Income Tax Scrutiny - Appeals & Related Matters
Scrutiny assessment refers to the examination of an income tax return by giving an opportunity to the assessee to substantiate the income declared and the expenses, deductions, losses, exemptions, etc. claimed in the return with the help of evidence.
A notice from the Income Tax office is not something that anyone likes to find in their mailbox. You might have filed your return in due time but still received a notice. The reasons can be many., Let’s understand why we end up receiving notices and how the same can be dodged to some extent (if not completely).
It usually takes 3 to 5 working days and varies from case to case.
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- Any assessee who has received any notice under the Income Tax Act. .
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What is Scrutiny Assessment?
What is Scrutiny Assessment?
The tax department examines the returns filed and if it has any reason to believe that the information declared by the assessee is incorrect or incomplete then the case is taken up for scrutiny assessment. The assessee is informed through issue of a notice and is supposed to take the required action as communicated by the department.
Income-tax scrutiny refers to the act of summoning taxpayers for making enquiries about the returns filed in relation to an assessment year. The provision regarding Income Tax Scrutiny is invoked if the concerned tax officials have a reason and evidence to believe that the expenses and income declared in the returns have been incorrectly stated. The scrutiny is aimed at providing taxpayers with an opportunity to substantiate the accuracy of the filing through documentary evidence.
The provision of scrutiny is initiated with the issue of a scrutiny notice to the concerned taxpayers, who are in turn required to respond. The notice is issued under a particular section or clause and would include the reason for such scrutiny. Post this stage, the officer may conduct inquiries with the assessee as considered necessary. As already stated, the notice is meant to facilitate the assessee with an opportunity to substantiate the relevant particulars declared while filing the returns.
Maths behind selection of cases for scrutiny
Maths behind selection of cases for scrutiny
There are two types of scrutiny assessments: Manual and compulsory scrutiny cases. While the reasons for manual selection for scrutiny are case specific and can be avoided with little care on part of the assessee, the compulsory selection can’t be prevented.
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The following are the most general reasons for selection of your case for scrutiny along with ways to dodge them.
Reason 1: Non filing of Income Tax Return (ITR)
- Any person whose gross income (without any deductions) is above the exempted limit (Rs 2,50,000 in case of individuals below the age of 60) is required to file annual Income tax return in due time
- If you are a resident Indian and you own a foreign asset or are a signing authority in a foreign bank account, you have to file tax return irrespective of your income
- Even where your employer has already deducted TDS from your pay you need to file your return to avoid a notice
How to dodge
Pay your advance taxes on time and file returns within the due date.
Reason 2: Error with respect to TDS
The TDS that you show in your return and what is actually shown on the Traces website might not match. When there is such a mismatch, there are high chances of getting a notice.
How to dodge
- Request your employer or any person who is deducting TDS on your income to deposit the amount with government treasury and file TDS return in due time
- Always first reconcile the actual TDS that has been deducted from your income with your Tax Credit Statement (Form 26AS). Report the deductor if you find any discrepancy
Reason 3: Non-disclosure of other incomes
- Every income that has been earned in the financial year is required to be reported in the tax return. People generally ignore interest income on the savings account, fixed deposits and recurring deposits
- There are many cases where TDS is deducted at a lower rate by your banker but you belong to a higher tax slab. For example, banks deduct TDS on interest at 10% while you may be falling in tax slab of 30%. In such cases, you might come under scrutiny for non disclosure of complete information or an attempt to minimise tax liability
How to dodge
- At the year end, request your banker to give interest statement of your deposits in various bank accounts
- Report all the income from any source in your tax return even if that amount is exempt from tax
Note: Penalty for concealment of income can be up to a maximum of 300% of tax payable
Reason 4: Unnatural or high value transaction
Incidences where the transaction value is a lot higher considering the disclosure of your income in the return can attract issue of notice. For example, a salaried individual whose salary is Rs 4,00,000 but he made a total deposit in his bank account exceeding Rs.10,00,000.When such transaction comes in knowledge of the department, a notice can be expected. The thing to be noted is that all these transactions are reported directly to the tax department through annual information return filed by institutions like your broker, bank etc.
How to dodge
Report every transaction that you may have made. Even if there is loss, like the loss in share trading, it has to be reported to the department to avoid notice.
