Reasons for Issue of Income Tax Scrutiny Notice


What is Scrutiny Assessment ?

Scrutiny assessment refers to the examination of an income tax return by giving an opportunity to the assessee to substantiate the income declared and the expenses, deductions, losses, exemptions, etc. claimed in the return with the help of evidence.

How does the Income tax officer start scrutiny ?

During the course of scrutiny, the assessing officer gets an opportunity to conduct enquiries, as deemed fit, from the assessee and from third parties.

Why the scrutiny assessment is made ?

The exercise is aimed at ascertaining whether the income in the return is correctly shown by the assessee and whether the claims for deductions, exemptions, etc. are factually and legally correct.

What will happen when the Income tax return is found to be wrong ?

If any omissions, discrepancies, inaccuracies, etc. come to light as a result of this examination, the assessing officer makes his own assessment of the assessee’s taxable income after taking into consideration all the relevant facts. These assessments are made under section 143(3) of the Income Tax Act. The assessing officer may charge mandatory additional interests and may levy penalties and may initiate prosecution proceedings.


Purpose of Scrutiny Assessment

In the cases selected for scrutiny, the assessing officer conducts necessary enquiries during assessment proceedings to ensure that the assessee has not

  1. Understated the income, or.
  2. Computed excessive loss, or
  3. Underpaid tax in any manner.

What are the types of Scrutiny assessments and for what reasons the cases are selected for scrutiny ?

There are two types of scrutiny assessments

  1. Manual scrutiny cases
  2. Compulsory scrutiny cases

They are explained in detail as under (Though the reasons for manual selection of scrutiny cases reasons are case sensitive and case specific and,most of the general reasons are explained, it should not be construed as exhaustive )

Manual scrutiny cases

  1. Not filing your Income tax return

The foremost compliance to law is, you should file your Income tax return in time if you have taxable income.(Recommended Read: Due Date for filing Income Tax Return).

Ensure that you are filing the return correctly and all the details given by you while filling Returns matches with the details available with department.

  1. If your earning from all sources of income is more than Basic Income Tax Exemption Limit.
  2. You should file your return even if the tax is already deducted (TDS) and paid.
  3. If you have not filed your returns for past few years due to your lethargy, laziness, overconfidence, you or your consultantans are pre-occupied, are out of station or country, you could not file due to health reasons, pre occupied with your work, pre occupied with some litigations, Ignorance of law etc etc – will not absolve you from getting your case selected for scrutiny, you are likely to get a notice from IT department.
  1. Declaring lesser income compared to earlier years or Declaring more loss compared to earlier years

There may be substantial & significant reduction in your income or significant increase of losses compared to last year, then it may cause suspicion to the Income tax officer and he may think of selecting your case for scrutiny.

These cases apply more in respect of businessman and traders, because their income is highly volatile for hundreds of reasons. This happens in large income cases. The ITO will make attempt to find out the reasons and may call for all the documentary evidences, books of accounts bills & vouchers, bank accounts, capital accounts, profit & loss account, Balance sheet, statement of affairs, the income of your family members and examine your case.

He may compare your Gross profit ratio with the returns filed in respect of similar trade, and similar income.

  1. Mismatch in TDS credit between the claim and 26AS

“26AS” is your tax credit statement and it gives the details of the “TDS” deposited on your behalf. You should check all the TDS payments duly credited to you or get it rectified otherwise. It can be viewed though NSDL or IT department’s site and even through Bank’s online portal before filing the return of income

You need to check & reconcile your form 26AS with all the taxes paid. There should not be difference between the TDS amount you are claiming in your income tax return and the TDS actually updated in your form 26AS.

Ensure whether your employer/vendors/deductor has paid TDS to government account and check with banks whether they have paid TDS on your interests. Only after ensuring everything is fine, then only claim the TDS amount.

You must have assumed that either your employer or your bank might have automatically paid the TDS to government account. If the TDS payer do not remit despite the fact that the TDS is deducted from your account, you may not get TDS credit, there will be mismatch of income and TDS in 26AS, resulting in selection of your case for scrutiny. Not only this, you may not get the Refund claimed.

  1. Non Declaration of Exempted Income 

On certain types of exempted income you have no obligation to pay income tax, but they must be essentially mentioned in the income tax return. For example your long term capital gains tax from equity/dividends received on equity shares of Indian companies/Saving bank account interest up to Rs. 10000/PPF interest, or gifts you receive from your parents/relatives.

These are some of the things which are exempted from tax, but that does not mean you need not disclose to the income tax department, thinking that lawfully you will not be troubled. Whether it is taxable or otherwise, You should not hide or omit to show in your income tax return because there is no reason as to why you should not show it, rather how does the income tax department know it is exempt, unless you claim it as exempt.

Even though certain Incomes are exempt from the tax, you still need to declare this while filing your return, because the department may take your case for scrutiny to verify the correctness of your income or exemptions.

  1. Interest from FDs or Savings A/C

This is one big reason which can apply in most of the depositors of FD/Investors case. Generally banks deduct 10% TDS on the deposits interest by default, but you are suppose to pay any additional tax if applicable depending on your income tax bracket.

There is a big myth that one does not need to pay any tax if TDS is deducted by the bank. For example if you are 30% tax bracket and you have Rs 5 lacs FD in bank and imagine 8% is the interest rate, which means you get a Rs 40,000 interest from the FD , now the bank will deduct the 10% TDS (which is Rs 4,000) and pay to the govt , and give Rs 36,000 directly to you .

Now actually tax you had to pay was 30% to govt, which means that at the end of the year you need to pay additional Rs 8,000 in tax. If you have not done this , then you might be inviting trouble in scrutiny proceedings.

