Income Tax Notice is a Puzzle which CAN be solved..!!

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Have you received any income tax notice so far? If yes then keep calm and continue reading this article.

Major reasons to expect notices or communication from Income Tax Department in Financial Year 2018-19 are:

  • Income is more than non-taxable limits and ITR (Income Tax Return) is not filed.
  • Income does not exceed non-taxable limit but TDS (Tax Deducted at Source) is deducted and ITR is not filed.
  • TDS mismatch in ITR filed and 26AS (Govt. record).
  • Arithmetical errors in ITR filed.
  • Investments in the name of spouse or minor kids but you are claiming deduction for them.
  • Non-disclosure of foreign assets and Indian assets in certain cases.
  • Unsecured loan or advances taken/given to others.
  • High value transactions:
    1. Cash deposits in a bank totaling Rs. 10 lakh or more in a year.
    2. Credit card purchases of Rs. 2 lakh or more.
    3. Mutual fund investments of Rs. 2 lakh or more.
    4. Purchase of bonds and debentures worth Rs. 5 lakh or more in a year.
    5. Sale or purchase of property worth Rs. 30 lakh or more.

If any of above is a ‘YES’, than what to do next?

First understand that Income Tax is based on each Financial Year (FY). Income Tax department take note of your financial matters for each FY separately. Hence, notice received by you must be having a particular Financial Year mentioned on it.

For the start, take the following steps if you have not done anything till now:

Check whether you have filed your ITR or not for that particular year:

  • If yes, problem is less.
  • If no, there are more things you need to do.

Check in which section of income tax act notice has been issued. Whole income tax is divided into different sections which define the set of rules/procedures/ laws to be followed. If you have not followed a certain section of law, the default of that particular section will be mentioned on the notice. Following are some common sections in which notices are generally issued to most of the people.

  • Notice for Non filing of ITR

This is a common notice issued to you when you have not filed your ITR. In this case you are supposed to file your ITR now and pay your tax liability. Make sure that you file your information correctly as information is already available with Govt. that you are supposed to file your ITR which you have not done.

This notice generally contains information which drew Govt.’s attention towards your financial transactions like investments made, earning of income or huge expenditure made etc. This information will give you a head-start on your transactions to be mentioned in your ITR.

The response to this notice will be filed on your online income tax profile under ‘Compliance’ window.

  • Section 143(1): Summary Assessment

This notice is issued when you have filed your ITR. This is simply intimation in response to the ITR filed by you, which shows arithmetical accuracy of income & deductions shown by you in your ITR and corresponding TDS (Tax Deducted at Source).

The notice have two columns- one which shows your calculations and another column against yours, where department shows its own calculations of your taxes. You need to match both the calculations to find any mismatch. If at the end of this table, both the columns match, then nothing to be done.

If there is a difference, then it means either you have to pay tax or your refund will be reduced.

What you have to do for difference?

Simply file your response on your online income tax profile.

  • Section 139(9): Defective Income Tax Return

This notice is issued when you have filed your ITR. This is in response to the ITR filed by you, which shows error while filling information in ITR form.

These errors can be because of ITR filed by you is defective on account of wrong ITR form selected, you have not paid the complete taxes, wrong PAN has been mentioned or there is a PAN mismatch, existence of duplicate PAN is pointed out, claimed deductions for investments made but not mentioned the source of income for making those investments, mismatch of details with Form 16/16A etc.

The best part is that a proper error description is mentioned on the notice and a probable solution to rectify the same is also suggested. You may file your response by agreeing or disagreeing with the discrepancy on your online income tax profile.

If you agree with the error, the next step will be to correct your ITR and you can correct it by revising the ITR.

If you disagree, you have to explain your reason for such disagreement.

  • Section 142(1): Preliminary Enquiry before checking your income

Notice under this section can be issued in two scenarios.

One is if you have not filed your ITR, then Govt. ask you to file it. If you do not reply, Govt. may ask for showing the documents/ records based on which you thought that you are not supposed to file ITR.

Second scenario is when Govt. has selected your ITR for detailed verification, then notice under this section is sent to you for providing explanation, documents and records based on which you have filed your ITR.

You need to show documents to Income Tax officer with care and proper understanding of contents of those documents.

  • Section 143(1A): Reporting of any mismatch

This notice is issued when you have filed your return. The mismatch may arise on different situations like, you have not considered all your income in your ITR as per the Govt. records, details of deductions claimed are not matching with Form 16, etc. This notice generally pin-points which income/information you have missed to mention in your ITR.

These computer-generated notices will be sent seeking necessary clarifications. The clarification/response for this will be filed on your online income tax profile.

If you file as ‘agreed’ with the mismatch, you have to file a revised return. In case of disagreement, file the necessary explanation.

  • Section 131(1A): Income is concealed or likely to be concealed

Concealing of income means you have earned income but you have mistakenly or deliberately opted to exclude it while disclosing income in your ITR.

If Govt. is of the opinion that you are concealing the income or likely to conceal income then you will receive income tax notice. This notice is basically intimation that Govt. is starting an enquiry or investigation into the matter.

