PROSPERR.IO

In India, the Income Tax Department employs various mechanisms to ensure tax compliance and accuracy in the reporting of income, deductions, and tax payments. One critical tool in this process is the issuance of scrutiny notices under Section 143(2) of the Income Tax Act. These notices serve as a formal call for taxpayers to substantiate the income or loss declared, exemptions and deductions claimed in their income tax returns. 

Let's understand the significance, the time limit and the importance of timely compliance of this notice.

Purpose and Issuance of Section 143(2) Notices

Section 143(2) of the Income Tax Act empowers the Assessing Officer (AO) or the prescribed income-tax authority to issue a notice to the assessee (taxpayer) for taking up the return under scrutiny if it is deemed necessary to ensure that:

• The income has not been understated.
• Excessive loss has not been claimed.
• The tax has not been underpaid in any manner.

The notice under Section 143(2) is followed by the notices under Section 142(1), through which the taxpayer is asked to produce the information and documents on the specific points within the time limit prescribed in the notice.

Also Read if you want to know Various types of Income-tax Notices 

Time Limit for Issuance of Notices

A crucial aspect of Section 143(2) notices is the time limit within which the Assessing Officer or the prescribed income-tax authority is required to issue such notice. The law mandates that no notice under this section shall be served on the assessee after the expiry of three months from the end of the financial year in which the return is furnished. It means the notice must be issued within 3 months from the end of the financial year in which the return is filed.

For example, if a taxpayer files his return for the financial year 2023–24 ( Assessment Year 2024–25) on July 31, 2024, the notice under Section 143(2) must be served to the taxpayer by the Assessing Officer or Prescribed Authority by June 30, 2025.

Issuance Through Computer-Assisted Scrutiny Selection (CASS)

A significant majority of scrutiny notices under Section 143(2) are issued through the Computer Assisted Scrutiny Selection (CASS) system. CASS is an automated system that uses data analytics and pre-determined risk parameters to identify tax returns for scrutiny. This method ensures an objective and efficient selection process, minimising human bias and focusing on returns that exhibit significant discrepancies or risk factors.

Manual Scrutiny Based on CBDT Guidelines

In addition to CASS, some cases are selected for scrutiny based on compulsory scrutiny guidelines issued by the Central Board of Direct Taxes (CBDT). These guidelines outline specific criteria and risk factors that necessitate a manual selection. Manual scrutiny is typically reserved for cases involving complex tax issues, high-value transactions, or significant deviations from standard reporting norms. The CBDT periodically updates these guidelines almost every year to address emerging tax compliance challenges and trends.

Responding to a Section 143(2) Notice

• Receiving a Section 143(2) (scrutiny notice) requires prompt and careful attention.
• Review the Notice: Understand the specific requirements and the date by which a response is needed.
• Gather Documentation: Collect all relevant documents and evidence that support the income, deductions, and claims made in the tax return.
• Timely Response: Ensure that all requested documents and explanations are submitted within the stipulated time frame to avoid penalties and adverse assessment orders.

Conclusion

Scrutiny notices play a crucial role in maintaining the integrity of the tax system by verifying the accuracy of returns filed by taxpayers. The dual approach of using CASS for automated selection and manual scrutiny based on CBDT guidelines ensures a balanced and effective scrutiny process. Taxpayers should remain diligent in their reporting and be prepared to substantiate their claims if selected for scrutiny. Understanding the process, including the critical time limits, and responding appropriately can help mitigate the risks and complexities associated with these notices.

By staying informed and proactive, taxpayers can navigate the scrutiny process with confidence, ensuring compliance and minimising potential disputes with the tax authorities. Click here to book your FREE tax assessment call

Disclaimer- The article is only for educational purposes and is not to be construed as tax advice. The relevant provisions of the Income-tax Act may be referred to, for complete understanding.