Divya Baweja, Anurag Jain and Shubham Goel
Every year the Income tax department verifies the correctness of the income tax returns filed by taxpayers by sending a scrutiny notice to them. This exercise is aimed at ensuring that the taxpayer has not understated the income or has not computed excessive loss or has not underpaid tax in any manner.
Scrutiny notice received by an individual can be classified into limited scrutiny or complete scrutiny. Under limited scrutiny, a taxpayer is only required to submit details with respect to specified transaction/query for which scrutiny has been initiated.
However, in case of a complete scrutiny, a tax officer can ask taxpayer to furnish an exhaustive list of documents/information, which he feels is relevant for detailed audit of the tax return.
To issue scrutiny notice, tax department follows certain pre-determined criteria (e.g. substantial tax refunds, foreign tax credit, etc.) for selecting cases for scrutiny. Further, scrutiny cases are also being selected under Computer Aided Scrutiny Selection (CASS) based on broad-based selection parameters.
It is important to note that income tax return can be picked up for scrutiny within 6 months from the end of Financial Year (FY) in which the return was filed. For example, if the tax return for FY17-18 was submitted on July 31, 2018, scrutiny notice can be issued by September 30, 2019. Therefore, it is important to review the date of the notice so as to inform the tax officer if notice is within prescribed time or not.
While, normally, scrutiny notice elicits a physical visit by a taxpayer or his authorised representative (i.e. chartered accountant, tax lawyers, etc.), however, recently with a view to promote efficiency, transparency and accountability, income tax authorities have launched the ‘e-proceeding’ facility. Under this, the government has mandated income tax officers to take recourse to electronic communications for all limited and complete security cases.
Generally, the scrutiny of a tax return is a regular process and a taxpayer should not panic upon receiving scrutiny notice from the tax department. Some key check points which help in responding to notices include verifying details on the notice such as name, Permanent Account Number (PAN) and the FY for which the same has been issued, along with details of the jurisdiction of the tax officer.
Depending on the type of scrutiny notice issued (complete/limited), it is important to review and arrange all documents (e.g. computation sheet, Form 16, details of interest earned, Form 26AS, etc.) well in advance before the reply is submitted.
The scrutiny notice prescribes a date by which the requested documents/information need to be furnished to the tax officer/uploaded into the e-filing website. It is advisable that in case the requisite documents are not ready by the said date, then a request letter for adjournment is submitted to the tax officer seeking additional time to collate and submit the required documents/details. In all correspondences with tax authorities, it is important to quote the PAN and the FY.
In cases where personal appearance is requested by officer, it should be ensured that appearance either in person or via authorised representative is made, as any failure to do so may initiate penalty proceedings.
It should also be kept in mind that the tax department has a mechanism in place to collate the details of major transactions carried out by a tax payer during a particular FY. In case, at the time of filing of tax return any error was committed, the tax payer has an option to disclose the same before the tax officer.
It is also important to note that the tax officer has the right to complete the scrutiny on ‘Best Judgement’ basis as he deems fit as per the information available with him in case he is not satisfied with the details submitted before him or if full particulars of information sought, has not been submitted to him as per his satisfaction. Therefore, it is prudent to furnish the information/documents as requested by tax officer during the course of the scrutiny proceeding.
In a nutshell, above points should be borne in mind by a taxpayer so that adequate information can be submitted timely during the course of assessments. This can go a long way in smooth closure of scrutiny proceedings and minimise the risk of any adverse implications.
(Divya Baweja is Partner, Deloitte India; Anurag Jain is Senior Manager with Deloitte Haskins and Sells LLP; and Shubham Goel is Deputy Manager with Deloitte Haskins and Sells LLP.)