Income Tax Scrutiny Notice

An income tax scrutiny notice can be defined as an official communication sent by the Income Tax Department to the tax payer after an assessment is made under Section 143(2) of the Income Tax Act. The objective is simple, to ensure that the details you provided in your ITR are correct and matches the data available to the IT Department from other sources such as Form 26AS, Form 16, etc.

A scrutiny notice does not automatically mean that you are being accused of tax evasion. It indicates that tax authorities want further clarity and/or additional information such proof of specific claims, transactions, deductions, or expenses that have been included in your ITR.

Any type of income tax notice is a key part of the income tax scrutiny assessment system. The primary goal being detection of errors, mismatches, and inconsistencies in the filed return.

The scrutiny assessment income tax process involves a detailed examination of your financial details.

The tax authorities may pick your previously filed income tax return for closer scrutiny based on risk parameters, data analytics, or random selection. An income tax scrutiny notice is issued, if your ITR is chosen for scrutiny and the most common among these is a scrutiny notice issued u/s 143(2).

Below are the 3 different types of scrutiny assessment that your ITR may undergo:

You may receive an income tax notice if the details filed in your ITR do not match the information the department already has. Key reasons for receiving an income tax scrutiny notice include:

• Non-filing of ITR: The Income Tax Department may pick you for tax scrutiny, if you are required to file an income tax return but have not done so.
• Errors, omissions, or incorrect information in the filed return: Errors such as incorrect income reporting, mismatched TDS credits, or incomplete ITR forms can trigger an income tax scrutiny.
• Non-disclosure of income: Income from bank interest, fixed deposits, or other sources that is not declared in ITR, even if TDS is deducted, may result in receiving a scrutiny notice.
• Unusual or high-value transactions: Large cash deposits in your bank accounts, substantial purchases, property sales, or transactions well beyond the declared income may be flagged. This also may lead to issue of an income tax scrutiny notice.
• Mismatch between reported income and data from other sources: Differences between the data your declaration and the data in forms like 26AS, AIS, etc. can result in your selection for scrutiny.

Understanding the income tax scrutiny time limit helps you avoid unnecessary stress. The tax department must follow strict timelines when issuing these notices.

• The income tax scrutiny notice time limit under Section 143(2) is 3 months from the end of the financial year in which you filed your ITR.
• Suppose you had filed your ITR in FY 2024–25. Then you should get the notice on or before 30 June 2025.
• If the department fails to issue the notice within this 3-month window, the “scrutiny assessment” cannot proceed under 143(2).
• You must respond within the specified time limit. Failure to do so can lead to court proceedings being initiated along with hefty fines and even imprisonment.

When you receive a notice, you should not panic. This is just a request for additional information.

• Step 1: Use your credentials to log in to the income tax portal. Access your e-filing account, then go to the worklist, e-Proceedings.
• Step 2: Open and review the notice. Click on “View Notice” to get a clear idea of the scrutiny that tax department will be conducting. This can help you provide the correct response in line with the income tax scrutiny notice you have received.
• Step 3: By clicking "Submit Response," you can choose your response as "Agree" or "Disagree". This is to indicate whether you accept the department's points.
• Step 4: If you agree, upload the ITR JSON and supporting proofs (like bank statements, tax saving deduction proofs, etc.) on the portal when prompted. In case you disagree, you can choose and submit the reason for such disagreement.
• Step 5: After you have made your submission, you will get a transaction number.

After you have provided your response, the assessing officer will review your submission and take appropriate action in due course.

The documents that you will need to submit in response to a scrutiny assessment notice depend on the type of scrutiny that is being conducted. Some common financial documents that may be required include:

• Copy of the filed Income Tax Return and computation statement.
• Bank statements for all accounts held by the tax payer for the assessment period.
• Documentation of income such as Form 16, Form 16A, if you are salaried.
• Documentation of tax saving deductions such as premium payment receipts for life insurance and health insurance, home loan interest certificate, investment proofs for tax saver FD investment, tax saver mutual fund investments, etc.
• Business financial statements, purchase or sales invoices, and bill details (for self-employed or business ‍‌owners).

It involves a detailed review of your income tax return by the assessing officer (AO) to confirm that income, deductions, exemptions, and taxes paid are correctly declared.

After you file your return (or respond to a notice under Section 142), the AO may decide if a deeper examination of your filing is needed. That begins with an income tax scrutiny notice under Section 143(2), asking you to submit documents and clarifications.

Once you have provided the required proofs, such as bank statements, TDS records, investment proofs, bills/invoices, or asset-sale documents, the AO cross-verifies them with data from various authentic sources.

Finally, the AO issues a formal assessment order under Section 143(3). The order may:

• Accept your original return, or
• Disallow certain deductions, make additions to income, and demand extra tax or add a penalty.

The assessment period depends on the Assessment Year. It can range from 12 to 21 months after the end of the relevant assessment year. After this, as a taxpayer, you can,

• Accept the Income Tax authority’s decision or
• File a plea with the Commissioner of Income Tax under Section 263 or 264.

So, understanding scrutiny notices and knowing ways to keep safe from them is a must.

In order to reduce the risk of receiving a Just follow some basic rules:

• File your Income Tax Return before the due date
• Report all income sources (salary, interest, rent, income from other sources, etc.) so no income is left unreported.
• Make sure that the figures in your ITR are aligned with the data like Form 26AS, AIS, and TIS. Differences in figures can cause scrutiny.
• Only claim deductions for which you have proper supporting documents.
• Maintain detailed records of financial transactions such as bank statements, investment proofs, receipts, and papers for big ‍‌transactions.
• Take help from professional tax consultants while filing income tax returns to reduce the risk of errors, if necessary.

Not responding to an income tax scrutiny notice in a timely manner can have various consequences, such as:

• On ignoring a notice under Section 143(2), the assessing officer may proceed with a “best-judgement assessment” under Section 144. This often results in a higher an increased tax demand being made.
• A penalty of ₹10,000 may be imposed for each instance of non-response under Section 272A.
• If the officer’s assessment leads to a higher tax demand and you wish to appeal, you will have to pay 20% of the assessed tax before filing the appeal. This will increase your financial burden.
• Additionally, it can also lead to imprisonment if you are found guilty of wilfully submitting supressing key details in your filed ITR.