Non-disclosure of interest on tax refunds does not attract penalties, according to a ruling by the Mumbai bench of the Income Tax Appellate Tribunal (ITAT). The case highlights the importance of accurately reporting income and the significance of this verdict for taxpayers facing similar challenges in their tax assessments.
Penalty for Non-Disclosure of Interest on Tax Refund Invalid
In a recent decision, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) ruled that levying penalties for the non-disclosure of interest earned on a tax refund is not valid. This decision brings clarity to the matter of tax penalties and serves as a guide for taxpayers navigating similar situations.
Mismatches and Tax Refund Interest
The ITAT bench underscored a crucial point: interest earned on a tax refund cannot be determined until the refund is received. Hence, non-disclosure of this interest in an income tax return should not be considered as underreporting of income. This verdict clarifies that discrepancies between reported and assessed income do not necessarily imply misreporting or underreporting.
Case in Focus: A Senior Citizen’s Challenge
The case that led to this ruling involved a senior citizen named K. Singh. She had filed her income tax return for the financial year 2016-17, declaring a taxable income of approximately Rs 1.9 crore. However, her return underwent scrutiny assessment, during which her taxable income was revised to about Rs 2 crore. The discrepancy of Rs 9.7 lakh was the interest she received on her income tax refund, which she had not disclosed in her initial return.
The Significance of Section 244A
Section 244A of the Income Tax Act stipulates that the tax department must pay 0.5% interest on the refund amount per month or part of the month. This interest is classified as taxable income under the head ‘income from other sources.’
A Taxpayer’s Response to a Penalty Notice
In response to a show cause notice for the imposition of a penalty under Section 270A, Singh explained that she had voluntarily offered the interest on her tax refund during the scrutiny assessment. This was done long before the notice was issued to her, making it an unsuitable case for the classification of underreported income. At the time of filing her return, she lacked information about the refund amount and had not yet received a refund.
ITAT Ruling in Favor of the Taxpayer
Despite the initial rejection of Singh’s submissions by the lower tax authorities, she appealed to the ITAT. The ITAT ruled in her favor, stating that differences between the income declared for taxation and the income ultimately taxed should not be treated as misreporting or underreporting of income, warranting penalties.
In Summary
The decision by the Mumbai bench of the Income Tax Appellate Tribunal highlights the importance of understanding tax law and diligently reporting income. This verdict clarifies that underreporting penalties should not be imposed on taxpayers who can demonstrate that mismatches in reported and assessed income were unintentional and can be supported by appropriate documentary evidence.
