Income tax authorities have become more vigilant; here are Income Tax notices to be aware of

Introduction of technology has played a pivotal role in automating various processes in the Income Tax database. Right from the advent of requiring PAN while undertaking significant transactions, mandating the filing of income tax returns electronically, linking of PAN with Aadhaar and till recently wherein all the information relating to any income earned from various sources and required to be taxed for the relevant financial year such as interest income on saving account, interest on fixed deposits, dividend income, capital gain arising on sale of mutual funds, sale of immovable properties etc. being available as a central repository by way of ‘Annual Information Statement’.  

Further, it is important to note that it has now become incumbent for every resident taxpayer holding any asset (including financial interest) or having income from any source outside India, to make adequate disclosures as regards foreign depository accounts, equity, immovable property, income etc. in the return of income to be furnished every year.  

With all the above processes in place and to ensure that the taxable income has duly been filed and reported in the income tax returns by the taxpayers, the tax authorities have now become more vigilant and have been identifying significant transactions, scrutinising the same against the income tax returns filed and reconciling in case of any mismatch found for which various notices are issued to the individual taxpayers.  

A few of the commonly issued notices issued by the tax authorities to the individual taxpayers are:  

I. Notice issued u/s 142(1) of the Income Tax Act, 1961(‘Act’)  

Notices can be issued to the taxpayers in terms of Section 142 (1) of the Act seeking clarification as regards the non-filing of return of income and requiring the Taxpayer to file the return of income.   

II. Intimation issued in terms of Section 143(1) of the Income Tax Act, 1961(‘Act’)  for processing of income tax return filed for relevant year: 

The income tax returns filed electronically are further processed and reconciled with the information available in the income tax database. In case the income reported in the income tax return is duly matched with the information available along with the TDS credit available as per Form 26AS, then refund claimed as per return of income filed is determined and processed. However, in case any mismatch identified in term of income disclosed in the return of income vis- a-vis the income reflected in Form 26AS, then an intimation is issued computing  demand payable by the Taxpayer.  

III. Notice issued under section 143(2) of the Act for regular assessment  

In cases, while processing of income tax returns, certain transactions like substantial losses, refunds, deductions claimed etc. are identified or which fall under the internal parameters for selection of case under scrutiny, then it is plausible that in such cases, notice may be issued to the Taxpayers intimating the selection of the case for detailed scrutiny.  

IV. Notice issued under section 148A of the Act for re-assessment  

In cases, wherein the tax authorities are in receipt of certain information which suggests that the income chargeable to tax has escaped assessment, then notice u/s 148A is issued to the taxpayers for conducting inquiry and providing opportunity before issuing the notice u/s 148 for reopening of the matters which may go back to 10 preceding years subject to satisfaction of various conditions prescribed.  

V. Summon notices for inquiry/investigation u/s 131 of the Act  

For the purpose of making an inquiry/investigation, the tax authorities may issue summon notices requiring discovery and inspection, enforcing attendance, producing documents, books of accounts etc.  

Furthermore, depending upon the outcome of the regular assessment and reassessment proceedings as regards assessed income and additions/disallowances considered therein, notice may also be issued initiating penalty proceedings in terms of Section 270A of the Act.   

Thus, considering the above, it would be worthwhile for the individual taxpayers to thoroughly check the information available from AIS/TIS/Form 26AS and disclose all the income required to be considered and pay applicable taxes thereon and timely file the tax returns. Further, it may also be ensured that all the requisite disclosures as regards income and assets (including offshore income and assets) have been adequately made while filing the return of income.  

In case of any taxable income which has been left to be considered in the preceding years then an option is available with the taxpayers now to file an updated return for preceding two assessment years by payment of additional tax liability as prescribed under the law.  

In case the matter has been selected for scrutiny then, the taxpayers should ensure timely compliance by filing timely response, furnishing requisite details/documents asked for so as to mitigate the risk of best judgement assessment passed by the tax authorities based on the information available leading to huge demands and prolonged litigation thereby causing undue hardship to the taxpayers.  

