In a move that would curb harassments of honest taxpayers, the Income-Tax department plans to make significant changes to the scrutiny mechanism.
It will amend the Saral tax return form and make changes to the software used to identify scrutiny cases to facilitate this exercise.
Central Board of Direct Taxes chairman Sudhir Chandra told Business Standard that the changes have been approved in principle and necessary instructions would be issued soon.
The objective is to remove from the scrutiny list cases where money has been invested in financial instruments such as mutual funds and fixed deposits for better returns from explained sources of income after payment of tax.
Chandra pointed out that currently, instances of a retired person investing superannuation benefits or a salaried employee investing savings are often erroneously picked up for scrutiny.
That's because these investments are reported in an annual information return, but there is no data readily available on sources of income.
This leads to harassment, Chandra added.
The Income-Tax department keeps a tab on high-value transactions in savings bank accounts, mutual funds, equity, bonds and debentures and purchase of immovable property from information obtained from agencies handling these areas.
The department then selects cases for scrutiny.
The proposed amendment to the Saral form would allow a taxpayer to provide details of investments.
In doing so, it will be evident that the money for these investments comes from income already reported and taxed, should the case be flagged for scrutiny.
Similarly, changes to the software to identify scrutiny cases would record that the income has already been explained. This will ensure the investment is not repeatedly picked up for scrutiny.
"These steps would ensure that there is no scrutiny of the cases in which investments have been made from explained sources of income," explained Chandra.