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The 500-Rupee Refund Trap: A Cautionary Tale for Taxpayers

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Three years ago, Ramesh, a salaried IT professional in Bangalore, came across an “income tax consultant” in his neighborhood. This consultant promised him “maximum refund possible” for just Rs 500 as a filing fee — or, better yet, “10% of the refund” if Ramesh agreed to his “special deductions plan.”


The offer was tempting. Ramesh, who had no loans or major deductions, thought, Why not? It’s just my own tax money coming back. He handed over his Form 16 and other basic details. Within a week, the consultant filed his return and got him a refund that was Rs 35,000 higher than what he expected.


The consultant’s trick?

He claimed bogus deductions — things like large life insurance premiums, education loan interest, donations, and housing loan interest — none of which Ramesh had actually paid.


Ramesh got his refund, paid the consultant 10%, and forgot about it.


Three years later…

One ordinary afternoon, Ramesh received an Income Tax Department notice under Section 148A — reassessment proceedings. The department had picked up his case after data matching with banks, insurers, and other third parties showed that the deductions claimed in his 2019–20 return did not exist.


The notice was clear:

  • Bogus deductions under Section 80C, 80E, and 80G

  • Short payment of tax due to reduced taxable income

  • Interest under Section 234A, 234B, 234C

  • Penalty under Section 270A for misreporting of income (200% of the tax evaded)


The “Rs 35,000 extra refund” from three years ago had now snowballed into:

  • Tax payable: Rs 35,000

  • Interest: ~Rs15,000 (for 3 years delay)

  • Penalty: Rs 70,000 (200% of Rs 35,000 misreported tax)

  • Total liability: Rs 1,20,000


The Real Cost of a Cheap Return

Ramesh’s “saving” of Rs 35,000 had turned into a loss of Rs 1.2 lakh, not counting the stress, embarrassment, and the time spent responding to tax notices. The consultant who filed his return? Disappeared. No office, no contact number.


Why This Happens

Cheap, unqualified tax filers often:

  • Claim false deductions or inflated expenses to boost refunds

  • File without proper supporting documentation

  • Use your PAN for other fraudulent activities

  • Disappear when notices arrive years later

The Income Tax Department has a 7-year window in some cases to reopen assessments — so a “good refund” today could mean a big penalty years later.


The Safer Route — Chartered Accountants

A Chartered Accountant (CA):

  • Files returns based on actual, verifiable records

  • Ensures compliance with Income-tax Act provisions

  • Advises on legitimate tax-saving options

  • Keeps a record of filings and documents for future reference

  • Represents you before tax authorities if needed


Key Penalty & Interest Provisions in Such Cases

  1. Section 234A/B/C – Interest for late payment, short payment, and deferment of advance tax

  2. Section 270A – Penalty of 200% of tax for misreporting income (50% if under-reporting without intent)

  3. Section 276C – Prosecution for willful attempt to evade tax (in severe cases)

  4. Section 148A – Reassessment notice if income has escaped assessment

  5. Section 80C/80E/80G misuse – Disallowed deductions added back to taxable income


Conclusion: Pay for Expertise, Not Tricks

Filing your tax return is not just a formality — it’s a legal declaration. A Rs 500 shortcut can cost you lakhs later. Always work with qualified professionals who file your return honestly, with complete documentation.


Because when the Income Tax Department comes knocking, it’s not the “refund consultant” who will answer — it’s you.

 
 
 

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