Here’s a breakdown of what this means and the recent trends:

Reasons for Increased Vigilance:

• Technological Advancements: The Income Tax Department (ITD) is heavily leveraging technology, including AI-powered systems, to scrutinize discrepancies. These systems are adept at identifying mismatches between reported income and actual transactions, fraudulent claims, undisclosed earnings, and high-value transactions.
• Data Analytics: The ITD collects vast amounts of data from various sources (like Annual Information Statement (AIS) and Tax Information Summary (TIS), bank statements, property registrations, etc.) and uses analytics to flag suspicious patterns.
• Focus on Compliance: There’s a strong push to improve tax compliance and curb tax evasion to broaden the tax base and increase revenue collection.
• Information Exchange: The ITD receives information from other law enforcement agencies and financial regulators regarding potential tax evasion.
• “Vivad se Vishwas” Schemes: While aimed at reducing litigation, the government has also used these schemes to encourage settlement of past disputes, which indirectly reinforces the idea of stricter enforcement.

Impact on Individuals and Businesses:

• Increased Scrutiny: Taxpayers are more likely to face scrutiny if their tax filings show:
  • Mismatch between reported income and spending patterns: For example, high income but low withdrawals or digital transactions, or vice versa.
  • Discrepancies between ITR and Form 26AS/AIS/TIS: Any inconsistencies in TDS, high-value transactions, or other reported financial data can trigger an alert.
  • Incorrect or excessive deduction claims: This includes fraudulent claims like fake rent receipts for HRA.
  • Undisclosed income or assets: This is particularly true for foreign income or assets, gifts, or large loans.
  • High-value transactions: Significant cash deposits, property dealings, large investments (including in stock market or crypto) that are not aligned with declared income.
  • Recurring large additions in previous assessments: If prior assessments resulted in significant income additions that were not appealed or were upheld.
  • Non-filing or repeated revisions of ITR.
  • Cancelled NGO registrations: NGOs and charitable institutions whose registrations have been revoked face automatic scrutiny.
• Higher Probability of Notices: Taxpayers can expect to receive various types of notices (e.g., under Section 143(1) for preliminary assessment, 143(2) for detailed scrutiny, 148 for reassessment of escaped income, 156 for demand) if any of the above discrepancies are identified.
• Penalties and Prosecution: If undeclared or misreported income is found, taxpayers can face hefty penalties (up to 50% for under-reported income, 200% for mis-reported income), interest charges, and even prosecution leading to fines or imprisonment in severe cases (especially for deliberate concealment of large amounts).
• Demand for Documentation: Taxpayers are increasingly required to provide thorough documentation to support their income, expenses, and claims.
• Importance of Accurate and Timely Filings: The emphasis is on accurate reporting of all income sources and maintaining proper financial records.

Recent Trends in India (FY 2025-26 and beyond):

• Compulsory Scrutiny Guidelines: The Central Board of Direct Taxes (CBDT) has issued fresh guidelines for compulsory scrutiny of income tax returns for FY 2025-26. These guidelines target specific high-risk cases, including:
  • Taxpayers covered under survey operations (Section 133A) after April 1, 2023.
  • Entities subject to search or seizure (Sections 132/132A) between April 1, 2023, and April 1, 2025.
  • NGOs and institutions whose registrations were revoked before March 31, 2024.
  • Cases with specific information about tax evasion from agencies like CBI, ED, or financial regulators.
  • Recurring additions of ₹50 lakh+ (metros) or ₹20 lakh+ (non-metros) in earlier years, if not appealed or upheld.
• Monitoring of Top Advance Tax Payers: The CBDT has directed officials to closely monitor top advance tax payers to identify bogus claims and encourage them to reassess their liabilities.
• Focus on Deductions and Exemptions: There’s a specific focus on identifying incorrect claims of exemptions and deductions that lead to revenue loss.
• Increased Use of Data: The use of information from AIS and TIS is becoming more prominent in flagging discrepancies.
• Digitalization and Faceless Assessments: While aimed at streamlining the process, the faceless assessment regime also allows for more automated and potentially more frequent scrutiny based on data analytics.
• Vigilance Awareness Campaigns: The Income Tax Department conducts vigilance awareness campaigns to promote integrity and address corruption.

What taxpayers should do:

Given the increased vigilance, it’s crucial for taxpayers to:

• Be meticulous with tax filings: Ensure all income sources are declared accurately and completely.
• Maintain proper financial records: Keep detailed records of all transactions, investments, and expenses.
• Reconcile data: Cross-check information in Form 26AS, AIS, and TIS with your own records before filing.
• Avoid excessive cash transactions: Align banking and digital transactions with declared income and lifestyle.
• Respond promptly to notices: Address any income tax notices accurately and within the specified deadlines, providing all necessary documentation.
• Seek professional advice: Consult with tax professionals for complex financial matters or if you receive a tax notice.