Scrutiny Assessment under Income Tax – Section 143(3)

Income Tax Assssment The term “assessment” in the context of income tax refers to the process where the Income-tax Department evaluates a taxpayer’s return of income. This evaluation is done to verify the accuracy and correctness of the information provided by the taxpayer in their Income tax return. The assessment process involves various methods, including:

• Regular assessments examine the details submitted in the taxpayer’s return for accuracy.
• Re-assessment might occur in specific situations as specified by the tax laws.
• Best judgment assessment under Section 144, where the evaluation is based on the best judgment of the Assessing Officer, is typically used when the taxpayer fails to comply with specific requirements of the tax laws.

Notably, the Finance Act of 2018 introduced Section 143(3A), which implemented an e-assessment scheme for regular assessments carried out under Section 143(3). Further expanding this, the Finance Act 2020 included the best judgment assessments under Section 144 within the scope of e-assessment. By leveraging digital platforms, E-assessment aims to make the entire process more efficient and less cumbersome.

Notice under Section 143(2)

When the Income Tax Department selects your Income Tax Return for a detailed check, they issue a Notice under Section 143(2). This is a step towards what is known as a scrutiny assessment or thorough assessment under Section 143(3).

Under Section 143(3), the scrutiny assessment thoroughly reviews your Income Tax Return. The main goal is to verify the accuracy and truthfulness of various claims and deductions you’ve made in your return. Essentially, this process ensures that the income you’ve reported and the tax you’ve paid are correct.

The Key Objectives of Scrutiny Assessment:

• The scrutiny primarily aims to check three things:
• That you haven’t reported less income than you have.
• That you haven’t claimed excessive losses.
• That you haven’t paid less tax than you should have.

So, in summary, to conduct a scrutiny assessment under Section 143(3) of the Income Tax Act, the Income Tax Department issues a notice under Section 143(2). This notice is typically given within three months from the end of the financial year.

What Exactly is a Scrutiny Assessment?

A scrutiny assessment, as defined under section 143(3), involves a detailed examination of the income tax return. During this assessment, the tax authorities meticulously check the authenticity and accuracy of various claims, deductions, and other details you have provided in your return.

Scope of Assessment under Section 143(1):

The assessment under Section 143(1) is essentially a preliminary check of the income tax return filed by the taxpayer. At this stage, the focus is not on detailed return scrutiny. Instead, it involves a basic verification process where certain adjustments may be made to the income or loss reported by the taxpayer. These adjustments include:

• Correction of Arithmetical Errors: Any mathematical mistakes present in the return are rectified.
• Identification of Incorrect Claims: If any claims in the return are incorrect, they are adjusted based on the information available in the return. This includes claims inconsistent with other entries in the return, claims lacking required substantiation, or deductions exceeding statutory limits.
• Disallowance of Loss Claimed: If the return for the previous year, for which a loss set-off is claimed, was submitted after the due date under Section 139(1), the loss claim can be disallowed.
• Disallowance of Expenditure Not Accounted in the Total Income: If certain expenditures are mentioned in the audit report but not considered in the total income calculation in the return, these can be disallowed.
• Disallowance of Certain Deductions: Deductions claimed under sections 10AA, 80-IA, 80-IB, 80-IC, 80-ID, or 80-IE can be disallowed if the return is filed beyond the due date specified under Section 139(1).
• Addition of Income Not Included in the Return: Any income that appears in Form 26AS, Form 16A, or Form 16, which has not been included in the total income stated in the return, may be added.

When Can a Scrutiny Assessment under Section 143(3) be Initiated?

Scrutiny Assessment  assessment can be started in the following situations:

• When you file an income tax return as per Section 139 or respond to a notice under Section 142.
• When the Assessing Officer or Income Tax Authority feels it’s necessary to audit your return to ensure the reported income and paid taxes are accurate.

Types of Scrutiny Assessments

Scrutiny assessments under the Income Tax Act can be categorized into manual and compulsory assessments.

•  Manual Scrutiny Assessments: These are selected on a case-by-case basis due to specific reasons. Assesses can often avoid manual scrutiny by exercising due diligence and careful compliance with tax laws and filing procedures.
•  Compulsory Scrutiny Assessments: These are not within the control of the assessee and cannot be avoided. They are usually mandated by specific criteria set by the tax authorities.

