Income Tax Scrutiny Assessment Under Section 143(3)

Scrutiny assessment under Section 143(3) is a detailed assessment of an income tax return filed by a taxpayer. In a scrutiny assessment, a tax officer would perform various tests and processes to confirm the correctness and genuineness of various claims, deductions, and so on, made by the taxpayer in the income tax return. The objective of a scrutiny assessment is to ensure that the taxpayer has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner.

Scrutiny assessment under Section 143(2) would be applicable for the following scenarios:

1. An income tax return has been filed under Section 139 or in response to an income tax notice under Section 142(1).
2. The Assessing Officer or Income Tax Authority deems it necessary or expedient to ensure that the taxpayer has not understated the income or has not computed excessive loss or has not under-paid income tax in any manner.

Income Tax Notice u/s 143(2)

To initiate a scrutiny assessment, the concerned Income Tax officer must first issue an income tax notice under Section 143(2). In the income tax notice under Section 143(2), the Assessing Officer would request the taxpayer to appear in person or complete the process through e-Assessment and/or produce information and documents which the tax officer ascertains to be important for determining the taxable income and tax payable. An income tax notice under Section 143(2) should be served within a period of six months from the end of the financial year in which the return is filed. For example if an income tax return is filed on 2nd November 2018, notice under Section 143(2) can be served on the assessee up to September 30, 2019. If the notice is issued on 29th September 2019 and is received by the assessee after 30th September 2019, it is not a valid notice.

The taxpayer or his/her authorised representative can appear before the Assessing Officer and will place his arguments, supporting evidence, and so on, on various matters/issues as required by the Assessing Officer.

Potential Reasons for Scrutiny Selection

Income tax return (ITR) not filed

• People must file an ITR if their gross income exceeds the exemption limit, which is Rs 2,50,000 for those under the age of 60. 
• Regardless of income level, residents who possess international assets or have control over foreign bank accounts are required to file an ITR. 

It is still required to file even if the employer has withheld TDS.

TDS-Related Errors

When TDS amounts on the Traces website and those reported in the ITR differ, there may be cause for concern.

Failure to Declare Additional Income

• Reporting requirements apply to all forms of income, including interest from savings accounts and regular and term deposits.
• When TDS is withheld at a rate that is less than the assessee’s tax slab, problems occur.

Abnormal or Expensive Transactions

• Transactions that are much more than the reported income may come under investigation. For instance, making large contributions into bank accounts that don’t match the income that is stated.
• Banks and other financial institutions frequently notify the tax authorities about these transactions.

Errors in the Income Tax Return 

• A notification may be sent for filing errors, such as utilising the incorrect ITR form or leaving out important information.
• To fix any errors, the tax agency may require the filing of a revised return under Section 139(9).

Income Tax Notice under Section 143(2)

To start a scrutiny assessment, the Income Tax officer must issue an income tax notice under Section 143(2). This notice requests the taxpayer to provide necessary information and documents either in person or through e-assessment. It should be served within six months from the end of the financial year in which the return was filed.

The Scrutiny Assessment Hearing

During the scrutiny assessment, the taxpayer has the opportunity to present their case before the Assessing Officer, either in person or through an authorised representative. They can provide arguments, facts, and other materials requested by the Assessing Officer. They can:

• Accept the Income Tax authority’s order, make any required tax payments, receive a refund, or accept the calculated loss. 
• Make a claim under Section 154 for payment if the clerical error persists. 
• They can, in line with Section 263/264, file an updated application to the Commissioner of Income Tax. 

Actions After Scrutiny Assessment

After the scrutiny assessment, the taxpayer has several options:

1. Accept the order issued by the Income Tax authority and pay any outstanding taxes or claim a refund.

2. If there’s a clerical error, submit a claim for reimbursement under Section 154.

3. Submit a revised application to the Commissioner of Income Tax under Section 263/264.

4. Appeal the judgment if necessary.

Time Limit for Scrutiny Assessment

According to Section 153, the timeframe for conducting a scrutiny assessment under Section 143(3) varies as follows:

Within 21 months following the assessment year’s end, when the income was originally taxable. [For the evaluation year 2017–18 or earlier]

18 months following the conclusion of the evaluation year during which the earnings were initially assessable. [For the 2018–19 evaluation period]

12 months after the evaluation year in which income was initially deemed taxable. [For the assessment period beginning in 2019–20]

Scrutiny Assessment Hearing

While conducting a scrutiny assessment, the concerned tax officer will provide ample opportunity for the assessment to be heard and to produce documents or evidence to support the information filed in a tax return. In case of failure to produce information or non-cooperation by the taxpayer, the tax officer is empowered to complete the best judgement assessment under section 144.