If you receive this notice, first collect all the records based on which you filed the return. Then review the documents to understand which income disclosure you have missed either by mistake or deliberately.

For facing the Income Tax Department on this issue, prepare your explanation very well for the income which was not mentioned in your ITR. 

  • Section 143(2): Follow up to the notice u/s 142(1)

If the Govt. is not satisfied with your response or you fail to provide documents against income tax notice, then you will receive this notice. In this scenario, the case is called for detailed checking and verification.

Sometimes this notice is issued randomly to check the authenticity of ITR filed along with supporting documents. You have to ask for reason for notice and then prepare &file necessary reply either through online mode or by visiting income tax department.

This is one of the most common notices for detailed verification of your records. Once this case is started it will take some time to complete. The reason is that a lot of information is asked on various intervals for verification of documents. You have to appear on every date of hearing to file the responses of questions asked. Non-appearance may call for penalty.

You have to be very diligent and extra cautious while submitting your response each and every time so that any wrong or unnecessary information is not submitted. Also, while submitting information you must have knowledge of each and every fact mentioned in your records. Necessary narration of each financial transaction mentioned in the records is to be provided.

This is required as it is not just submission of documents, verbal interaction also happens with the Income Tax Officer in which you might be required to explain the submitted information. Also, cross questioning maybe done where you must defend your stand by proper facts. Each time when you are present for the case, attendance is marked with a brief note of what happened on that date. This is recorded in a note sheet maintained by officer in a file. Whatever you submit or explain, it must be convincing and satisfactory to the officer.

Another advise is to understand the behavior of officer towards you, as sometimes officers might be too harsh to accept your point. You have to be tactful while dealing with the officer.

Documents which are generally asked at the start of the case are bank statements, investment details, income details, tax deduction details, Form 16/16A, Assets & Liability statement, if you have a business then Balance Sheet and Profit & loss account.

  • Section 148: Income escaped assessment

This notice comes when the Govt. feels that some/whole portion of your income has escaped verification earlier when it was supposed to be checked. Hence, they call for information again to verify the unchecked income.

This notice can come for any of the last 6 years, forcing you to keep your last 6 years records safe and documented. Once you get the notice you get another chance to file the ITR (if not filed earlier) or revise your already filed ITR. After filing the ITR, you have a right to ask for the reason for issuing such notice to you. The officer is duty bound to provide you the reasons for sending the notice.

Now since you have got specific reasons for notice, you can file your reply that there is no escapedincome and you have mentioned all your income information correctly in your original ITR. Therefore, the case should be closed.

Documents which are generally asked at the start of the case are bank statements, investment details, income details, tax deduction details, Form 16/16A, Assets & Liability statement, if you have a business then Balance Sheet and Profit & loss account.

Since this again is a full-fledged case, most of the handling part is similar to that of case under 143 (2) as mentioned in previous point.

A major difference lies in the condition of your documents as it would be 6 years old and this case can be started for any number of times.

There might be a chance that the reason you receive for opening the case is not justifiable/ vague/ unrealistic. You can approach the senior officer for dropping the case or file a petition in High Court.

  • Section 156: Notice of Demand

Notice of demand means that Govt. is demanding the Tax dues from you. If any penalty, tax, fine or any other amount is due from your end to the income tax department then this notice is given which shows the complete calculation of what and how you have to pay. This is also considered as recovery notice, therefore, it should not be ignored as Govt. have extensive powers to take action.

  • Section 245: Refund adjusted against the tax demand

Sometimes it is observed that you are supposed to get refund of taxes. But, you get this notice in which details of pending dues is given and refund is also mentioned. This is your opportunity to correct the demand or it will be adjusted with your refund.

If you do not respond to this notice, you will not get your refund fully.

Sooner or later you realize that the full refund has not reached your bank account. This is due to the reason that tax dues of other years have been adjusted against this refund amount.

Therefore, whenever you receive this notice, do reply immediately to get timely and full refund.

  • Section 133 (6): Information from you for other person

This notice is issued when Govt. believes that you are the right person to provide information about some other person. In this notice they ask for confirmation of certain transaction done with you and balance confirmation of receivable or payable.

It is known that you have done a transaction in past or holding some information about that person. You have to provide the details else a penalty of Rs.10,000/- may be imposed on you.

This is a brief summary of practicalities of these notices. There are a lot of other reasons as well where you might receive a notice. However, an attempt has been made to equip the readers about the notices which are majorly prevalent.

Never ever ignore any type of communication from Income Tax Department. Do check you records and file a suitable reply. Every question and query from Income Tax can be comfortably handled and resolved if taken care properly,otherwise it would create a lot of mess in near future and will not bring a smile on your face.

Shashi Shekhar Rai
Chartered Accountant, B. Com

He is an expert in the field of taxation particularly the practical aspects of Income Tax Department. He is a partner in a CA firm which specializes in Income Tax, GST, Project Finance.

He can be reached at [email protected], 9891473868

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.