The income tax department in India examines the filed tax returns, and if there are any reasons to believe that the information provided by the taxpayer is incorrect or incomplete, the case is selected for scrutiny assessment. The taxpayer is then issued a notice by the department and is required to take necessary actions as communicated by the department in response to the notice.
Income-tax scrutiny refers to the act of summoning taxpayers for making enquiries about the returns filed in relation to an assessment year. The provision regarding Income Tax Scrutiny is invoked if the concerned tax officials have a reason and evidence to believe that the expenses and income declared in the returns have been incorrectly stated. The scrutiny is aimed at providing taxpayers with an opportunity to substantiate the accuracy of the filing through documentary evidence.
The provision of scrutiny is initiated with the issue of a scrutiny notice to the concerned taxpayers, who are in turn required to respond. The notice is issued under a particular section or clause and would include the reason for such scrutiny. Post this stage, the officer may conduct inquiries with the assessee as considered necessary. As already stated, the notice is meant to facilitate the assessee with an opportunity to substantiate the relevant particulars declared while filing the returns
What is scrutiny assessment?
The tax department examines the returns filed and if it has any reason to believe that the information declared by the assessee is incorrect or incomplete then the case is taken up for scrutiny assessment. The assessee is informed throughissue of a notice and is supposed to take the required action as communicated by the department.After the assessee has filed their income tax return, whether within the due date or in response to a notice, the tax department has the authority to initiate scrutiny proceedings if there is a reason to believe that income has escaped assessment. This means that the department suspects that the income declared by the assessee is understated or the expenditure is overstated. In such cases, the department issues a notice to the assessee, requesting them to visit the department’s office and provide any additional documents that may be required.
Reasons for Scrutiny
The Income-tax Department pursues scrutiny assessment by means of following a set of predetermined guidelines. The process is also carried out using sophisticated technology that aids in identifying instances of errors. Listed below are some of the most common reasons for the enactment of this provision:
- Non-filing of tax returns
- Rapid rise or fall in income
- Abnormal value of transactions
- Mismatch in TDS credit
- Understated income
- Non-declaration of exempted income
- Underpayment of tax or misappropriation
Understanding the Process of Scrutiny
It is important to note that receiving a notice does not imply any wrongdoing or crime on the part of the assessee. It simply signifies that an investigation is being conducted to determine if any income has indeed escaped assessment. The notice indicates a difference of opinion between the Assessing Officer (AO) and the assessee, and the scrutiny proceedings aim to resolve this difference and arrive at a correct assessment of the income.
Timeline for Issue of Notice
A notice under this provision is to be issued within six months from the end of the financial year of filing returns. An issue of notice after this period will entitle the assessee to raise an objection with the jurisdictional tax authority.
Selection of cases for scrutiny
The following are the most general reasons for selection of your case for scrutiny along with ways to dodge them.
Reason 1: Non filing of Income Tax Return (ITR)
Any person whose gross income (without any deductions) is above the exempted limit (Rs 2,50,000 in case of individuals below the age of 60) is required to file annual Income tax return in due time
If you are a resident Indian and you own a foreign asset or are a signing authority in a foreign bank account, you have to file tax return irrespective of your income
Even where your employer has already deducted TDS from your pay you need to file your return to avoid a notice
How to dodge
Pay your advance taxes on time and file returns within the due date.
Reason 2: Error with respect to TDS
The TDS that you show in your return and what is actually shown on the Traces website might not match. When there is such a mismatch, there are high chances of getting a notice.
How to dodge
Request your employer or any person who is deducting TDS on your income to deposit the amount with government treasury and file TDS return in due time
Always first reconcile the actual TDS that has been deducted from your income with your Tax Credit Statement (Form 26AS). Report the deductor if you find any discrepancy
Reason 3: Non-disclosure of other incomes
Every income that has been earned in the financial year is required to be reported in the tax return. People generally ignore interest income on the savings account, fixed deposits and recurring deposits
There are many cases where TDS is deducted at a lower rate by your banker but you belong to a higher tax slab. For example, banks deduct TDS on interest at 10% while you may be falling in tax slab of 30%. In such cases, you might come under scrutiny for non disclosure of complete information or an attempt to minimise tax liability
How to dodge
At the year end, request your banker to give interest statement of your deposits in various bank accounts
Report all the income from any source in your tax return even if that amount is exempt from tax
Note: Penalty for concealment of income can be up to a maximum of 300% of tax payable
Reason 4: Unnatural or high value transaction
Incidences where the transaction value is a lot higher considering the disclosure of your income in the return can attract issue of notice. For example, a salaried individual whose salary is Rs 4,00,000 but he made a total deposit in his bank account exceeding Rs.10,00,000.When such transaction comes in knowledge of the department, a notice can be expected. The thing to be noted is that all these transactions are reported directly to the tax department through annual information return filed by institutions like your broker, bank etc.
How to dodge
Report every transaction that you may have made. Even if there is loss, like the loss in share trading, it has to be reported to the department to avoid notice.
