Assessment in GST is the assessment process in arriving at the tax liability of a registered individual, either by self-assessment or the tax authorities, as prescribed under the Goods and Services Tax law. Assessment facilitates taxpayers to fulfil their obligations in the right manner, hence enabling the government to raise the funds necessary. The GST Act allows for various types of assessments in certain circumstances, like voluntary compliance, non-filing, underpayment, or fraud. These include self-assessment, provisional assessment, scrutiny assessment, best judgment assessment, and summary assessment.
What is Scrutiny Assessment?
A scrutiny audit is a rigorous examination of the return of income of the taxpayer to verify its correctness and genuineness. It is conducted under Section 143(3) of the Income Tax Act, 1961, wherein the Assessing Officer (AO) scrutinises the return for the purpose of verifying that the taxpayer did not suppress income, claim excessive deductions, or short-pay taxes.
In general, the process starts when the department serves notice under Section 143(2) within the stipulated time period, requiring explanation or records. The taxpayer is required to produce supporting documents such as vouchers of salary, bank statements, proof of investments, books of accounts, or any other material information. The AO can verify information from third parties, including Form 26AS, AIS, GST returns, or bank reports.
Upon consideration of the submissions and verifications, the AO issues an assessment order specifying the correct taxable income and tax liability. This order may accept the return as submitted, make a further demand, or direct a refund.
Scrutiny assessment is thus a mechanism for ensuring tax compliance, verification of the correctness of returns, identifying evasion, and safeguarding revenue, and also for fostering transparency and equity in the tax system.
Purpose of Scrutiny Assessment
The scrutiny test is conducted according to Section 143(3) of the Income Tax Act, 1961. Its intention is that the income stated by the taxpayer should be correct, honest, and complete, and without any concealment or misrepresentation.
1. Testing Return Correctness
- Verifies that the income, deductions, and taxes stated by the assessee are supported by proper documentation.
- Ensures that the return is not only filed but also true to facts.
3. Detection of Hidden Income
- Uncovers income not disclosed or unreported income, including cash deposits, benami transactions, and foreign income/assets not disclosed.
- Assists in the prevention of tax evasion.
4. Verification of Deductions, Exemptions, and Claims
- Authorises the genuineness and validity of claimed exemptions, deductions, and relief (for example, under sections 80C, 80D, 10(14), HRA, and capital gains relief).
- Seeks to avoid loss of revenue on account of false or excessive claims.
5. Cross Verification Using Third-Party Information
- Compares return data with department-accessible data such as TDS statements (Form 26AS), AIS/TIS data (Annual Information Statement), GST returns, and bank and financial institution reports for high-value transactions.
- Finds voids and discrepancies.
6. Guaranteeing Correct Income and Tax Computation
- Reverifies income under appropriate classifications like salary, business, real estate, capital gains, and others.
- Helps with accounting principles, depreciation policy, and expenditure disallowance compliance.
7. Prevent Tax Evasion and Black Money
- The tax department needs a critical instrument to deter deliberate tax evasion.
- Investigating doubtful returns deters future noncompliance.
8. Improving Compliance with Taxes
- Seeks to encourage voluntary and truthful compliance by making it plain that returns are to be examined.
- Assists taxpayers in having correct disclosures, records, and documentation.
9. Protection of Revenue
- Ensures government revenue protection by ensuring all income subject to tax is brought to tax.
- Protects the exchequer from loss arising out of fictitious reporting or abuse of tax avoidance arrangements.
10. Creation of Transparency & Fairness
- Under the Faceless Assessment Scheme, scrutiny will ensure an objective, transparent, and technology-based process.
- It minimises harassment, ensures consistency, and instils confidence in the system.
Post Scrutiny Notice Reply Procedure
The process of handling a post-scrutiny notice includes a diligent reading of the notice, preparation of comprehensive replies with document proof, submission in time through the portal of e-filing, responding to any follow-up questions, and then waiting for the final order of assessment. It is necessary that replies should be in time, open, and well-documented so that the result is favourable.
1. Receipt of the Notice
Notice is sent electronically via the Income Tax e-filing system, registered email, and SMS alert. It will specify if the scrutiny is complete (whole return) or selective (limited issue). The response submission deadline will be given.
2. Comprehend the Scope of Examination
Review closely the points and issues presented:
- Inconsistencies in income, deductions, or TDS.
- Unreported bank transactions or cash deposits.
- Investments of significant value relative to reported income.
- Disallowance of certain expenses or exemptions.
Determine the documentation and evidence required to support your return.
