Decoding Income tax Notices and Scrutiny Cases By Devashish Bharti

Income Tax Notice is often served when there is any Mismatch in ITR filed with Form 26AS or while Scrutinising/Processing an Income Tax Return filed by Assessee himself and when the Assessing Officer wants to have some answers from the Taxpayers. There may be some cases when Notices is served because Assessing Officer believes that Assessee has concealed the Income or has not disclosed all the Information which was required to be disclosed in the Income Tax Return. As you all might know that in Income Tax Return, the Income shown is not approved by the Income Tax Department and it is just a Self-Declaration made by the Assessee/Taxpayer about their Income for the Financial Year.
There are mainly Five kinds of Notice:
  1. Routine notices
  2. Scrutiny notices
  3. Show cause notices
  4. Prosecution notices
  5. Notices on details of income/assets outside India
What should you do if you receive an Income Tax Notice?
  1. Neither Panic nor Ignore;
  2. Check if it's issued in your PAN;
  3. Identify the reason behind issuing a Notice;
  4. Check Validity and Issuer Details;
  5. Preparing two sets of Documents and Covering Letter;
  6. Reply on Time;
  7. Preserve the Envelope;
  8. Get Professional Help from a Chartered Accountants;
  9. Note the Section of Income Tax Act and Read more. 
How to reply if you receive a Notice from the Income Tax Department?
At present, Since Income Tax Returns are being filed through online mode only, Government is taking measures to convert the whole process online. Taking a step ahead, they have launched “E-Proceedings” option on E-filing Portal ( Hence, now you will receive the notice on your registered email. Go through the email carefully, and do what it asks for as early as possible because most notices require a time-bound response. The response to E-notice should be submitted online either through “Reply on Email” or through “Login to E-filing Portal”.
For each tax notice, a particular response procedure has to be followed. Once you receive such an email, access your income tax account under the head “My Account”, click on “My Pending Actions” tab or on “Worklist” and then go to “For your action” to see if any demands or arrears are pending in your name. You can reply to almost all tax notices online through the account.
Some notices are also issued by the Central Processing Centre (CPC). You can respond to most of these online through your income tax account; unless personal appearance is specifically asked for. Personal appearance is typically required when the assessing officer wants to further discuss the case or verify documents in original which is not possible online.

There are 14 Types of Income Tax Notice:
  1. Notice u/s 139(9)
  2. Notice u/s 131(1A)
  3. Notice u/s 142(1)
  4. Notice u/s 143(1)
  5. Notice u/s 143(1)(a)
  6. Notice u/s 143(2)
  7. Notice u/s 147
  8. Notice u/s 148
  9. Notice u/s 154
  10. Notice u/s 156
  11. Notice u/s 200A
  12. Notice u/s 234(F)
  13. Notice u/s 245
  14. Notice u/s 133(6)
(1) Section 139(9): Notice under this section is issued to the Assessee/Taxpayer when Income Tax Return becomes defective due to the wrong ITR filed, missing information, incomplete Return, income shown under the wrong head or if Balance Sheet is not tallied etc. If you don't respond within 15 Days, your Return will be rejected/invalidated by Income Tax Department. Once an ITR is rejected by the department you will have to file a fresh/revised ITR for that particular Assessment Year.

(2) Section 131(1A): Assessing Officer will initiate an Enquiry or Investigation if he is of the Opinion that Income is concealed or likely to be concealed by the Assessee. If they are issuing a notice under this section, it means they have reasons to suspect/proof of concealment of Income.

(3) Section 142(1): It is a Preliminary Enquiry before an assessment of return in case the Return is not filed on Time by the Assessee or if AO wants Documentary Proof for your Claim. The time limit to serve the notice u/s 142(1) is before the end of the relevant Assessment Year. It is generally issued when your TDS is deducted & deposited by a Person or when you are a High Net worth Individual or dealing in High-Value Transactions but not filing your Income Tax Return. The return filed under this section is called a Belated Return.

(4) Section 143(1): It is simply an Intimation in response to the Income Tax Return filed by you in the cases where there is Increase/decrease in Tax/Interest Payable, or Increase/decrease in Refund, or Adjustment that makes a change in the loss claimed, after which you will be given an Income Tax Assessment Order (Approved Copy of your ITR by IT Department). They may process your Return along with the Refund in your Bank Account or may ask a Tax Demand depending upon the Tax Refundable or Payable standing in your ITR or as determined by the Assessing Officer.

