INCOME TAX NOTICES AND ASSESSMENT AND SCRUTINY
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Types of Income Tax Assessments
Income tax assessments in India involve a series of steps undertaken by the Income Tax Department to verify the accuracy of income tax returns filed by taxpayers. Here's a detailed guide to the different types of income tax assessments:
1. Self-Assessment (Section 140A)
- What It Is: Before filing the return, the taxpayer calculates the tax liability, deducts any advance tax or TDS, and pays the balance tax.
- Process:
- Calculate the total income and the tax liability.
- Deduct the advance tax, TDS/TCS, and any other credits.
- Pay the balance tax, if any, and file the return with proof of tax payment.
2. Summary Assessment (Section 143(1))
- What It Is: A preliminary check of the return by the Income Tax Department to correct any arithmetical errors, incorrect claims, or inconsistencies.
- Process:
- The return is processed electronically.
- Intimation is sent to the taxpayer specifying any tax payable, refund due, or no further action required.
- Adjustments made for arithmetic errors, incorrect claims, or mismatch of income.
3. Scrutiny Assessment (Section 143(3))
- What It Is: A detailed examination of the return to ensure the accuracy of income and deductions claimed.
- Process:
- Notice under Section 143(2) is issued within six months from the end of the financial year in which the return is filed.
- The Assessing Officer (AO) may ask for further information or documents.
- A detailed examination of books of accounts and other documents.
- Final assessment order is passed with the determination of tax liability or refund.
4. Best Judgment Assessment (Section 144)
- What It Is: Applied when the taxpayer fails to comply with the terms of a notice under Sections 142(1) or 143(2), or fails to file the return.
- Process:
- AO makes a reasonable judgment based on the available information.
- AO considers all relevant material gathered during the assessment proceedings.
- An assessment order is passed determining the income and tax liability.
5. Income Escaping Assessment (Section 147)
- What It Is: Also known as "Reassessment," it is done when the AO has reasons to believe that some income chargeable to tax has escaped assessment.
- Process:
- Notice under Section 148 is issued to the taxpayer.
- The taxpayer is required to file a return or revised return.
- AO examines the return and issues an assessment order if income is found to have escaped assessment.
- The reassessment can be conducted up to four years from the end of the relevant assessment year, extendable to six years in certain cases.
6. Protective Assessment
- What It Is: Applied when there is a possibility that income may be taxed in the hands of another person, but to protect the interest of revenue, a protective assessment is made.
- Process:
- AO issues notice and makes an assessment.
- The assessment is tentative and may be finalized once the matter is settled.
7. Assessment of Search Cases (Section 153A)
- What It Is: Assessment carried out following a search and seizure operation.
- Process:
- Notice issued to the taxpayer to file returns for six assessment years preceding the year of search.
- AO examines the returns and assesses the income for those years.
- The assessment must be completed within two years from the end of the financial year in which the search was conducted.
8. Faceless Assessment Scheme
- What It Is: Introduced to eliminate the interface between the taxpayer and the Income Tax Department and to provide greater transparency.
- Process:
- The National e-Assessment Centre (NeAC) issues a notice.
- All communications are electronic.
- Cases are randomly allocated to different assessment units.
- Draft assessment orders are reviewed by another unit before being finalized.
Key Points to Remember
- Time Limits: Each type of assessment has specific time limits for issuance of notices and completion of the assessment.
- Documentation: Maintain proper documentation and records to substantiate the claims made in the return.
- Response to Notices: Timely and appropriate responses to notices are crucial to avoid penalties and best judgment assessments.
- Professional Advice: It’s advisable to seek professional advice for handling complex assessment proceedings.
Understanding these types of assessments and their processes can help taxpayers prepare better and ensure compliance with tax laws.
Section Wise List of Income Tax Notices
Various types of income tax notices issued by the Indian Income Tax Department, explained in more detail:
- Notice under Section 139(9) – Defective Return:
- Reason: This notice is issued if the Income Tax Return (ITR) filed by the taxpayer is considered defective. Common reasons for a defective return include missing mandatory information, incorrect details, or discrepancies in the return.
- Action Required: The taxpayer must rectify the defect within 15 days from the date of intimation. The rectification can be done online through the Income Tax e-filing portal.
- Notice under Section 142(1) – Inquiry Before Assessment:
- Reason: This notice is issued if the Assessing Officer (AO) requires more information or documents to process the ITR. It can also be issued if the taxpayer has not filed the return and the AO wants to inquire into the reasons for non-filing.
- Action Required: The taxpayer must submit the required details or documents within the specified time frame mentioned in the notice. Failure to comply can lead to best judgment assessment by the AO.
- Notice under Section 143(1) – Intimation:
- Reason: Issued after the preliminary assessment of the ITR filed. The intimation will either:
- Propose adjustments to the return filed,
- Demand additional tax if payable,
- Refund excess tax paid,
- Or simply confirm the return as filed.
- Action Required: The taxpayer needs to check the details in the intimation. If there are proposed adjustments, they can agree with them or disagree and file a rectification request.
- Notice under Section 143(2) – Scrutiny Notice:
- Reason: Issued for detailed scrutiny of the return filed. The AO might ask for comprehensive information and documents to verify the claims made in the return.
- Action Required: The taxpayer must provide the requested documents and information to support the claims made in the ITR. This can include bank statements, invoices, and other financial documents.
- Notice under Section 148 – Income Escaping Assessment:
- Reason: Issued if the AO believes that some income chargeable to tax has escaped assessment.
- Action Required: The taxpayer is required to file a return or revised return for the relevant assessment year within the time specified in the notice.
- Notice under Section 156 – Demand Notice:
- Reason: Issued when there is any tax, interest, penalty, fine, or any other sum payable by the taxpayer.
- Action Required: The taxpayer must pay the demanded amount within the time specified in the notice. This can be done online through the Income Tax e-filing portal.
- Notice under Section 245 – Set-off of Refunds:
- Reason: Issued if the Income Tax Department intends to adjust the current year's refund against any outstanding demand from previous years.
- Action Required: The taxpayer should respond to this notice by agreeing to the adjustment or disagreeing and providing reasons for the disagreement.
- Notice under Section 131(1A) – Income Concealment:
- Reason: Issued when the IT department suspects that income has been concealed or is likely to be concealed. This notice empowers the department to conduct inquiries and investigations.
- Action Required: The taxpayer must comply with the inquiries and provide the necessary documents and explanations.
- Notice under Section 153A – Search and Seizure:
- Reason: Issued following a search and seizure operation, requiring the taxpayer to submit returns for six assessment years preceding the year in which the search was conducted.
- Action Required: The taxpayer must file the required returns and provide detailed information about their income, assets, and financial transactions for the specified years.
- Notice under Section 92CA – Transfer Pricing:
- Reason: Issued when there are concerns related to transfer pricing in international transactions, and the AO refers the case to the Transfer Pricing Officer (TPO) for examination.
- Action Required: The taxpayer must provide detailed documentation and information about their international transactions, including the pricing methods used, to ensure compliance with transfer pricing regulations.
Understanding the nature of these notices and responding appropriately within the stipulated time frame is crucial for avoiding penalties and legal complications. If you're unsure how to respond to a notice, it's advisable to consult with a tax professional or chartered accountant.
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