If an employee submits fake investment documents to the employer to claim exemptions to lower the tax liability, then this amounts to a case of misreporting income to lower the tax liability.

In such a case the assessing officer may start a scrutiny case against the individual and then it is up to the taxpayer to prove that the bills are genuine.

If claims are found to be fake, this will result in penalties for misreporting or under-reporting of income.

For clarification:

Let's say the employee has submitted fake investment documents to his employer to claim the deduction of Rs 1.50 lakhs (or lower) from his total income. The same will reflect in the form 16 of the employee, and thus makes it's way into the ITR.

There are two terms in income tax, called 'under-reporting' and 'misreporting' which I think will be relevant to this situation.

Essentially speaking, under-reporting of income may not be fraudulent, but under-reporting as a result of misreporting is a deliberate attempt to evade taxes and considered a serious offence.

As per section 270A (1), a penalty of 50 per cent will be levied if income has been under-reported. However, if under-reporting of income is a consequence of misreporting of income, then penalty of 200 per cent can be levied.

Therefore, the employee's stunt can cause him a damage of twice his tax liability.

(1.50 lakhs * Rate of tax)*2

where, Rate of tax is the respective slab rate applicable to the employee.

Also, assessee is liable to pay an interest under sections 234A, 234B and 234C of the Income tax.