Following is a complete guide on everything you should know about scrutiny assessment under Income Tax Act, 1961
An income tax assessment is a procedure through which a person or corporation’s tax liability is calculated using data submitted by that person or a corporation. Income tax assessments are performed by the Income Tax department and monitored by the Central Board of Direct Taxes once the assessee has filed an income tax returns (CBDT).
The income tax department has the jurisdiction to assess any taxpayer under the Income Tax Act of 1961. The first stage in the assessment process is often a notification from the Income Tax agency asking the assessee for details on their income and expenses for the fiscal year. Below, we will discuss the various details surrounding scrutiny assessment under Income Tax Act 1961.
When is a Case Selected for Scrutiny?
The Income Tax administration may choose a case for a scrutiny assessment if the assessee either does not submit a tax return or if the return lacks needed information. There is also the possibility that the tax office has launched a scrutiny assessment because it has found an anomaly in the assessee’s tax computations.
Most of the time, the Assessing Officer will choose a case for further assessment to ensure the following conditions are met:
- There was no underreporting of income or overestimation of loss on the part of the assessee
- Or, the assessee did not submit an insufficient tax payment.
In this regard, it is worth noting that the AO must adhere to the CBDT’s suggestions following Supreme Court regulations and practice.
What is the Time Limit for Issuing Notice u/s 143(2)?
The assessee must have been notified no later than six months after the end of the fiscal year covered by the return under review, as required by Section 143(2). no assessment may be made against the assessee for that budgetary year about any income or profits if the assessee does not receive the notification by the deadline.
As a result, if a person has not received such a warning, their finances and income tax filing cannot be scrutinized, even if there are reasonable reasons to suspect that they have received unlawful revenue during a specific time.
It is the responsibility of the AO’s office to prove beyond a reasonable doubt that the notice was delivered to the assessee within the prescribed time frame if the assessee certifies by affidavit under Section 143(2) that they did not receive the notice within six months of the end of the financial year. Forget about the complete evaluation if this condition isn’t fulfilled.
What is Section 292BB?
Section 292BB provides guidelines stating that if the assessee has cooperated fully with the proceedings, it is assumed the notice has been served to him. This means they will not be able to raise an issue of a late or irregular serving of notice at a later date.
A provision here also states that if, before the assessment proceedings, the assessee has objected to the no service, late service, or irregular service of Notice Under Section 143(2), then section 292BB cannot be applied to this situation.
In simple words, if the assessee, after receiving or not having received the notice u/s 143(2), cooperates with the proceedings without raising an issue of a late or irregular serving of said notice, the proceedings will be held to be valid.
What to Do When You Receive a Notice u/s 143(2)
When you receive such a notice, the AO will generally ask for such information:
- Bank statements
- Ledgers of Accounts
- Certificates of verification (for loans taken, if any)
- The names and addresses of creditors and debtors
- Statements of creditors and debtors’ finances (to verify the transactions)
- However, taxpayers should be aware that just submitting the paperwork does not relieve them of the burden of proof. Instead, they must provide the following to demonstrate the disputed transactions
- Creditor’s Proof of Identity (government-issued ID card)
- The creditworthiness or ability of a loan creditor to have repaid or advanced the funds
- The fact that the transaction was legitimate.
Suppose the assessee proves all of the above, the onus shifts to the department to rebut the same. However, the AO can only request evidence of the cash credit or loans taken or given in the previous financial year. They are not allowed access to transactions in preceding years.
Things You Should Know About Scrutiny Assessment Under Income Tax Act, 1961
The Assessee Must Have a Chance to Be Heard
During a scrutiny assessment under Income Tax Act, the assessee must be given a chance to be heard by the court. This is not a Section 143(2) provision but a rudimentary justice system rule. Suppose the AO decides to add any evidence procured from sources about which the assessee has no awareness. In that case, they must be given a fair opportunity to cross-examine this evidence.
As seen in the case of CIT vs Eastern Commercial Enterprises 210 ITR 103(CAL), the department should not add to the income of the person being assessed without providing ample time for cross-examination.
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Deposits Made In a Firm
If partners in a firm deposit an amount of cash in a company and the AO cannot prove beyond reasonable doubt that this amount was the firm’s income, then this amount should not be taken as income generated by the firm. It will be treated as income made by the partners instead.
Gifts Given to the Assessee
Where the receiving of a gift is being assessed, the assessee has to produce the following:
(a) The affidavit of the donor
(b) PAN no. of the donor
(c) Gift deed
(d) The relationship of the recipient with the donor.
Producing all of this is usually considered sufficient to prove that the transaction was a gift.
Additions Cannot Be Made on Suspicion Alone
The guidelines also state that the Assessing Officer cannot write up additions to the assessee’s income by suspicion alone. This is a measure that prevents abuse of power by the AO. To demonstrate, the AO is not allowed to make an addition to the assessee’s income by just saying they already have enough money and further they do not need it anymore.
Sending A Summons Request to Non-Cooperating Creditors
Sometimes the assessee finds depositors’ creditors are not cooperating with them on the assessment. In that case, the assessee can ask the AO to issue a Summons u/s 131 to them. They have to present their account books along with their account books and other things needed to prove the legitimacy of the assessee’s transactions.
