10-Feb-2020 Scrutiny Assessment Under The Income Tax Act, 1961
Income tax assessment is the process carried out by the Income Tax department after the filing of income tax return by an assessee. In an income tax assessment, the Income Tax department would verify the return filed for correctness with respect to the amount of taxable income declared and tax paid. There are various types of income tax assessment. In this article, we look at scrutiny assessment u/s 143(3) in detail.
What is Scrutiny Assessment:-
The tax department examines the returns filed and if it has any reason to believe that the information declared by the assesse is incorrect or incomplete then the case is taken up for scrutiny assessment.
Time Line for issue of notice to Assesse for scrutiny :-
The cases can be selected for scrutiny within a period of six months from the end of Financial Year in which the return is filled by Assesse. Effectively, this means that irrespective of date of filling the return, the return can be selected for scrutiny up to 30th September of the next financial year. E.g. return for AY 2019-20 filed can be taken up for scrutiny till 30th September, 2020.
In case the assesse does not receive notice for scrutiny till 30th September , it can be safely assumed that the return filled has been accepted by the department and no scrutiny assessment will take place for that year.
The assesse is informed through issue of a notice u/s 143(2) which can be issued by the Assessing officer (AO) upto a period of 6 months from the end of financial year in which the return was furnished by the assesse and then the assesse is supposed to take the required action as communicated by the department by initially replying to the notice u/s 143(2) within the due date as mentioned in the notice. Later, notice u/s 142(1) giving details of particulars / evidences required by the AO is issued.
Who can select the case for scrutiny ?
The assessing Officer does not have right for selection of cases for scrutiny. Normally, for every year, criteria for selection of cases for scrutiny are decided by Central Board of Direct Taxes (CBDT) and also published in official pronouncements. In case, any AO wants to select a particular case for scrutiny, he is duty bound to take special permission for doing so from Principal Commissioner of Income Tax. Hence, normally, cases are selected for scrutiny through Computer Aided Scrutiny Selection (CASS) and no human intervention would come into play for said selection. More than 98% of the cases are selected for scrutiny through CASS.
The process of Scrutiny:-
The process of scrutiny starts with the notice u/s 143 (2) from the Income Tax Department informing the assesse that return of income filed has been taken up for scrutiny. Notice has to be served to Assesse before the prescribed time limit (As described in previous para). Any notice served beyond the said period would make the said selection unlawful and the same can be contested in the court of law.
In this electronic era, scrutiny notices are served through e mail on the Id registered with the Income Tax portal.
More stress is given on the reason for selection of scrutiny where AO needs fully satisfied about correctness of the income / claims based on which the selection is made.
Having obtained all the information, AO would pass the appropriate order determining the income. In case AO is adding any income to the income already declared by the assesse, he is duty bound to give detailed reasoning for the same.
Time limit for completion of scrutiny assessment :-
From scrutiny assessments for Asst Year 2018-19, Assessment has to be completed before 30th September, 2020 i.e. 18 months from the end of the assessment year in which the income was first assessable. This is reduced from 21 months from 18 months as provided till last year.
For scrutiny assessments for A.Y. 2019-20 onwards the said time limit is reduced from 18 months to 12 months. In short all the assessments thereafter have to be completed before end of next year. E.g. Scrutiny assessment for AY 2019-2020 has to be completed before 31.03.2021 and so on.
Reasons for selection of cases for Scrutiny Assessments.
There are several reasons why an income tax scrutiny may be initiated .Some of the important reasons are described below:
· Failure to file a Return:
One important reason why a scrutiny is initiated is because the assesse may have failed to file an ITR for current financial year or for multiple years. Sometimes, the assesse’s calculations may not match with that of the IT department or may have inadvertently missed declaring an income in a particular financial year.
