Income Tax Department Uncovers Fake Deduction Using AI Tools

Income Tax Department Uncovers Fake Deduction Using AI Tools

A Hyderabad-based taxpayer sold an immovable property for ₹1.4 crore and attempted to reduce the capital gains liability by claiming deductions exceeding ₹68.7 lakh under the head “cost of improvement” using bogus bills with indexation.

The Income Tax Department, leveraging AI tools and generative AI forensics, detected discrepancies in the submitted documents. These included forged photocopies of expenditure bills allegedly dated between 2002 and 2008. One suspicious bill dated July 6, 2002, claimed an expense of ₹7.68 lakh, which triggered red flags due to evident inconsistencies.

The AI-driven analysis, which included font forensics, revealed that the text in the submitted documents was in the ‘Calibri’ font—a font designed between 2002 and 2004 but not publicly released until 2007. This crucial finding indicated that the bills were fabricated post-2007 and were not authentic for the period claimed.

After being confronted with the findings, the assessee failed to produce original bills and instead stated that the photocopies were discovered in an old folder belonging to their late father. Given the clear evidence of fabrication, the taxpayer withdrew the inflated claim, filed a revised return excluding the false cost of improvement, and paid taxes on the correct capital gain.

This case demonstrates the growing effectiveness of Artificial Intelligence in detecting tax evasion, ensuring taxpayer compliance, and protecting government revenue—especially in complex cases involving historical financial data.