PROSPERR.IO

There's a hierarchy to income tax notices. Some are routine. Some are informational. And then there's Section 143(2)—the one that makes people call their CA immediately.

Section 143(2) means detailed scrutiny of your return. Not quick verification. Not just submitting documents. Full-blown scrutiny where the Assessing Officer examines your return line by line, questions your claims, expects you to defend every rupee.

It's more serious than Section 142(1). Takes longer. Involves multiple hearings. And yeah, it's stressful.

But knowing what scrutiny entails, why returns get selected, and how to navigate the process makes it manageable. Most cases involving honest taxpayers end with either no changes or minor adjustments. Problems come when people panic or don't respond properly.

What Section 143(2) Actually Means

Section 143(2) allows the Assessing Officer to call you for scrutiny assessment. It's the formal notice that says "we're examining your return in detail."

The notice has specific time limits. For returns filed before the due date, AO can issue Section 143(2) within six months from the financial year end. For late returns, within six months from the month end when filed.

Example: Return filed July 2024 for AY 2024-25. Financial year ends March 2025. Section 143(2) can be issued until September 2025. Miss that window? Return is processed as filed under Section 143(1) without scrutiny.

Once issued, scrutiny proceedings begin. AO asks for information, documents, explanations. You attend hearings—personally or through authorized representative. Process continues until final assessment order.

Time limit for completion: generally 12 months from the assessment year end. Extensions possible but need approval from higher authorities.

Why Returns Get Selected for Scrutiny

Selection isn't random. The CASS (Computer Assisted Scrutiny Selection) system analyzes returns using risk criteria. Some get flagged automatically. Others get selected manually.

• High-value transactions: Property purchases, share sales, large mutual fund redemptions, cash deposits crossing thresholds especially if reported income seems low.
• Significant refund claims: Claiming ₹2 lakh refund when your history shows you've always paid tax gets scrutinized.
• Loss reporting: Business losses, especially for new businesses. Losses carried forward from multiple years. House property losses exceeding reasonable limits.
• Disproportionate deductions: ₹1.5 lakh 80C deduction on ₹5 lakh income looks unusual.
• Income-expenditure mismatch: Reported income ₹6 lakh but expenditure indicators (car purchase, foreign travel, credit card spends) suggest higher income.
• Large cash dealings: Substantial cash deposits or withdrawals that don't align with your profile.
• Specific sectors: Real estate, construction, trading, professional services face higher selection rates.
• Random sampling: Some returns genuinely get picked randomly. Nothing wrong. Just bad luck.

What the Notice Contains

Section 143(2) notice is formal and specific:

• DIN: Verify on e-Filing portal to confirm authenticity.
• Assessment Year: Which year's return is under scrutiny.
• Jurisdictional details: AO's name and office address.
• Date and time for appearance: First hearing. Can be physical or virtual.
• Questionnaire: Attached list of questions or documents the AO wants.
• Mode of service: Email, registered post, physical delivery.
• Consequences warning: What happens if you don't comply.

Notice gets served through multiple channels email, SMS, post, e-Filing portal notification. Hard to claim non-receipt.

Initial Response: What You Need to Do

First, verify the notice. Confirm the DIN using the e-Filing portal. Fake scrutiny notices are rare but exist.

1. Engage a professional: Scrutiny is complicated. Unless you're confident with very simple affairs, get a CA. Cost is worth it compared to potential tax demands.
2. Gather all documentation: Bank statements, investment proofs, property documents, salary slips, Form 16, business books if applicable. Everything related to income and expenses for that year.
3. Review your own return: Before the AO questions it, you question it. Identify issues yourself first.
4. Prepare written submissions: Better than oral explanations. They're on record, clear, supported with documents.
5. File authorization: Form 11A through e-Filing portal authorizing your representative. Without it, they can't effectively argue your case.

The Scrutiny Process: How It Actually Works

Scrutiny spans months:

• First hearing: AO discusses issues. Issues questionnaire. Gives deadline for response—7 to 30 days.
• Document submission: Submit requested documents physically or through e-Filing portal. Keep proof.
• Subsequent hearings: AO calls you again after reviewing submission. Could be multiple rounds.
• Cross-examination: AO verifies with issuing authorities—your bank, employer, transaction parties.
• Draft assessment order: For additions above ₹5,000, AO issues draft showing proposed changes. You file objections.
• Final assessment order: After considering objections, AO passes the final order. Could accept return as filed, make additions, or disallow deductions.
• Demand notice: If additional tax is determined, you receive demand notice with amount and deadline.

Timeline stretches. What starts in October 2024 might not conclude until late 2025 or early 2026.

Common Areas of Scrutiny

Each area requires specific documentation. Missing one document can lead to disallowance of the entire claim.

Real Scenario: High Refund Claim Case

Someone files return showing ₹5 lakh income. TDS ₹1.2 lakh, advance tax ₹40,000. Total tax paid ₹1.6 lakh. Tax liability at 5% slab: ₹12,500. Refund claimed: ₹1.47 lakh.

AO issues Section 143(2). Questions: Why so much TDS if income is just ₹5 lakh? Why advance tax in lowest bracket?

Explanation: Changed jobs mid-year. First employer deducted TDS assuming full year employment. Second employer also deducted TDS.

Combined TDS was excessive. Advance tax based on first employer's projection, but actual income ended lower after job change.

Documents: Both Form 16s with employment periods. Resignation letter. Offer letter. Month-wise income breakup.

Outcome: AO verifies forms, checks TDS with employers. Satisfied with explanation. Return accepted. Refund processed.

