Income Tax Taxation

Things to Know About Income Tax Scrutiny in India

In this article, we will discuss how the amount of Income Tax is scrutinized. But are we aware of the actual meaning of Income Tax Scrutiny?

What do you Mean by Income Tax?

An income tax is a tax which is imposed on individuals or entities (taxpayers) that vary with respective income or profits (taxable income).

What is the Meaning of Scrutiny Assessment?

Scrutiny Assessment is a kind of assessment of the income tax return by giving a chance to the assessee to prove the incomes, losses, expenses, deductions, etc which are claimed in the tax return with proof.

Reason for Scrutiny Assessment

There are many reasons for scrutiny assessment, drawn out of complex checks and balances did with the help of software systems and manual intervention. In case the assessing officer finds out any discrepancies, omissions, overstatement, inaccuracies or factual errors, he/she can call for scrutiny with a purpose to inquire further and come to a conclusion. It is not a criminal investigation but a tool to further scrutinize to seek accurate information. It is a procedure to find out if the assessee has escaped assessment as per the law.

How is the Scrutiny Assessment done?

While scrutinizing, the assessing officer enquires the taxpayer. The scrutiny is done in order to ensure that the details given by the taxpayer are true, correct and completely valid. In case any discrepancies are found, then the assessing officer can charge penalties from the assessee for the same.

The main objective of conducting scrutiny assessment is to ensure that the assessee has not understated his/her income, calculated excessive loss or underpaid tax in any manner.

Methods of Scrutiny Assessment of Income Tax

There are two types of scrutiny assessment:

1. Manual scrutiny assessment
2. Compulsory scrutiny assessment

Let’s discuss them in detail:

Manual Scrutiny:

• Not filing ITR (Income Tax Return):
  

If you’ve taxable income as per the slabs, it’s expected that you file returns as per the law. The details and figures provided in the ITR should be true and factually correct. If there is TDS (Tax deducted at source), you should still file returns. Lame reasons such as being pre-occupied, ignorance and others are not acceptable. If you fail to file returns for a year or two, chances are that you will be served a notice by the IT department, being chosen for scrutiny.

• The disparity in the current year’s income or losses compared to previous assessment year:
  

If there is a considerable rise or fall in the income or losses filed in the ITR, it may attract the attention of the officials. It raises suspicion in the eyes of the assessing officer who feels the need for further scrutiny. This is more applicable to taxpayers such as businessmen where the business is more volatile. In such cases, you may be summoned by the department and asked to produce related documents such as P & L account, bank statements, and others.

• Not showing exempted income:
  

There are certain categories of income where you’re exempted from paying income tax. However, they must be shown in the ITR filed. Some of the examples of income where you don’t pay tax are interest drawn from savings bank deposits, interest from PPF, etc. Regardless of whether it is taxable or not, all categories of income must be shown, failing to which, you may attract the eye of the officials.

The assessing officer is required to verify the exempt on the basis of what you file for. Therefore, make sure to declare all types of income received during the assessment year and tag them to the relevant category.

• Not filing the required paperwork due to change in jobs:
  

If you’re changing jobs during a particular assessment year, make sure to collect Form 16 from the previous employer(s) and notify the new employer about the income you drew from the previous employer. It helps the payroll team, to take into account, various facets of taxable income you drew earlier.

Read More: How to Claim Income Tax Refund Online?.

It allows the current employer to seamlessly arrive at deductions under various sections. When you file for ITR at the end of the assessment year, make sure to refer to both the Form 16s.

• Transactions of high value:

Please be aware that the IT department accesses information through various sources to keep track of all the high-value transactions under a specific PAN. Banks and financial institutions are obligated to report such transactions under the Annual Information returns filed by the companies.

Transactions such as deposits in bank accounts of more than Rs.10 lakhs, property dealings worth over Rs.30 lakhs can attract further scrutiny to validate the income versus declaration.

Compulsory Scrutiny:

In addition to the reasons above for manual income tax scrutiny, the IT department has laid down the procedure for cases that are selected for compulsory scrutiny as well. Some of the reasons for this type of examination areas below.

• Cases that involve pending decisions before the appellate authority for the previous assessment year over a certain value will be under compulsory scrutiny.
• Cases where information pertaining to tax evasion was provided by government agencies to the IT department. Prior approval from the jurisdictional authorities will be obtained by the assessing officer before making such cases eligible for scrutiny.

Contact Enterslice for the simple and easy procedure to file your income tax returns.

Turnaround Time for Sending Notice:

The scrutiny notice must be served within 6 months from the end of the financial year during which the return was filed. If the notice is received after expiry of this term, the assessee can raise an objection with the jurisdictional tax authority. You’re required to respond to the notice appropriately by way of being present for a further inquiry along with the supporting documents requested. If there is going to be a delay in doing so, you must keep the authorities informed along with valid reasoning.

If you fail to respond appropriately as per the timelines, it can lead to the officials to complete the assessment on the basis of information available to them. You may have to cough up a fine amount along with accepting the income and tax liability as the officials deem fit.

What if you Receive an Income Tax Scrutiny Notice?

• First of all, do Not Panic

The first important thing to understand is that you do not have to panic when you receive any notice from the Income Tax Department. The scrutiny may just be a result of any random selection or formality and in that case, you do not have to worry at all about the notice. It might just be a regular check on your income and income tax return statements. In case you have nothing to hide from the IT department, then you need not worry about the notice. Try to find out why exactly you have received such notice.

• Read the details of the notice properly

As discussed above, as soon as you receive the notice of scrutiny, please check all the details of the notice including your name and PAN number and the fiscal year to which it refers to. Additionally, check the name of the office that has issued such notice or the name of the assessing officer who might have signed it. It is very important to read out all the details of the notice and try to analyze and understand the section under which the notice has been issued to you. You may take an expert or consultant advice if facing a problem to understand the section and notice, a post which you can then prepare your reply with regard to the terms mentioned in the notice.

• Arrange all your necessary documents

It is very important to be taken care of that even if you have a clear case, you must arrange for all your genuine documents well in advance as these may be required to be submitted at the time of investigation which may include your salary slips from current or previous employer as the case may be, your IT return statements, your bank statements, any other salary or income statements, etc.

• Never hide any Information
  

You need to note that Income tax department^[1] has all the complete details of the transactions done by you in a financial year, so never ever try to hide any kind of information from them which you ought to declare and should show at the first place. If you hide any such information, you will become all the more vulnerable and may be liable for heavy fine or penalties.

Conclusion

Income tax scrutiny is no hay and nay. Scrutiny Assessment is just a kind of assessment of the income tax return by giving a chance to the assessee to prove the incomes, losses, expenses, deductions, etc which are claimed in the tax return with proof.

See Our Recommendation: Section 143(2) – Notice for Scrutiny and how to Response .