Got Scrutiny Notice under Section 143(2)? Here is what you should do.

How to Handle Notice received under section 143(2)?

Notice under section 143(2)The tax authorities issue notices for several reasons irrespective of you have filed returns or paid tax or not. The notice could be to verify the details reported in a tax return, to seek further information or to ask a person to file his tax return. The tax authorities can issue a notice under Sections 142(1) and 143(2) of the Income Tax Act.

Let’s dive into section 143 first and then understand what one should do in case of scrutiny proceedings.

Section 143

Section 143 of the Income-tax Act, 1961 (‘the Act’) provides for assessment by an Assessing Officer (‘AO’) of the tax payable by an assessee for a particular assessment year. Section 143 is a purely procedural or machinery section laying down the procedures for making assessment in various contingencies. Broadly, section 143 prescribes two types of assessment

  1. ‘Summary assessment’ u/s.143(1)
  2. ‘Scrutiny assessment’ u/s.143 (2)

Section 143(1)

As the name suggests, under ‘summary assessment’, the AO makes regular assessment without inquiry and makes adjustments, if any, to the income, limited to any arithmetical error in the return or an incorrect claim which is apparent from any information in the return. Section 143(2) on the other hand provides for regular assessment after detailed inquiry. Section 143(2)(ii) enables the AO to make a regular assessment after detailed inquiry.

Section 143(1D)

If a return of income is filled and it contains a claim of refund and if the case is selected for scrutiny assessment under section 143(2), then such return shall not be processed under section 143(1). Accordingly, refund shall not be granted under section 143(1). The A.O. shall make the assessment under section 143(3) and if he increases the income, then the same shall be adjusted by the refund claim by the assessee against the tax increased by A.O. If on completion of 143(3), refund is found due, it shall be granted under section 143(3).

Section 143(2)

The proviso to section 143(2)(ii) of the Act prescribes the service of notice on the assessee within a particular period as a pre-requisite to enable the AO to complete an assessment other than summary assessment. The notice should specify a date and should call upon the assessee either to attend before the officer on that date or produce or cause to be produced before the officer, on that date, any evidence which the assessee may rely upon in support of his return and it is then up to the assessee to satisfy the officer by producing necessary material that the return is correct and complete. At present, the proviso to section 143(2)(ii) specifies six months from the end of the financial year in which the return is furnished, as the time-limit within which notice needs to be served on the assessee for valid assessment of his return of income.

Section 143(2)(ii) and the proviso thereto, read as under:

“Section 143(2) Where a return has been furnished u/s.139, or in response to a notice u/ss.(1) of section 142, the Assessing Officer shall, —

(i) ……..

(ii) notwithstanding anything contained in clause (i), if he considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner, serve on the assessee a notice requiring him, on date to be specified therein, either to attend his office or to produce, or cause to be produced, any evidence on which the assessee may rely in support of the return;

Provided that no notice under clause (ii) shall be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.”

What you should do once you receive notice?

Never ignore the notice

It cannot be overstressed: never ignore a notice received from the tax authorities. In case of repeated failures to reply to a notice, the tax authorities are empowered to determine the sum payable by a person on a best judgement basis u/s 144. However, before doing so, the authorities are obliged to provide the taxpayer with a reasonable opportunity of being heard.

Typically, a notice under Section 142(1) lists the details required by the tax authorities and the date by which they should be submitted. For instance, the tax authorities might seek details of major repair expenditure or a stay overseas while on deputation abroad. The notice might require you to appear before the tax authorities either personally or through an authorized representative such as a tax consultant or chartered accountant (personal presence is must only u/s 131), to provide clarifications or explanations.

Failure to provide specific clarifications or information sought through the notice can lead to the tax authorities making an adverse assumption based on the limited facts available to them.

Check whether the notice is within the time limits

On receiving the notice, the first thing that you should check is whether it is issued within the time limit permitted by the IT Act. With effect from 1 April 2008, any notice under Section 142(1) or 143(2) should be received by the taxpayer within six months from the end of the financial year in which the return is furnished. In case the notice is furnished after the stipulated time period, the same would be considered invalid.

In case the notice is time barred do not fight with assessing officer, you must give in writing that the notice was received after the time prescribed in the section.

However, one of the most retrograde amendments has been the insertion of Section 292BB by the Finance Act, 2008, which requires that if a taxpayer has appeared in any proceeding or cooperated in any inquiry relating to an assessment/reassessment, it shall be deemed that the notice from the tax department was duly serviced on him and would not be considered invalid.

Section 292BB. Where an assessee has appeared in any proceeding or co-operated in any inquiry relating to an assessment or reassessment, it shall be deemed that any notice under any provision of this Act, which is required to be served upon him, has been duly served upon him in time in accordance with the provisions of this Act and such assessee shall be precluded from taking any objection in any proceeding or inquiry under this Act that the notice was—

(a)  not served upon him; or

(b)  not served upon him in time; or

(c)  served upon him in an improper manner:

Provided that nothing contained in this section shall apply where the assessee has raised such objection before the completion of such assessment or reassessment

The taxpayer cannot object to the invalidity of the notice at a later stage. This results in an awkward situation for the taxpayer who can no longer cooperate with the tax authorities or appear in proceedings without prejudice to his right to claim that the notice was invalid.

Respond early

Typically, a notice requires a person to produce certain documents and information on a particular date. To avoid last-minute rush, start collating the requisite information and documents well in advance. This will also give you enough time to peruse the information/documents to see that they are in line with the details reported in your return of income.

In case you are unable to attend the hearing or furnish the details by the stipulated date, write to the relevant tax officer requesting him to adjourn the date of hearing. This adjournment request should be filed in advance before the date of actual hearing.

Furnish the information

After collation of the necessary information/documents, prepare a cover letter (in duplicate) listing the documents provided. After submission of the details to the relevant tax officer, secure an acknowledgement on the duplicate copy of the cover letter. This should be preserved as it may serve as evidence of the documents submitted and could be helpful in further proceedings with the tax officer.

In case of a simple notice under Section 143(2), wherein the details required are not specified, it would be advisable to collate the basic information such as the summary of bank statements, major expenses, income details, gift and loan certificates etc.

It is a myth that tax authorities are out to harass taxpayers to extract additional tax from them. If a person promptly complies with the notice issued by the tax authorities, it creates a good impression in the minds of the tax authorities.

However, non-compliance with the notice or failure to produce the required documents could lead to a penalty of Rs 10,000 in addition to tax and penal interest.

So, be compliant and do not panic.

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