(5) Section 143(1)(a): If mismatches found in your ITR filed, such as Deductions claimed under Chapter VI-A or Income difference are found between Form 26AS (used as a form for comparison of data) and Form 16/Form 16A, then this Computer-assisted notice under section 143(1)(a) will be sent for clarification for the same. A reply should be given within 30 Days otherwise the System itself will calculate the Income and determine the Tax Liability according to the Provisions of Income Tax Act.

(6) Section 143(2): If the AO is not satisfied with the response of the Assessee or Assessee failed to provide the Documents against Income Tax Notice u/s 142(1), then they will issue notice under this Section and the AO will do Detailed Scrutiny / Reassessment (AO may ask to attend Office or produce Supporting Evidence). The timeline of this notice is before the expiry of Six Months from the End of the Assessment Year to which the Return relates.

(7) Section 147: Section 147 gives power to Assessing Officer to re-assess or re-compute income, turnover etc. to bring any income which has escaped assessment in the original assessment done under the Act. This notice does not necessarily mean that Tax Department believes that you have done something wrong. This section contains the pre-requisite conditions to be fulfilled for invoking the jurisdiction to reopen the assessment.

(8) Section 148: Even after completion of Assessment of your ITR, If the assessing officer has reasons to believe that you have not disclosed your income correctly and therefore, you have paid lower taxes or where you have not filed your return at all in a case where you should have ideally filed it as per law, this is termed as income escaping assessment. Under these circumstances, the assessing officer is entitled to assess or re-assess your income, as the case may be. Prior to making such assessment or reassessment, the assessing officer should serve a notice to the assessee asking him to furnish his return of income. The notice issued for this purpose is issued under the provisions of section 148. The notice can be served within 4 years from the end of the relevant Assessment Year if income escaped is Rs.1 Lakh or less, otherwise within 6 years.

(9) Section 154: If there is any mistake apparent from the record in any order passed by the Assessing Officer, it can be rectified under section 154. The AO may,
  • Amend any order passed under any provisions of the Income-tax Act;
  • Amend any intimation or deemed intimation sent under section 143(1);
  • Amend any intimation sent under section 200A(1);
  • Amend any intimation under section 206CB.
No order of rectification can be passed after the expiry of 4 years from the end of the assessment year in which order sought to be rectified was passed. The Income Tax Authority shall amend the order or refuse to allow the claim within 6 months from the end of the month in which the application is made by the Assessee.

(10) Section 156: If any penalty, tax, fine or any other amount is due from the taxpayer to the income tax department after the Assessment of the ITR then income tax notice u/s 156 is served. There is no time limit to serve this notice but Taxpayer should deposit the amount payable within 30 Days from the Notice. Income tax notice under section 143(1) and 200A are also referred as Notice of Demand.

(11) Section 200A: An Intimation being sent to the Deductor for his Tax liabilities and Interest payable against TDS Returns filed by him. Such intimation is sent within One Year from the end of the financial year in which TDS Returns were filed.

(12) Section 234F: Applicable to salaried individuals who are not diligent in filing their Returns on time by July 31st of the Respective Assessment Year. From the Assessment Year 2018-19, if filed between 1st August to 31st December, a fine of Rs 5,000 will be levied. If it is filed after December 31st, the Individual can be fined up to Rs 10,000. Additionally, for Individuals whose income is below Rs.5 Lakh, they can face a penalty of Rs 1,000.

(13) Section 245: This notice is served by the Income Tax Department to the Taxpayer, on whom there is an Outstanding Demand from earlier years and a Refund is claimed in another Assessment Year. In such a case, as per Section 245, the Assessing Officer has right to use the Refund against the Tax Demand which is Outstanding from the Taxpayer. The Taxpayer should reply within 30 Days and satisfy the AO that "Why the AO should not adjust the Refund with previous years Demand". However, the adjustment of demand and refund could be done only after you have been provided with a proper notice and an opportunity of being heard.

(14) Section 133(6): IT department is taking various steps to curb the use of Black Money and Benami Property. For this, the Assessing Officers are given the power to call for information that are relevant for proceedings or enquiries and for the verification of cash deposits under “Operation Clean Money.” Notice can also be issued by the Intelligence & Criminal Investigation Division of Income Tax Department seeking clarification or documentary evidence on various sources of income or assets located outside India.

