Every year, the extensive multitude of taxpayers across India receives notices related to scrutiny assessments, which are generally not adequately understood. They are a significant factor considering which the Income Tax Department implements the laws and guidelines. If you earn a salary, run a business, or have a role in taxes, understanding how the inspection process works helps you follow the law and avoid fines.
Everyone who is taxed must give their income information to the Income Tax department. This happens by submitting income tax returns. After the tax statement and returns filing, the next phase is for the Income Tax Department to examine the income returns for accuracy. This process of income evaluation is termed “Assessment “, which also covers reassessment and best judgment assessment, as defined in Section 144. Assessment also covers listing any omitted income under the tax base from previous assessments and detailed or scrutiny assessments.
This article examines the concept of scrutiny assessment as defined in Section 143(3) of the Income Tax Act, 1961, its legal specifications, procedural stages and practical implications.
The Principle of Scrutiny Assessment
A scrutiny assessment is a situation where the tax officials investigate your income tax return. They want to confirm that the figures, exemptions, and other details in your filings are accurate. The officer who is in charge of assessment goes through your income return to check if the claims, deductions, and information that you have submitted are true. From their standpoint, this is a check to make sure all things are right and legal.
In essence, the process of scrutiny assessment certifies that your reported income, whether from business or salary wages, is factually accurate and valid. The basic goals of Scrutiny Assessment are to confirm the following:
- Your disclosure of income is not less than what you have.
- Your claim of heavy losses.
- You have submitted less tax than what is due.
To administer a scrutiny assessment as settled in Section 143(3) of the Income Tax Act, a notice is sent by the Income Tax Department, which is normally provided within 3 months of the culmination of the financial year.
Criterion for Initiation of a Scrutiny Assessment
For initiating the Scrutiny Assessment, these conditions need to be fulfilled:
- Filing of income tax return according to Section 139 or reply to an income tax notice subject to Section 142.
- When the tax department or assessing officer decides it is mandatory to inspect your return to ascertain the accuracy of the declared income and the taxes remitted.
Categories of Scrutiny Assessments
Scrutiny assessments according to the Income Tax Act can be classified into Manual and Compulsory Assessments.
- Manual Scrutiny Assessments: Such a type of assessment is favoured on the basis of each case due to concrete reasons. Taxpayers can avoid the process of manual scrutiny by acting diligently and following tax regulations and filing processes scrupulously.
- Compulsory Scrutiny Assessments: By their very nature, these are mandatory assessments that are outside the controlling capability of the assessee and impossible to evade. These are generally enforced by specific conditions laid down by the tax authorities.
Selection Standards for Scrutiny Assessment
In certain cases, the tax department conducts a scrutiny assessment.
- Failure to File Tax Liabilities: Missing a tax filing can lead to this assessment. Such a scenario is a result of an individual’s taxable income and the non-submission of the appropriate documents.
- Deficient or Inaccurate Tax Assessment: A wrong or incomplete tax return can cause the tax department to make an inaccurate tax assessment, which will also cause trouble. This covers errors in reporting income or calculating tax amounts.
Main Reasons to Select for Audit
Reason 1: Not Filing Returns or Trying to Evade Taxes
- People whose total income goes beyond the exemption limit (like Rs 2,50,000 for individuals under 60 years) need to file returns.
- Residents in possession of foreign assets or who own overseas bank accounts need to submit a tax return, regardless of their income level.
- Filing is mandatory, even if the employer has made a TDS deduction.
Ground 2: Lapses Linked to TDS
- Any inconsistency in the reporting of TDS amounts in tax returns and those entered on the Traces site can provoke scrutiny.
Ground 3: Concealment of Additional Incomes
- Every income, whether from savings accounts, term, or fixed and recurring deposits, needs to be reported.
- Difficulties crop up when the TDS rate deducted is lower than the tax rate of the assessee.
Ground 4: Unnatural or Large-Scale Transactions
- Monetary dealings on a larger scale than the asserted income can result in scrutiny. Like, for instance, huge deposits in bank accounts that are inconsistent with the stated income.
- These high-value transactions are usually disclosed to the tax authority by banks and other financial institutions.
Ground 5: Discrepancies in Income Tax Return
- A few times, mistakes made in the tax returns, such as the usage of an improper ITR form and missing details, might end up in a notice.
- The department of tax might dispatch an intimation asking you to file a rectified return under Section 139(9) in order to resolve the issue.
Process for Scrutiny Assessment in Income Tax
Income Tax Notice under Section 143(2) and Scrutiny Assessment Procedure is explained here:
1. Beginning a Scrutiny Assessment – Income Tax Notice u/s 143(2)
When an Income Tax officer requires a scrutiny assessment, they first issue a notice under Section 143(2) of the Income Tax Act. This notice asks that the taxpayer turn up in person or submit an e-assessment. Taxpayers need to provide any papers or details the officer considers requisite to determine the taxable income and any unpaid taxes. The authorities must send a notice within 6 months after the financial year ends when the return was submitted. For instance, if a return was submitted by anyone on November 2, 2019, a notice could be received by them anytime till September 30, 2020. If a notice was sent on September 29, 2020, but it was received by the taxpayer after September 30, the notice would be invalid.
2. Participating in the Scrutiny Assessment
The taxpayer or their authorized representative can meet with the Assessing Officer to discuss and provide evidence or arguments on multiple issues as queried by the officer.
3. Conducting the Scrutiny Assessment Hearing
During this hearing, the tax officer provides the taxpayer multiple opportunities to be heard and present documents or proof upholding their tax return. In cases where the taxpayer does not give the essential information or declines to work with the officer, the officer will carry out a best judgment assessment under Section 144. The officer considers the data provided by the taxpayer and makes a decision after reviewing the evidence if the latter is fully cooperative.
Once the officer makes a decision, the taxpayer has some choices:
- Accept the decision and either pay any extra tax, obtain a refund, or accept the loss determined.
- Apply for a correction under Section 154 if there is a clerical error.
- Submit a revision application to the Commissioner of Income Tax under Section 263 or 264.
- Challenge the decision by filing an appeal if someone disagrees with it.
When conducting scrutiny, the Assessing Officer looks into the following:
- Ensuring Income Reporting Matches Reality: The officer checks if the person has avoided reporting income or exaggerated losses in their tax filings.
Verifying Correct Tax Payments: The officer ensures the individual has paid the right amount of taxes owed. Any deficiency in tax payment can be a point of examination.
When performing these assessments, the Assessing Officer must follow the guidelines and norms established by the Central Board of Direct Taxes (CBDT). The CBDT follows the rules and regulations established by the Supreme Court. This ensures that the inspection process remains constant, just, and aligned with the law.
Time Limits to Complete Scrutiny Assessments Under Section 153
The time allowed to complete a scrutiny assessment through Section 143(3) is defined in Section 153 and varies depending on the relevant assessment year.
To complete scrutiny assessments for the 2017-18 assessment year or earlier, officials must wrap them up within 21 months from the close of the year when the income was first disclosed. To assess the year 2018-19, authorities have 18 months after the assessment year’s conclusion to finish the scrutiny assessment marking when the income became assessable. Starting from 2019-20, including the current year, the rule gives 12 months after the assessment year’s end to complete the scrutiny, counting from when the income was first treated as taxable.
Bottom Line
Knowing how income tax scrutiny works under Section 143(3) is important to handle tax issues. It ensures your compliance with the law and records your financial details. If this seems too complex and you need aid, Kanakkupillai provides you with the support and instruction to complete the process.
