Income Tax Scrutiny Time Limit & Guidelines
Aspects of Income Tax Scrutiny
The below mentioned article broadly covers all important aspects relating to scrutiny proceedings carried out u/s 143(2)/(3) of the Income Act 1961.
What is a scrutiny?
It is not possible to the Income Tax Department to make regular assessment of all the returns filed by assesses in any assessment year. So, based on norms fixed by the CBDT and with the help of CASS (Computer Assisted Scrutiny System) Income Tax department selects some returns for regular assessment (scrutiny assessment) u/s 143(3).
The scheme of comprehensive scrutiny is as follows-
- A return of income (or loss) has been made u/s 139 or in response to the notice under section 142(1)
- The Assessing officer considers it necessary or expedient to ensure that the assessee has not-
- Understated the income (or)
- Computed excessive loss (or)
- Not under-paid tax in any manner
- A notice shall be served on the assessee under section 143(2) (ii). The notice requires the assessee to produce any evidence which the assessee may rely in support of the return.
Time Limit for serving notice Applicability Notice is to be served within 6 months from the end of the FY in which return is furnished From April 1, 2008 Notice was to be served with in 12 months from the end of the month in which return was filed Up to March 31, 2008
If the notice u/s 143(2) is served beyond the prescribed time limit, the said assessment is invalid in law and has to be quashed, even though the assessee had not challenged the same- (CIT V. Mahi Valley Hotels & Resorts).
- After hearing such evidence produced by the assessee in response to the notice given u/s 143(2) the Assessing officer shall pass an assessment order in writing determining-
- The total income or loss of the assessee and
- The sum payable by the assessee (or refund of any amount due to him) on the basis of such assessment order
The main objective of the IT officer during scrutiny is to make sure that the income shown in the return is real and there is no tax evasion. The expenses incurred are also scrutinized to find out whether they are actually incurred and are not fictitious. For this, the assessing officer calls for the following documents/information:
- Summary of all the bank accounts and copies of the bank pass book/statement explaining each debit and credit.
- Details of the family members living with assessee.
- Investments made in immovable properties, FDRs, shares, debentures, bonds and sources of funds for making such investments by assessee and his family members.
- Details of all 12 months’ credit card statements and source of payment thereof.
- Details of loans accepted and given during the year especially friends and relatives, and also confirmation from borrowers along with their respective PANs.
- Details of gifts given and taken during the year.
- Details of household expenditure and drawings made to meet it.
- Details of foreign travel/ packaged tour undertaken and expenditure thereon.
- Club membership and annual subscription.
- Details and source of expenditure on children’s education.
- Details and source of expenditure on family weddings, parties and any other festive occasion held during year under scrutiny.
- Details of motor vehicles held and source of purchase thereof.
- Details and proofs of rent paid during the year for which HRA has been claimed as exempt.
- Details and proofs of donations made for which deduction has been claimed u/s 80G.
- Source of income of minor child and assets held by him.
- Details of household electricity expenses and the electronic gadgets in home.
Measures to be taken during assessment stage
- It should be ensured that all the credits of income appearing in the bank statement/pass book have been shown in the return. A balance sheet should be prepared for each year which keeps a proper track of assets and incomes.
- Adequate withdrawals (cash or bank) should be made for personal and household expenses. The ITO would be smart enough to make an estimate that how much money a family like yours would be requiring for household needs (based on the size of family and cost of living in the city) and compare it with withdrawals made by the assessee for the given purpose. If there is shortfall then it is presumed that there is supply of black money which is generally spent on day-to-day expenses.
- Ensure that payment for the expenses charged on the credit cards is done through regular bank account and not secret bank account.
- A proper record should be maintained of the investments made along with their sources and supporting documents. All unexplained investments would be added as income.
- Income of minor child should be included in the income of parent whose total income is higher, before including the income of minor child.
- If HRA exemption is claimed, then the proof of rent paid has to be furnished. Also ensure that if rent is paid to one’s parents or any relative, then the rent is shown in the return of income of the person receiving the rent.
