Income Tax Scrutiny

Income Tax Scrutiny: Overview

Every year, the Income Tax Department reviews the income tax returns of thousands of Indians and monitors their income tax return filing patterns. While some of the scrutiny cases are selected randomly, others are deliberately selected because they meet the pre-set watch list criteria that have been laid down by the Income Tax Department. However, it should be remembered that if you have received an income tax scrutiny notice, you do not have major reasons to worry and sweat about.

The fact of the matter is that the IT Department sends this scrutiny notice every year to a large number of salaried individuals and businessmen who file their income tax returns. It does not mean that you are found guilty of any charges; it simply is a habitual action undertaken by the income tax team every year as a part of their routine check and yearly supervision. The idea is to assess your income tax return filing pattern and ensure that everything is in order as per the standard protocols and norms laid out by the department.

Knowing all about Income Tax Scrutiny

Income tax scrutiny notice is issued by the Income Tax Department after the income tax return is filed by you. The department may ask you to initiate scrutiny for your case. This may be a result of either a random check or a deliberate attempt. This notice may be issued under a particular section or clause and clearly defines the reason for scrutiny. The idea is to provide the assesse an opportunity to substantiate his income declared and the expenses, losses, deductions and exemptions announced in a financial year.

The process of scrutiny

The process of scrutiny starts with the notice from the income tax department. After this, the assessing officer may conduct inquiries as deemed necessary from the assesse. The idea is to monitor the income declared and other deductions as mentioned by the employee during income tax return process.
Reasons for Income Tax Scrutiny Notice

There are several reasons why an income tax scrutiny may be initiated in your case. Some of the important reasons are described below:

Failure to file a Return:

One important reason why a scrutiny is initiated is because you may have failed to file an ITR for current financial year or for multiple years. Sometimes, your calculations may not match with that of the IT department or you may have inadvertently missed declaring an income in a particular financial year.

Sudden rise or fall in income

This is a self-explanatory case where your tax return amount has increased or decreased drastically in a very less time. This may force the IT department to check the details of your income and IT return filed by you. For instance, if your income tax return has jumped significantly from Rs 5 lakh in one year to Rs 50 lakh in the next year, it may ring an alarm in the minds of IT officers who may then issue a notice of scrutiny for you.

High value transactions in a financial year

In case you have done a very high value transaction in a year, which is different from your normal spending habit, you may get a scrutiny notice. For instance, if you have purchased a house or a piece of land or have received a huge amount in your account from someone which is not a part of your normal income, your case may classify for a scrutiny. Also, huge credit card expenses, which may affect your cash inflow and outflow may be another reason for scrutiny.

Mismatch in TDS Credit

In case there is a mismatch in your TDS credit as claimed by you with respect to the details of the income tax department, your individual case may fall under the scrutiny of IT department.

Declaring lesser income or more loss as compared to previous fiscal year

In case you have declared significantly lesser income or more loss as compared to your previous year’s declaration, you may come under the scrutiny. For a normal salaried person, such a situation is unlikely to happen and hence IT department may want to question you. These things often happen in case of huge business where salary or losses are highly volatile. Even in those cases, chances of receiving scrutiny notice is quite high.

Non-declaration of exempted income

Some people mistakenly think not to disclose exempted income during IT return. Income from long term capital gain, interest income from saving bank account or FDs up to Rs 10,000 or any gifts received from others all come under exempted category. But still these things should be clearly announced while filing IT return so as to save yourself from future trouble.

What to do in case you receive an Income Tax scrutiny notice

Do Not Panic

The first important thing to understand is that you do not have to panic at the sight of income tax scrutiny notice. The scrutiny may just be a result of any random selection and in that case you do not have to worry at all about the notice. It may just be a regular check on your income and return statements. In case you have nothing to hide from the IT department, then you do not have to worry about the notice. In case you have proper justification of any unusual pattern in your income, deduction or expenses in a financial year, then scrutiny will become a normal routine check for you.

Read the details of the notice

As soon as you receive the notice of scrutiny, please check all the details of the notice including your name and PAN number and the fiscal year to which it refers to. Also check the name of the office that has issued it or the name of the assessing officer. It is very important to read out the details of the notice and find out the section under which the notice has been issued to you. You may take an expert advice about the section. You can then prepare your reply as per the terms mentioned in the notice.

Align your documents

It is very important that even if you have a clear case, you arrange for all your documents well in advance as these may be required to be submitted at the time of investigation. The important documents that may be required are your salary slips from current or previous employer as the case may be, your IT return statements, your bank statements, any other salary or other income statements, etc.

Important things to keep in mind when your case comes under IT scrutiny

Do not ignore the scrutiny notice

It is very important that you do not ignore the notice or take it lightly. This can further complicate things for you and by doing this, you may have already lost the first battle against the IT department. They may start judging you by this and may put severe penalties later on for your reckless behaviour.

Never hide any Information

Please note that Income tax department has all the details of the transactions done by you in a financial year. Never ever try to hide any such information from them which you ought to declare and show at the first place. By doing so, you will become all the more vulnerable and may be liable for heavy fine or penalty.

Always Act on Time

It is very important that you take this matter with utmost sincerity and pay due attention to it. Any information or documents asked by the IT department must be submitted before the due date. Do not delay any of your responses and comply with all the deadlines else things may not fall in your favour.

Take Expert Advice if required

It may be quite possible that you do not understand each and every term of the notice. Ignoring those terms upfront and not taking any action on those just because of your incognizance will be qualified as mere foolishness. In case you need any assistance on the matter, seek professional help or an expert advice. Consult a chartered accountant who can then give you proper direction as how to deal with the notice.

Keep note of your scrutiny number

Your scrutiny number or notice number will act as a reference for all your future communications with the IT department. Hence it is important to keep it handy with you always as you may require to quote it at any step of the process.

Please remember that receiving any income tax scrutiny notice is not uncommon. It may be uncommon for you but that does not put you under any charge or prove you guilty. If you are clear on your part and have not hidden any information from IT department, you have no reasons to worry about. By following some of the aforementioned points that triggers such a notice, you may want to be extra careful in future so that your chances of receiving such a notice from income tax department is bare minimum.

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