27 September 2017
Dear, an assessee has received a notice for limited scrutiny u/s. 143 (2) asking to disclose the sources of cash deposits made in banks for AY. 2015-16. the assessee is retailer who has filed ITR showing sales far below the cash deposits made in banks. there might be diffrence of Rs 20 lacs appx. now assessee has to either show the sources of these extra cash deposits or to disclosed it as unaccounted/undisclosed income. What should be the recommended solution to reply the notice & face the case? thanks in advance.
27 September 2017
It is better to make true and full disclosure of the undisclosed income of Rs.20 lacs(approx), else you may be held up with penalties. So come clean
02 August 2024
When facing a limited scrutiny notice under Section 143(2) of the Income Tax Act, it's crucial to respond carefully and accurately. Here’s a recommended approach to handling the notice and addressing the discrepancy between your reported sales and the cash deposits:
### **1. **Review the Notice and Gather Information**
**1.1. **Understand the Notice:** - Review the specific details mentioned in the notice. Typically, the notice will require you to provide explanations and documents related to the cash deposits and other discrepancies identified.
**1.2. **Gather Documentation:** - Collect all relevant documents and records related to the cash deposits, including bank statements, receipts, invoices, and any other supporting evidence.
### **2. **Analyze the Discrepancy**
**2.1. **Evaluate Cash Deposits:** - Analyze the nature of the cash deposits. Determine if there are legitimate sources for these deposits, such as sales receipts, loans, gifts, or other sources of income.
**2.2. **Assess Sales Reporting:** - Compare the sales reported in the ITR with the actual cash deposits. Verify if there were any discrepancies or unreported sales.
### **3. **Provide a Detailed Response**
**3.1. **Prepare an Explanation:** - Draft a clear and detailed explanation for the cash deposits. If the deposits were made from sales, provide evidence to support this claim, such as sales vouchers, invoices, or bank deposit slips.
**3.2. **Document Sources:** - If the cash deposits are from sources other than sales (e.g., loans, gifts), provide appropriate documentation to support these sources. Include loan agreements, gift deeds, or other relevant records.
**3.3. **Disclose Undisclosed Income (if applicable):** - If you cannot substantiate the source of the cash deposits, you may need to disclose them as unaccounted or undisclosed income. This should be done in a transparent manner, and you may need to pay tax on this income along with applicable penalties.
### **4. **Financial Impact and Tax Implications**
**4.1. **Tax Liability:** - If you disclose the cash deposits as unaccounted income, you will need to pay tax on this amount at the applicable rate. Calculate the additional tax liability based on the nature of the income.
**4.2. **Penalties and Interest:** - Be aware that disclosing undisclosed income may attract penalties and interest. Penalties under Section 270A could be up to 200% of the tax payable on the undisclosed income, depending on the circumstances. Interest under Sections 234A, 234B, and 234C may also apply.
**4.3. **Amendments and Reconciliation:** - If you need to amend your ITR, do so promptly to reflect the correct income and deposits. Reconcile the amended figures with your financial statements.
### **5. **Communicate with the Income Tax Department**
**5.1. **Submit Documents:** - Submit all the required documents and your explanation to the Income Tax Department within the stipulated time frame mentioned in the notice.
**5.2. **Seek Professional Advice:** - Consider consulting a tax professional or chartered accountant for assistance in preparing the response and navigating the scrutiny process.
### **6. **Responding to the Notice**
**6.1. **Draft a Response:** - Ensure your response is comprehensive and addresses all points raised in the notice. Include all relevant documentation and a clear explanation for any discrepancies.
**6.2. **Submit the Response:** - Submit the response and documents to the tax authorities as specified in the notice. Keep copies of all submissions for your records.
### **Conclusion**
**Handling a limited scrutiny notice involves careful preparation and clear documentation.** The key steps are to analyze the cash deposits, provide a detailed explanation with supporting documents, and address any discrepancies transparently. If unaccounted income needs to be disclosed, calculate the financial impact, including tax, penalties, and interest. Respond promptly and accurately to the notice, and seek professional advice if needed to navigate the process effectively.
CAclubindia
