Income Tax Scrutiny

In case of fraudulent activities it isn’t easy to be out of the IT department’s purview. If you have misrepresented your information in order to save tax, the IT department will get to know the same via a mechanism known as income tax scrutiny.

There are cases where the jurisdictional Income Tax Office issues notices under section 143(2) of Income Tax Act, summoning taxpayers such as individuals, companies and firms with regard to the returns filed during an assessment year. Popularly known in public as scrutiny, this proceeding is exercised if the officials have a reason and evidence to believe that the declared income or expenses in the returns filed have been under or overstated. It gives an opportunity to the assessee to justify the filing with the help of documentary evidence.

There are many reasons for scrutiny assessment, drawn out of complex checks and balances done 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 a 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.

Pre-existing guidelines for the Scrutiny

The Income Tax maintains a predetermined set of guidelines for identifying and scrutinizing such cases. The scrutiny may be based on fishing out all those assessments above a certain income bracket. It also used sophisticated softwares capable of identifying cases of tax evasions, filings that are not legally compliant etc. The systems are designed in such a way that it correlates data sourced from various inputs and throws an output for further assessment.

Some of the most common scrutinies done the following basis:

  • Understated income
  • Shown excessive loss
  • Tax underpaid or misappropriation

Two types of scrutiny assessments are undertaken by the Income Tax Department. They are:

  1. Manual scrutiny
  2. Compulsory scrutiny

The section below throws light on the basis for initiating inquiryof these types.

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 IT department, being chosen for a scrutiny.

Disparity in current year’s income or losses compared to previous assessment year:

If there is considerable raise 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 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 is 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.

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 scrutiny, the IT department has laid down procedure for cases that are selected for compulsory scrutiny as well. Some of the reasons for this type of examination are as 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.

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 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 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. 

News About Income Tax Scrutiny

  • Scrutiny of IT returns reduced by 0.25% for 2018-2019

    The total number of cases selected for the scrutiny of income tax returns have been decreasing every year according to reports. This was to ease the facilitation of taxpayers. The level of scrutiny has dipped to 0.25% of all returns which were filed in 2018-2019 compared to 0.71% in 2015-2016.

    The lowest rate of scrutiny was in the year of 2018-2019 in the past 4 assessment years. In 2016-2017, 0.40% of the returns which were filed were scrutinised along with 0.55% of the cases in 2017-2018.

    In Delhi, the scrutiny has decreased from 1.12% in 2015-2016 to 0.52% in 2018-2018 where over 16 million people hold PAN cards and 2.5 million returns were filed in the former tenure.

    66.6 million people hold PAN cards in Maharashtra and the total number returns filed were 9.7 million in 2018-2019 and the scrutiny had decreased to 0.38% compared to 0.98% in 2015-2016 when 7.48 million returns were filed.

    5 August 2020

  • First faceless scrutiny phase- 7,116 assessments disposed

    The Income Tax department has now disposed 7,116 cases under its very first phase of the faceless assessment system. Ever since its inception last year, and the implementation of the first phase, faceless scrutiny assessment scheme, taxpayers need not be face-to-face with any tax officer. They can visit an I-T office and can also e-file their reply. One source had said that in the first phase, 58,319 cases had been assigned in an automated way

    19 July 2020

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