3. Preparing the Reply
Collect supporting documents (depending on the issues raised), like:
- Form 16/Salary slips, bank statements, and proof of investment (LIC, PPF, ELSS, etc.).
- Rental agreement and property documents.
- Business books, ledgers, GST reports, invoices, etc.
Give elaborate answers to all questions. Give plain, factual explanations supported by supporting documents, without going into irrelevant details.
4. Filing the Reply on the E-Filing Portal
- Go to the Income Tax e-filing portal and log in.
- Go to Pending Actions → E-Proceedings → For your Action.
- Select the Notice reference number.
- Upload your written reply (in PDF format, normally signed by the assessee or authorized representative).
- Attach supporting documents (bank statements, proofs, contracts, etc.).
- Ensure submission on or before the deadline (extensions allowed if justified).
5. Acknowledgement
Acknowledgement Number is generated once a reply is submitted. The case officer (in a faceless way) will consider the reply.
6. Further Clarifications (if required)
The AO may issue further notices requesting clarification. You will have to respond in a similar manner until the AO is satisfied.
7. Assessment Order
Based on your responses, the AO issues a Final Assessment Order:
- No adjustment (return accepted as submitted).
- Addition/disallowance (tax demand raised, interest/penalty probable).
- Refund altered/reduced.
This is intimated electronically along with a demand/refund notice under Section 156.
Key Points to Remember
- The deadline is strict; failure to respond may lead to a judgment assessment against you.
- Consistency with submitted returns is essential for maintaining credibility.
- Organise your documentation, as authorities heavily depend on evidence.
- In cases of scrutiny, it is advisable to seek professional guidance (for instance, from a CA or tax specialist).
- The Faceless Assessment method eliminates the need for in-person interaction and allows all assessments to be conducted online.
Example/Illustration
Suppose that you reported an income of ₹8 lakh but received cash of ₹15 lakh and credited it to your bank account. The scrutiny notice requires an explanation as to where the money came from.
In your response, specify that the money received was a loan from your father. Mention the confirmation of the loan, PAN, and bank withdrawal proof.
If the information is satisfactorily verified, there will be no tax levied additionally. Alternatively, if it is not verified, the Assessing Officer can treat it as unexplained income under Section 68 and charge tax accordingly.
Consequences of Non-Compliance
Non-response to a scrutiny notice results in an ex parte assessment under Section 144, which is a bloated tax demand, interest, penalty, and even prosecution in egregious cases. This also weakens your hand for appeal and could result in further scrutiny. It is always preferable to comply suitably and in a timely manner than be deaf to all.
1. Reluctant non-compliance
If you do not reply to a scrutiny notice:
- It is taken as non-cooperation in the assessment process.
- Your case will continue irrespective of your contribution.
2. Best judgment assessment
The Assessment Officer (AO) is allowed to make use of accessible data (Form 26AS, bank statements, third-party data, AIS/TIS) under Section 144 and execute the best judgment assessment. This usually results in:
- Higher taxable income
- Disallowance of deductions/exemptions
- Additions of unexplained/unreported transactions
3. Tax Demand, Interest, and Penalties
You may receive a tax demand exceeding your real obligation. Under sections 234A/B/C, interest is charged for deficiency and delay. Penalties may be applied under section 270A for income suppression or giving of incorrect information. Tax evasion penalties run between 50% to 200%.
4. Prosecution Dangers (in severe cases)
- Should there be clear intent not to comply (e.g., concealing income or rejecting the authority): Prosecution could be ordered under section 276D (failure to produce documents).
- The penalties can reach basic incarceration for a maximum time of one year and a fine.
5. Other Consequences
- Refunds (where due) can be denied.
- Continued non-compliance can result in:
- Re-assessment or re-opening of cases in subsequent years.
- High-risk profiling by the department’s system.
- More scrutiny in future years.
6. Loss of Legal Remedies
In case you fail to respond and the AO passes an adverse order:
- You may still appeal before the CIT(A) or ITAT.
- But considering no evidence was produced at the assessment stage, your case is weaker.
- Proving new evidence at the appellate stage becomes difficult (needs special permission u/r 46A).
Conclusion
The integrity of the income tax system depends mostly on scrutiny reviews. By meticulously scrutinising returns, confirming assertions, and cross-referencing with third-party data, it demands that taxpayers truthfully declare their income and pay their taxes. The process helps protect government income as well as discourages tax evasion, concealment, and dishonest deduction. Transparency, effectiveness, and fairness were brought to the process by faceless evaluation. Lastly, assessment evaluation constructs taxpaying public trust and accountability, promotes voluntary compliance, and assists in establishing trust within a just, predictable, and dependable revenue system.
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