higher refunds and hassle-free filing, often without fully disclosing the nature of deductions being claimed in their names.
In several cases, taxpayers later claimed ignorance, stating they were unaware that false or exaggerated deduction claims had been submitted in their returns. However, officials have clarified that legal responsibility ultimately rests with the taxpayer, regardless of whether the return was filed personally or through an agent.
A striking pattern emerged during data analysis, with thousands of returns showing near-identical income figures, donation amounts and deduction claims. Such uniformity raised red flags in the department’s risk assessment systems, leading to automatic alerts and the classification of these cases as high-risk for scrutiny.
Sections Most Commonly Misused
The Income Tax Department has identified multiple sections under which fake or inflated deduction claims were frequently made. These include:
- House Rent Allowance (Section 10(13A))
- Health insurance premiums (Section 80D)
- Donations to political parties and general donations (Sections 80G and 80GGC)
- Interest on education and home loans (Sections 80E, 80EE and 80EEB)
Tax experts noted that detection of misuse under these sections has become easier due to increased availability of third-party data from banks, insurance companies, lenders and donation recipients, enabling cross-verification at scale.
Severe Penalties and Prosecution Provisions
Claiming fake deductions or misreporting income is treated as a serious offence under the Income Tax Act. The law provides for stringent financial penalties as well as criminal prosecution in aggravated cases.
Under Section 270A, misreporting of income can attract a penalty of up to 200% of the tax payable.
Sections 234B and 234C allow the department to levy interest of up to 24% per annum on unpaid or short-paid tax.
In cases involving wilful tax evasion, Section 276C provides for rigorous imprisonment of up to seven years, in addition to monetary penalties.
Officials said prosecution would be considered in cases where intent to evade tax is clearly established, particularly where organised networks and repeated violations are involved.
Stricter Disclosures in New ITR Forms
To curb fraudulent claims, the Income Tax Department has significantly strengthened disclosure requirements in the latest ITR forms. Taxpayers are now required to provide detailed break-ups and documentary information, including HRA calculations, insurance policy details, loan sanction particulars and bank account information linked to deductions.
Any mismatch between declared data and third-party information is now automatically flagged, triggering system-generated notices without manual intervention.
ITR-U Offers a Corrective Window
Tax professionals have advised taxpayers who suspect that an incorrect deduction has been claimed—whether knowingly or inadvertently—to make use of the ITR-U (Updated Return) facility. Filing an updated return allows taxpayers to withdraw false claims, disclose omitted income and regularise their tax position by paying additional tax and applicable interest.
Experts have also cautioned taxpayers against relying on unverified third-party refund agents, stressing that returns should be filed either personally or through authorised and qualified professionals to avoid legal and financial consequences.
