Income Tax Department cracks down on bogus claims of Deductions & Exemptions

August 5, 2025

The Income Tax Department initiated a large-scale verification operation across various locations in the country on 14th July 2025, identifying individuals and entities that have undertaken fraudulent claims of deductions and exemptions in Income Tax Returns (ITRs).

Investigators have uncovered organized rackets by certain ITR prepares and tax consultants, who have been filing returns claiming fictitious deductions and exemptions. These fraudulent filings involve abuse of beneficial provisions to claim excessive refunds.

Analysis reveals misuse of deductions under sections 80G, 80D, 80DDB, 80EE, 80EEA and many other sections. Employees of MNCs, PSUs, Government bodies, entrepreneurs and many other salaried employees are those among the targeted. Taxpayers are often lured into these fraudulent schemes with promise of inflated refunds.

The department has cracked down on these bogus claims of deductions and exemptions through use of third-party sources, ground-level intelligence, and artificial intelligence. Further search and seizure operations were carried out in Maharashtra, Gujarat, Delhi, Tamil Nadu and many other places to substantiate the evidence of fraudulent claims.
As a result, approximately 40,000 taxpayers have updated their returns in the past four months, voluntarily withdrawing claims amounting to Rs.1,045 crores.

CBDT Notifies IREDA Bonds as Eligible for Section 54EC Exemption

The Central Board of Direct Taxes (CBDT) has notified the Indian Renewable Energy Development Agency (IREDA) as a long-term specified asset for the purposes of Section 54EC of the Income-tax Act, 1961. This move provides taxpayers with an additional avenue for capital gains exemption under the said section.

As per the notification, the following conditions must be fulfilled for IREDA bonds to qualify as long-term specified assets:

1. The bonds must be issued by IREDA.
2. They must be redeemable after 5 years.
3. The bonds must be issued on or after 9th July 2025.

Only those bonds that meet all the above criteria will be eligible for capital gains exemptions under Section 54EC.

Use of Proceeds

A key stipulation in the notification pertains to the utilisation of proceeds from the bond issuance. The CBDT has mandated that:

1. The funds raised through these bonds must be used by IREDA only for renewable energy projects.
2. Such projects should be capable of servicing the debt from their own revenues.
3. These projects must not rely on any financial assistance or guarantees from State Governments for debt servicing.

This ensures that the tax benefit is linked to financially viable and self-sustaining renewable energy initiatives.

Benefit to Taxpayers

Investors who earn capital gains and wish to claim exemption under Section 54EC can now consider IREDA bonds (issued post 09-07-2025) as an eligible investment. By doing so, they can defer their tax liability while supporting the development of sustainable energy infrastructure in India. Further, investors also now have a different avenue to invest while claiming exemption under Section 54EC.

Boost to development of sustainable energy infrastructure in India

Introducing investing in IREDA bonds to claim exemption under Section 54EC boosts development of sustainable energy infrastructure in India while at the same time reducing tax liability of Taxpayers.

No personal hearing is required to be granted before transferring case to another AO

Section 127 empowers certain income tax authorities to transfer a case from one Assessing Officer (AO) to another for administrative or investigative convenience. In the recent case of Shreeji Foods (P.) Ltd. Vs. Union of India, there was a decision made by the Tribunal on based on the above provisions.

Facts of the Case

The Principal Commissioner, Hyderabad, passed an order under section 127(2) transferring the case of the assessee from Hyderabad to Delhi on the ground that certain incriminating material pertaining to the assessee was found during the course of search and seizure operation conducted under section 132 in the case of one of the entities of the SAIL Group at Delhi.
The assessee filed instant writ petition contending that the order passed was without jurisdiction, illegal, arbitrary and violative of the provisions of section 127, and passed without proper opportunity of being heard.
The Tribunal held the decision to transfer AO.

Conclusion

The High Court found no illegality, irregularity, or procedural lapse in issuance of transfer order. The detailed objections filed by the petitioners were duly considered before passing the transfer order and the transfer was necessitated due to the involvement of other group cases and centralization of assessments for effective investigation and coordination.

CBDT has notified ‘376’ as Cost Inflation Index (CII) for Financial Year 2025-26

The Central Government has made a change to its earlier notification (issued in 2017) regarding Cost Inflation Index (CII) under Explanation (v) to Section 48 of the Income-tax Act, which is used to calculate capital gains.
A new entry is added to the table:
Financial Year 2025-26 is assigned a Cost Inflation Index of 376.
This new CII will be applicable from 1st April 2026 and will apply to Assessment Year 2026-27 and onwards.

No additions towards unexplained purchases if assessee was following presumptive taxation scheme

Section 44AD of the Income Tax Act,1961 is a presumptive taxation scheme for small businesses whose turnover/gross receipts are up to Rs. 2 crores during the relevant previous year. The profits are calculated as 8% of total turnover/gross receipts and 6% if receipts are through digital modes.

Section 69(C) states that where in any financial year an assessee has incurred any expenditure and he offer no explanation about the source of such expenditure then amount covered by such expenditure or part thereof, as the case may be, may be deemed to be income of the assessee during that particular previous year.
In recent case of Lakshmanram Bheemaji Purohit vs. Income Tax Officer, the decision was made based on the above provisions.

Facts of the Case

1. The assessee was an individual engaged in the business of trading of waste home products. He filed his return as per provisions of section 44AD.

2. The Assessing Officer received information from GST department that the assessee had received a bogus purchase bill. It was alleged that this was a bogus tax invoice wherein false input credit was claimed under GST.

3. The assessee submitted that he had filed the return of income under section 44AD and therefore the details of purchases were not maintained.

4. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer.
However, the Tribunal held a different view:

Since, the assessee had opted for presumptive taxation under Section 44AD, they were not required to maintain regular books of account or provide purchase details, as long as turnover is within the prescribed limit.
The assessing officer had made an addition solely on the basis of information provided by GST Department and did not carry out any independent verification to substantiate the disallowance.
The tribunal relied on Punjab & Haryana High Court’s ruling in CIT v. Surinder Pal Anand and the coordinate bench decision in Bipinchandra Hiralal Thakkar v. ITO, both holding that under Section 44AD, an assessee is not obligated to explain individual purchase entries unless such entries affect the gross receipts, which remained undisputed in this case.