With the start of the new year, you must be receiving e-mails from your company’s accounts/HR department asking you to claim any reimbursements you are entitled to and provide bills or receipts for these as well as rent receipts to claim HRA tax-exemption before the end of the financial year. However, while submitting the proofs, make sure you only provide real bills/receipts, as giving fake proof can land you in trouble with the tax department. You could end up with a tax notice for under-reporting of income.
Often companies reimburse certain expenses of employees and/or provide House Rent Allowance (HRA) which are exempted from tax up to specified limits as per the Income-Tax Act, 1961. Paying an employee through such reimbursements instead of via a corresponding amount added to salary allows the employee to receive the sum exempt of tax. Consequently, it results in lower tax outgo for the employee. However, such tax exempt reimbursement/tax-exempt HRA is permitted by the income tax department only in case of real expenditure incurred on specified activities.
Common tax-exempt reimbursements offered by employers include for Leave Travel Allowance (LTA) and HRA. For many years, up till last year reimbursement of medical bills by employers was also tax-exempt up to Rs 15,000 in a single fiscal year. Claiming LTA from employers as tax-exempt requires submission of documentary proof like air and train tickets for travel on leave. Similarly, employees have to provide rent receipts to the employer to claim tax exemption on HRA given by the employer.
Those who do not have bills/receipts of sufficient value to claim the full amount they are entitled to (as per their company policy) as exempt from tax may be tempted to claim the reimbursements by submitting fake bills/rent receipts to their companies. But this is not a good idea. This is because if fake bills are submitted for reimbursement then you are yourself liable even if the employer accepts the bills and reimburses you for them.
Chetan Chandak, Head of Tax Research, H&R Block India, says “Generally, the employer’s responsibility is restricted to ensure that the employee has submitted the necessary documents in support of his claim and he is under no obligation to examine the genuineness of the supporting evidence submitted by an employee.”
How the department will catch you
Naveen Wadhwa, DGM, Taxmann.com leading publisher of taxation and corporate law books, says, “There are three ways through which the income tax department can find out if an individual has submitted fake bills to claim reimbursements. These are: a) If the ITR of that individual is selected for scrutiny and supporting evidence cannot be provided by the individual to substantiate his claims, b) If the Department asks the employer to furnish supporting evidence for tax deducted at source (TDS) calculated under Section 192 and bills submitted by the employees are not found to be genuine, and c) If the tax department gets some information through search or survey indicating that the employee has claimed deduction on the basis of false bills.”
The income tax department is actually tracking your every financial transaction. Wadhwa says, “Every bank is required to report high value transactions to the department through an Annual Information Return (AIR). Some of these types of transactions include cash deposits aggregating to Rs 10 lakh or more in a financial year, in one or more saving accounts of a person, depositing money in fixed deposits aggregating to Rs 10 lakh or more in financial year and so on.”
Any transaction reported by these financial institutions under your PAN which does not match with the income claimed by you in your ITR are bound to raise suspicion.
The tax department will ask you to provide documents and transactional proofs such as bank account statement etc. for the same. If you are unable to provide the same, then the department will reject your claim and ask you to pay additional tax on the income along with interest and penalty.
Penalties if discovered by tax department
Chandak says, “When an employee submits fake bills of reimbursements to the employer to claim exemptions to lower the tax liability, then this amounts to a case of misreporting income to lower the tax liability. In such a case the assessing officer may start a scrutiny case against the individual and then it is up to the taxpayer to prove that the bills are genuine.”
If claims are found to be fake, this will result in penalties for misreporting or under-reporting of income. Chandak says, “As per section 270A (1), a penalty of 50 per cent will be levied if income has been under-reported. However, if under-reporting of income is a consequence of misreporting of income, then penalty of 200 per cent can be levied. Therefore, an individual’s deliberately submission of fake bills to misreport the income will attract penalty of 200 per cent.”
Additionally, an assessee is liable to pay an interest under sections 234A, 234B and 234C of the Income tax Act, adds Wadhwa.
In addition to that, certain allowances such as leave travel allowances can be claimed through only the employer, i.e., they cannot be claimed at the time of filing ITR.
If an employee does not fulfil the conditions to claim the tax deductions in respect of any allowance, that is part of his salary package for a financial year, it is added to his income and taxed accordingly on the rates applicable to his taxable income, says Wadhwa.
Any reimbursements, by your employer, of expenses incurred for official purposes e.g travel on official duty, is exempt from tax to the extent of expenditure incurred. Documentary (bills) proof is required to claim such reimbursements.
Though your claims may be genuine, if it is paid in cash, sometimes it may become difficult to prove it to the assessing officer (AO). Hence, it is important for the taxpayers to keep track of all the original bills and receipts. Moreover, if these payments are made through a bank account or credit card or any other electronic mode then it becomes easier to prove that they are genuine, adds Chandak.