Tighten scrutiny of tax exemption claims on farm income: CAG to I-T Departement

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  • CAG claims tax exemption on farm income has been allowed based on ‘inadequate verification or incomplete documentation’ in more than a fifth of the 6,778 cases
  • CAG report comes at a time the CBDT is finalizing a new direct tax code that seeks to make income tax law simpler

Claims of tax exemption on farm income are on the radar of Comptroller and Auditor General of India (CAG), with the government’s statutory auditor saying that tax officials need to scale up efforts to check evasion in such cases.

In an audit report of the revenue department tabled in Parliament on Tuesday, the CAG pointed out that claims of tax exemption on farm income have been allowed by the department based on “inadequate verification or incomplete documentation” in more than a fifth of the 6,778 cases it has looked into.

According to the report, farm income of nearly ₹500 crore was exempt by tax officials without adequate verification.

The CAG also flagged the issue of abuse of tax exemption granted to charitable trusts and institutions, resulting in assessees whose activities were not ‘charitable’ in nature getting the benefit. The tax department has been battling abuse of tax relief given on agriculture income and on earnings of charitable trusts for some time now.

In May, the Central Board of Direct Taxes (CBDT) proposed a new audit format requiring religious and charitable trusts to be more open about their affairs. It also proposed rules that require such institutions to make more detailed disclosure of their transactions.

The CAG report comes at a time the CBDT is finalizing a new direct tax code that seeks to make income tax law simpler and align it with global best practices. A task force drafting the code is expected to give its report by 16 August, CBDT said on Wednesday.

The auditor said among farm income exemption claims it looked into, the exemption was granted in hundreds of cases where land records were not available or proof of farm income was not available in terms of ledger account or invoices.

“As such, it was not possible to determine whether the system in place was robust enough to ensure that assessees were being allowed an exemption for agricultural income, only after adequate examination in the process of assessment,” said the CAG report.

It suggested that the tax department should re-examine all cases where exemption has been allowed as agricultural income above a certain threshold, say ₹10 lakh, to ensure that the tax benefit has been allowed only to eligible assessees, and is based on appropriate documents and their verification.

Courtesy: livemint