More than five million Income Tax Returns (ITRs) were revised last year after the Income Tax Department flagged incorrect or bogus deduction claims, leading to a reduction of nearly Rs 2,000 crore in refund claims, according to Ravi Agrawal, chairman of the Central Board of Direct Taxes.
The information was shared before the Parliamentary Standing Committee on Finance, whose report was later tabled in the Lok Sabha.
Tax Department Chose Voluntary Compliance Over Scrutiny
According to the CBDT chairman, the department had two possible approaches when it detected suspicious claims in tax returns:
- Initiate formal scrutiny proceedings, or
- Alert taxpayers and allow them to revise their returns based on information available with the tax department.
The authorities opted for the second approach, encouraging taxpayers to voluntarily update their returns rather than immediately launching large-scale scrutiny actions.
Verification Drive on Bogus Deduction Claims
The committee report noted that in July 2025, the Income Tax Department conducted a verification exercise to identify incorrect deduction claims, particularly donations claimed under:
- Income Tax Act, 1961
- Section 80G
Section 80G allows taxpayers to claim deductions for contributions made to charitable organisations, relief funds and approved institutions.
However, the verification drive revealed a substantial number of incorrect or fraudulent claims, prompting the department to intervene and flag such returns for correction.
Refund Claims Reduced by Rs 2,000 Crore
Following alerts issued by the tax department, over 50 lakh taxpayers revised their income tax returns, resulting in a reduction of approximately Rs 2,000 crore in refund claims.
Officials said the department also used the exercise to identify high-risk refund cases and strengthen monitoring mechanisms.
Technology and Data Analytics Driving Compliance
Tax experts say the large number of revised returns indicates the growing effectiveness of the tax department's data-driven compliance framework.
The government has significantly strengthened the technological backbone of the tax administration through increased investment in:
- Information and communication technology (ICT)
- Advanced data analytics
- AI-based risk profiling systems
These systems integrate multiple databases, such as:
- Annual Information Statement (AIS)
- Tax Deducted at Source (TDS) data
- GST records
- Financial transaction data
Such integration enables the department to detect mismatches early and send automated alerts to taxpayers, prompting them to correct discrepancies before enforcement action is initiated.
Shift Toward Preventive Tax Administration
Experts believe the department is gradually shifting toward a preventive and intelligence-led tax administration model.
Instead of relying heavily on enforcement actions such as scrutiny and penalties, the focus is increasingly on:
- Early detection of discrepancies
- Automated taxpayer alerts
- Voluntary compliance mechanisms
This approach helps protect government revenue while reducing litigation and administrative burden associated with large-scale scrutiny proceedings.
Wider Compliance Efforts Continue
The tax department has recently intensified compliance checks across sectors. Earlier this month, authorities also conducted investigations into tax evasion patterns in the food and beverages sector, where several restaurants were found deleting bulk bills and modifying records to suppress actual sales.
Officials say such data-driven enforcement measures are part of the government's broader effort to widen the tax base and improve compliance as tax reforms and relief measures are rolled out.
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