- If any asset is purchased by spouse out of the money gifted by assessee then the income from such asset would be included in the income of assessee.
- One should generally not give interest-free loans when one has already borrowed money and is repaying that with interest. The most common disallowance/addition that is being made nowadays in the scrutiny assessment orders is the addition of notional interest on interest free loans given to someone. It has to be proved that the loans are genuine and reasons for giving interest-free loans are also genuine.
- Proper record should be maintained of the gifts received including gift deed, PAN and bank statement of donor. With effect from April 1, 2006, gifts received from non-relatives in excess of Rs.50,000 would be taxable as income of receiver. However, gifts from relatives and those received on occasion of marriage of individual are exempt without any limit.
The scrutiny assessment should be completed in 21 months from the end of the relevant assessment year. For instance, the scrutiny for assessment year 2005-06 has to be completed by December 31, 2007.
No doubt, the scrutiny process causes hardship to the assessee as the main focus of the IT department is to recover as much tax as possible. But taking proper measures from the beginning can mitigate the trouble.
Computing the income chargeable to tax as per the provisions of the Income-Tax Act, 1961 is the first step in tax compliance. The natural sequence thereafter would be filing the return of income and awaiting approval of the tax authorities in respect of the income returned by means of an assessment order. Section 139(1) enjoins on all corporate and partnership firms to file return of income whether or not they have income or loss.
In the case of other assessees i.e., individuals, HUFs etc., the return of income has to be filed only if the income exceeds the prescribed basic limit.
This write-up discusses the scrutiny procedure prescribed by the Central Board of Direct Taxes (CBDT) for the current financial year and the related issues.
Legal provisions As per Section 143 (1) if any tax or interest is due, intimation is required to be issued to the assessee. Similarly, where there is any refund due on the basis of return filed by the assessee, intimation is required to be issued by the Assessing Officer (AO). The time limit for giving intimation is one year from the end of the financial year in which the return was filed. For example, for the assessment year 2006-07 if the return is filed on June 5, 2007, the time limit for giving intimation under Section 143(1) is available up to March 31, 2009.
Where the AO believes that the claim of loss, exemption, deduction, allowance or relief in the return is inadmissible or if he considers it necessary to ensure that the assessee has not understated his income, a notice under Section 143 (2) would be issued for verifying the books of account and other relevant documents and evidences. The culmination of this exercise would be scrutiny assessment envisaged in Section 143(3).
The time limit for service of scrutiny notice is 12 months from the end of the month in which the return was filed by the taxpayer. The time limit for completing the assessment is 21 months from the end of the assessment year in which the return was first assessable. For the assessment year 2007-08 if the return is filed after June 1, 2007 the time limit for completing scrutiny assessment would expire after December 31, 2009. The time limit for issuing intimation under Section 143(1) for non scrutiny cases, however, is available up to March 31, 2010 (i.e.2 years from the end of the financial year in which the return was filed).
Guidelines/Criteria for Selection
The CBDT instruction The CBDT has given norms for current fiscal for selection of cases meant for scrutiny.
- Where value of international transaction as defined u/s. 92B exceeds Rs.15 Crore.
- Cases where there was addition of Rs.10 Lacs or more in earlier assessment year and question of law or fact is confirmed in appeal or pending before appellate authority.
- Cases in which addition of Rs.10 Crore or more was made in earlier assessment year on the issue of transfer pricing.
- In case of survey carried out during the financial year, this criteria will not apply in the following cases.
- there are no impounding books or documents
- there is no retraction of disclosure if any made during survey
- The income declared in the return excluding any amount of disclosure made during survey is not less than the declared income of the preceding assessment year.
- Assessment in search and seizure cases
- Assessments initiated u/s. 147 / 148 (Reassessment cases)
- Cases of research organizations (in order to examine credibility of research and other activities as provided u/s. 35 of the I T Act).
