Jagoinvestor

November 8, 2014

Everything you wanted to know about Income Tax Notice and scrutiny cases ?

If you are a taxpayer then you must have heard the recent news about Income tax department’s drive by keeping a close eye on all your transactions. Even the salaried employees are on the radar.

Department has already identified 12 lakh taxpayers who have not filed their returns, more than 20 Crores high value transactions are being scrutinized and Notices/letters to more than 1.5 lakh people have already been issued.

Income Tax Notice - How to Avoid

8 reasons why you can expect income tax scrutiny notice?

Let’s take the first parameter today and see how & under what circumstances a notice can be issued to you as follows:-

Reason #1 – You have not filed your return

Every individual earning more than Basic Exemption Limit i.e. Rs. 2,50,000/- p.a. (Basic Exemption Limit has been enhanced from Rs. 2 lakhs to 2.5 lakhs in the last union budget for current financial year) needs to file tax returns compulsorily, even if the tax is already deducted (TDS) and paid .

So if you have not filed your returns for past few years, then you can expect a notice from IT department very soon. You might have not filed it due to your laziness or simply because you didn’t get the time, but understand that this mistake can cost you a lot especially when you have some any kind of tax evasion !

Reason #2 – Interest from FDs or Savings A/C

This is one big reason which can apply in most of the investors case . Generally banks deduct 10% TDS on the deposits interest by default, but you are suppose to pay any additional tax if applicable depending on your income tax bracket. There is a big myth that one does not need to pay any tax if TDS is cut by the bank.

For example – If you are 30% tax bracket and you have Rs 5 lacs FD in bank and imagine 8% is the interest rate, which means you get a Rs 40,000 interest from the FD , now the bank will deduct the 10% TDS (which is Rs 4,000) and pay to the govt , and give Rs 36,000 directly to you .

Now actually tax you had to pay was 30% to govt, which means that at the end of the year you need to pay additional Rs 8,000 in tax. If you have not done this , then you might be inviting trouble for future.

Reason #3 -Sudden drop in Income

Do you know that if there is a significant reduction in your income from last year, then it may cause suspicion and you might invite a IT scrutiny. This is more applicable in case of businesses and traders, because their income is highly volatile .

However in case of salaried people, this is not a big issue because in general there is no huge drop from the last year income. Let me give you an example – Imagine Ajay, who runs a business and earned Rs 15 lacs in a year and paid his taxes properly in year 2014 .

Now in 2015, he files his income tax returns with Rs 12 lacs income or Rs 17-18 lacs income, this looks natural overall , but imagine he files his return declaring his income to be Rs 3.5 lacs, then suddenly it raises some eyebrows and the IT department might want to talk to you . It might happen that you are not doing any tax-Chori, but IT department might want to enquire .

Reason #4 – Claiming Higher refund amount

If you have filed your returns claiming a high refund in a particular year, there are chances that you might get a scrutiny .

This is because firstly, its a higher amount to be refunded back to you , so naturally tax department might want to have a look at data and might question things (otherwise everyone will start asking for refunds without solid reasons) , and secondly – the refunds are generally a lower amounts because of the mismatch in your planning or some calculation and any big tickets will attract eye balls .

So if you have paid Rs 2 lacs tax, and you are asking for Rs 15,000 Refund or Rs 35,000 refund . It looks fine .. but if you ask back 90,000 refund, that might attract scrutiny.

Reason #5 – Mismatch in TDS credit

You need to check & reconcile your form 26AS with all the taxes as paid on your account . It should ideally not happen that the TDS amount you are claiming in your income tax return and the TDS actually updated in your form 26AS are different .

That’s why before filing your returns, its an important thing to check your 26AS , make sure its updated properly (check with your employer who has paid TDS, check with banks who paid TDS on your interests) . Only once everything looks fine, then claim the TDS amount . Don’t assume things like (my employer must have paid TDS and updated it properly) .

