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Income tax notices and what to do next

Income tax notices are issued by income tax department for various non compliance. In this post, you can get insight about reasons for income tax notices and their solutions.

 

Income tax notices and their solution:

In today’s time tax compliance is very important. We all being an individual or company or trust or any other organization are always under eye the of income tax department. In modern computerized times the income tax department has access to wide range of financial information of taxpayers with the help from computer-aided scrutiny system (CASS) which generates cases where there is discrepancy in income tax return data.

The above system is utilized for identifying potential cases of tax evasion and tax fraud.

To ensure proper adherence towards tax laws and to keep check on tax evasion, the income tax department authorities issues notices under various provisions of Income Tax Act.

Reasons for notice from income tax department

The below are some common reasons which results into notice from Income Tax department:

  1. Escaped Income: Escaped income mean, income on which tax was not paid whether knowingly or unknowingly by the assesse in the relevant assessment year.

 

  1. Non-filing of income tax return: As per income tax provisions, it is mandatory to file income tax return if the income is above the exemption limit (currently Rs. 2.5 Lac) for the relevant year.

 

  1. Not declaring income: An assesse is required to pay taxes on his or her total taxable income during the year. Total income is the sum of all incomes from all the heads which are : salary, business income, house property, capital gains and other income.

 

  1. Mismatch in between TDS details as per Form 26AS and details filed as in income tax return:

Form 26AS is a tax statement which provides consolidated details for all tax deducted for the assesse for that financial year. There should not be any difference between TDS details as per Form 26AS and details filed in income tax return. Both should be reconciled and differences should be rectified before filing the income tax return. If there is a mismatch of details the assesse is bound to get a notice.

 

  1. Mismatch in income, expenses and investments

In normal scenarios, all investments and expenditure of the assesse should match with his or her income for that relevant financial year. If the expenses or investment of the assesse is more than the income earned then it may create suspicion of escaped income which may lead to notice from the department.

 

 

The below are income tax sections and provisions which govern the rules and regulation under which notices are issued and the action required by the assesse to avoid consequences in case they were non-compliant.

Inquiry before assessment: Notice under Section 142(1)

Notice: Notice under this section if the department wants to make Preliminary investigation and needs to enquire a certain case before starting an assessment.

The department authorities may call upon all documents and details from the tax payers concerning the particular case under assessment. The Assessing Officer may or may not start assessment after compliance with this notice depending on all the facts submitted and provided by the assesse.

Solutions for income tax notice under section 142(1):

The assesse must provide all documents and details asked for under notice issued u/s 142(1) even if the tax payer is of the opinion that the accounts/documents requested are irrelevant. The notice need to be mandatorily complied with.

Consequences of Non-Compliance:

If assesse do not comply with the provisions of this section: The department will take their own decision based on their finding and evidence resulting in Best Judgment Assessment u/s 144. The assesse may also be penalized under Sec 271(1) for each failure or may be prosecuted under Sec 276D which may extend up to 1 year with or without fine.

 

Scrutiny Notice: Notice under Section 143(2)

Notice: This notice is generally served after notice u/s 142(1) has already been sent and the assessing officer is not satisfied with all documents and proofs which was submitted by the assesse.

This notice can be served up to 6 months from the completion of relevant assessment year.

(Note: Where the assesse has not furnished his return of income, then notice under Section 143(2) cannot be issued to him and also scrutiny assessment cannot be done.)

The assessing officer by issuing this notice might ask assesse to produce additional documents in support of deductions, exemptions, allowances, reliefs other claim which the assesse has filed for.

Solutions of notice u/s 143(2):

The assesse must provide all relevant documents and details asked for under notice issued u/s 143(2) to avoid further scrutiny. The notice need to be mandatorily complied with.

Consequences of Non-Compliance:

If assesse do not comply with the provisions of this section: The department will take their own decision based on their finding and evidence resulting in Best Judgment Assessment u/s 144. The assesse may also be penalized under Sec 271(1) for each failure or may be prosecuted under Sec 276D which may extend up to 1 year with or without fine.

 

Best Judgment Assessment: Notice under Section 144

Notice: The notice or intimation under this section is released only if the assesse:

(a)  Fails to file income tax return for an assessment year.

(b)  Fails to comply with the terms and conditions laid in the notice issued under any of the          above section

(c)  The assesse has filed the return but failed to comply with the notice received.

The assessing officer may after taking into account all relevant documents and file collated through assessment and after providing the assesse an opportunity to be heard will make the assessment of total income or loss and tax calculations due or refunded to the respective assesse, based on best of his judgment.

The assessing officer cant release the order under section 144 unless and until he provides fair opportunity to the assesse of being heard by providing notice to present his side of facts and documents. The assesse then can provide all details related to the assessment on the given date and time as specified in the notice.

The notice under this section can be released only within a period of two years from the end of the relevant assessment year.

 Solutions of notice u/s 144:

The assesse must provide all relevant documents and details asked for under notice issued u/s 143(2) to avoid further scrutiny. The notice need to be mandatorily complied with.

Consequences of Non-Compliance:

If assesse do not comply with the provisions of this section: The department will take their own decision based on their finding and evidence resulting in Best Judgment Assessment u/s 144. The assesse may also be penalized under Sec 271(1) for each failure or may be prosecuted under Sec 276D which may extend up to 1 year with or without fine.

 

Letter of Intimation: Notice under Section 143(1)

Notices: Three types of notices can be sent under section 143(1)

  1. Intimation of income tax return filed: This notice is released in case where the details in the return filed by you are matching with assessing officers’ computation under section 143(1).
  2. Refund notice: This notice is released in case, where the officer’s computation shows amount excessively paid by the assesse and the same needs to be refunded.
  3. Demand Notice: This notice is released in cases, where the officer’s computation shows shortfall in your tax payment. The assesse has to make the tax payment within 30days from receipt of notice released

The notices under this section can be served within 1 year after the completion of relevant assessment year.