In case of co-operation of the taxpayer and submission of information, after hearing/verifying such evidence and taking into account all the information produced by the taxpayer, the Assessing Officer would pass an order. On the passing of the order by the Assessing Officer, the assessee has one of the choices below:

• To agree with the order passed by the Income Tax authority and pay any tax demand or receive a refund or accept the loss determined
• Make an application for a refund under Section 154, if any clerical error persists
• Can make a revision application to Commissioner of Income Tax under section 263/264
• Appeal the order

Time Limit for Scrutiny Assessment

As per Section 153, the time limit for making scrutiny assessment under section 143(3) is:

• Within 21 months from the end of the assessment year in which the income was first assessable. [For the assessment year 2017-18 or before]
• 18 months from the end of the assessment year in which the income was first assessable. [For the assessment year 2018-19]
• 12 months from the end of the assessment year in which the income was first assessable [For the Assessment year 2019-20 and onwards]

FAQs

Q1. What documentation should be prepared for Scrutiny Assessment u/s 143(3)?

Ans. It’s essential to maintain all relevant financial documents, including income statements, expense receipts, investment proofs, and any other documents related to your income and deductions. These documents will be essential if you are selected for a Scrutiny Assessment.

Q2. What is a scrutiny assessment, and how does it differ from other types of income tax assessments?

Ans. A scrutiny assessment under Section 143(3) involves a detailed examination of a taxpayer’s return to validate various claims and deductions. It aims to prevent understated income, excessive loss claims, or underpayment of taxes.

Q3. When does the Income Tax Department conduct a scrutiny assessment under Section 143(3)?

Ans. A scrutiny assessment is initiated when a taxpayer has filed a return under Section 139 or in response to a notice under Section 142(1), and the assessing officer deems it necessary to verify the financial details.

Q4. How is a scrutiny assessment initiated, and what is the role of an income tax notice under Section 143(2)?

Ans. A scrutiny assessment begins with the issuance of an income tax notice under Section 143(2). This notice requests the taxpayer to provide important information and documents for determining taxable income and tax payable.

Q5. Is a Scrutiny Assessment the same as an Audit?

Ans. While both a Scrutiny Assessment and an audit involve a thorough examination of your financial information, they are not the same. A Scrutiny Assessment is typically a routine verification of your return, while an audit is usually conducted when the tax authority has specific concerns or doubts about your financial transactions.

Q6. What happens during a scrutiny assessment hearing, and how can taxpayers cooperate with the tax officer?

Ans. During a scrutiny assessment, taxpayers have the opportunity to present their case, provide documents, and cooperate with the tax officer to ensure a fair assessment.

Q7. What are the options available to taxpayers after the Assessing Officer passes an order following a scrutiny assessment?

Ans. After the Assessing Officer’s order, taxpayers can choose to accept the order, pay any tax due, and claim refunds. They can also apply for corrections in case of clerical errors or file a revision application or appeal if they disagree with the assessment.

Q8. What is the time limit for completing a scrutiny assessment under Section 143(3)?

Ans. The time limit for scrutiny assessments varies depending on the assessment year, ranging from 12 to 21 months from the end of the relevant assessment year.

Q9. Can taxpayers request a scrutiny assessment on their own if they suspect errors in their tax return?

Ans. No, taxpayers cannot initiate a scrutiny assessment themselves. It is conducted by the Income Tax Department as part of their routine verification process.

Q10. How can taxpayers ensure a smooth scrutiny assessment process and minimize potential issues?

Ans. To navigate the scrutiny assessment process smoothly, taxpayers should keep accurate records, respond to notices promptly, and cooperate fully with tax authorities to provide the necessary information and documents.