What happens if the taxman finds undisclosed income?

As you file your income-tax return, don’t simply refer to the Form 16 and the business income that you have earned.

There are several other things that you need to mention in your tax returns and take that into account while calculating your tax.

The income-tax department has initiated random checks on taxpayers, by which a computer randomly selects a taxpayer, who then has to rush to the income-tax office with documents such as bank account statements etc, which would reflect income earned, including through investments, savings account interest and fixed deposit interest.

If this income is not shown in the income-tax return, then you would be made to suffer not just the tax applicable on this income, but also a penalty for hiding the income and interest on the delay. The income might be minute,  but the amount to paid when the same is detected could turn out to be a hefty sum.

Minute earnings such as savings bank interest, fixed deposit interest, or rental income are some of the many that may escape your mind.

As the deadline for filing the returns for assessment year 2010-11 (where income earned between April 2009 and March 2010 is assessed) nears, let’s see what are the consequences of not declaring minute income details in your return.

The penalty can be a minimum of 100% and maximum of 300% of the tax that you should have paid on the undisclosed income. The level of penalty would be decided by the assessing officer scrutinising or checking the return.

Then there’s interest on the tax not paid. This is charged not charged from the day it is detected to the day you pay up, but from the date you should have paid the tax up to the day the case is detected. And it’s charged at 1.5% a month simple interest.
There may also be other things — such as change in the tax bracket that you fall under — from 10%, 20% or 30% once the new income is tallied.

Your return can come up for scrutiny any time within six months from the end of financial year in which the return is filed. This means if you file your returns by July 31, 2010, the assessing officer can open your file anytime up to September 30, 2011 (end of financial year 2010 in March + 6 months).

Can’t blame your CA
As an assessee, you may claim that you didn’t know whether a particular income is liable to be taxed or declared in the return. For instance, your fixed deposit interest can be taxed in two ways — you can either decide to show the interest income the year you get the money in your hand (case method) or you can show the interest accrued for a particular year in that year (mercantile method). However, if you start using one method of declaring the interest income, you have to stick to it.

Chartered accountants advise to show the interest as and when it gets accrued, so interest earned in a year can be showed in the same year. The reason behind this is that the tax slab may change if you show the entire interest at the end of maturity.

So, if you started a fixed deposit in January 2010 for a five-year period, you can show the interest earned in three months (January-March 2010) while filing your returns before July 31, 2009. If calculating the interest for only the three months off the total 5-year period means a lot of difficult math for you, don’t worry. But you can always ask your bank for an interest accrued statement and mention the amount in the return.

Similarly, for those following the accrual or mercantile method, the interest component on National Savings Certificates has to be taken into account every year, even though the actual money is coming into your hand at a later date.

But you can’t claim ignorance and say your CA never informed you about it. Chartered accountants don’t sign at the bottom of the tax return, it is the taxpayer who does, agreeing that the information contained in the return is correct and authentic. Unless you can prove that you had provided the inputs to the CA but he never disclosed the same, the CA can’t be held guilty.