The Oxford Dictionary defines scrutiny as “careful and thorough examination”. If you add the word ‘tax’ before the word ‘scrutiny’, the words together evoke goosebumps in anyone who files his taxes. It evokes a sense of fear and panic as the layman thinks that the officials want to conduct a raid or a search. However, that is not the case.
What is tax scrutiny and how does it work?
Tax scrutiny is nothing but the tax department examining and looking into the returns that are filed. Every year, some pre-set criteria are followed by the department for identifying cases that are to be scrutinized. If upon such scrutiny the officials have any reason to believe that the information declared is false or incomplete it is taken up for further assessment. The person whose returns are being scrutinized and assessed is called the assessee. The assessee is usually informed through a notice and is supposed to take relevant action as mentioned by the department. Receiving a notice is not indicative of a crime; it is just an intimation that further investigation is to be done. It is a normal action and there is no need to sweat about it if you have not evaded taxes on purpose.
Some of the reasons for tax scrutiny are:
- Non-filing of ITR – Any person whose gross income is above the exempted limit needs to file his returns in time. Non-filing will lead to scrutiny.
- TDS errors – When there is a mismatch between the TDS shown in the return and what is shown on the TRACES website, there is a high chance of receiving notice.
- Not disclosing other income – Every source of income needs to be reported including interest from savings accounts, Fixed Deposits, and Recurring Deposits. Sometimes the banker may deduct TDS at a lower rate than the one the assessee falls in. This kind of error also attracts scrutiny as it may be interpreted as an effort to lower tax liabilities.
- High-value transactions – If a deposit of an amount that is unusually large when compared to the income of the individual is made, then also a notice can be expected. While for a business person who is in a highly volatile business this might be normal, for a salaried individual it is better to keep records for high-value transactions since they will most definitely be scrutinized. This includes receipts for any cash deposits over Rs. 10 lakhs, credit card bills over 2 lakhs, purchase of immobile property over Rs. 30 lakhs, purchase of RBI bonds over Rs. 5 lakhs.
- Improper ITRs – Sometimes due to negligence or insufficient knowledge, the wrong forms are filed, thus skipping out on disclosing some important information.
- Non-declaration of exempted income – It is essential to disclose exempted income such as income from long-term capital gains, and interest income from FDs up to Rs. 10,000, or any gifts that fall under the exempted category.
- If a person has changed jobs in one financial year, then he may receive tax reduction benefits from two employers. This must be reported and tax benefits can be availed only from one employer.
In cases where no returns were filed, an inquiry notice will first be received by the assessee under Section 143(1) of the Income-Tax Act, 1961. If there is no timely response, then the notice under Section 143(2) will be sent.
What are the due dates for filing ITR for FY 2021-22?
31st July 2022 is the due date for ITR filing for the FY 2021-22 for individuals and for entities not liable for a tax audit.
31st October 2022 is the due date for filing of ITR for AY 2022-23 for taxpayers liable for audit. The audit report, however, needs to be filed by 30th September 2022.
15th June 2022 is the due date for the first installment of advance tax, 15th September 2022 is the due date for the second installment of advance tax, 15th December is the due date for the third installment of advance tax, and 15th March is the due date of the fourth installment of advance tax for FY 2021-22.
31st December 2022 is the last date for filing a belated return or revised return for FY 2021-22. A penalty of Rs. 5,000 will be charged for delay in filing the return. But if the total income itself is less than Rs 5 lakhs, then the fee payable is Rs. 1,000.
Types of Assessment
Assessment is the process of examining the returns filed by the taxpayers.
- Deemed assessment under Section 143(1)–This is a preliminary or summary assessment that is done without calling the taxpayer. At this stage, the assessment is not detailed. The total income, or loss, is calculated after taking into account arithmetic errors, incorrect claims, disallowance of loss claimed, and disallowance of deduction claimed. The adjustments are only made after an intimation is given to the taxpayer/assessee. The response by the taxpayer is also considered. However, if no response is received within 30 days of the intimation, the adjustments are made. This assessment is done within 9 months of the end of the FY in which the ITR is filed.
- Regular assessment under Section 143(3)–This is more detailed than the aforementioned assessment. It is done to confirm the correctness of the ITR and to make sure that the taxpayer has not underreported his income or calculated excessive losses.The time limit for making such an assessment is within 9 months from the end of the assessment year in which income was first assessable. So, the ITR for FY 2020-21 which was filed in AY 2021-22 can be picked up for regular assessment until December 2022. The Assessing Officer can serve a notice to the taxpayer under Section 143(2). The assessee can get the notice for scrutiny under Section 143(2) only within three months from the end of the financial year in which the returns were filed. The timeline has been reduced from 6 months to 3 months because of the reduced time frame due to the introduction of faceless assessment.
