Income tax notice: Respond with facts and documents, not panic

Verify it, respond within deadline; file revised or updated return if needed

The July 31 income tax return (ITR) filing deadline is approaching. Tax filing at the last moment should be done with the utmost care. Errors such as mismatched income, incorrect tax credit claims, undisclosed bank interest or the wrong ITR form can trigger notices from the Income-Tax (I-T) department. The department uses data analytics and information from the Annual Information Statement (AIS), Form 26AS and financial institutions to identify discrepancies.

 

Understand what each notice means 

After an ITR is filed, an automated intimation under Section 143(1) may confirm the return, issue a refund or raise a tax demand. A Section 139(9) notice allows taxpayers to correct a defective return, such as one filed using the wrong ITR form or without mandatory details. 

“A Section 143(2) notice means the return has been selected for scrutiny, requiring the taxpayer to substantiate the income, deductions and exemptions claimed. A Section 142(1) notice seeks additional information or documents needed to complete the assessment. In essence, Sections 143(1) and 139(9) relate to return processing, while Sections 143(2) and 142(1) involve a more detailed examination of the taxpayer’s return,” says Akhil Chandna, partner and global people solutions leader, Grant Thornton Bharat. A notice under Section 156 raises a tax demand after an assessment. 

Avoid errors that trigger notices 

The department cross-checks returns against data from banks, employers, brokers and other reporting entities. “Common triggers include unreported income, incorrect TDS or tax credit claims, errors in reporting capital gains, wrong residential status, incorrect deduction claims, non-disclosure of foreign assets or income, filing the wrong ITR form, and mismatches involving high-value transactions such as property purchases, investments and foreign remittances,” says Chandna. 

Before filing, reconcile the ITR with AIS, the taxpayer information summary (TIS), Form 26AS, Form 16, bank statements, capital gains statements and other relevant records. 

Transactions that may attract scrutiny 

The department tracks transactions through AIS, the Statement of Financial Transactions (SFT) and tax deducted at source (TDS) statements and other reporting mechanisms. “Transactions that commonly attract attention include property purchases and sales, large securities transactions, foreign assets and income, overseas bank accounts, large cash deposits, high-value spending such as luxury purchases or foreign travel, and unexplained gifts, loans or other financial transactions,” says Preeti Sharma, partner, global employer services, tax and regulatory advisory, BDO India. 

The existence of a reportable transaction by itself does not imply tax evasion. “In many cases, the department may seek clarification simply to verify that the transaction has been correctly disclosed and appropriate taxes have been paid,” says Sharma. 

When reassessment begins 

The assessing officer (AO) may begin reassessment when data analytics, audit findings or information from other authorities suggest income has escaped assessment. Except in cases such as search proceedings, the AO first gives the taxpayer a notice and an opportunity to explain why reassessment should not begin. 

“After considering the taxpayer’s response and supporting documents, the AO decides whether to issue a formal notice under Section 148. This pre-notice hearing acts as an important safeguard, ensuring taxpayers get a fair opportunity to present their case before reassessment proceedings begin,” says Sharma. 

Demand, adjustment and rectification notices 

A demand notice requires payment of additional tax, interest or penalty after a return is processed or assessed. Before adjusting a refund against an outstanding tax demand, the department issues a Section 245 notice and allows the taxpayer to respond or object. 

A Section 154 notice is issued to rectify an apparent error, such as an arithmetical mistake or an incorrect tax credit. 

“Taxpayers should not ignore any of these notices. Verifying the facts and responding promptly can help resolve issues early and avoid unnecessary litigation,” says Sharma. 

Identifying fake notices 

Genuine emails usually come from the @incometax.gov.in domain, while legitimate short message service (SMS) communications typically carry the ITDCPC sender ID. Treat emails, SMSes, WhatsApp messages or calls seeking payments, know your customer (KYC) updates, one-time passwords (OTPs), passwords or bank details as possible fraud. 

“The safest way to verify a notice is to log in to the Income Tax e-Filing portal and check whether it appears under ‘Pending Actions’, ‘e-Proceedings’ or ‘View Notices and Orders’. Every genuine notice also carries a document identification number (DIN), which can be verified on the portal,” says Shubham Jain, director, SVAS Business Advisors. 

Respond promptly 

Read the notice, identify the issue, the relevant section and the deadline, and reconcile the details in the ITR, Form 26AS and AIS before replying through the Income Tax e-filing portal. 

“Under the NUDGE initiative, the I-T Department may send preliminary SMSes or emails highlighting possible discrepancies and encouraging voluntary corrections before formal proceedings are initiated,” says Neeraj Agarwala, senior partner, Nangia & Co. 

Keep supporting documents ready 

Keep the records used to file the ITR readily available. “These may include Form 16, bank statements, bank interest certificates, investment proofs, capital gains statements and tax payment challans. Having the relevant documents on hand will help taxpayers respond accurately and resolve the issue more quickly,” says Agarwala. 

Revise or update where needed 

File a rectification request if an intimation, demand notice or order contains an apparent error. If the ITR itself contains an error, file a revised return within the prescribed time or, where permitted, an updated return. 

“If taxpayers disagree with a notice or tax demand, they should respond through the Income Tax e-filing portal with supporting documents within the stipulated deadline. They shouldn’t ignore any communication,” says Jain.

 

Why timely response is crucial

• Allows taxpayers to explain facts, submit supporting documents 
• Prevents authorities from passing an ex parte order based on information available to them
• Averts additional tax demands and the denial of eligible deductions, exemptions, tax credits
• Helps avoid interest, penalties, and, in extreme cases, prosecution
• Prevents additional proceedings, costs, and loss of time

Source: SVAS Business Advisors

The writer is a Delhi-based independent journalist