- After amendment to definition of “Charitable Purpose u/s. 2(15)” of the I T Act cases in which exemption is claimed u/s. 10 (23C) or u/s. 12AA are claimed.
- Over and above the above stated criteria, the assessing officer may select maximum 25 cases in mofussil stations with the prior approval of Additional CIT / Joint CIT.In other areas i.e. metros and bigger cities the assessing officer may select maximum 10 cases after recording reasons for doing so. It is also directed to the approving authorities to monitor and ensure that, quality assessments are framed in these cases.
- Officer dealing with company cases can select other cases over and above the above mentioned criteria which are in its initial years of operation and are infusing investment by introducing capital or are taking loan but the return filed shows loss.
At present, approval of scrutiny draft orders by the higher authorities delays the completion of assessment and causes hardship to the taxpayers. The AO who is empowered to make assessment in law must be permitted to complete the assessment without procedural bottlenecks. The administrative delay could be reduced by fixing the responsibility on the AOs wholly and solely for completing the scrutiny assessments.
Power with the Assessee to Challenge
If the AO chooses a case for scrutiny deviating from the norms fixed by the Board then the assessee can challenge the selection of case by means of a writ. There is no provision within the statute book for preventing the AO from proceeding further. However, even after the completion of assessment it could be challenged. Favourable decisions could be found in Nayana P. Dedhia vs Asst. CIT (86 ITD 398); Bombay Cloth Syndicate vs CIT (214 ITR 210) and CIT vs Savoy Enterprises Ltd (211 ITR 192). Contrary decision could be found in Setalvad Brothers vs M.K.Meerani , Addtl. CIT (253 ITR 530).
Can Scrutiny be part of RTI?
The Government is not bound under the Right to Information law to divulge details about its Income Tax scrutiny policy, used to identify tax payees before subjecting them to detailed investigation.
The Central Information Commission held this while accepting the Finance Ministry’s view that revealing information related to the scrutiny guidelines would adversely affect economic interests of the country.
“The Finance Ministry at the highest level has analyzed the whole issue and has given its considered opinion about the possible effect of disclosure on economic interest of the State,” a CIC bench headed by Chief Information Commissioner Wajahat Habibullah said .
The order came on an RTI application of Kamal Anand who sought details from Central Board of Direct Taxes about its instructions issued to I-T assessment officers on scrutiny policy for financial year 2006-07, while also claiming a copy of the policy guidelines for individual tax payers.
The matter that was taken with the Commission following CBDT’s refusal to provide the details, was thereafter referred to the Department of Revenue within the Finance Ministry for its views.
In its submissions before the CIC, the Finance Ministry had said that divulging details about the scrutiny guidelines would affect India’s economic interests by making it easy for unscrupulous tax payers to evade taxes.
It was said that the guidelines were meant for use by I-T assessment officers to enforce compliance of tax-payers’ liability, and hence there was no public interest attached to such disclosures.
Other important points relating to scrutiny
- The assessing officer may call for the information relating to the FY which is under scrutiny. However he cannot call for earlier year’s information.
- Maintenance of books of accounts is compulsory only in case of incomes received from business or profession or income from other sources.
- According to Sec 44AA specified professionals and others who satisfy conditions specified therein are required to maintain books of accounts. If these persons face scrutiny, they are supposed to produce books of accounts maintained by them at the time of scrutiny if required by assessing officer.
- The assessee is not permitted to produce any record or evidence before the Appellate Authority which was not produced before the assessing officer during the course of proceedings before him. Hence care should be taken that all the evidences are filed before the Assessing Officer only.
However the Appellate Authority may allow production of additional evidence by the assessee if the conditions specified in Rule 46A of Income Tax rules are satisfied.
Demand of the Tax Paying Community
With buoyant tax collections becoming regular year after year, many tax practitioners that Business Line spoke felt that it would have been fair and justified if the scrutiny norms are made public so that transparency in selection of cases for scrutiny and correct collection of taxes could be guaranteed.