Reason #6 – Non Declaration of Exempted Income

There are various income’s on which you don’t have to pay income tax , but they must be still mentioned in the income tax return . Things like your long term capital gains tax from equity/dividends received on equity shares of Indian companies/Saving bank account interest up to Rs. 10000/PPF interest , or lets say gifts you receive from your parents/relatives ..

These are some of the things which are exempted from tax, but that does not mean you don’t have to tell the income tax department about it and you should anyways not hide it because there is no reason for it. I know a lot of people might be feeling – “Since it is already exempt, then what is the need of declaring it, I have never done it for last so many years!”  .

So now as you know make sure you take your income tax filing very seriously, because till the time you don’t get IT scrutiny its not an issue , but the day you will get it, you will know it’s a pain

Reason #7 – Taking double benefits due to change in Job

Many times salaried employee who changed job during previous year gets multiple form 16 & fails to declare income from all the employers & calculate and pay the due taxes, if any. It may arise on account of certain deductions & benefits given twice .

Many times, it has been observed that when people changes their job during  a year they forgot to inform about their previous income to their new employer or if at all they have declared it, they forget to make sure that it has been duly incorporated while calculating their tax liability and arriving at a TDS figure and because of this failure, new employer will deduct taxes on the income which will go from their side by giving and allowing all the deductions like 80C/section 10 etc.

All over again (as the previous employer had already factored the same while paying TDS) and also basic exemption limit and initial tax slabs benefits are also given again resulting in lower deduction of taxes.

But due to lack of this technical knowledge along with a pressure and joy of a new job this goes unnoticed and there is a shortfall in taxes which was supposed to be deducted and paid to the government; so beware when you change your job and inform previous employer income duly to your new employer to avoid getting an IT notice.

Reason #8 – High Value Transactions

If you have executed high value transactions either for investments or spending then chances of you getting the notice from IT Department are very high.

For example – Your credit card usage of more than Rs. 2 lakhs p.a./ investing in FDs for more than Rs. 5 lakhs/ depositing more than Rs. 10 lakhs in your bank account/ investing more than Rs. 2 lakh in MFs or Rs. 1 lakh in Shares or buying or selling property over Rs. 30 lakhs.

All these transactions are reported to the IT department under Annual information Returns filed by respective companies and may attract an enquiry ranging from simple to exhaustive by IT department.

How to Avoid getting Notice from IT department

With the IT department becoming net savvy and going online, it has become very easy for them to identify discrepancies in your papers and to keep a close eye on almost every financial transaction you do.

Even the honest taxpayers have received notices and have come under the scrutiny causing them running around to prove their honesty. Hence it becomes very critical for everyone to maintain their papers & documentary evidences properly to safeguard their own interest.

Here is sample of how a tax notice looks like in reality. I have scanned and uploaded a real life tax notice for you to look at below

Income Tax Notice Sample

You need to take the following actions to minimize your chances of receiving a notice –

  • Always file your returns on time and correctly – This is the basic precaution you need to take to ensure 100% compliance with the law. Make sure you are filing the return correctly and all the details given by you while filling Returns matches with the details available with department.
  • Submit ITR V to Centralized Processing Centre (CPC) Bangalore: Your filing of taxes would get complete only when your ITR V reaches CPC. Just uploading returns online is not enough; make sure you get confirmation of its receipt from CPC. Please follow the Dos & Don’ts of sending ITR-V to CPC.
  • Check your form 26AS (Tax Credit Statement): “26AS” gives the details of the “TDS” deposited on your behalf. You should check all the TDS payments duly credited to you or get it rectified otherwise. It can be viewed though NSDL or IT department’s site and even through Bank’s online portal.
  • Mismatch in Income & Expenses/investments:  If your income was Rs. 10 lakhs and you invested Rs. 25 lakhs, you need to justify the source of used funds and the same applies to expenses also.
  • Gifts/Money credited to your account: If you have funds credited to your account out of Gifts or loan from relatives/ friends, you need to keep the documentary evidence for the same. You may also need to report these transactions in few instances.
  • Declaring “Exempt” Income: Even though few Incomes are exempt from the tax, you still need to declare this while filing your return.
  • Updating PAN details: Keep updating any changes in your pan data like address/surname change post marriage etc.
  • Pay Advanced Tax: if you are liable to pay advance tax, then you have to pay it as per its schedule & deadline.
  • Form 15H or 15G: Use 15H/15G instead of claiming refund, submit this at all the financial institutions like banks to prevent them from deducting TDS on your investments with them; in case your Income is below the taxable limit.
  • Avoid High Value transactions: Department gets information for all your high value transactions from the concerned institution and chances of you coming under scrutiny increases. Avoid these transactions wherever possible & plan it carefully and legally.

