Overview on Income Tax Scrutiny u/s 143(2) Notices

Overview on Income tax scrutiny under section 143(2) Notices

When the Income Tax Department finds discrepancies, whether minor or major, in your income tax returns, a notice is issued under Section 143(2). These discrepancies could involve under-reporting income or over-reporting losses. The notice aims to ensure that you have not underpaid taxes. U/s 143(2) of the Income Tax Act, the Income Tax Department issues formal notices to taxpayers for conducting scrutiny assessments, usually under Section 143(3).

These notices must be issued within three months from the end of the financial year in which the ITR is filed. Receiving a Section 143(2) notice signifies a scrutiny assessment process. Timely and accurate responses, supported by relevant documents, are essential to avoid penalties and ensure compliance. The basic aim of income tax scrutiny is to check & Ensure that:

• • You have not computed excessive loss
  • You have not understated your income
  • High value transactions
  • Any mismatch in Income figures
  • You have not underpaid the tax in any manner or
  • Any other defect in the Income tax return

Types of Notices under Section 143(2)

There are three types of scrutiny notices under Section 143(2):

Limited Scrutiny:

• Selection Basis: Specific parameters, often identified through Computer-Assisted Scrutiny Selection (CASS).
• Focus Areas: Particular issues mentioned in the notice, such as discrepancies in tax credits or property sales.

Complete Scrutiny:

• Selection Basis: Cases identified through CASS.
• Scope: Comprehensive review of the filed ITR and supporting documents, though limited to the specific assessment year.
• Documents: The assessing officer can only inspect documents relevant to the assessment year in question.

Manual Scrutiny:

• Selection Basis: Criteria defined by the Central Board of Direct Taxes (CBDT), which may change annually.
• Scope: Ensures a thorough examination of relevant cases based on the specified criteria.

Time Limit to Issue the Notice

The notice under Section 143(2) must be issued within three months from the end of the financial year in which the return was filed. If Taxpayer have do not response or answer within thirty days, Taxpayer ITR will be processed after making the relevant changes for which Income tax notice has been shared. The AO may close the assessment with information he has with best judgment u/s 144 under the Income tax Act

Response to Section 143(2) Notices

Responding to a Section 143(2) notice involves several steps:

Drafting a Response:

• If you have not filed returns for the financial year, the assessing officer cannot issue a notice under Section 143(2). They must first issue a notice under Section 142(1), asking you to file returns.
• For those who have filed their return, the officer can issue a Section 142(1) notice requesting further information based on the filed return. This can include documents supporting deductions, exemptions, allowances, reliefs, and other claims.
• Proof Requirement: You must provide proof related to all your income sources. The assessing officer will conduct a detailed enquiry. Address each point mentioned in the notice comprehensively.
• Provide explanations supported by relevant documents to clarify any discrepancies identified by the department.

Submission:

• Submit the response along with all supporting documents to the Income Tax Department.
• Use the e-proceedings tab on the e-filing portal to submit the response within the stipulated timeframe mentioned in the notice.

Follow-Up:

• Keep track of any further communications or requirements from the department to ensure compliance and resolution.

Time Limit to Issue the Final Assessment Order

Final Order: After considering all submissions, a final order is passed under Section 143(3) confirming whether the income shown in the return is accepted or if there are further additions. This order will indicate if there is any additional tax payable.

AY	Basic Time limit from end of Assessment Year
Assessment Year 017-18 or before	Twenty One months
AY 2018-19	Eighteen months
Assessment Year 2019-20 onwards	twelve  months

What Happens if You Fail to Respond?

Failure to respond to Section 143(2) notices or Ignoring the notice can lead to severe consequences can lead to severe following consequences:

Penalties:

• A penalty of Rs. 10,000 may be imposed u/s 272A of the Income Tax Act for each failure to respond.

Best Judgment Assessment:

• Under Section 144, the assessing officer may pass a best judgment assessment based on available information.
• This may result in a higher taxable income being determined and additional tax liabilities being imposed.
• The assessment officer may close the assessment with available information, resulting in a potentially higher taxable income and additional tax liabilities u/s 144 of the Income Tax Act

Higher Tax Demand:

• Disputing a higher tax demand requires a minimum of 20% of the tax due to be paid before filing an appeal with higher authorities.

Prosecution:

• Failure to respond can lead to prosecution, with potential imprisonment if found guilty.