Here are some of the common reasons why taxpayers receive an income tax notice:
a) Mismatch in TDS amount: When the TDS claimed in the Tax return doesn’t match with Form 26AS and 16 or 16A.
b) Mismatch in income: Whenever there is a discrepancy between the income tax return and form 26A.
c) Discrepancy in tax returns: There are times when taxpayers make common mistakes like claiming deductions under the wrong sections, or unintentionally failing to add their interest, rent, dividend, or other incomes in their calculations. Such instances will create discrepancies in their tax returns and what they are actually liable to pay and will invite income tax notice.
d) Discrepancies in disclosure of declared income versus your actual income: This is an obvious one. The income tax department is constantly on the lookout for people trying to evade taxes. If the IT authorities suspect that you haven’t disclosed all your income from various sources, then you could be served with an income tax notice.
e) Failing to report high-value transactions: The Income Tax Department requires taxpayers to report all their high-value transactions, so they can curb black money and detect all under-reported income. In case, you fail to report such transactions then this will invite an IT notice. Examples of high-value transactions include cash deposits or withdrawals over ₹10 lacs, international transactions in foreign currency over ₹10 lacs, and purchase of mutual funds, bonds, or debentures of over ₹10 lacs.
f) Random scrutiny: If you’re unlucky, you could receive the notice because every year, the IT department randomly selects the files for which IT returns need to be scrutinized. If you have paid your taxes diligently and have all the paperwork in order, you have nothing to worry about.
g) Incomplete documentation: Many times, your income tax returns need to be accompanied by some required documentation. If you fail to provide these, then you will receive a notice. These include but are not limited to: your balance sheet and profit and loss statement in case the net profit from your business income or profession exceeds ₹1.2 lacs, Form 67 if you have received any foreign income and Form 10E in case of arrears.
Some of the reasons due to which taxpayers may receive income tax notice are as follows:
1) Taxpayers not filing their income tax returns irrespective of their total income exceeding the basic exemption threshold or otherwise being eligible for filing such return
2) Mismatch in the income details as per the returned income and Annual Information Summary (AIS)/ Tax Information Summary (TIS)/ Form 26AS
3) Taxpayers have claimed excess TDS than what is reflected in Form 26AS
4) Discrepancy in the calculation of interest u/s 234A/B/C as per the returned income and as per the revenue authorities records
5) Missing out disclosing certain income or failing to apply clubbing provisions
6) Selection of wrong ITR form leading to a defective return
7) Any high value or unusual transaction which is not commensurate with other details of the returned income
Types of Income Tax Notices:
Depending on the reason for the notice, the income tax department sends different types of notices to taxpayers. The following are the notices:
Section 142(1):
In two cases, the assessing officer issues a notice under section 142 (1). Firstly, the officer may request further information and documents related to your tax filings. Second, if the officer requests that the return be filed despite the fact that it has not yet been filed. If you do not answer the Section 142(1) notification, you could face a fine of INR 10,000, a year in prison, or both if you do not comply.
Section 139(9):
If the AO feels you have filed a defective income tax return, he will notify you under this provision. Missing information, using the incorrect ITR form, submitting an incomplete return, and so on are all examples of errors. The officer also would make references out and advise a solution to the defect in the tax return. You have a 15-day period to respond to the notice. Your ITR would be rejected if you did not respond.
Section 148:
When the assessing officer (AO) has reason to believe that a taxpayer has submitted his ITR on a lesser income or has not submitted when required by law, this notice is sent. The amount and type of revenue escaped determine the time limit for sending the notice under this provision.
Section 156:
A notice under Section 156 would be issued if there is any type of demand, such as a penalty, fine, tax, or any other amount that the taxpayer is required to pay to the income tax department. The taxpayer must pay the outstanding amount within 30 days of getting the notification, which is also known as a notice of demand.
Section 143(1):
The tax department processes your ITRs online after you file and verify them. Following this initial assessment, the tax department notifies all taxpayers in accordance with Section 143(1). It comprises information on an additional tax liability or refund, as well as whether the loss amount stated in the return should be increased or decreased, and whether the return has been submitted correctly.
Section 143(2) for scrutiny assessment u/s 143(3)
If the tax department chooses to examine the taxpayer’s ITR then a Notice u/s 143(2) will be issued to the taxpayer. This notice is sent by the assessing officer within 6 months of the end of the financial year in which the return is filed. Once the taxpayer receives the notice, the taxpayer must respond to the income tax department questionnaire and present all other requested documents.
Section 131
The assessing officer can issue a notice under this section if he believes that the taxpayer is hiding his income or a portion of it. The notice can be used to inquire about the taxpayer’s accounts books and to examine the income of the taxpayer.
Section 245
The assessing officer (AO) shall be entitled to this notice u/245 of the Income Tax Act if it is believed that, in the previous FY where you had a tax liability and in order to pay the current FY’s tax refund, you could not have paid the tax liability. You must respond within 30 days, or the AO will consider your failure to respond as consent to adjust the tax refund with previous tax liabilities and issue your refunds after such adjustments.