Section 80P Notice: Tax Department Clarifies on Erroneous Section 80P Tax Notices

Section 80 P, if a cooperative society earns income from a banking or credit facility, agricultural activity and products or a cottage industry, they are offered deductions of Rs 15,000-20,000 while calculating total income.

The Income-Tax department admitted on X (formerly, Twitter) that the notices sent to individual taxpayers for wrongly claiming tax deduction under Section 80P was sent by mistake. In response to a query raised by Nirav Choksi, a chartered accountant, the tax department clarified that “an email communication regarding this will be sent to you shortly.”

Defective return errors coming in partnership firm. Section 80P mentioned is not applicable to firms. Futile exercise of responding to such system generated queries has to be done. @IncomeTaxIndia

— ca nirav choksi (@niravana2010) September 1, 2023

Dear @niravana2010,

Intimation u/s 143(1) of Income-tax Act, 1961 with the error description: “In Schedule 80P, deduction u/s 80P(2)(e) cannot be claimed on income other than rental income” has been inadvertently sent.

An email communication regarding this will be sent to you…

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— Income Tax India (@IncomeTaxIndia) September 2, 2023

Last week, hordes of taxpayers have reached out to tax intermediaries and professionals again, despite paying their taxes on time and
the last opportunity to e-verify income tax returns ended on August 31. This time, it was to respond to notices for claiming deductions they aren’t even eligible to claim.

The notices sent out to thousands of taxpayers across Maharashtra and Gujarat, under Section 143 (1), asked them to justify why they claimed deductions  under Section 80 P. Deductions are amounts claimed to reduce your income by way of investments or expenses.

This deduction is not available to individuals, but only to cooperative societies. Under Section 80 P, if a cooperative society earns income from a banking or credit facility, agricultural activity and products or a cottage industry, they are offered deductions of Rs 15,000-20,000 while calculating total income.

Also read: An easy-to-use guide to file income-tax returns

“Incorrect notices regarding proposed adjustments under Section 143 (1) (a) are being sent for claiming Section 80 P deductions. But we haven’t claimed these deductions for our clients as they aren’t eligible to claim them. These are sent not for returns filed by cooperative societies, but individual income tax returns,” said Ahmedabad-based chartered accountant Raju Shah.

Also read: Missed the July 31 deadline to pay your income taxes? Here's what to do

System error

The emailed notices stated that deductions under Section 80 P cannot be claimed or allowed for assessment year 2023-24. As a result, individuals must respond to the notices within the given timeline of 15 days.

“It is an additional burden for both individuals and tax professionals as we do not claim any fee from the client for what seems to be purely a system-driven error but needs attention,” said Shah.

What if you do not check the notice email or fail to respond?

Paras Savla, a partner at KPB & Associates, said, “If you do not respond to the notice of adjustment under Section 143 (1), then there could be suo moto adjustment of the said deductions against any refund due to you. Apart from reduction in refund, you could also be asked to bear taxes along with interest and penalty even though it is an error in the system.”

Chartered accountant bodies told Moneycontrol they are likely to approach the Central Board of Direct Taxes regarding these notices.

Also read: Faceless Income-Tax Assessment: How Does It Work?

“There are so many notices that need to be addressed even as audits for other taxpayers are under way. Clients are unhappy with us as despite doing a thorough job of filing timely, accurate returns, they have received a notice. We would approach the income tax department by Saturday, September 2, 2023,” said a member of the Karnataka State Tax Practitioners Association.

Additionally, there has been a surge in the number of scrutiny notices sent lately.

“Many high net worth individuals have received scrutiny notices for assessment year 2022-23. These are linked to individuals who have claimed several deductions, which are alerted by the artificial intelligence software. The system detects if certain deductions are prima facie not possible,” said Savla.

Also read: Using Tech and AI, Income-Tax Department Sends Notices to Tax Evaders For Fake Donations

He said that even though several deductions are mentioned in Form 16, there are others such as Section 80G and 80GG that are mentioned too. Donations help one to reduce tax liability, but they are being asked to share documents to verify the claims.

Additionally, those with significant investments in both India and abroad have received scrutiny notices, especially those claiming losses. The tax department wants to verify the sources of their past investments and documents of exemptions and deductions claimed.

During scrutiny-linked audits, the tax department asks for a variety of information, including cash flow statements.

“The process of preparing accurate cash flow statements needs preparation of detailed accounts, which can't be easily done overnight,” Savla added.

The good news here is that with the tax department having accepted the error, it is expected to send out a clarification email to all taxpayers who had erroneously got the Section 80P notice.