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Things to Do if You get a Scrutiny Notice from the Tax Department

Number of Income tax returns (ITR) picked up for scrutiny has dropped significantly, a data published by the tax department. The number of scrutiny cases dropped to 0.25% in FY18-19 from 0.71% in FY15-16.

Although the tax department didn’t disclose the absolute number of cases, the tax experts believe that better data collection and mining may have helped in reducing the number of cases picked up for scrutiny, as the tax department will have more information about the taxpayer, which earlier it may have sought from the taxpayer by issuing scrutiny notice.

“This may have been possible as the government has increased its sources in collecting relevant data from various sources such as TDS (tax deducted at source) on cash transactions, memorandum of understanding with other government departments to share information,” said Parizad Sirwalla, partner and head, global mobility services, tax at KPMG India.

Despite the percentage of tax scrutiny cases going down, the tax department has been strengthening its data mining processes, tracking more and more transactions, especially cash and high-value transactions. This has increased the probability of you getting a scrutiny notice.

“Some of the taxpayers who have reported capital gains are getting scrutiny notices from the tax department asking for more details regarding these transactions,” said Shilpa Bhatia, director-direct taxes, AKM Global, a consulting firm.

This is one of the examples and there are various other provisions under which the tax department can issue scrutiny notices. Let’s understand the various types of scrutiny notices and how to deal with them.

The tax department can pick up ITRs for scrutiny until up to six months from the end of the financial year in which the return was filed. For example, if you had filed your return on 31 July 2019 for the financial year 2018-19 (assessment year 2019-20), the income tax department can issue a notice by 30 September 2020 only.

“Generally speaking, when the income tax department selects a return for scrutiny (they have an internal basis or use the computer-assisted scrutiny selection process), a notice could be issued under Section 143(2) of Income-tax Act, 1961. The objective of the scrutiny notice is to initiate a revenue audit on the tax return filed by the taxpayer so as to ensure the taxpayer has not underpaid tax in any way, said Sirwalla.

Let’s understand the different types of scrutiny notices you may get.

Limited scrutiny: This is a computer-assisted scrutiny selection (CASS) where cases are selected based on set parameters. The scrutiny will be limited to the particular area of return mentioned in the notice. So if you have reported capital gains, the tax department may ask you to show the supporting documents such as sale deed and stamp duty paid, among others, related to the transaction.

Complete Scrutiny: “A complete scrutiny will be undertaken on the return filed and all supporting documents. The cases will be flagged based on CASS. As the scope of scrutiny is not limited, the assessing officer can verify various aspects of the tax return filed for a particular assessment year along with supporting documentation,” said Sirwalla.

Manual Scrutiny: Some of the cases are selected for complete scrutiny based on the criteria defined by the Central Board of Direct Taxes (CBDT) and such criteria may vary every year.

Re-assessment: Such scrutiny notices are issued when the assessing officer believes that one of the incomes was not assessed by the tax department then it can re-open the assessment.

How to deal with scrutiny notices

A taxpayer should not take the scrutiny notice lightly and must respond to it on a timely basis. “If a person fails to comply with the scrutiny notice, the assessing officer can resort to best judgment assessment under Section 144 of the Act, wherein the assessing officer can compute the income of the taxpayer based on his best judgment. In addition to it, a penalty of ₹10,000 under Section 272A is also applied,” said Bhatia.

According to Sirwalla, in such cases, a higher taxable income may be assessed vis-à-vis income reported in the tax return resulting in additional tax and interest payable.

Responding to the notice

If the notice is about complete scrutiny or reassessment, you may have to undergo detailed scrutiny. Such notices come along with a questionnaire asking for information on a particular transaction, asset or income.

If the notice is related to limited scrutiny, you have to provide details of particular assets mentioned such as when it was purchased, its cost and source of fund. The notice will also specify the date before which such information and documents are to be submitted.

The first thing is not to panic in case you get a notice and respond to any such notices in a timely manner. Now, the government has introduced an e-proceeding facility under which all notices can be responded to online. In case you don’t understand the notice, take the help of a chartered accountant to respond to it.


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