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Income Tax Scrutiny


Income Tax Scrutiny

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.

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

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.

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.

Consequences of Non-Compliance

Non-response to the notice may result in a penalty of Rs. 10,000, in addition to additional taxes. It may also force the Assessing Officer to complete the scrutiny on the basis of ‘Best Judgement’, whereby the assessment can be confirmed and finalized as the Assessing Officer deems fit. Taxpayers who are defaulting could be targeted for a more rigorous assessment in the form of a survey, or search and seizure operation.