Why You Can Get Tax Notice and How To Deal With Such notices

Why You Can Get Tax Notice and How To Deal With Such notices. A recent wave of notices being sent by the IT department has created a sense of panic among people, cutting across all classes. Fear of fines, penalties and worse still, imprisonment are giving people sleepless nights and nightmares.

But let’s not forget, understanding this would not only prepare us in case we are on the list of recipients but also help us be cautious next year onwards. Let us begin with what are the notices an assessee could be served with:

Tax notices that are going to be discussed here are classified into:

Notice under section 142 to file return under 139(1) 

This notice is served when an assessee, who is otherwise required to file a return under section 139(1), fails to file his return. In this case, the assessee simply has o adhere to the contents of the notice served upon him.

Notice for Scrutiny Assessment under section 143(3)

In case of a notice for scrutiny assessment the time limit of which is 6 months from the end of the Financial Year in which return of income is filed, the method of selection is:

i. Centrally through Computer Assisted Scrutiny System (CASS)

ii. Manual Selection by the Assessing Officer

Guidelines are issued every year by the CBDT for Selection of Cases, which are kept confidential for obvious reasons. However media reports and information from reliable sources, tantamount to common knowledge as regards General parameters applicable to all assesses (i.e. all forms of organization) and certain parameters on specific cases.

General Parameters being:

  1. Addition of more than Rs.10 Lakh in the earlier year and confirmed by appellate authorities.
  2. Cases where Seizure has been carried out
  3. Cases where reassessment proceedings u/s 148 have been initiated
  4. Cases where survey proceedings have been initiated
  5. Addition of more than Rs.10 Lakh in the earlier year under the provisions of Transfer Pricing
  6. Cases where transactions with Associated Enterprises involving provisions of Transfer Pricing exceed Rs.15 Crores
  7. After seeking Prior Approval of the Chief Commissioner of Income Tax or Director General of Income Tax, A.O may serve notice on having sufficient reason to believe

Specific Parameters

Cash deposits in Bank during the Financial Year exceeding Rs.10 Lakhs Buying or Selling Property, sales consideration exceeding Rs.30 Lakhs *(However it could be exempted in cases where profit net of tax,i.e. actual profit less tax on capital gain, is less than 1/8th of investment (non-  network) [Network being assesses in areas where the IT department is having Network Station] 3. Agricultural Income exceeding Rs.10 Lakhs 4. Sales turnover exceeding Rs.20 Crores 5. Gross Receipts in Profession exceeding Rs.40 Lakhs and net profit less than 30% of Gross Receipts 6. Cases where fresh capital gain during the year exceeds Rs.30 Lakh 7. Exemption claimed under Section 54 and 54 F (For capital Gains on sale of Residential Property/Other than residential property and invest proceeds in Residential Property), exceed Rs.20 Lakhs 8. Cash deposits in Bank during the Financial Year exceeding Rs.10 Lakhs 9. Credit Card payments during the Financial Year exceeding Rs.2 Lakhs 10. Pay more than Rs.2Lakh into Mutual Funds during the Financial Year 11. Investments exceeding Rs.5 Lakhs in Bonds/Fixed Deposits and/or Rs.1 Lakh in Stocks/ETFs 12. Loss under the head House Property 13. Income from Short Term Capital Gain i.e. on assets held less than 3 years/Shares held for less than 12 months 14. Refund Claim by Non Resident, exceeding Rs.5 Lakhs 15. Cases where sundry creditors exceed Rs.30 Lakhs and 30% of Total Sales 16. Commission paid by assessee exceeds Rs.10 Lakh 17. Deductions/Exemptions claimed for the first time under 10 (23A) to 10(23G),10A,10AA,80IA to  imagesIE,80JJA,80JJAA,80LA. 18. Brought forward losses or current year’s carried forward losses exceed Rs.25 Lakhs 19. Contractors  following Contract Completion Method/Net Profit is less than 5% of Turnover. 20.Share Brokers having Gross Receipts exceeding Rs.2 crores 21.Real Estate Developers having sales exceeding Rs.5 crores 22. Assesses claiming Deductions in excess of RS.25 Lakhs under Chapter VI–A. 23. Cases where fresh capital introduced during the year exceeds Rs.50 Lakhs. 24. Cases where exemption u/s 10A,10AA,10B,10BA exceed Rs.25 Lakhs.