How to deal with Income Tax Notice if you are already in receipt of one?

Any communication from IT department & especially receiving a Notice can send shivers down your spine, even though it might be a routine enquiry or a simple clarification sought. Notice can be issued for varied reasons and there is no standard single solution to deal with different notices in the same way, but you can surely follow these 6 steps steps as mentioned below in response to any kind of notice you may receive:-

 

Step 1

Neither Panic nor Ignore –  Your first reaction could be to press the panic button or ignoring it completely due to ignorance, both ways are wrong and key is to handle this carefully and sincerely else you may end up paying hefty penalty along with tax payment.

Step 2

Check if its issued in your PAN – Department issue notices based on your PAN and not by name, so make sure notice is issued in your PAN and do not pertains to someone else who shares similar names or DOB as yours!

Step 3

Identify the reason behind issuing a notice – Reasons could be a simple mismatch in TDS or inconsistency in your returns or some serious concerns like income concealment or survey or scrutiny of accounts.

Step 4

Check Validity and Issuer Details – Check the validity of a notice & timely issuance and under which IT section it has been issued and also look at the mention of officer in-charge, his or her designation, signature, address with details of ward & circle no. etc. Verify these details in view to avoid being cheated.

Step 5

Check DIN – If the notice is delivered online then check document identification number.

Step 6

Preparation two sets of documents and covering letter – Start collecting documents which you are asked to furnish before the assessing officer or based on the gravity of the notice. and make sure you prepare a covering letter along with the set of documents. Prepare two set of all the documents required to be submitted to the department along with a covering letter, get a stamp on your copy for your record purpose and as a proof of submission of documents and complying with the notice. You can also consult a CA for his help in drafting the proper income tax notice reply letter

3 Important Points you should always remember

  • Reply in time – Always reply in time even if you are not able to collect the required documents. You can even ask for some time to prepare the same. It would establish that you are honest and cooperating with the laws.
  • Preserve the Envelope: If you receive the notice in an envelope please keep the same safely as it contains Speed Post number which work as an evidence of its delivery to you.
  • Professional Help: If the gravity of notice is high then it would be prudent to have a CA represent you (you can hire us for your issues or any other income tax related problem). Otherwise you can follow the above steps and represent yourself in most of the cases.

One of the major steps that you need to take even otherwise is to keep track & records of all your Tax papers & financial transactions for the last 6 years as it will help you substantiate your claims in case of any scrutiny.

I hope this guide has given you enough knowledge about the income tax notice and why scrutiny cases happen . If you just take care of few things, you can surely lower the chances of getting income tax notices. Let us know what all did you like and if you have any questions in the area of income tax ?

This article is guest post by Rishabh Parakh, a Chartered Accountant by Profession & Founder Director of Money Plant Consulting, which provides services related to income tax filing, scrutiny cases and various other CA related services with operations in Pune, Mumbai and expanding to other regions.
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94 Comments
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sheky
sheky
7 years ago

How the IT depart knows a person as NRI by looking at PAN..??

dipak
dipak
7 years ago

i m planning to buy a home. my father is a partner in a company, and after finishing partnership he will get 25l. and those money want to give me. is there any IT problem if he credit in my acc. i am employee of PCu and my income is 5 to 7 laks.

