The Income-tax Department pursues scrutiny assessment by means of following a set of predetermined guidelines. The process is also carried out using sophisticated technology that aids in identifying instances of errors. Listed below are some of the most common reasons for the enactment of this provision:
- Non-filing of tax returns
- Rapid rise or fall in income
- Abnormal value of transactions
- Mismatch in TDS credit
- Understated income
- Non-declaration of exempted income
- Underpayment of tax or misappropriation
Timeline for Issue of Notice
A notice under this provision is to be issued within six months from the end of the financial year of filing returns. An issue of notice after this period will entitle the assessee to raise an objection with the jurisdictional tax authority.
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.
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 throughissue of a notice and is supposed to take the required action as communicated by the department.
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.
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
