Artificial Intelligence and Strong Database to drive Income Tax Department


Artificial Intelligence and Strong Database to drive Income Tax Department

“About 1,00,000 notices were sent… …By March 2024, this entire 1 lakh will be cleared… All the notices were issued based on the information that we have. The process will be now rather more predictable…it is no longer a fishing expedition.” – Extract from the speech of Smt. Nirmala Sitharaman, Finance Minister at the 164th Income Tax Day celebration event.

The Income Tax department is banking on Artificial Intelligence (AI) to identify probable tax evaders & revenue leakages. Technology & AI software is now used for powerful tax administration & catching fraudulent tax evasion cases. Right from businessmen to salaried taxpayers, from charitable organizations to corporate, everyone is under the lenses of the tax department & the result is visible too. Let us discuss some of the instances which have resulted in the selection of the cases by the income tax department in the recent past and may invite the notices in days to come.

1. Bogus Deduction and Exemption by Taxpayers:
At present, no documents or evidence are required to be submitted at the time of filing income tax return in support of the deduction and exemption. IT has resulted in a temptation to make bogus claims, mostly by salaried taxpayers. There are various instances & cases which are now in the possession of the income tax department regarding the fake exemption and deduction claim. Few of such instances noticed could be summarized as under:
a) Fake claim of deduction towards House Rent Allowances (HRA). Deduction is claimed without payment of actual rent, or without any documentary evidence.
b) Bogus political or charitable donation claim through accommodation entries.
c) Deduction under section 80C without any investment in LIC/PPF/ etc
d) Deduction towards mediclaim or health expenses of the parents who are senior citizens.
e) Bogus housing loan deduction.

f) Bogus Purchase cases found during enquiry by the GST Department.

2. Not showing all the income:
The Income tax department is collecting information from various sources and the same is forming the part of Form 26AS (Tax Credit Statement) as well as in AIS (Annual Information Statement).  Non-reporting of the income which is already in the database of the income tax department often results in income tax notices to the Taxpayers.

3. High Value Transactions – Non commensurate with the Income of the Taxpayers:
High amounts of cash deposited in the bank account, high credit card spending, high value investment of mutual funds, etc which doesn’t match with the income profile of the taxpayers results in investigation by the income tax department.

4. High Value Income Tax Refund:
Income tax refund claim of high amount by various taxpayers, more particularly salaried taxpayers, is also under the scanner of the income tax department. Such cases may also come under the security of the taxmen
5. Not incorporating the Shares & Mutual Funds transactions in the ITR:
There are various taxpayers who have incurred the losses in the shares transactions and have not shown it in the ITR form for the reason that they have incurred the loss. The data base of the income tax department is showing the transaction of shares and it’s not incorporation in the ITR form (though it is a loss) may result in enquiry by the department. Even the off market share transaction is getting reported and scrutinized by the department.

Consequences if the department notices the bogus claim/exemption/deduction or suppression of income:

Any attempt by the taxpayers to reduce the tax liability by underreporting or misreporting of income is subject to penalty U/s 270A. Penalty shall be 50% of the tax payable on under-reported income. However, in a case where under-reporting of income results from the “misreporting” of income then the taxpayer shall be liable for penalty @ 200% of the tax payable on such misreported income. In short, the cost of penalty would be double the amount of otherwise legitimate tax liability. For levy of penalty @200%,  following cases are considered as misreporting of income:

i.  Misrepresentationor suppression of facts.

ii.  Failureto record investments in the books of account.

iii. Claim of expenditure not substantiated by any evidence.

iv.  Recordingof any false entry in the books of account.

v.  Failureto record any receipt in books of account having a bearing on the total income.

vi.  Failure to report any international transaction or any transaction deemed to be aninternational transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

In short, the bogus claim / deduction / concealment of income will attract a penalty @ 200% of the tax amount. This is the bare minimum amount of penalty which is subject to other penal consequences as well.

Option available with the taxpayers:

If taxpayers find any mistake or error in the ITR recently filed, they have an option to rectify it by submitting a revised income tax return. No penal consequence is attracted if the taxpayers voluntarily rectify its mistake by filing the revised income tax return before issuance of notice by the department. Time for revising the income tax return has been reduced to 31st December from 31st March.  Taxpayers may note that the revised return doesn’t attract any late fee.  Return can be revised any number of times without any restrictions or bar.


Even genuine mistakes and errors could result in a penalty & now the cost of penalty/fine is more than the cost of tax. The chances of getting caught are now higher. Taxpayers who have filed the return may just recheck the return filed to see if there is any concealment or error and may use the option of filing revised income tax return to avoid any adverse consequences.

Readers may forward their feedback & queries at taxtalknew@gmail.comOther articles & response to queries are available at]

CA Naresh Jakhotia
Partner – M/s. SSRPN & Co.
10, Laxmi Vyankatesh Apartment
Telephone Exchange Square
Central Avenue Road

Web     :


linkedin  :

Phone Nos: (0712)2735479, 6549611
Cell No. :  094228-60300