But if taxpayer can't produce a second Form 16, can't prove employment, story doesn't add up—AO disallows some TDS, reduces refund, could add undisclosed income. Very different outcome.

How to Handle Scrutiny Effectively

Attend all hearings: Skipping is the worst move. AO proceeds ex-parte without your input. Results rarely favorable.

1. Be cooperative but concise: Answer questions asked. Don't volunteer unrequested information.
2. Everything in writing: Confirm verbal discussions in writing. Written submissions are recorded properly.
3. Request adjournments when needed: Can't gather documents? Request adjournment through portal. AOs grant reasonable requests.
4. Challenge incorrect additions: If draft order has additions you disagree with, file detailed objections. Fight at the assessment stage itself.
5. Maintain documentation: Keep copies of everything submitted. Note hearing dates. Record discussions.
6. Consider settlement: If you genuinely missed income or claimed wrong deductions, admitting it might result in reduced penalties.
7. Escalate if needed: AO being unreasonable? Approach higher authorities Commissioner, DG, Ombudsman.

Time Limits and Appeals

Scrutiny assessment must complete within 12 months from assessment year end. For AY 2024-25, that's March 31, 2026. Extensions possible but limited need authority approval.

After assessment order, appeal to Commissioner (Appeals) within 30 days. Extendable to 60 days with valid reasons.

If You Disagree with Final Order

• File appeal: Most common. Appeal to CIT(A) within specified time. Commissioner can modify, reduce, or confirm assessment.
• Rectification: If there's a mistake apparent from record—something factually wrong—file rectification under Section 154. Simpler than appeal.
• Stay of demand: Apply for stay pending appeal. Requires showing prima facie case and hardship.
• Settlement commission: For serious cases with substantial amounts. Make full disclosure, they determine tax. Penalties may be reduced.

Conclusion

Section 143(2) scrutiny is serious but manageable. It's detailed examination, not criminal investigation. Most involve straightforward verification ending with return accepted or minor adjustments.

Critical factors:

• Respond to every notice and hearing
• Maintain complete documentation
• Get professional help for complex matters
• Be truthful and cooperative
• Fight incorrect additions with objections
• Use appeal rights if assessment unfavorable

Scrutiny selection doesn't mean you did something wrong. It means return needs verification. Handle properly, it works out fine. Ignore or mishandle, even clean returns can result in unexpected demands.

For returns with genuine issues—missed income, incorrect claims, questionable transactions scrutiny will likely uncover them. Better to be upfront, explain circumstances, and offer to pay correct tax. Shows good faith, often results in reduced penalties.

Scrutiny is process-driven. Understanding the process, meeting deadlines, presenting documentation methodically—that's how you get through successfully.

Book a free tax assessment call with us now!

Frequently Asked Questions

Q1: Received Section 143(2) notice but nothing seems wrong with the return. Everything was reported correctly with all supporting documents already attached to the return. Why scrutiny?

Scrutiny selection happens for various reasons beyond just errors in the return. Could be sector-specific targeting (your profession or industry is under focus this year). Could be random selection for statistical purposes. Could be high-value transactions even if properly reported—department wants to verify source and genuineness. Sometimes the system flags returns based on parameters that seem fine to you but match scrutiny criteria. Having everything correct doesn't prevent scrutiny, it just means the process should go smoothly if you respond properly with supporting documents.

Q2: The first hearing date in the notice is impossible to meet—it's in three days and during business hours. What options exist?

File adjournment request immediately through the e-Filing portal. Explain the difficulty—prior commitment, insufficient time to gather documents, representative unavailable, or whatever the genuine reason is. Most AOs grant first adjournment requests if filed promptly before the original date. In emergency situations, you can also send an email directly to the AO's official address (usually mentioned in the notice) explaining the situation. Showing willingness to comply while requesting reasonable accommodation usually works. What doesn't work is ignoring the notice and not showing up.

Q3: Can the entire scrutiny process happen online, or is physical appearance mandatory?

Post-pandemic, most scrutiny proceedings happen virtually through video conferencing. The notice will specify the mode—virtual or physical. If virtual, you'll get a link. However, physical appearance can be required in certain cases, especially if the AO feels in-person meeting is necessary. You can request conversion from physical to virtual citing distance or health reasons. Most AOs accommodate such requests now. All document submissions can happen electronically through the portal, which is actually better since you have proof of submission.

Q4: During scrutiny, can the AO question income sources from previous years that weren't under scrutiny, or is examination limited to the assessment year mentioned in the notice?

The scrutiny is technically limited to the assessment year mentioned in the notice. However, if during examination the AO discovers information suggesting income was underreported in earlier years, they can initiate reassessment proceedings for those years under Section 148. So while they can't add income from previous years to the current assessment, they can trigger separate proceedings for those years. Similarly, they might ask about subsequent years to understand patterns or verify genuineness of claims. Always answer truthfully lying about any year can have cascading consequences.

Q5: If the CA handling the case suggests settling by accepting some additions to avoid prolonged scrutiny, is that advisable?

Depends entirely on facts. If there are genuine errors or missed income that will eventually be discovered anyway, settling might make sense—you pay the tax, possibly reduced penalty, matter closes quickly. If the additions are completely unjustified and you have strong supporting documents, fighting makes sense. The call depends on: strength of your case, amounts involved, time and cost of litigation, your risk appetite, and quality of documentation. Some CAs push settlement to close files quickly. Others fight everything. You need to understand the merits of your specific case and make an informed decision. Don't accept additions just to avoid hassle if your case is strong.