· Sudden rise or fall in income or more loss as compared to previous fiscal year
This is a self-explanatory case where the assesse’s tax return amount has increased or decreased drastically in a very less time. This may force the IT department to check the details of the income and IT return filed. For instance, if the income tax return has jumped significantly from Rs 5 lakh in one year to Rs 50 lakh in the next year, it may ring an alarm in the minds of IT officers who may then issue a notice of scrutiny. Also , if there is more loss as compared to previous year’s declaration, this may come under the scrutiny. These things often happen in case of huge business where salary or losses are highly volatile. Even in those cases, chances of receiving scrutiny notice is quite high.
· High value transactions in a financial year
In case assesse has done a very high value transaction in a year, which is different from normal spending habit, an assesse may get a scrutiny notice. The following are high value transactions in for which the assesses case can be selected for the scrutiny:-
1. The assesse have purchased a house or a piece of land or have received a huge amount in the account from someone which is not a part of the normal income, the case may classify for a scrutiny.
2. Huge credit card expenses, which may affect the cash inflow and outflow may be another reason for scrutiny.
3. Huge amount of cash deposits and withdrawals in the bank can lead to scrutiny.
· Mismatch in TDS Credit
In case there is a mismatch in TDS credit as claimed with respect to the details of the Income Tax Department, the case may fall under the scrutiny of IT department.
· Declaring lesser income or more loss as compared to previous fiscal year
In case assesse has declared significantly lesser income or more loss as compared to previous year’s declaration, this may come under the scrutiny. For a normal salaried person, such a situation is unlikely to happen. These things often happen in case of huge business where salary or losses are highly volatile. Even in those cases, chances of receiving scrutiny notice is quite high.
· Non-declaration of exempted income
Some people mistakenly think not to disclose exempted income during IT return. Income from long term capital gain, interest income from saving bank account or FDs up to Rs 10,000 or any gifts received from others all come under exempted category. But still these things should be clearly announced while filing IT return so as to save yourself from future trouble.
Points to be kept in mind while preparing for the documents to be submitted before the officer once the Scrutiny Assessment Starts:-
• Once notice u/s 142(1) is issued, read all the details of the notice and accordingly start the compilation of the details / documents required as per the notice.
• The notice issued by the officer, should not be ignored and all the submissions as mentioned in the notice should be submitted on the due date.
• All the details /documents should be provided correctly as all the details are available with the Income Tax Department. Hiding any information will lead to penalty.
• All the details/ documents should be uploaded on the e-filing portal in clear pdf format and one should always check the e-filing portal for further notices that will be issued by the officer.
Final step for the completion of the Scrutiny Assessment:-
After completing the assessment, the Income Tax Authority (called as A.O.) issues an order to the taxpayer, which is called “Assessment Order”. The order contains the details of the assessment and calculations as per the Income Tax Department vis-à-vis details as per the Income Tax Return.
Rectification under section 154.
After the Assessment Order is passed, rectification under section 154 has to be filed in case if the assessing officer has made mistakes apparent from the records, if any arithmetical / calculation mistakes are made , mistake in case of any interest is levied , credit for the advance tax, self assessment tax , TDS , TCS is not given etc.
Appeal Under The Income Tax Act, 1961.
If any demand is raised by the Assessing Officer in the assessment , aggrieved tax payer can file appeal before the Commissioner (Appeals) having, jurisdiction over the tax payer.
Designation of the Commissioner (Appeals), with whom appeal is to be filed is also mentioned in the notice of demand issued by the Assessing Officer under section 156 of Income Tax Act, 1961.
The following are the points to be followed while preparing and then filing of appeal: -
• Online appeal needs to be uploaded ( Form 35 ) on the e-filing portal.
• Grounds of appeal and statement of facts are also to be prepared
• Appeal fees is to be paid online . ( Online filing of appeal will be done only is appeal fees is paid)
• Application for stay of demand is to be filed and submitted to the concerned officer. ( Stay application can be filed once the assesse pays 20% of the demand which is mentioned in the Assessment Order)
• A letter for penalty to be kept in abeyance is to be submitted to the concerned officer.