Income Tax

Analysis of the Scrutiny Assessment under the Income Tax Act 1961

The Income Tax Department is vested with the power to examine the authenticity of the income tax return filed by the assessee, which the department does through a process known as assessment. There are numerous types of income tax assessment depending upon the type of discrepancy, the scrutiny assessment being one of them. The present article analyses the Scrutiny Assessment under the Income Tax Act 1961 to provide a better understanding of the concept. 

What is Scrutiny Assessment? 

Scrutiny assessment refers to the examination of the ITR filed by the assessee wherein the Assessing Officer checks the adequacy, accuracy and genuineness of the income, claim, and deductions etc., declared in the return of income not before providing an opportunity of being heard to the assessee. 

What is the Purpose of Scrutiny Assessment? 

A scrutiny assessment aims to ensure that there isn’t any understated income, computed excessive loss or underpayment of any tax by the assessee. 

What are the Types of Scrutiny Assessment? 

Two types of scrutiny assessments are differentiated based on the reasons for which the assessee’s case has been selected for such assessment. The two types of the same are – 

• Manual Scrutiny 
• Compulsory Scrutiny  

Manual Scrutiny 

The Assessing Officer conducts manual Scrutiny due to the following reasons – 

Non-Filing of Return of Income 

It is an undeniable fact that timely filing of the return of income is mandatory for every assessee in the manner prescribed under the Income Tax Act 1961^[1], and the failure to comply with the same can result in the initiation of the scrutiny assessment against the defaulter/ assessee. 

Declaration of Less income Or More Loss in comparison to the previous yrs 

There can be changes in the income of the assessee over the yrs either by way of generation of lesser  income or incurrence of greater loss as compared to previous yrs, especially if the assessee is a trader or businessman owing to the dynamic and volatile business environment which can lead to a suspicion in the mind of the AO resulting in the selection of case for scrutiny assessment wherein the AO may ask for all the documentary evidence of income from the assessee and  compare the gross profit ratio with the ITR (Income Tax Return).

Mismatch in TDS credit:

If the Income Tax Department has noticed a mismatch in the TDS credit, it may initiate the scrutiny assessment against the assessee. 

Failure in the Declaration of Exempted income:

In the event of any failure by the assessee in the declaration of the exempted income in the income tax return filing, such as the income  being generated from LTCG, interest income earned from a Bank Account, or any gifts received fall within the exempted category can lead to the ITR being scrutinized by the IT Department. 

Interest Income from Savings Account / RD, FD

Scrutiny Assessment can be conducted against the assessee in cases of interest income on FDs, RDs, or savings accounts, as most of the account holders under the misconception that there isn’t any need for payment of the tax upon the deduction of TDS by the bank on such income. However, on the contrary, an additional tax must be paid depending upon the tax slab of the assessee.

The claim of Large Refunds in ITR

The income tax department may take up those cases for scrutiny assessment wherein the assessee has claimed a higher refund in their ITR. The assessee must file Form 15H or 15G to prevent financial institutions like banks from deducting TDS on their investments; in case the income is below the taxable limit. Even if the assessee has substantial taxable income, he shall file the form 15H or 15G to avoid the deduction of TDS

Availing Double Benefits due to change in Job

Usually, salaried employees that change their job during the previous year get multiple form 16 & which often results in their failure towards the declaration of income from all the employers, calculation and payment of the due taxes, if any, which may lead to certain deductions & benefits being availed twice.

High-Value Transactions

The Department receives information for all the high-value transactions from the concerned institution, thereby increasing the chances of being selected for such an assessment. In case the assessee has executed high-value transactions either for investments or spending, then the chances of him getting the notice from the IT Department are very high.

Compulsory Scrutiny 

This is the second type of scrutiny assessment which can be initiated in the following cases. 

• Cases which involve an addition in earlier assessment year exceeding Rs. 10 lakhs on a significant and recurring question of law or fact confirmed in an appeal pending before an appellate authority shall form a part of the compulsory scrutiny. 
• Cases where an addition in an earlier assessment year on the issue of transfer pricing exceeds  Rs 10 crores or more on a substantial and recurring question of law or fact confirmed in appeal or pending before an appellate authority.