Reason 5: Defect in income tax return
An Income tax return is a statement of income by the taxpayer to the tax department. At times, out of ignorance or lack of knowledge, people end up filing the wrong ITR form, may skip any mandatory information or commit some other error
If the return is not filed accurately, the tax department on its own discretion may issue a notice to you under Section 139(9) and direct you to file a revised return on income after correcting the error
Compulsory Scrutiny Cases
The following types of cases are compulsorily selected for scrutiny, and it may not be possible to prevent them from being selected. However, it is important to understand the reasons for selection and take measures to minimize the likelihood of scrutiny:
- Cases involving addition in an earlier assessment year in excess of Rs. 10 lakhs on a substantial and recurring question of law or fact, which is confirmed in appeal or is pending before an appellate authority, may come under compulsory scrutiny.
- 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.
- All assessments pertaining to Survey under section 133A of the Act, excluding cases where there are no impounded books of accounts/documents and the returned income (excluding any disclosure made during the Survey) is not less than the returned income of the preceding assessment year. However, if the assessee retracts the disclosure made during the Survey, it will not be covered by this exclusion. Cases where there is information about concealment of income, based on an enquiry report, survey report, or any other source, can also be selected for scrutiny with the approval of higher authorities.
- Assessments in search and seizure cases made under specific sections of the Act, along with returns filed for the relevant assessment year. These assessments are made based on the information gathered through search, survey, or enquiry and follow the same process as other scrutiny assessments.
- Returns filed in response to a notice under section 148 of the Act, which allows for the reopening of cases where there is reason to believe that income has escaped assessment. Assessments in these cases are framed under section 143(3) after following due procedure.
- Cases where registration under section 12AA of the IT Act has not been granted or has been cancelled, but the assessee is still claiming tax exemption under section 11 of the Act. However, if the order denying or withdrawing the approval has been reversed or set aside in appellate proceedings, those cases will not be selected under this clause.
- Cases where the approval under section 10(23C) of the Act has been denied or withdrawn by the Competent Authority, but the assessee is still claiming tax exemption under that provision.
- Cases in which specific and verifiable information pointing out tax evasion is given by Government Departments/Authorities. The Assessing Officer must record reasons and obtain prior approval from the jurisdictional Pr. CCIT/CCIT/Pr. DGIT/DGIT concerned before selecting such a case for scrutiny.
- Computer Aided Scrutiny Selection (CASS): Cases are selected under CASS using broad-based selection filters. The list of such cases is separately intimated by the DGIT(Systems) to the jurisdictional authorities. The selection process is mostly computer-assisted, eliminating subjectivity.
It is important to note that these are the criteria for compulsory scrutiny selection, and the selection process involves adherence to the provisions and guidelines of the Income Tax Act.
Specific Tax Evasion-One of the key parameters for selecting cases for scrutiny is specific information pointing to tax evasion for a relevant Assessment Year (AY). It is important to note that the taxpayer must have filed the tax return for the respective AY.
Notice under Section 148-Cases, where a notice has been issued under Section 148 to the taxpayer, are also subjected to scrutiny, irrespective of whether the tax return has been filed in response to the notice. This provision ensures that potential instances of tax evasion are thoroughly investigated.
Notice under Section 142(1)-Taxpayers who have yet to file a tax return in response to a notice under Section 142(1) will be selected for scrutiny. Section 142(1) notices are issued to seek additional clarification or information about the filed tax return, and non-compliance can trigger a scrutiny process.
Search & Seizure Cases-Cases where search and seizure operations have been conducted by the income tax authorities, either before or after April 1, 2021, fall under the purview of scrutiny. These operations typically target instances of undisclosed income or assets.
Survey Cases-The income tax department will select cases for scrutiny where surveys have been conducted under Section 133A based on the filed tax return. However, exclusions apply if the collection of books of accounts or documents did not take place during the survey.
Types of Notices and Recipient’s Response
Notices under Section 143(2) is issued in any of the following forms:
- Limited Scrutiny
- Complete Scrutiny
- Manual Scrutiny
Once the recipient is issued with any of the notices mentioned above, the Income-tax Department will prompt the taxpayer to appear before an officer on a specific date and time. If the taxpayer is issued with a limited scrutiny notice, the assessee merely requires to furnish basic documents. On the other hand, a manual or complete scrutiny mandates the taxpayer to produce an exhaustive list of documents connected with income and expenses – the list of which includes credit card statements, bank account details, salary slips, Income-tax return statements, and so on. If the concerned applicant does not possess any of the required documents, the same must be communicated to the Income-tax department. Taxpayers who find the entire process to be cumbersome and who are not averse with these laws may appoint a qualified Chartered Accountant (CA) to represent the case on their behalf. Taxpayers are advised to keep hold of their security/notice number as it acts as a reference for all future communications with the Income-tax Department.
FAQs
Q:What is limited scrutiny?
Limited Scrutiny cases shall remain confined only to the specific reasons/issues for which the case has been picked up for scrutiny.
Q: What is a scrutiny assessment, and how does it differ from other types of income tax assessments?
A scrutiny assessment under Section 143(3) involves a detailed examination of a taxpayer’s return to validate various claims and deductions. It aims to prevent understated income, excessive loss claims, or underpayment of taxes.
Q: Is a Scrutiny Assessment the same as an Audit?
While both a Scrutiny Assessment and an audit involve a thorough examination of your financial information, they are not the same. A Scrutiny Assessment is typically a routine verification of your return, while an audit is usually conducted when the tax authority has specific concerns or doubts about your financial transactions.
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