Procedure for Scrutiny Assessment in Income Tax
Starting a Scrutiny Assessment
To initiate a scrutiny assessment, an Income Tax officer first issues a notice under Section 143(2). This notice requires the taxpayer to appear in person or participate through an e-assessment. The taxpayer must also provide any documents or information requested by the officer to determine the accurate taxable income and tax liability. This notice must be sent within six months of the end of the financial year in which the tax return was filed. For instance, if a return is filed on November 2, 2018, the notice must be issued by September 30, 2019. If the notice is sent on September 29, 2019, but arrives after September 30, it is considered invalid.
Participating in the Scrutiny Assessment
The taxpayer, or their authorised representative, can meet with the Assessing Officer to discuss and present evidence related to the issues raised in the notice.
Conducting the Scrutiny Assessment Hearing
During the hearing, the Assessing Officer provides the taxpayer ample opportunity to present documents and evidence supporting their tax return. If the taxpayer fails to provide the required information or does not cooperate, the officer may proceed with a best judgement assessment under Section 144.
If the taxpayer cooperates and submits all requested information, the Assessing Officer will review the evidence and make a decision. After the decision, the taxpayer has several options:
- Accept the Decision: Pay any additional tax due, accept a refund, or acknowledge any losses determined.
- Request a Correction: Apply for a correction under Section 154 if there is a clerical error.
- File a Revision Application: Appeal to the Commissioner of Income Tax under Section 263/264.
- Appeal the Decision: Challenge the decision if they disagree with it.
- Focus Areas During Scrutiny
The Assessing Officer will focus on:
Income Reporting: Ensuring no income is underreported or losses overstated.
Tax Payment: Verifying that the correct tax has been paid, and addressing any shortfall.
The Assessing Officer must follow the guidelines set by the Central Board of Direct Taxes (CBDT) and adhere to legal standards and precedents established by the Supreme Court, ensuring a fair and consistent scrutiny process.
Types of Scrutiny Assessments
Scrutiny assessments under the Income Tax Act are divided into two main types: manual and compulsory.
Manual Scrutiny Assessments
These assessments are selected on an individual basis based on specific reasons or concerns. Taxpayers can often avoid manual scrutiny by carefully adhering to tax laws and filing procedures, ensuring all information is accurately reported.
Compulsory Scrutiny Assessments
Unlike manual assessments, compulsory scrutiny assessments are not influenced by the taxpayer’s actions. They occur when certain predefined criteria set by the tax authorities are met, and the taxpayer cannot avoid this type of assessment.
Common Reasons for Scrutiny Selection
The Income Tax Department employs several criteria to select tax returns for scrutiny. Understanding these reasons can help taxpayers avoid unnecessary scrutiny.
Reason 1: Non-filing of Income Tax Return
Individuals with taxable income are legally obligated to file an income tax return. Failing to do so is a common reason for scrutiny. This includes those with income exceeding the basic exemption limit and taxpayers with foreign assets or bank accounts.
Reason 2: Discrepancies in TDS
Inaccuracies or inconsistencies between the TDS (Tax Deducted at Source) amount declared in your tax return and the information recorded by the tax department can trigger a scrutiny assessment. It’s essential to ensure that the TDS figures match on both ends.
Reason 3: Undisclosed Income
Hiding income from the tax authorities is a serious offense. If the tax department suspects undisclosed income, your return is likely to be selected for scrutiny. This includes income from all sources, such as savings account interest, rental income, and capital gains.
Reason 4: Unusual or High-Value Transactions
Large and unexplained financial transactions can raise red flags. Excessive deposits in bank accounts that don’t align with your declared income are prime examples. Such transactions often attract the attention of the tax department.
Reason 5: Errors in Tax Return
Mistakes in your income tax return, such as incorrect deductions, mismatched information, or using the wrong ITR form, can lead to scrutiny. It’s crucial to review your return carefully before submitting it to minimise errors.
When Can a Scrutiny Assessment under Section 143(3) be Initiated?
A scrutiny assessment is typically triggered under two primary circumstances:
After Filing a Tax Return: When you submit your income tax return, the tax authorities have the authority to select it for a detailed examination. This scrutiny aims to verify the accuracy of the declared income, deductions, and tax liabilities.
Based on Tax Department’s Discretion: The Income Tax Department may initiate a scrutiny assessment if it suspects discrepancies or irregularities in your tax filings. This decision is often based on factors like high-value transactions, inconsistencies in reported income, or information received from third-party sources.
Conclusion
If you’re new to the concepts of the Income tax Assessment law, you should know that one of the biggest mistakes you can make is trying to handle your scrutiny assessment under the income tax act alone. Instead, you should get on a call with the experts of Vakilsearch and find the right financial and legal counsel to help you through this trial. With the country’s largest database of legal and financial professionals, we guarantee you’ll find the right kind of counsel in no time.
FAQs
How can I prepare for a scrutiny assessment?
To prepare for a scrutiny assessment, maintain meticulous financial records, including bank statements, investment proofs, and expense receipts. Understand the details of your tax return, especially deductions and exemptions claimed. Be ready to provide clear explanations for any discrepancies or unusual transactions. Consider seeking professional advice if you anticipate a complex assessment.
What happens if I fail to respond to a notice under Section 143(2)?
Ignoring a notice under Section 143(2) can have serious consequences. The tax authorities may initiate further actions, including issuing a demand notice, imposing penalties, or initiating legal proceedings. It's crucial to respond to the notice within the specified timeframe, even if you have no additional information to provide. Failure to respond can escalate the matter and lead to adverse tax implications.
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