Scrutiny of Taxpayer by Income Tax Department

Income-tax scrutiny refers to the summoning of taxpayers for making inquiries regarding the income tax returns filed during the year if the concerned tax officials have a reason to believe that the expenses and income declared in the returns are dishonest and fabricated. The scrutiny aims at providing an opportunity of being heard to the accuracy of the return through documentary evidence.

Reasons For Serving Income Tax Notices

The income tax scrutiny notice is served to the tax filers when the concerned tax officials have a reason to believe that the expenses and income declared in the returns are malafide and fabricated. Listed below are some of the most common reasons for serving the income tax notice:

1. Non-filing of tax returns: It is the major reason for initiating a notice if you failed to file an ITR for the current financial year or for multiple years or if you have failed to declare or intentionally hide any source of income in a particular financial year.
2. Abnormal rise or fall in income: Any rapid decrease or increase in tax liability in very little time may attract the attention of the income tax department. They may even check the details of the Income and expenditure incurred during the year and the amount of Income tax return filed.
3. Mismatch in Form 16 and Form 26AS: If any mismatch happens between form 16 and Form 26AS (TDS claimed) in respect of the details of the Income Tax Department, the declaration made of lesser income or more loss in comparison to the declaration given the previous year may result in Income Tax scrutiny. For a normal salaried person, such a situation arises when the TDS claimed is more than what TDS actually paid.
4. Mismatch in AIS or TIS with Form 26AS: With the introduction of AIS from November 1, 2021, it is compulsory to consider the information contained in AIS or TIS. The AIS contains all the details relating to savings bank interest, dividends, capital gains, and share transactions made during the year.
5. Non-declaration of exempted income: Income from a long-term capital gain, interest income earned from a Bank Account or FDs up to Rs 10,000, or any gifts received from others that fall under the exempted category should be clearly stated while filing IT returns to avoid any future complications.

Types Of Income Tax Scrutinies

Notices served under the Income tax act are categorized into 4 types:

1. Summary assessment without calling the assesses under section 143(1)

• This is a preliminary assessment of checking the return of income. At this stage, no detailed scrutiny of the return of income is carried out. At this stage the assesses need not be present in person.
• This notice is served because of any of the following reasons
• Any arithmetical error is an incorrect claim in the return; if such claim is apparent from any information stated in the return.
• Disallowance of loss claimed if the return of the previous year beyond the due date as specified under section 139(1) of the Income tax act,
• Disallowance of expenditure that is present in the audit report but has not been considered while computing the total income in the return; or
• Addition of any other sources of income appearing in Form 26AS or Form 16A or Form 16 but has not been included while filing the return.

2. Scrutiny assessment under section 143(3)

• This is a detailed assessment of the return of income that is carried out to confirm the correctness and genuineness of various claims, deductions, exemptions, etc., that are made by the taxpayer in the return of income.
• The objective of this assessment is to confirm whether the taxpayer has not hidden any income while preparing the return or has not underpaid the tax in any manner.

3. Best judgment assessment under section 144

• This assessment is made as per the best judgment of the Assessing Officer based on all the relevant documents he gathered. This assessment is carried out in cases where the taxpayer fails to comply with the following reasons
• If the taxpayer fails to file, the return is required within the due date prescribed under section 139(1) or a belated return under section 139(4), or a revised return under section 139(5).
• If the taxpayer fails to comply with a notice served under section 142(1) of the act or fails to comply with the directions issued under section 142(2A).
• If the taxpayer fails to produce such accounts or documents as he may require and to furnish in writing and verified in the prescribed manner as he may require.

4. Income escaping assessment under section 147

• If any assesses has escaped any of his income for any assessment year, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income and any the course of the proceedings, or recompute the loss or the depreciation allowance or any other allowance for the such assessment year.

Procedure Of Dealing with The Income Tax Scrutiny

• (i). If the Assessing Officer considers it necessary to ensure that the taxpayer has not understated the income or has not underpaid the tax in any manner, then he will serve on the taxpayer a notice requiring him to attend his office to any reasonable evidence on which the taxpayer may rely, in support of the return.
• (ii). The notice should be served within a period of six months from the end of the financial year in which the return is filed.
• The taxpayer or his representative (as the case may be) will appear before the Assessing Officer and will present all the related evidence, documents, etc., as required by the Assessing Officer.
• After hearing/verifying such evidence and considering such particulars as the taxpayer may produce and all such other evidence which he has gathered, the Assessing Officer shall, by an order in writing, assess the total income or loss of the taxpayer and determine the sum payable by him or any refund due to him based on such assessment along with the interests.

Consequences For Non-Compliance with Income Tax Notice

Non-compliance to the income tax notice within the due time may result in a penalty of Rs. 10,000, in addition to additional taxes. The Assessing may also order based on ‘Best Judgement’, whereby the assessment can be confirmed and finalized as the Assessing Officer deems fit. Taxpayers who are habitual defaulters could be targeted for a more rigorous assessment in the form of a survey, or search and seizure.

The author Sushant Gangurde is a legal analyst who aims to educate people about various tax laws and financial planning.