Illustration- Mr. Kapoor files his returns for FY2021-22 on June 30, 2022. He can receive a notice for complete scrutiny only until June 30, 2023, which is three months from March 30, 2023 (end of FY 2022-23).
- Ex parte assessment under Section 144 – This is also called Best Judgement assessment. This occurs in cases when there is no response from a taxpayer to a notice issued by the AO, no ITR filed, or no cooperation by the taxpayer in terms of furnishing information. The AO can carry out the assessment to the best of his knowledge and determine the sum payable by the taxpayer. For AY 2021-22 and onwards, the time limit for this kind of assessment is within 9 months from the end of the assessment year in which income was first assessable.
- Reassessment under Section 148 – This was introduced in The Finance Act 2021. This kind of assessment is applicable if any income has escaped the assessment. The AO should issue a notice under Section 148. The AO can conduct an inquiry and can provide the assessee with an opportunity to be heard. A notice can be served to show cause in no less than 7 days and no more than 30 days from the date on which such notice is issued. No such notice can be issued if 3 years have passed since the end of the relevant assessment year. But in cases where the AO has evidence that the income that escaped assessment amounts to 50 lakhs or more, notice can be issued beyond a period of 3 years but not beyond a period of 10 years.
Types of Scrutiny/Notices
Under Section 143(2), a notice can be issued in any of the following types:
- Limited Scrutiny – This is a Computer Assisted Scrutiny Selection (CASS) where cases are selected based on some parameters like mismatch in tax credits, inaccurate information, etc. It is considered ‘limited’ because it is limited to information in a particular area of the ITR
- Complete Scrutiny – In this type of scrutiny, the return filed along with all the supporting documents are assessed. Such cases are already flagged by CASS and the scope of scrutiny is unlimited. The assessing officer can verify the documents only for that particular assessment year and not beyond it.
- Manual Scrutiny – The cases selected are manually assessed for their correctness and accuracy. The criteria vary from year to year.
If an assessee receives a limited scrutiny notice, he is required to furnish only basic documents. If he receives a complete or manual scrutiny notice, he will need to furnish an elaborate set of documents like details of bank accounts, gifts made and received, credit card statements, bank account details, salary slips, etc.
The deadline for responding to the notices is generally 30 days. If the assessee has been asked to personally report to the I-T department, the assessee can go himself or authorize a representative who is usually a tax lawyer or expert.
Upon failure to cooperate and respond, the assessee may be subjected to a fine of Rs 10,000. The Assessing Officer (AO) can close the assessment process with unchallenged information under Section 144 of the IT Act. The AO could consider a higher taxable income and the assessee may owe a higher tax and pay a higher penalty
What are the new guidelines and rules for scrutiny set by the CBDT?
Recently, the Central Board of Direct Taxes issued its annual guidelines for Complete scrutiny during the financial year 2022-23.
According to the new guidelines, scrutiny will also be done in cases where information is received regarding tax evasion.With the integration of technology between various departments and also between countries, picking up such cases of tax evasion has become highly efficient. The guidelines also list out parameters and procedures for selection under complete scrutiny.
Section 10(23C) provides that the income earned by a charitable institution or trust shall be exempt from tax if the annual receipts do not exceed Rs. 5 crores. If an institution was denied approval under this section, or if it was given and then withdrawn, and the exemption continued to be claimed, then the case would be picked up for scrutiny.
In cases where a survey was conducted under Section 133A, the returns will be selected for compulsory scrutiny with prior administrative approvals from top officials. Some cases can be excluded such as cases where books were not impounded.
In cases where a search and seizure were conducted under Section 153(A), the selection of cases for complete scrutiny is to be done with prior approval.
For cases in which a notice has been sent under Section 143(1) calling for returns and no returns have been furnished, the case will be flagged to the National Faceless Assessment Centre for further investigation.
Notices for scrutiny should never be ignored even if one has done his filing. It may be because of discrepancies and unintentional errors. For example, you may not have reported the foreign income you receive as an Indian resident because you’ve already paid the tax on them. Here’s how to get credits for the foreign income.
It is better to rectify such errors and claim credits before any further penalization. To avoid making errors while filing, and to receive help if one receives such a notice, it is best to use the help of a CFO consultancy service.