• All assessments with respect to Survey u/s 133A of the Act, excluding the cases not having any impounded books of accounts/documents and ITR excluding any disclosure made during the Survey, is not less than ITR of preceding AY However, if there is a retraction of such disclosure by the assessee during the Survey the same will not be covered by this exclusion. 
• Where there is information about the concealment of income based on an enquiry report, survey report or any other source, it can be selected for compulsory scrutiny. Such selection is made by the AO only with the approval of higher authorities to ensure fairness in the process. 
• Assessments in search and seizure cases under the relevant sections r/w section 143(3) of the Act, the returns filed for the AY relevant to the PY in which authorization for search or seizure was executed u/s 132 or 132A of the Act. 
• The cases wherein the searches, surveys and enquiries have taken place to culminate into scrutiny assessments and determine the taxable income and the tax liability of the concerned persons and entities. At the time of framing the assessments, all information collected about the relevant financial transactions through search, survey or enquiry is logically analysed in order to determine the correct taxable income. The taxpayers are provided with an opportunity of explaining their stand and rebutting the findings of the enquiry. The process for completing scrutiny assessment in such cases is the same as in the cases of ITR selected for such assessment.
• Returns filed responding to notice u/s 148 of the IT Act. There is a provision in the IT Act enabling the AO to the cases of 148 if there exists a reason to believe that any income has escaped assessment. This reopening can be done even in cases which had been earlier subjected to such assessment. Any suspicious case can be reopened within a period of 6 years from the ending of the relevant assessment year. 
• In cases where registration u/s 12AA of the IT Act hasn’t been granted or has been cancelled by the CIT/DIT concerned, even then, the assessee has claimed tax-exemption u/s 11 of the Act. However, where such orders of the CIT/DIT have been reversed/set aside in appellate proceedings, those cases won’t be selected under this clause.
• Cases where an order of the denial of the approval u/s 10(23C) of the IT Act or withdrawal of the already granted approval has been passed by the Competent Authority, despite this,  the assessee has been found claiming tax-exemption under the aforesaid provision of the Act.
• Cases regarding which specific and verifiable information showcasing tax evasion are given by Government Departments/Authorities. The AO shall record reasons and take prior approval from jurisdictional Pr. CCIT/CCIT /Pr. DGIT/DGIT is concerned prior to selecting such a case for scrutiny.
• Computer-Aided Scrutiny Selection (CASS): Such cases are selected based on broad-based selection filters. A list of such cases shall be separately intimated in due course by the DGIT (Systems) to the concerned. Jurisdictional authorities the cases for this purpose are mostly selected through the process of computer-assisted scrutiny selection (CASS) without any element of subjectivity in this process.

The procedure of Assessment under section 143(3)

The procedure for Scrutiny Assessment u/s 143(3) of the IT Act is elaborated below. 

• If the Assessing Officer is suspicious about the ITR filed by the assessee, then he shall serve a notice to the assessee askng him to attend his office or produce or cause to be produced any of the evidence on which he can place reliance to support the return of income filed by him. 
• For the purpose of conducting the assessment u/s 143(3), the Assessing Officer shall serve such notice as per the provisions of sec – 143(2). Notice u/s 143(2) must be issued within 6 months from the ending of the FY in which the return is filed. 
• The assessee or his representative (as the case may be) shall appear before the assessing officer to place his arguments, supporting evidence, etc., on various matters/issues as needed by the AO. 
• After hearing/verifying such evidence and noting such particulars produced by the assessee and such other evidence as the AO may need on specified points and after noting all relevant materials so collected, the AO shall, by written order, assess the total income or loss of the taxpayer followed by determining the payable sum, refund of any other amount due to him based on such assessment.

Time Limit for Scrutiny Assessment

Section 153 of the IT Act prescribes the time limit for conducting such assessment 

Which is elaborated hereinunder – 

• Within 21 months subsequent to the end of the AY when the income was originally taxable. [For the evaluation year 2017–18 or earlier] 
• 18 months after the conclusion of the evaluation year, during which the earnings were initially assessable. [For the 2018–19 evaluation period] 
• 12 months subsequent to the evaluation year in which income was initially deemed taxable. [For the assessment period beginning in 2019–20]

Conclusion

The scrutiny assessment is initiated if the income tax department has any suspicion with regard to the ITR filed by the assessee; therefore, every assessee needs to ensure that their ITR is filed in the prescribed manner by disclosing all the relevant information in order to avoid the initiation of such proceedings against them.   

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