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. This blog discusses Tax Return Scrutiny in detail.
Understanding About Income Tax Scrutiny
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.
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.
Manual Scrutiny Cases
In manual scrutiny cases, the selection for scrutiny is done by the assessing officer based on case-specific reasons. The assessing officer may have identified certain aspects or discrepancies in the taxpayer’s return or financial information that warrant a closer examination. These cases can be avoided or minimized by ensuring accuracy and consistency in the tax filings, maintaining proper documentation, and responding promptly and comprehensively to any queries or notices from the tax authorities. By being diligent and proactive in fulfilling tax obligations, taxpayers can reduce the likelihood of being selected for manual scrutiny.
Tax Return Scrutiny: Reason for Income Tax Scrutiny Notice
The first and foremost requirement for complying with the law is to file your income tax return on time if you have taxable income. Ensure that you fill out the return accurately and that all the details provided match the information available with the tax department.
If your income from all sources exceeds the basic income tax exemption limit, you must file a return even if the tax has already been deducted (TDS) and paid. Neglecting to file returns for previous years due to reasons such as lethargy, laziness, overconfidence, preoccupation, or ignorance of the law will not absolve you from the possibility of getting selected for scrutiny by the income tax department. You are likely to receive a notice in such cases.
Declaring a lower income compared to previous years or reporting higher losses may raise suspicion with the income tax officer, potentially leading to your case being selected for scrutiny. This is particularly relevant for businessmen and traders whose income can vary significantly for various reasons.
Form 26AS, which is your tax credit statement, provides details of the TDS deposited on your behalf. It is important to check if all the TDS payments have been correctly credited to you and rectify any discrepancies. You can view Form 26AS through NSDL, the income tax department’s website, or your bank’s online portal before filing your income tax return.
Reconcile your Form 26AS with the taxes paid to ensure that there is no difference between the claimed TDS amount in your return and the TDS actually updated in Form 26AS. Verify if your employer, vendors, or deductors have paid TDS to the government account and check with your banks to ensure they have paid TDS on your interest. Only after confirming everything is in order should you claim the TDS amount.
- Failure to Declare Exempted Income
Certain types of income are exempt from income tax, but they must still be mentioned in your income tax return. For example, long-term capital gains tax from equity, dividends received on equity shares of Indian companies, interest from a savings bank account up to Rs. 10,000, or gifts received from parents or relatives. Although these incomes are exempt, they should not be omitted from your return as the income tax department needs to be informed of them.
Non-declaration of exempted income can be a common issue for depositors of fixed deposits and investors. Banks typically deduct 10% TDS on interest from deposits by default, but you may be required to pay additional tax if applicable based on your income tax bracket. Assuming that the TDS deducted by the bank absolves you from paying any tax is a misconception and may lead to scrutiny proceedings.
Claiming a higher refund may also attract scrutiny from the income tax department. To minimize the amount of interest payable on delayed refunds, the department may prioritize returns with higher refund claims for assessment. They might scrutinize the data and question the reasons behind the higher refund claim.
If you file Form 15H or 15G to prevent the deduction of TDS on your investments when your income is below the taxable limit, make sure to accurately declare your income in your return. Copies of Form 15H or 15G will be sent by banks to the income tax department, and if there is a mismatch, your case may be selected for scrutiny.
When individuals change jobs during the year, they often forget to inform their new employer about their previous income or fail to ensure that it is included when calculating their tax liability and TDS figure. This can result in the new employer deducting taxes again, including deductions and benefits that were already factored in by the previous employer. It is important to inform the new employer about your previous income to avoid receiving an income tax notice.
The income tax department receives information about high-value transactions from relevant institutions, increasing the likelihood of scrutiny. Engaging in high-value transactions for investments or spending, such as using a credit card for more than Rs. 2 lakhs per year, investing over Rs. 5 lakhs in fixed deposits, depositing more than Rs. 10 lakhs in your bank account, investing over Rs. 2 lakhs in mutual funds or Rs. 1 lakh in shares, or buying or selling property over Rs. 30 lakhs, may attract scrutiny by the income tax department.
Tax Return Scrutiny: Types of Scrutiny Assessments
There are two types of scrutiny assessments,
- Manual scrutiny cases
- Compulsory scrutiny cases
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. Get in touch with our CA and know more about the tax scruitnity.
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.
Cases in which the income tax department has not granted or cancelled registration/approval under specific sections (such as 12A, 12AB, 35(1)(ii)/(iia)/(iii), 1023(C), etc.), but the taxpayer has claimed or claims tax exemption or deduction, will be scrutinised. However, cases, where withdrawal/approval orders have been reversed or set aside in appellate proceedings will be excluded.
Cases with Recurring Issues
Cases involving recurring issues of law or fact (including transfer pricing) will be selected for scrutiny if they meet specific monetary thresholds and have become final or have been upheld by appellate authorities in favour of revenue. Pending further appeals by the assessee will not affect the selection.
Approval from Higher Officials
Before initiating the scrutiny process, approval from higher-income tax officials must be obtained. This ensures a higher level of scrutiny and enhances the credibility of the process.
Utilising Extensive Data Resources
The guidelines emphasise the government’s intention to leverage extensive data resources, including information from the Goods and Services Tax (GST) and other agencies. By cross-referencing this data with tax returns, the income tax department aims to assess the accuracy and adequacy of income reporting. This approach allows the government to identify potential discrepancies and ensure compliance with tax regulations.