Solutions of notice under section 143(1):

  1. In case the notice received is an intimation notice and all the details provided by the taxpayer and as verified by the Income Tax department authority matches, then the notice is itself a final assessment of the return and the tax payer has to do nothing about it. The notice has to be kept for documentation or future reference purpose.
  2. In case the notice received is a refund notice, then the tax payer has to do nothing about it and wait for the amount of refund to be transferred into the respective account.
  3. In case the notice is a tax demand, then this intimation becomes Notice of Demand under section 156. The assesse has to make the requisite payment of tax within 30 days of receipt of this intimation.

Consequences of Non-Compliance:

If assesse do not comply with the provisions of this section and doesn’t pay the required tax before due date then the assesse may be prosecuted and respective penalty would be imposed.

 

Notice under Section 148 – Income escaping assessment

Notice: The notice under this section is released if the assessing officer believes that any income chargeable to tax has escaped assessments. Notice under section 148 serves as an intimation to initiate proceedings under Sec 147, as notices under Sec 147 cannot be sent in regard to the income involving matters which are the subject matter of any appeal, reference or revision. The assessing officer may or may not provide reason for such notice. The Supreme Court has clarified that the act nowhere states that the beliefs or reasons of AO should ultimately prove to be escaped income in order to be valid reason.

If the income escaped is below one lac rupees then the notice under section 148 can be issued within 4 years from the end of relevant assessment year

But if the income escaped is more than Rs. one lac or more then the notice under section 148 can be served within 6 years from the end of relevant assessment year.

Solutions for notice u/s 148:

At the first, the assesse has to comply with the Notice and file a Return of Income. The assesse then can ask for the copy of reasons recorded for issue of notice u/s 148. After receiving the details if the assesse deems necessary then he can file objection to the issuance of notice.

Consequences of Non-Compliance:

If assesse do not comply with the provisions of this section then the assesse may be prosecuted and respective penalty would be imposed.

 

Notice of Demand: Notice under Section 156

Notice: The notice under this section is served in case where assessing officer has assessed the assesse’ s income under any of the above sections and there is an outstanding tax, interest, penalty, fine or any other sum, payable in consequence of any such order passed.  The demand notice specifies details of the total amount to be paid by the assesse. The notice under this section won’t be issued in case assesse has paid the tax on his own based on the self-assessment.

The tax so demanded is to be paid within 30 days from the receipt of the notice of demand.

The assessing officer may reduce the due date of payment with prior approval of Joint Commissioner of Income Tax.

In case there is further delay in payment of the taxes due, the assesse shall be deemed to be in default and would be liable to pay simple interest @1% under section 220(2) for every month or part of month thereof from the end of the period allowed u/s 156. Further additional penalty can be imposed under section 221(1) for further defaults.

Solutions of notice under section 156:

The assesse if agrees with the order must make requisite payment of tax within 30 days of receipt of this order.

In case the assesse is not satisfied with the demand he may file an objection against the order.

Consequences of Non-Compliance:

If assesse do not comply with the provisions of this section and doesn’t pay the required tax before due date then the assesse may be prosecuted and respective penalty would be imposed.

 

Defective Return: Notice under Section 139(9):

Notice: A return is said to be a defective return in case sufficient details are not provided as per income tax requirement (or) If the assessing officer has a reason to believe that the return filed by the assesse is incomplete or defective, then he may intimate the defect to the assesse.

The assessing officer may provide the assesse an opportunity to rectify the defect within 15 days from the date of such intimation. This 15 days period may be extended as the assessing officer deems necessary.

In case assesse fails to rectify the return within the said period then the return filed by the assesse shall be considered as an invalid return which ultimately means that the assesse has not filed the return. The return filed the assesse would be null and void.

In other case where the assesse corrects the defect after the aforesaid period but before the completion of assessment, the assessing officer may condone the delay and treat the return as a valid return.

Solutions of notice u/s 139(9):

The assesse if agrees with all the changes proposed must re-file the said return and comply with the intimation within 15 days or said time period as provided by the assessing officer. In case the assesse is not satisfied with the order then she or he may file an objection against the order.

Consequences of Non-Compliance:

If assesse do not comply with the provisions of this section and doesn’t make the defect correct or submit all details as required within the aforesaid period provided by the assessing officer then the assesse may be prosecuted and respective penalty would be imposed.

 

Set off of refunds against tax remaining payable: Notice under Section 245

Notice: The order under section 245 is received when the Income Tax department authorities have a reason to believe that there is an outstanding amount of tax to be refunded to the assesse from any earlier assessment years and the assesse can claim or adjust the same in current financial or assessment year. In simple terms, order under this section is released, where any amount of refund is pending to the assesse and also any sum is payable under the act and the assessing officer is of the opinion that the same can be adjusted against each other.

Notice under Section 245 is more of intimation letter and less of demand notice.

By providing intimation under section 245, the assessing officer informs the effect of the adjustments made with the amount refund and amount due by the assesse. It indicates the adjusted amount which can be either merely intimation or demand notice of lesser amount still payable after the adjustment.

Solutions:

This is just information and assesse need not do anything.

Consequences of Non-Compliance:

None

Final Words:

After implementation of Demonetization policy , Indians are becoming more and more concerned for tax compliance.  I pray you do not get notice. However, this post will help you to tackle with income tax notices if you receive . ( Author contribution: CA Rohini Kumari).

 

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