Besides, these factors, could lead to a notice are :

  • Error – When the IT department sends notices it its PAN -wise not Name wise. It could be that two persons have the same name or date of Birth and could have been erroneously sent. Hence PAN should be correctly checked by the assessee on receipt as it could be a case of mismatch.
  • Also at the time of Getting TDS certificates, Form 26 AS should be checked by the assessee himself and also periodically to ensure that TDS credit is being credited to his PAN.
  • When an Assessee changes his Jobs, non-disclosure of one of the employer’s (predecessor employer mostly) salary receipts could lead to a problem. Earlier this was not detectable but now, by virtue of integration of information, TDS on the employee’s salaries on his PAN not disclosed due to non disclosure of salary itself is a weak link which the department on getting hold of, would like to probe further into.
  •  Refund Claims of high amounts especially by Salaried Persons. When there is income under the head PGBP, set off and carry forward of prior year losses and unabsorbed depreciation can be a reason but for Salaried Employees, such claims might look suspicious to the department.
  •  Assessees availing Treaty benefits under the Double Taxation Avoidance Agreement governed by sections 90 and 91 of the Income Tax Act.
  •  Sharp drop in taxable Income of assessee as compared to previous year.
  •  Filing ROI without Digital Signature .Filing of returns is complete only when it reaches CPC Bangalore. Often filling of details in the ITR is misconstrued as completion of filing of returns. ITR V may be accepted without signature but it is not complete and invites Scrutiny from the department.
  • Salaried Employee with only Bank Interest as Income, total income being Less than Rs. 5 Lakh on which TDS has already been deducted under the respective sections are absolved from filing returns. This has often been misconstrued as Assesses and even assesses having Business Income below Rs.5 Lakh have followed suit, wrongly and attracted non compliance to Section 139(1).

Notice under section 148 for Income Escaping Assessment under 147

Notice under 148 can be served on an assessee:

  1. Income only from India below Rs.10 Lakh,upto four years from the relevant assessment year
  2. Income only from India above Rs.10 Lakh, six years from the relevant assessment year
  3. Income outside India ,Sixteen Years from the relevant assessment year

As per the Finance Act 2012, an assessee having Income from outside India, whatever be the amount, is liable to file an ROI. Hence there is no exemption at all if there is foreign income.

Hence assesses having income outside India, whether from Bank Accounts abroad or immovable property or even Financial Interest in an entity have been specifically targeted to be covered.

Readjustment under Section 245 :

Under this, refund claims of assesses after disclosing true and full details of his income to the Settlement Commission are adjusted with demands of prior years, the details of which are not disclosed to him.  More information on this can be checked here -  http://taxmantra.com/strict-guidelines-issued-to-end-depts-tds-credit-refund-adjustment-harassment-by-delhi-high-court/

What to do when you receive any of the above notice

  • Read the Notice Thoroughly : The notice should be thoroughly read and its contents be strictly adhered to.
  •  Don’t Ignore the notice or delay reading it :  Ignoring the notice is a mistake as it leads to further complications.
  • Maintain Year Wise Files of documents pertaining to your income, investments, challans etc for ease of reference

It is of utmost importance that every person maintains documents pertaining to Income Tax in an organized manner. The Documents that need to be kept in the file are enumerated as follows:

  • Form 16 in case Salaried Individuals indicating TDS deducted from salary by the employer
  • Form 15G/15H in case of persons /senior citizens having income below the threshold limit (Rs.2,00,000/Rs.2,50,000/Rs.5,00,000(in case of Persons above the age of 80)
  • Challans of Self Assessment Tax paid, Advance Tax paid etc
  • Print out of Form 26AS indicating TDS credited against PAN, on a periodic basis
  • Investments deductible under Chapter VI-A (Life Insurance Premium, Infrastructure Bonds etc)
  • Proof of Preventive Medical Check up of self and dependent family members, Prescription etc attracting deduction under section 80D upto Rs.5000.

This list is only illustrative, any other documents important from your point of view which could pertain to an income/expenditure or investment that could attract the provision o f the Income Tax Act should also be maintained in addition to these.

From the cost benefit analysis point of view, fines and penalties arising from misconstruing the requirements are definitely high, not forgetting harassment and worries that accompany them!

So, in the event of there being confusion or query, one should not hesitate to approach a tax Consultant.

*The Income Tax Department switched over to a computerised mode of processing of returns and the related actions using AST software at stations which are already on the network. At stations which are not yet on the network Tax Management System (TMS) software on stand alone computers is to be used till such time as they are brought on the network. For computerised processing of returns etc