Income Tax News: What is an Income Tax Scrutiny Notice? Check How To Deal With It

Income Tax News: The tax department in India reviews everyone’s tax filings. If they suspect any mistakes or missing information, they’ll put your form under a “scrutiny microscope.” This means they’ll take a closer look to double-check everything’s accurate. The IT Department will then send you a Notice explaining what they need and why. This article explains what happens when the IT Department wants to know more about your tax papers.

What is Income Tax Scrutiny?

Imagine your tax return as a financial snapshot presented to the authorities. Scrutiny is like putting this snapshot under a magnifying glass. The income tax department delves deeper to verify the accuracy and completeness of the information you’ve provided. They might suspect underreported income, inflated deductions, or underpayment of taxes.

Getting a notice doesn’t mean you’ve done something wrong. It just means the tax department wants to check if everything in your tax return is accurate. The notice shows there’s a disagreement between the Assessing Officer (AO) and you, and the scrutiny process is meant to sort out this difference and figure out the correct income assessment.

Navigating Manual Scrutiny

In manual scrutiny, the assessing officer chooses which cases to look at more closely based on individual reasons. They might spot inconsistencies or unusual details in your tax return or financial records. To reduce the chances of being selected for manual scrutiny, it’s important to ensure your tax filings are accurate and consistent. Keep thorough documentation and respond promptly and fully to any queries or notices from the tax authorities. Being diligent and proactive with your tax responsibilities can help minimize the likelihood of being chosen for manual scrutiny.

Understanding the Reasons Behind Income Tax Scrutiny Notices

Non-Compliance with Income Tax Return Filing

It’s crucial to file your income tax return on time if you have taxable income. Ensure accuracy in your filings to match the details with the tax department’s records. Ignoring previous years’ filings can lead to scrutiny, regardless of reasons like laziness or ignorance.

Mismatch in TDS Credit

Review your Form 26AS, which outlines TDS deposits made on your behalf. Correct any discrepancies before filing your return to avoid scrutiny. Not declaring exempted income, such as interest from fixed deposits, can trigger scrutiny, as TDS doesn’t cover your full tax liability.

Claiming Higher Refunds

Seeking larger refunds might prompt scrutiny to ensure accuracy and prevent interest payments on delayed refunds. If you submit Form 15H or 15G to prevent TDS deduction, ensure your income declaration aligns with these forms to avoid discrepancies.

Failure to Disclose Income from Multiple Employers

Inform your new employer about previous income to prevent double taxation and discrepancies in TDS deductions. Failing to do so could result in an income tax notice.

High-Value Transactions

Engaging in significant transactions, like large investments or expenditures, can catch the tax department’s attention. Transactions exceeding specified thresholds, such as credit card usage, fixed deposits, bank deposits, mutual funds, shares, or property dealings, may trigger scrutiny.

Understanding the Types of Scrutiny Assessments for Tax Returns

There are two main types of scrutiny assessments – manual and compulsory.

Compulsory Scrutiny Cases:

1. Addition exceeding Rs. 10 lakhs in an earlier year: If you had an addition to your income in a previous year exceeding Rs. 10 lakhs, confirmed in an appeal or pending before an appellate authority, your case is automatically selected for scrutiny.
2. Transfer pricing adjustments exceeding Rs. 10 crore: Similar to above, if your income was adjusted due to transfer pricing issues exceeding Rs. 10 crore and confirmed in an appeal, your case will be automatically scrutinised.
3. Cases involving Survey under Section 133A: All assessments following a survey conducted by the tax authorities under Section 133A are scrutinised, unless no documents were impounded and your reported income is consistent with the previous year.
4. Search and Seizure cases: If your case involved a search and seizure operation, your tax return for that year will be automatically scrutinised based on the information gathered during the operation.
5. Reopened cases under Section 148: If the tax department suspects income has escaped assessment in previous years, they can reopen your case under Section 148. Such reopened cases are subjected to scrutiny.
6. Claimed tax exemption without valid registration: If you claim tax exemption under specific sections but lack the required registration, your case gets automatically selected for scrutiny.
7. Denied tax exemption under Section 10(23C): Similar to above, if your claim for exemption under Section 10(23C) is denied, your case is automatically selected for scrutiny.
8. Specific information about tax evasion: If government authorities provide specific and verifiable information pointing towards tax evasion, your case will be scrutinised after approval from higher authorities.
9. Computer Aided Scrutiny Selection (CASS): The tax department uses computer algorithms to identify potential cases for scrutiny based on broad filters. These cases are selected automatically, minimizing human subjectivity in the process.

Specific Triggers for Income Tax Scrutiny

Here’s a breakdown of specific reasons that might trigger scrutiny for your tax return:

Specific Information about Tax Evasion:

• If the tax department has specific and verifiable evidence suggesting you evaded taxes in a particular year, your return will be scrutinised.

Notices and Non-compliance:

• If you receive a notice under Section 148 requesting additional information or clarification about your return, and you don’t respond, your case goes under scrutiny.
• Similarly, failing to file a return after a notice under Section 142(1) triggers scrutiny.

Search & Seizure Operations:

• If your premises were searched by the income tax department, your return for that year will be scrutinised regardless of the date (before or after April 1, 2021).

Survey under Section 133A:

• If the tax department conducted a survey of your business under Section 133A, your return will be scrutinised. However, if no documents were seized, and your reported income matches the previous year, you might be exempt.

Registration/Approval-related Issues:

• If you claim tax exemptions or deductions without valid registration approvals under specific sections like 12A, 12AB, or 10(23C), your case will be scrutinised. However, if the denial of approval was overturned on appeal, you’re exempt.

Recurring Issues:

• If you have recurring legal or factual issues with your tax returns (including transfer pricing) that exceed certain monetary thresholds and have been decided against you in appeals, your return will be scrutinised.

Approval from Higher Authorities:

• Before initiating scrutiny, the tax department requires approval from higher officials, ensuring a more thorough and credible process.

Extensive Data Analysis:

• The government uses data from various sources, including GST, to cross-check your tax return for accuracy and identify potential discrepancies.