Criteria for Selecting Cases for Scrutiny Assessment  

A case is typically selected for scrutiny assessment by the Income Tax Department under certain circumstances:

•  Non-filing of Tax Return: If the assessee does not file the tax return, it can trigger a scrutiny assessment. This is particularly relevant when the assessee has a taxable income but fails to file the required returns.
•  Incomplete or Erroneous Tax Return: Cases where the tax return is filed but lacks necessary information or contains errors may also be scrutinised. This includes inaccuracies in income reporting or tax calculations.

Common Reasons for Scrutiny Selection

Reason 1: Non-filing of Income Tax Return (ITR)

• Individuals with gross income above the exempted limit (e.g., Rs 2,50,000 for individuals below 60 years) must file an ITR.
•  Residents who own foreign assets or have authority over foreign bank accounts must file an ITR regardless of income level.
• Filing is necessary even if the employer has deducted TDS.

Reason 2: Errors Related to TDS

• Discrepancies between TDS amounts reported in the ITR and those recorded on the Traces website can trigger scrutiny.

Reason 3: Non-disclosure of Other Incomes

• All incomes, including interest from savings accounts and fixed and recurring deposits, must be reported.
• Issues arise when TDS is deducted at a lower rate than the assessee’s tax slab.

Reason 4: Unnatural or High-Value Transactions

• Transactions significantly higher than the income declared can lead to scrutiny. For example, extensive deposits in bank accounts that don’t correspond with the reported income.
• Such transactions are often reported to the tax department by banks and other financial institutions.

Reason 5: Defects in Income Tax Return

• Errors in filing, such as using the wrong ITR form or omitting mandatory information, can result in a notice.
• The tax department may direct the filing of a revised return under Section 139(9) to correct any inaccuracies.

Procedure for Scrutiny Assessment in Income Tax

Income Tax Notice under Section 143(2) and Scrutiny Assessment Process is explained here:

Starting a Scrutiny Assessment – Income Tax Notice u/s 143(2)

When an Income Tax officer needs to conduct a scrutiny assessment, they first issue a notice under Section 143(2). This notice asks the taxpayer to show up in person or through an e-assessment. The taxpayer must also provide any documents or information the officer thinks are essential for determining the taxable income and tax owed. This notice must be sent within six months after the end of the financial year the tax return was filed. 

For example, if a return is filed on November 2, 2018, the notice can be sent until September 30, 2019. However, if the notice is sent on September 29, 2019, but reaches the taxpayer after September 30, it’s invalid.

Participating in the Scrutiny Assessment

The taxpayer or their authorized person can meet with the Assessing Officer to discuss and present evidence or arguments about different issues as requested by the officer.

Conducting the Scrutiny Assessment Hearing

During this hearing, the tax officer gives the taxpayer plenty of chances to be heard and to show documents or evidence supporting their tax return. If the taxpayer doesn’t provide the needed information or doesn’t cooperate, the officer can do a best judgment assessment under Section 144.

If the taxpayer cooperates and provides all the information, the Assessing Officer will review this evidence and decide. Once the officer makes a decision, the taxpayer has a few choices:

• Accept the decision and either pay any extra tax, get a refund, or accept the loss determined.
• Apply for a correction under Section 154 if there’s a clerical mistake.
• File a revision application to the Commissioner of Income Tax under Section 263/264.
• Appeal the decision if they disagree with it.

During the scrutiny process, the Assessing Officer (AO) focuses on ensuring:

• No Underreporting of Income or Overstating of Losses: The AO verifies that the assessee has not underreported income or overstated losses in their tax return.
• Sufficient Tax Payment: The AO checks if the assessee has paid the correct tax due. Any shortfall in tax payment can be a point of examination.

In conducting these assessments, the Assessing Officer must adhere to the guidelines and norms set by the Central Board of Direct Taxes (CBDT) and follow the precedents and rules established by the Supreme Court. This adherence ensures the scrutiny process is consistent, fair, and in line with legal standards.

Time Limits for Conducting Scrutiny Assessments as Per Section 153

The duration allowed for completing a scrutiny assessment under Section 143(3) is outlined in Section 153 and varies based on the assessment year:

• For the assessment year 2017-18 or earlier: The scrutiny assessment must be concluded within 21 months from the end of the assessment year when the income was first subject to tax.
• For the assessment year 2018-19: The scrutiny assessment should be completed within 18 months following the end of the assessment year in which the income was first assessable.
• For the assessment years starting from 2019-20 onwards: For the assessment years beginning in 2019-20 onwards, including the current assessment year, the rule is that the scrutiny assessment must be completed within 12 months after the end of the assessment year in which the income was first considered taxable.