Reason 5: Defect in income tax return
- An Income tax return is a statement of income by the taxpayer to the tax department. At times, out of ignorance or lack of knowledge, people end up filing the wrong ITR form, may skip any mandatory information or commit some other error
- If the return is not filed accurately, the tax department on its own discretion may issue a notice to you under Section 139(9) and direct you to file a revised return on income after correcting the error
How to dodge
- Keep all your documents ready before you sit to file your ITR
- Take help of an expert wherever you find difficulty in filing your return
Types of Notices and Recipient’s Response
Types of Notices and Recipient’s Response
Notices under Section 143(2) is issued in any of the following forms:
- Limited Scrutiny
- Complete Scrutiny
- Manual Scrutiny
Once the recipient is issued with any of the notices mentioned above, the Income-tax Department will prompt the taxpayer to appear before an officer on a specific date and time. If the taxpayer is issued with a limited scrutiny notice, the assessee merely requires to furnish basic documents. On the other hand, a manual or complete scrutiny mandates the taxpayer to produce an exhaustive list of documents connected with income and expenses – the list of which includes credit card statements, bank account details, salary slips, Income-tax return statements, and so on. If the concerned applicant does not possess any of the required documents, the same must be communicated to the Income-tax department. Taxpayers who find the entire process to be cumbersome and who are not averse with these laws may appoint a qualified Chartered Accountant (CA) to represent the case on their behalf. Taxpayers are advised to keep hold of their security/notice number as it acts as a reference for all future communications with the Income-tax Department.
Consequences of Non-Compliance
Consequences of Non-Compliance
Non-response to the notice may result in a penalty of Rs. 10,000, in addition to additional taxes. It may also force the Assessing Officer to complete the scrutiny on the basis of ‘Best Judgement’, whereby the assessment can be confirmed and finalized as the Assessing Officer deems fit. Taxpayers who are defaulting could be targeted for a more rigorous assessment in the form of a survey, or search and seizure operation.
Compulsory scrutiny cases :
The following types of cases are compulsorily selected for scrutiny, you cannot prevent it being selected for scrutiny, for the following reasons, but see how it is selected for scrutiny and take measures as to how best you can avoid the happenings of following reasons.
- Cases involving addition in an earlier assessment year in excess of Rs. 10 lakhs on a substantial and recurring question of law or fact which is confirmed in appeal or is pending before an appellate authority may come under compulsory scrutiny.
- Cases involving addition in an earlier assessment year on the issue of transfer pricing in excess of Rs. 10 crore or more on a substantial and recurring question of law or fact which is confirmed in appeal or is pending before an appellate authority.
- All assessments pertaining to Survey under section 133A of the Act excluding the cases where there are no impounded books of accounts/documents and returned income excluding any disclosure made during the Survey is not less than returned income of preceding assessment year. However, where assessee retracts the disclosure made during the Survey will not be covered by this exclusion. The cases where there is information about concealment of income, which may be based on an enquiry report, survey report or any other source, can also be selected for scrutiny. The selection in this manner is made by the assessing officer only with the approval of higher authorities so that the selection is fair and proper.
- Assessments in search and seizure cases to be made under section 158B, 158BC, 158BD, 153A & 153C read with section 143(3) of the Act and also for the returns filed for the assessment year relevant to the previous year in which authorization for search arid seizure was executed u/s 132 or 132A of the Act. In the cases where searches, surveys and enquiries have been conducted finally culminate into scrutiny assessments determining the taxable income and the tax liability of the concerned persons and entities. While framing the assessments, all information gathered about the relevant financial transactions through search, survey or enquiry is logically analysed with a view to determining the correct taxable income. The assessee's are given an opportunity to explain their stand and rebut the findings of the enquiry. The process for completing scrutiny assessment in these cases is the same as in the case of returns selected for scrutiny assessment.
- Returns filed in response to notice under section 148 of the Act. There is a provision in the Income Tax Act which enables the reopening of cases U/s.148 where there is reason to believe that any income has escaped assessment. This reopening can be resorted to even in cases which had been subjected to scrutiny assessment earlier. A case can be reopened within a period of six years from the end of the relevant assessment year. To elucidate this point, it may be stated that the assessment for the assessment year 2009-10 (pertaining to financial year 2008-09) can be reopened by 31-03-2016. Older cases cannot be reopened. In all reopened cases, assessments are framed under section 143(3) after following due procedure.
- Cases where registration u/s 12AA of the IT Act has not been granted or has been cancelled by the CIT/DIT concerned, yet the assessee has been found to be claiming tax-exemption under section 11 of the Act. However, where such order’s of the CIT/DIT have been reversed/set-aside in appellate proceedings, those cases will not be selected under this clause.
- Cases where order denying the approval u/s 10(23C) of the Act or withdrawing the approval already granted has been passed by the Competent Authority, yet the assessee has been found claiming tax-exemption under the aforesaid provision of the Act.
- Cases in respect of which specific and verifiable information pointing out tax evasion is given by Government Departments/Authorities. The Assessing Officer shall record reasons and take prior approval’ from jurisdictional Pr. CCIT/CCIT /Pr. DGIT/DGIT concerned before selecting such a case for scrutiny.
- Computer Aided Scrutiny Selection (CASS): Cases are also being selected under CASS on the basis of broad based selection filters. List of such cases shall be separately intimated in due course by the DGIT(Systems) to the jurisdictional authorities concerned. The cases for this purpose are mostly selected through the process of computer assisted scrutiny selection (CASS) and there is no element of subjectivity in this process.