  1. Claiming large refunds in return of income

There are many reasons that you might get a scrutiny for claiming higher refund. In order to minimizing the amount of interest payable on delayed refund, the department may first choose returns of higher refund case for disposal of assessment. Sometimes the department might want to have a look at data and might question reasons for higher claim of refunds.

You will file Form 15H or 15G and prefer the income tax return to claim the refund yourself and you want to prevent the financial institutions like banks from deducting TDS on your investments with them; in case your Income is below the taxable limit. Even if you have substantial taxable income, you will be filing your form 15H or 15G to avoid the deduction of TDS, there are chances that you may escape declaring the income.

Please remember, copy of 15H or 15G will be sent by bankers to the dept. The dept will come to know your income through your PAN, if there is a mismatch, your case may be selected for scrutiny.

  1. Taking double benefits due to change in Job

Many times salaried employee who changed job during previous year gets multiple form 16 & fails to declare income from all the employers & calculate and pay the due taxes, if any. It may arise on account of certain deductions & benefits given twice.

Many times, it has been observed that when people changes their job during  a year they forgot to inform about their previous income to their new employer or if at all they have declared it, they forget to make sure that it has been duly incorporated while calculating their tax liability and arriving at a TDS figure and because of this failure, new employer will deduct taxes on the income which will go from their side by giving and allowing all the deductions like 80C/section 10 etc. all over again (as the previous employer had already factored the same while paying TDS) and also basic exemption limit and initial tax slabs benefits are also given again resulting in lower deduction of taxes.

But due to lack of this technical knowledge along with a pressure and joy of a new job this goes unnoticed and there is a shortfall in taxes which was supposed to be deducted and paid to the government; so beware when you change your job and inform previous employer income duly to your new employer to avoid getting an IT notice.

  1. High Value Transactions

Department gets information for all your high value transactions from the concerned institution and chances of you coming under scrutiny increases. If you have executed high value transactions either for investments or spending then chances of you getting the notice from IT Department are very high.

For e.g. your credit card usage of more than Rs. 2 lakhs p.a./ investing in FDs for more than Rs. 5 lakhs/ depositing more than Rs. 10 lakhs in your bank account/ investing more than Rs. 2 lakh in Mutual Ffunds or Rs. 1 lakh in Shares or buying or selling property over Rs. 30 lakhs. All these transactions are reported to the IT department under Annual information Returns filed by respective companies and may attract scrutiny by the department department.

Compulsory scrutiny cases :

The following types of cases are compulsorily selected for scrutiny, you cannot prevent it being selected for scrutiny, for the following reasons, but see how it is selected for scrutiny and take measures as to how best you can avoid the happenings of following reasons.

  1. 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.
  2. 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.
  3. All assessments pertaining to Survey under section 133A of the Act excluding the cases where there are no impounded books of accounts/documents and returned income excluding any disclosure made during the Survey is not less than returned income of preceding assessment year. However, where assessee retracts the disclosure made during the Survey will not be covered by this exclusion. The cases where there is information about concealment of income, which may be based on an enquiry report, survey report or any other source, can also be selected for scrutiny. The selection in this manner is made by the assessing officer only with the approval of higher authorities so that the selection is fair and proper.
  4. Assessments in search and seizure cases to be made under section 158B, 158BC, 158BD, 153A & 153C read with section 143(3) of the Act and also for the returns filed for the assessment year relevant to the previous year in which authorization for search arid seizure was executed u/s 132 or 132A of the Act. In the cases where searches, surveys and enquiries have been conducted finally culminate into scrutiny assessments determining the taxable income and the tax liability of the concerned persons and entities. While framing the assessments, all information gathered about the relevant financial transactions through search, survey or enquiry is logically analysed with a view to determining the correct taxable income. The assessees are given an opportunity to explain their stand and rebut the findings of the enquiry. The process for completing scrutiny assessment in these cases is the same as in the case of returns selected for scrutiny assessment.
  5. Returns filed in response to notice under section 148 of the Act. There is a provision in the Income Tax Act which enables the reopening of cases U/s.148 where there is reason to believe that any income has escaped assessment. This reopening can be resorted to even in cases which had been subjected to scrutiny assessment earlier. A case can be reopened within a period of six years from the end of the relevant assessment year. To elucidate this point, it may be stated that the assessment for the assessment year 2009-10 (pertaining to financial year 2008-09) can be reopened by 31-03-2016. Older cases cannot be reopened. In all reopened cases, assessments are framed under section 143(3) after following due procedure.
  6. Cases where registration u/s 12AA of the IT Act has not been granted or has been cancelled by the CIT/DIT concerned, yet the assessee has been found to be claiming tax-exemption under section 11 of the Act. However, where such order’s of the CIT/DIT have been reversed/set-aside in appellate proceedings, those cases will not be selected under this clause.
  7. Cases where order denying the approval u/s 10(23C) of the Act or withdrawing the approval already granted has been passed by the Competent Authority, yet the assessee has been found claiming tax-exemption under the aforesaid provision of the Act.
  8. Cases in respect of which specific and verifiable information pointing out tax evasion is given by Government  Departments/Authorities. The Assessing Officer shall record reasons and take prior approval’ from jurisdictional Pr. CCIT/CCIT /Pr. DGIT/DGIT concerned before selecting such a case for scrutiny.
  9. Computer Aided Scrutiny Selection (CASS): Cases are also being selected under CASS on the basis of broad based selection filters. List of such cases shall be separately intimated in due course by the DGIT(Systerns) to the jurisdictional authorities concerned. The cases for this purpose are mostly selected through the process of computer assisted scrutiny selection (CASS) and there is no element of subjectivity in this process.

He is a Retired Income tax officer and desires to share his knowledge and experience on Income tax.