Manish Chouhan
Manish Chouhan
Reply to  dipak
7 years ago

kya hai je

Manish Chouhan
Manish Chouhan
Reply to  dipak
7 years ago

kya hai je hindi me likh ke bhejo

Prakash
Prakash
7 years ago

Sir,
I have received a polite letter from income tax regarding high value transaction which I did in the year 12-13(quoting non valid pan) and response is to be submitted on line.
I do not understand what non valid pan means whereas I have mentioned Pan in that transaction and have also reflected it in my return.Pls explain

Ragini
Ragini
7 years ago

Hello Manish,
Regarding the drop in income for the salaried income whether 30% drop income due to any reason would ring the bell for the income tax?.
Regards,
Ragini

samit
samit
Reply to  Jagoinvestor
7 years ago

i don’t have any salary income or business income for the AY 2016-17. i am fining my returns as salaried employee with FD interest from last 12 years. in AY 2016-17 i was not working due to illness. is there any chances of scrutiny if i file ITR for AY 2016-17 with no salary income and only FD interest income.

Avinash
Avinash
7 years ago

Hi Manish
I invested in shares & commodity market and had losses than profit in last two years. Have never shown those in returns. Is that necessary? what kind of penalty to be liable in case if caught with this act?

Narendran
Narendran
8 years ago

Respectedsir
Iam central govt pensioner .During financial year 2014-15 I was working as a parttime lecturer in private college During that year my pension and lecturer salary put to gether it was 7.6 lakhs booked as salary .This financial I am notnot working as lecturer hence my pension of Rs 4lacs only is salary .There is a 50 % drop in income .Wil my return attract scruitany I have filed ITR1 kindly clarify

Arnab
Arnab
8 years ago

Hello,

I have received an Income Tax Notice u/s 143(2). It says that my case has been selected for scrutiny under CASS.
Along with my Name, Pan and AY, a RETURN INCOME in mentioned in the notice.

I need to know what this RETURN INCOME means. It is in the range of 3 lacs and what will be my tax penalty(if any) in this case.

Rahul
Rahul
8 years ago

Hello Sir, i have an Fd of rupees 1500000 at bank and as per norms TDS is beng deducted from the interest amount, so i want to know whether i would have to pay any extra income tax on my Fd amount or should i continue as it is.

UDAYRAJ
UDAYRAJ
8 years ago

Hello Manishji,

I have one question,
Can IT Dept. send a notice for the Scrutiny, even after receiving Refund or Assessment Order u/s 143(1)?

Biswadeep
Biswadeep
8 years ago

Thanks for a wonderful article…
I wanted to know in details about the 2lac limit for mutual funds.
If i do SIP of 25000/- per month in few equity MF schemes across different AMCs (total investment in a FY of 3lacs) then wil i be more prone for a IT scrutiny ? Is it for total of 2lacs in a same mutual fund house ?

Biswadeep
Biswadeep
Reply to  Jagoinvestor
8 years ago

thanks for your reply…
so is the limit of 2 lacs for Mutual fund applicable for investing in same AMC ?
what about the bank FD limit of 5 lacs ? is it for FD in a particular bank in a FY or for all FDs made across all the banks combined together ?

Debashis
Debashis
8 years ago

Due to immediate requirement, I had taken Rs. 10 Lakh loan in cash from uncle (friend of my father). After 6 day I have repay all amount to him by using 3 cheques ( 3lakh+3lakh+4lakh) by breaking some my FD.
I want to know that I have pay income tax for taking 10lakh loan from my uncle. Is it consider as a income ? Please let me know the rule

vineet
vineet
8 years ago

hi my father retired 3 years before and received a notice this year.
Actually his total income was less than 2 lacs so he didn’t submit it.
Now tell me what to do.

