Facing an Income Tax Scrutiny? Here’s How to Deal with It.

There are instances when a person receives a scrutiny notice from the Income Tax Department, which causes him to be stressed. However, it needs to be kept in mind that such a notice does not mean that the department has found a person guilty of any financial crime or wrongdoing. A scrutiny may be established for assessment and double checking, as per the satisfaction of the tax authorities.

What are Income Tax Returns?

The concept of Income Tax Returns (or ITR) has been defined under Section 139 of the Act, which includes the form in which an Assessee (the person supposed to pay tax or the Taxpayer) files information about his income and tax thereon to the Income Tax Department. An individual is required, if he has a taxable income, to file return in time as a crucial compliance with law. It must also be ensured that the information given by a person is filed correctly and matches with the details already available with the department.

What exactly is the notice for scrutiny?

Notice under section 143(2) of the Income Tax Act, 1961, commonly known as a Scrutiny Assessment Notice, can be sent to a taxpayer if the tax department has questions and doubts about the income of an individual. Scrutiny notice refers to proper examination of income tax returns where an opportunity is given to the Assessee to substantiate the income declared and the expenses, losses, deduction, exemption etc. claimed in the return by considering evidence. The scrutiny notice is divided into three types.

(a) Limited Scrutiny

(b) Complete Scrutiny

(c) Manual Scrutiny

Through these notices, the department asks the Assessee to be present before an office on a specific day. In case of limited scrutiny, a person may not have to submit all the bulky records. However, in manual and complete scrutiny, a person may be asked to get all the relevant documents related to his income and expenditure viz. details of the bank account and credit card statements, and documents about gifts sent/received.

What are the reasons for selection of any case for scrutiny?

Failure to File Income Tax Return: Any person having gross income above exempted limit (Rs. 2,50,000), or a person being an Indian resident owning a foreign asset, must file ITR even if his employer has deducted TDS from the pay.

How to avoid this? Pay the advance taxes on time and file returns within the time limit.

TDS error: When TDS in the return and the TDS details with the Income Tax Department mismatch, a notice may be issued.

To avoid it, request your employer who is deducting TDS on your income to deposit the amount with the treasury of the government and submit TDS return in permitted time limit. Moreover, a person must always first harmonize the actual TDS deducted from the income with the Tax Credit Statement (Form 26AS). In case of any discrepancy, immediately inform the Deductor.

Concealment of Other Incomes: Income on the savings account, fixed deposits and recurring deposits may generally be ignored by people. Moreover, in some cases, even the banks deduct income at a lower rate, even if the Assessee belongs to a higher tax slab. In such cases, a notice may be issued.

A person, at the end of the year, may request his banker to give a statement of interest of the deposits in several bank accounts to avoid this. Also, a person must report all the income from any source in his tax return.

Doubtful Transactions: There may be cases when the transaction value is higher, considering the disclosed income of a person. For example, if a person with the salary of Rs. 3,50,000 deposits Rs. 15,00,000 in his bank account and such transaction comes to the knowledge of the department, a notice may be issued.

Therefore, a person must report every transaction that he has made, even if there is loss. Reporting of every transaction to the department is essential to avoid notice.

Defective Income Tax Returns: A taxpayer may, due to lack of knowledge or out of ignorance, end up filing a wrong ITR form, or may even skip to furnish any mandatory information, or may commit errors of such nature. In such cases, the department may issue a notice on its own discretion under Section 139(9) of the Act and may instruct the taxpayer to file a revised return on income after rectifying the error.

The taxpayer must keep all the relevant documents ready before filing the ITR. If case of difficulty, help of an expert must be taken immediately.

What to do when you receive a scrutiny notice:

Do not panic: As mentioned above, scrutiny notice is issued just to check the returns in detail. If there is nothing to hide, there is absolutely no need to worry.

Check the details of the notice: The details of the notice including the name, PAN number, and the financial year for which the notice has been issued must be checked. The provision under which the notice is issued must be checked and the taxpayer must prepare his reply accordingly.

Do not ignore the notice: No reply from the Taxpayer permits the department to hold him at fault and the department may take an ex parte decision which may include a fine for filing wrong or incomplete information.

Do not delay: Replies to the IT department must always be submitted on time to avoid future intricacies.

Take professional help if necessary: If a person cannot comprehend the information sought or any miscalculations take place, it is advisable to take the help of professionals like Chartered Accountants to fathom the entire process.

Repercussions of not complying:

Complying with the notice is a wise thing to do. Failing to do the same permits the Assessing Officer to confirm the assessment and finalize the income and tax liability as he deems fit. Under Section 271(b) of the Act, penalty of Rs. 10,000 may be imposed for non-compliance, which puts the tax payer in a bad light.

To conclude:

Thus, considering the information, it must be kept in mind that Income Tax scrutiny does not always portray the tax payer in a bad light. Compliance with the notice is advisable as cooperation with the department makes the functioning easier.

About the Author:

Aditya Pratap is a lawyer practising at the Bombay High Court. Questions can be addressed to him by email at aditya@adityapratap.com. For further information one may visit his website adityapratap.in.

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Advocate Aditya Pratap
About Advocate Aditya Pratap 65 Articles
Aditya Pratap is a lawyer practising in Mumbai. He argues cases in the Bombay High Court, Sessions and Magistrate Courts, along with appearances before RERA, NCLT and the Family Court. For further information one may visit his website adityapratap.in or view his YouTube Channel to see his interviews. Questions can be emailed to him at aditya@adityapratap.com.