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TAXING TIMES

Preparing for an income-tax scrutiny? Here's help.

First, what is a scrutiny assessment? Under the Income Tax (I-T) Act, if (the Act) an Income Tax Officer (ITO) is of the opinion that you have concealed any income in your returns or you have filed any inaccurate particulars in your return, he can do a complete scrutiny of the filed returns before giving a clean chit to your income tax assessment.

An ITO can serve a notice within six months from the end of the financial year in which you have filed your return.

Tax payers are permitted to engage and depute chartered accountants or other tax practitioners to attend before the ITO on their behalf. If you decide to appoint an authorised representative, you must execute a power of attorney (letter of authority) in his favour.

The main objective of the ITO during a scrutiny assessment is to make sure that the income shown in the return is properly disclosed and there is no tax evasion. Expenses claimed are also scrutinised to find out whether they have been actually incurred and are legitimate and not fictitious. For this, ITO may ask for statements of all your bank accounts, match your withdrawals with expenses, including those on credit cards, loans you may have given and or received from friends.

The first time tax payer should keep in mind the following aspects during the assessment proceedings: 

 

It should be ensured that all the credits of income appearing in the bank statement/pass book have been shown in the return. A balance sheet should also be prepared every year to keep track of assets and incomes. 
 

Adequate withdrawals (cash or bank) should be made for personal and household expenses. An ITO generally makes an estimate of money that a family like yours should be requiring for meeting household needs (based on the size of family, cost of living in the area of the city and other parameters) and compares it with withdrawals made by you for a given year. If there is a shortfall, then it is presumed that black money is spent for incurring day-to-day expenses and accordingly, added to your income with penal consequences. 
 

Ensure that payment for the expenses charged on the credit cards is done through regular bank account. 
 

A proper record should be maintained of all the investments made along with their sources and supporting documents/brokers' notes. 
 

If HRA exemption is claimed, then the proof of rent paid has to be furnished. 
 

You should generally not give interest-free loans when you have borrowed money on interest. The most common addition that is made in the scrutiny assessment is the addition of notional interest on interest free loans given by the tax payer to a close relative. 
 

These days an ITO also disallows expenses incurred to earn exempt income under a new section 14A of the Act. For instance, if you have borrowed to invest in dividend-yielding stocks, the interest paid on that borrowed money cannot be set-off against the professional income from other sources because the dividend is tax-exempt. So care should be taken by the assessee to bifurcate such borrowings or expenses incurred for earning tax-free returns.

Finally, the ITO passes the assessment order and a Notice of Demand recording the statements furnished, submissions and attendance made before him.

No doubt, the scrutiny process before the ITO does cause some hardship to the tax payer as the main focus of the IT department is to recover as much tax as possible. But taking proper measures and good record-keeping from the beginning itself can go a long way to mitigate the trouble.

The writers are chartered accountants