ADARSH
ADARSH
Reply to  vineet
8 years ago

Hello Vineet !!!!

kindly note that as per section 139(2) of the income tax Act Which says ” Every person whose Total income without giving deduction under the head chapter VIA(80C to 80U) exceed the Basic exemption limit(BEL) need not file the Return of income .

I know that u must have received the notice as per section 142(1)(i) of income tax. and as a Tax payer u must had replied to that notice by stating that since his income is Below BEL , he didn’t file the return of income.
However no need to worry wait for notice( which may come in this regards) and reply to the notice accordingly.
Note:- whenever u received some notice from IT dept – please see the section under which notice has been sent and google that section to get some brief idea.

vaibhav aggarwal
vaibhav aggarwal
8 years ago

Sir,i have received a notice for furnishing all documents.my ca instead of showing money received as gifts showed it as purchase of property.i dont have any proof for such property.please help sir what to do.
Thanking you in anticipation.

Vishal
Vishal
8 years ago

My sister got married and shifted from kolkata to nagpur but her address in pan has not been changed. Her in laws have filed her return from nagpur. Now we have received a scrutiny letter in her name requesting to visit kolkata office. Can this case be transferred to nagpur as all her documents are there.

Vishal
Vishal
Reply to  Jagoinvestor
8 years ago

Ok Thanks.

Debashish
Debashish
8 years ago

We have a old house with a tenant from 1979. Long days, we are trying to vacate them. Presently our tenant asking for 15 lakhs cash for vacate the house. I want to give that cash from overdraft against my FDs. Now my question is that if I pay cash like that without any receipt for vacate the house then is there any problem in future ? My tenant is not ready give any receipt of cash. Is IT department will ask me where I spent this amount ?

sachin
sachin
8 years ago

Hi sir ,

very good information.

sir i got notice, about high utilization of credit card.
i have used this credit card for my company telephone bills, train tickets, petrol purchasing and my all insurance premium.
i have also not filled itr for 12-13.
what can i do ?

thanks,
Sachin

Deepak
Deepak
Reply to  sachin
8 years ago

I got similar notice for the same.I received a compliance notice as i have not filed any return for 2012-2013, actually i have paid above 2 lakhs for credit card bill payments. I don’t have any taxable income. the money spent was for family and friends, Tickets, recharges etc etc and they have paid back the same. now what should i do. just fill the online form as ITR not filed and reason No taxable income. or there will be any issues. please help.

Venkatesh
Venkatesh
8 years ago

What is the time frame for Scrutinizing some one’s ITR?
for example, Mr. X filled his returns by e-filing on 25th March 2015 for the AY 2014-15, till when he can expect a scrutiny from income tax department.
Pls clarify…..

Pk
Pk
9 years ago

Hello sir,My mother got Payment on her retirement from govt job. She has withdrawn about 12 lakhs for home constructions n other works but now we need lessmoney so deposited back half of the money so is there any problem that might get a notice for high value transaction

Nilesh
Nilesh
9 years ago

Hi Manish,

By mistake I have submitted wrong document to my Employer for Tax Calculation for Assessment year 14-15. Now what steps I need to carry to get it corrected? Or do I need to submit the correct documents at the time of Income Tax Return Filing? Please guide.

Thank You,
Nilesh

krishna
krishna
9 years ago

Thanks !

Could you kindly clarify correct way of calculating interest income? This is important in case one doesn’t have 16A (thanks to 15H submitted).
I can think of 2 possible methods:
1. Sum total the principal amounts for different FDs. Calculate one year interest as per the interest rate ( lets assume its constant).
2. Consider only FDs which matured during the year. Subtract principals from the corresponding maturity amounts.
Problem with method 1 is that, one pays tax for the interest amount is not actually in hands. What if someone later breaks the FD before maturity; which basically means actual earning is less than estimated.

So I think method 2 to be more realistic.

krishna
krishna
Reply to  Jagoinvestor
9 years ago

Thanks Manish