Scrutiny Assessment is a more detailed examination by the Assessing Officer (Income Tax Department) of the Income Tax Return filed by the Taxpayer, by giving a chance to the Assessee to substantiate the incomes, losses, expenses, deductions, etc. which are claimed in the Tax Return, with the help of Evidence and Proof. Notice u/s 143(2) is issued for Scrutiny to be carried u/s 143(3). Further, you can also get a notice under Section 133A for survey or scrutiny of accounts.
Objectives of Scrutiny Cases:

In the selected Scrutiny Cases, the AO conducts necessary enquiries and collects evidence in support of expenses, deductions, losses and exemptions to arrive at an Opinion whether Assessee has-
  • Concealed any Income; or
  • Understated the Income; or
  • Computed Excessive Loss; or
  • Claimed excess Deduction; or
  • Underpaid Tax in any manner.
Two types of Scrutiny Cases by IT department:
  1. Manual Scrutiny - It is the case-specific selection and can be avoided by applying due care.
  2. Compulsory Scrutiny - It is compulsory selection by the department and can't be avoided.
Reasons for Manual Scrutiny Assessment:
  • Not filing your Income Tax Return - When your Income exceeds Basic Exemption Limit or any TDS is deducted on your Income and you could not file your ITR.
  • You have declared lesser Income or excess Loss as compared to earlier years - Significant change in the percentage of Gross Profit or Loss, Net Profit or Loss and Operating Expenses.
  • Mismatch in TDS Claimed and Available - Difference of TDS available in Tax Credit Statement Form 26AS and TDS claimed in ITR.
  • Non-Declaration of Exempt Income.
  • Not declaring Interest from Fixed Deposits or Savings Account.
  • Claiming Excess Refund in Income Tax Return.
  • Taking Double Benefits of Exemptions or Deductions.
  • Unnatural or High-Value Transactions - IT Department gets all your Big Financial Transactions details through Annual Information Returns filed by the Companies in Banking & Finance Sectors.
Reasons for Compulsory Scrutiny Assessment:
  • If the addition in earlier Assessment Year is more than Rs. 10 Lakhs on a substantial and repeating question of law or fact which is confirmed in appeal or is pending before an Appellate Authority.
  • Cases involving addition in an earlier Assessment Year on the issue of Transfer Pricing in excess of Rs. 10 Crore or more on a substantial and recurring question of law or fact which is confirmed in Appeal or is pending before an Appellate Authority.
  • Assessments in search and seizure cases to be made under Section 158B, 158BC, 158BD, 153A & 153C read with Section 143(3) of the Act and also for the earlier years in which authorization for search arid seizure was executed u/s 132 or 132A of the Act.
  • Assessments relating to Survey under Section 133A of the Income Tax Act excluding the cases where there are no impounded books of accounts and the Income Returned is not less than the Income Returned of the previous Assessment Year.
  • Returns filed in response to Section 148 of the Income Tax Act. If any Income Assessment has been missed out, the cases u/s 148 can be reopened. Any case can be reopened within Six Months from the end of the Assessment Year.
  • If the cases where the Registration u/s 12AA of the Income Tax Act has been cancelled by the concerned CIT/DIT, yet the Assessee is claiming Tax exemption under Section 11 of the Income Tax Act.
  • Computer Aided Scrutiny Selection (CASS): Such cases are separately intimidated in due course by DGIT jurisdictional authorities concerned.
  • If the specific and verified information regarding Tax Evasion is released by the department’s authorities.
  • Cases where the order denying the approval u/s 10 (23C) of the Income Tax Act or withdrawing the approval granted which has been passed by the Competent Authority yet the Assessee is found to have claimed the tax exemption under the Act.
Things to Remember:

Replying to income tax notices within the stipulated time is a must. There is a general penalty for each default or failure, in case an assessee, who is legally bound to furnish information or to comply with a notice issued by the Income-tax department, but fails to do so or defaults in making such compliance. Additionally, there may be specific and more severe penalties, if the assessee fails to furnish certain specific documentation or information required. Things can get escalated to the prosecution, depending on the case.

In case you need additional time to respond or to provide documents asked by the department, you should request for an extension of time to reply either by approaching the respective assessing officer or through the online portal.

Take the notices seriously and if you think you will be unable to reply appropriately, take the help of a chartered accountant or other experts.

Never forget that whatever types of notices you are served by the Department, you will always have a Right to be Heard (You will be given a chance to prove your innocence in front of the Assessing Officer) and a Right to Appeal to Commissioner of Income Tax (Appeals) and Other Senior Offices.
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