When Intimation under Section 143(1) Tax Notice is Issued?

You’ll receive this intimation in various scenarios, depending on the outcome of your ITR assessment:

• Tax Refund with Adjustments: If the ITD determines you’re entitled to a tax refund but has made certain adjustments to your return during processing, you’ll receive an intimation under Section 143(1) outlining the revised tax calculation, the final refund amount, and details of any changes made.
• Demand for Additional Tax or Interest: In cases where the ITD calculates a higher tax liability than you declared, or identifies additional interest payable, you’ll receive an intimation under Section 143(1) specifying the revised tax amount, the reason for the demand, and any applicable interest charges.
• Return Processed with No Change: Even if there’s no change to your declared tax liability, resulting in neither a demand nor a refund, you’ll still receive an intimation under Section 143(1) confirming that ITD has processed your return and accepted the information you provided. This serves as an official acknowledgement of your ITR filing.

Time Limit

Assessment under section 143(1) can be made within one year from the end of the financial year in which the income return is filed. Thus, the intimation for tax or interest due under Section 143(1) should not be sent after the expiry of one year from the end of the financial year in which the return is filed.

How is the ITR intimation received?

The Income Tax department in India will send you your ITR intimation electronically after processing your tax return. There are two main ways you’ll receive it:

• Email: The intimation will be sent to your registered email address that you provided while filing the return or registering on the income tax e-filing portal. The sender will be the Central Processing Centre (CPC) with the email ID intimations@cpc.incometax.gov.in.
• SMS: You may also get an SMS alert on your registered mobile number informing you that the intimation has been sent to your email.

To open the intimation, you need to use the password for the ITR intimation. You can also view or download the intimation again by logging in to the income tax e-filing portal.

What is the ITR intimation password?

The file you downloaded is password-protected to ensure your privacy. “To open your ITR intimation notice under Section 143(1), the password is a combination of your PAN (in lowercase letters) and your date of birth in DDMMYYYY format, without any spaces or special characters.” For example, if your PAN is ABCDE1234E and your date of birth is January 1st, 2000, the password to access the document would be “abcde1234e01012000”.

How to read the received intimation tax notice under Section 143(1)?

The ITR intimation notice can seem complex at first glance, but it’s essentially a summary of your tax return compared to the Income Tax department’s assessment. Here’s a breakdown on how to read it:

1. Verify Basic Details:

• Confirm that the name, address, PAN number, and assessment year mentioned in the notice are correct.
• Check the e-filing acknowledgement number matches the one you received when filing your return.

2. Compare Income and Deductions:

The notice will have side-by-side columns showing:

• The income you declared in your return.
• The income as per the department’s records.

This includes details like salary, interest income, capital gains etc. Similarly, it will compare the deductions you claimed (like those under sections 80C, 80D etc.) with what the department allows.

• If there are any discrepancies, investigate the reason. It could be a mistake you made or information the department has that you don’t.

3. Review Tax Calculations:

The notice will show how your tax liability is calculated based on your net taxable income. This includes details like:

• Tax rate applicable to your income slab.
• Any tax reliefs or pre-paid taxes considered.
• Interest or penalties (if any) levied by the department.
• Ensure you understand each element contributing to your final tax liability.

4. Look for Refund or Demand:

• The intimation will state whether you are entitled to a tax refund or owe tax to the department.

5. Take Action (if required):

• If there are discrepancies or you need to pay additional tax, you may have to file a revised return within a specific timeframe.
• If you’re due a refund, the intimation will provide details on the processing timeline.

How to Respond to Income Tax Notice under Section 143(1)?

To respond to an income tax notice under Section 143(1), follow the steps below:

Step 1: Log in to your account on the Income Tax Department E-Filing website.

Step 2: Click on the E-Proceedings tab and select E-Assessment/Proceedings.

Step 3: Select Prima Facie Adjustment u/s 143(1)(a).

Step 4: You will see the details of the notice received. Click on Submit to submit the response.

Step 5: You will now see the list of all mismatches identified. Click the drop-down next to the Response to submit a response to the mismatch.

Step 6: Enter the same in the justification or remarks if you have any specific information or explanation.

Step 7: Submit any supporting documents regarding the discrepancy amounts before submitting your response.

Step 8: Click on “Submit”. Once the response is submitted, an acknowledgement will be provided.