Respond to Income Tax notice, or face recurring penalties: Experts

Provide documentary evidence, else officer could make assessment based on his judgement

Last week the Income Tax Appellate Tribunal (ITAT) reiterated that notices issued under Section 143(2) of the Income Tax (I-T) Act must be served to assessees within six months. When the I-T department finds discrepancies in a taxpayer’s I-T Return (ITR), it issues a notice under Section 143(1), 143(2), or 143(3). Many taxpayers have received them in recent days. When you get such a notice, it can be scary. Stay calm and respond with the appropriate documents in support of your case.
 
Section 143(1): Once you file your ITR, the Central Processing Centre (CPC), Bengaluru, processes it under Section 143(1) within one year from the end of the financial year in which the return was filed. Gopal Bohra, partner, NA Shah Associates, says, “CPC Bengaluru processes the ITR to check for arithmetic accuracy, incorrect claims, mismatch in Tax Deduced at Source (TDS) credit claimed in ITR compared to Form 26AS or Form 16, inconsistency between particulars in ITR versus tax audit report, etc.” Under this section, the department provides a comparison of the tax liability as reported by the taxpayer vis-à-vis that calculated by the CPC.
 
Processing of return by CPC results in one of three outcomes: Return processed without any adjustment; return processed determining refund; and return processed resulting in demand, or reduction in refund claim.
 
Bohra says: “In case the variation is incorrect, the taxpayer can file for rectification or appeal, based on the facts of his case.”
 
Section 143(2): Through a notice under Section 143(2), the department informs the assessee that his return has been selected for scrutiny, of which there are three types.

 
The first is limited scrutiny (under Computer Assisted Scrutiny Selection or CASS) where the scope is restricted to the areas mentioned in the notice.
 
The second is complete scrutiny. It indicates that the department wants to carry out a complete scrutiny of the return filed and of related documents.
 
The third is manual scrutiny. On the basis of pre-defined criteria issued by the Central Board of Direct Taxes (CBDT) each year, specific cases are selected for manual scrutiny.
 
Archit Gupta, chief executive officer (CEO) Cleartax, says, “The primary purpose of such a scrutiny is to check for understatement of income, claim of excessive loss, or underpayment of tax.”
 
On receiving a scrutiny notice under Section 143 (2), the taxpayer should check the eligibility. Gupta says, “It means that the notice should be properly addressed. It should be sent via registered post. Most importantly, it must be received within six months from the end of the financial year in which the return was filed.”
 
On receiving this notice, the assessee needs to furnish material and evidence on various matters, as asked for.
 
Take this notice seriously and respond to it. Bohra says, “Non-compliance can lead to a penalty of Rs 10,000 for each failure to respond. If you don’t respond, the tax office can also complete the assessment ex-parte.”
 
Section 143(3): Once the assessment is completed, the order is issued under Section 143(3). It informs the taxpayer if any tax or interest is due from him, or if he will receive a refund. Naveen Wadhwa, deputy general manager, Taxmann, says, “If the assessee is aggrieved by the assessment order, he can make an appeal before the Commissioner of Income Tax (Appeals) or apply for revision.”