Introduction

The Income Tax (I-T) department in Hyderabad has uncovered a massive ₹110 crore tax fraud involving IT professionals. The scam revolved around fraudulent claims of tax deductions under Section 80GGC of the Income Tax Act, which provides tax benefits for genuine political donations.

This case highlights how individuals exploited tax laws by making fake contributions to Registered Unrecognised Political Parties (RUPPs) and subsequently claiming tax refunds. As the government tightens compliance, taxpayers must be aware of the risks associated with such fraudulent activities.

How the Political Donation Scam Was Carried Out

The scam was orchestrated in a well-planned manner, with IT professionals from 36 different companies participating in the fraud. The modus operandi involved the following steps:

1. Fabricated Political Donations
   • Employees claimed to have donated large sums to political parties to avail tax deductions.
   • Transactions were conducted via bank transfer or cheque to make them appear genuine.
2. Money Circulation and Kickbacks
   • After transferring the money, the same amount was returned in cash to the employee, minus a commission.
   • The actual donation never reached any political entity.
3. False Tax Refund Claims
   • The fraudulent donations were reported under Section 80GGC, reducing taxable income.
   • As a result, employees received huge tax refunds, some amounting to several lakhs.
4. Collusion with Political Parties
   • Many RUPPs involved in the scam were traced to Gujarat and Telangana.
   • These entities had never contested elections and failed to submit reports to the Election Commission of India (ECI).

One shocking instance involved an IT professional earning ₹46 lakh annually falsely claiming a ₹45 lakh political donation.

How the Income Tax Department Uncovered the Fraud

This tax fraud came to light during a routine assessment of tax returns from FY 2021-22 to 2023-24. The key red flags included:

• Unusually high tax refund claims under Section 80GGC.
• Multiple tax filings from a common email ID, indicating coordinated fraud.
• Lack of political contribution reports from the recipient parties.
• Mismatch in employee earnings and donation amounts, with some donating nearly their entire salary.

The investigation revealed that RUPPs linked to the fraud had no substantial financial activity apart from these fraudulent transactions.

Legal Consequences and Crackdown

Immediate Action by the Income Tax Department

The I-T department has taken several steps to curb this fraud:

• Notices sent to employees instructing them to withdraw fraudulent claims.
• Those found guilty must file an updated return (ITR-U) by March 31, 2025.
• 200% penalty on incorrect refund claims under Section 270A of the Income Tax Act.

Corporate Responses

Many leading IT firms have:

• Halted tax deductions under Section 80GGC to prevent misuse.
• Opted for Tax Deducted at Source (TDS) instead of allowing self-claimed deductions.

Despite these measures, employees continue to claim refunds independently, bypassing company policies.

Extent of Fraud in the IT Sector

One major IT company reported 430 employees fraudulently claimed deductions totaling ₹17.8 crore, with an average refund of ₹4.2 lakh per person.

Although the companies were not directly involved, their employees manipulated the system, prompting stricter compliance measures.

Preventive Measures and Awareness Campaigns

To prevent future fraud, the Income Tax department has launched:

• Awareness sessions at IT firms and financial institutions (held in Hyderabad from January 28-30).
• Educational campaigns on legal tax deductions and penalties.
• Closer monitoring of RUPPs and stricter compliance checks.

What Taxpayers Need to Know

Legitimate Political Donations Under Section 80GGC

• Only donations to recognized political parties and electoral trusts are eligible for 100% tax deduction.
• Contributions must be made via banking channels (cheque, demand draft, or online transfer).
• Cash donations are not eligible for deductions.

Penalties for Tax Fraud

• 200% penalty on false claims.
• Prosecution under the Income Tax Act, leading to fines and imprisonment.
• Blacklisting from tax benefits and future scrutiny of tax returns.

Final Thoughts: Importance of Ethical Tax Practices

The ₹110 crore political donation scam highlights the growing misuse of tax laws in India. While tax deductions provide legitimate benefits, exploiting them through fraud can result in severe legal and financial consequences.

With increased scrutiny, taxpayers must ensure they file accurate and compliant returns to avoid penalties. This case serves as a warning for professionals engaging in tax evasion schemes.

For individuals and businesses, ethical tax planning is the best approach to maintaining compliance and avoiding legal troubles.

FAQs

1. What is Section 80GGC of the Income Tax Act?

Section 80GGC allows 100% tax deduction on donations made to registered political parties and electoral trusts, provided the payments are made through banking channels.

2. How did IT professionals commit fraud using Section 80GGC?

They falsely claimed political donations by making bank transfers to RUPPs, only to get the money returned in cash after deducting a commission.

3. What are the penalties for fraudulent tax claims?

Taxpayers found guilty must withdraw false claims, file an updated return (ITR-U) by March 31, 2025, and may face a 200% penalty or even prosecution.

4. How can taxpayers ensure legitimate tax deductions?

Ensure donations are made to recognized political parties, avoid cash transactions, and retain proof of payments.

5. What steps is the government taking to prevent such fraud?

The Income Tax department is conducting awareness campaigns, closely monitoring political donations, and scrutinizing high-value tax refunds.