ITR: Exempted income was shown in ITR, now you will have to visit the Income Tax Department..

The Income Tax Department is now investigating the 'exempt income' on which people have not paid tax. The department has sent notices to many senior professionals, partners of big companies, and retired employees. In this, questions have been raised whether their shown 'exempt income' is really tax-free. However, experts consider it correct under the law. But this action of the department has increased concern among taxpayers.

The department wants to investigate whether the large amount shown in 'Schedule EI' is just a means of saving tax. Due to this, many people may now have to visit the department. According to ET, it is believed that most of the people who have received these notices for the financial year 2023-24 have shown these earnings as 'exempt income' in their income tax returns. This is allowed under the rules.

What is exempted income?

Profits distributed by the firm to partners, agricultural income, payment of retirement benefits such as Provident Fund and Gratuity, and government investment schemes such as Public Provident Fund. While filling the ITR form, these are recorded under Schedule EI of the ITR form. Its purpose is to exclude such income from the calculation of total income.

What is the reason?

The previous action of the Income Tax Department was against those who fraudulently showed agricultural income or fake donations. But now the investigation of legitimately exempted income, like partnership profits and retirement settlements, has surprised many. Since a firm pays tax, the profit made later is not taxable in the hands of the partners. Some tax practitioners feel that this may be a system error that the Income Tax Department needs to fix.

What do experts say?

Experts believe that these notices may have come due to showing a large amount in 'Schedule EI'. Some believe this could be a fault of the department's system, as partner profits paid by the firm are usually tax-free (the firm has already paid tax). According to Gautam Nayak, senior tax professional and partner at CNK & Associates LLP, large exemption claims could be a selection criterion for scrutiny this year. According to Ashish Karudia, founder of CA firm Ashish Karudia & Co, initiating scrutiny based only on disclosures made under Schedule EI, particularly under the category of 'other exempt income', may not be in line with the rules.

What next?

Taxpayers who escape scrutiny notices (issued under section 143) may later find out that reassessment proceedings (under section 148) have been initiated against them. The department has a long time frame for issuing such notices. Most of the people facing scrutiny notices will probably be able to defend their claims, especially if the concealed income is more than Rs 50 lakh. But they would still have to go through the hassle of dealing with the department.

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