Tax return: Dos and Don'ts

It's that time of the year again when you need to get all your papers in order and file that dreaded income-tax return. Don't worry, if you follow certain simple steps, filing returns is not as difficult as it is made out to be. It's really easy, as the Income Tax Department says: "File, Smile and Go."

However, don't take it too lightly. There are serious consquences if the return of income is not filed, filed late or is incorrect.

Step 1: Are You Liable?

Needless to say, if your taxable income exceeds the basic exemption limit (See below: Return Reckoner) , then you must file your return of income. Even in the case that your total income before considering Chapter VI-A deductions (such as investment in PPF, life insurance policies, pension plans, housing loan installments, mediclaim premium, and eligible donations) exceeds the basic exemption limit, it is mandatory to file a return of income.

You also need to file your return if you are claiming a refund or claiming carry forward of loss. The provision of filing the return under the one-by-six scheme now stands withdrawn.

All companies and firms, however, have to file their return irrespective of their income.

Step 2: Computation of Income

While computing the taxable income for the return, first determine the income falling under each of the following heads: (a) Salaries (b) Income from Property (c) Profits and Gains of Business or Profession (d) Capital Gains, and (e) Income from Other Sources.

After aggregating the income under all the heads, the deductions allowable under Chapter VI-A of the Income Tax Act (mentioned above) should be subtracted. The balance will be the taxable income. Tax has to be calculated on this net income, allowing for special rates for certain items of income such as capital gains.

Then, prepare your Balance Sheet or Statement of Assets and Liabilities. Cross check and ensure that income on all of your assets has been considered in your computation of income, keeping in mind whether the cash or mercantile method of accounting is followed.

Also, remember the clubbing provisions and ensure that income of minor children has been included, if so required.
 

Step 3: Payment of Taxes

The entire tax payable on your income has to be paid before filing the return of income either by way of tax-deducted at source (TDS), advance tax or self-assessment tax. Ensure that it is done before the return of income is filed.

If there is any interest payable on account of deferment of advance tax, or shortfall of advance tax or delay in filing of the return, that also should be paid prior to filing the return of income. Non-payment of taxes leads to payment of interest as well as penalty.

Step 4: Completing the Return of Income

Determine the return of income form that you would be required to fill in. The most commonly used forms are:

Form 2D (Saral): This is the form for entities other than companies;

Form 2E (Naya Saral): This is individuals and Hindu Undivided Families (HUFs) not having business income or capital gains or agricultural income.

Form No 16AA is a certificate of TDS from salaries that doubles as a return of income. If you have an annual salary income not exceeding Rs 150,000 and no business income, capital gains, agricultural income, or any other income from which tax has been deducted at source, you can file your return in Form 16AA through your employer.

The details required to be filled in the applicable form for the return of income include the name, the permanent account number (PAN), address, details of bank account (compulsory in case of refunds), status (resident individual, HUF and the like) and, of course, details of income under the various heads and the taxes paid.

Quoting PAN is mandatory. Failing this means that your return may not be accepted. There is a penalty of Rs 10,000 for misquoting PAN.

The return has to be verified and signed by an authorised person. The list of authorised persons is as follows:

It is to be noted that the person signing the return gives an undertaking that he has read and understood the contents. Any person making a false statement is liable for prosecution. 

Step 5: Supporting Documentation and Evidence

Certain documents have to be collated in order to furnish your return. These include:

• Return of income, duly filled in and completed.
• Computation of total income.
• Balance sheet, and profit and loss account.
• Tax audit and statutory audit report, if applicable.
• Proof of taxes paid (original copy of TDS certificates, advance tax and self-assessment tax).

If you do not attach these documents, the tax authorities might treat your return of income as defective. If the lapse is not rectified within 15 days or any extended period granted, the return filed may be treated as invalid and it will be deemed that you have failed to file your return.

In addition, you need to file evidences of investments/payments made to claim deductions such as the following:

• Original copies of donation receipts.
• Proof of investment in PPF, LIC, NSC, pension plans.
• Receipt for payment of mediclaim.
• Original certificate for housing loan interest.

Failure to do so may lead to a denial of the deduction claimed, resulting in an unnecessary demand of tax or a reduction of refund.

Step 6: File Your Return. Don't Rush. Be on Time.

These steps have no meaning till the return of income has actually been filed. The due date for filing the return of income is 31 July, unless your accounts are subject to audit under the Income Tax Act or under any other law, or you are a working partner of a firm whose accounts are subject to audit. In the latter cases, the due date is 31 October.

If you are planning to file a return of loss -- which you want to carry forward -- it is of utmost importance that the return is filed on or before the due date. If you do not meet this filing requirement, then the loss claimed will not be allowed to be carried forward.

You must also ensure that the return of income is filed at the correct place of jurisdiction -- this normally depends upon the address. In the case of salaried employees, the jurisdiction is determined by particulars of the employer. The proof of filing the return is the acknowledgement, which is stamped and signed by the recipient authority and a copy is returned to the tax payer.

Step 7: Revised Return

If you have filed your return on time, that is on or before the due dates as given above, and discover that an inadvertent error has crept in or you have omitted to show certain income or expense, you can file a revised return. This must be done within a year from the end of the assessment year or before completion of assessment, whichever is earlier. Hence, return for the assessment year 2006-07 can be revised before 31 March, 2008, or before the completion of assessment, whichever is earlier.

Step 8: Belated Return

If you have missed the bus and have not filed the return on time, do not despair. You can still file late returns within one year from the end of the assessment year. Interest is payable on the unpaid amount of tax.

In addition, a penalty of Rs 5,000 may be levied if the income-tax return is not furnished before the end of the assessment year. Hence, a belated return for the assessment year 2006-07 can be furnished up to 31 March, 2008. But in order to avoid the Rs 5,000 penalty, you need to furnish it before 31 March, 2007.

On the other hand, if you claim a refund, interest on refund is granted only from the period the return is filed till issue of refund order. If your return is filed on time, interest from the beginning of the assessment year is granted.

A belated return cannot be revised. If there are losses during the year, these will not be allowed to be carried forward for future set off.

If for any reason, you do not file your return even though you are liable to tax, it will be presumed that you have concealed your income and this could lead to penalty.

In certain cases, you may even be liable for prosecution for not having filed returns with the intention of willfully avoiding tax payments. "Better late than never" is the best policy when it comes to income tax.

The author is a member of the Bombay Chartered Accountants' Society. www.bcasonline.org