According to Section 156 of the Income Tax Act, 1961, the Income Tax Department will issue a Tax Demand Notice regarding any tax liabilities, outstanding taxes, interest, penalties, or other dues.
The Assessing Officer (AO) will send an assessment order for the payment of additional taxes by the taxpayer. The reasons for the issue of such an order may be due to unreported income, incorrect tax calculations, incomplete information etc.
Notice for demand may be issued in the following cases such as:
- Regular assessment
- Scrutiny assessment
- Penalty assessment under section 270A/271(1)(c) of Income Tax Act
- Best judgement assessment under section 144 of the Income Tax Act
Section 143(1), 200A(1) and 206CB(1) shall also be considered as Notice for Demand under section 156 of the Income Tax Act, 1961.
Section 156 of the Income Tax Act, 1961, states that-
“(1) When any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the Assessing Officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable :
Provided that where any sum is determined to be payable by the assessee or the deductor or the collector under sub-section (1) of section 143 or sub-section
(1) of section 200A or sub-section (1) of section 206CB, the intimation under those sub-sections shall be deemed to be a notice of demand for the purposes of this section.
(2) Where the income of the assessee of any assessment year, beginning on or after the 1st day of April, 2021, includes income of the nature specified in clause* (vi) of subsection† (2) of section 17 and such specified security or sweat equity shares referred to in the said clause* are allotted or transferred directly or indirectly by the current employer, being an eligible start-up referred to in section 80-IAC, the tax or interest on such income included in the notice of demand referred to in sub-section (1) shall be payable by the assessee within fourteen days—
(i) after the expiry of forty-eight months from the end of the relevant assessment year; or
(ii) from the date of the sale of such specified security or sweat equity share by the assessee; or
(iii) from the date of the assessee ceasing to be the employee of the employer who allotted or transferred him such specified security or sweat equity share, whichever is the earliest”
Time Limit to respond to the demand
The assessee shall have a time limit to respond to the demand notice within 30 days from the date of service of notice. However, due to some exceptional cases, the time limit may be reduced or extended with prior approval of the Joint Commissioner.
Consequences of delay
Delay in responding to the demand notice will attract certain penalties and interest to be paid.
Section 220(2) – Interest on delayed payment of taxes
- Simple interest shall be payable at 1% per month or part of a month
- Interest will be calculated from the due date of payment until the date of actual payment i.e., after the expiry of such 30 days
- Interest shall be payable even if the Assessing Officer has approved an extension
Section 221 – Penalty for failing to pay taxes on time
- The Assessing Officer (AO) may impose a penalty for failure to pay taxes within the prescribed time limit of 30 days
- Such penalty amount cannot exceed the tax amount and can increase for continuing default
- Penalty can be avoided if there are any sufficient reasons to prove
Points to be noted by a taxpayer in case of demand notice:
- Check the reasons for such demand notice which may be due to incorrect information, unreported details, incorrect tax details, incomplete information etc
- Check the contents of such notice to make sure the tax amount, interest applied and any penalties are applied as per the law
- Check the calculations of such interest and penalties
- Cross check whether tax has been paid within the stipulated time
- Breakdown of such interest (from which date the interest has been charged) and penalties (check if it is avoidable)
- Check the due date for such demand notices
- Consult a tax professional who can provide guidance in these matter
FAQs
It is issued after the completion of an assessment, reassessment, or order by the assessing officer. It specifies the exact amount the taxpayer needs to pay.
The notice includes the amount due, the section under which it is levied, and the deadline for payment.
Failure to pay by the due date may result in additional penalties and interest.