Top 5 Income Tax Notices & How to Avoid Them

Top reasons for income tax notices  - Income tax notices can be sent for various reasons, from seeking information and enquiry to demanding tax payment and penalty as applicable. Every notice sent by the department should be governed by the provisions of the Income Tax Act. There are various provisions governing notices sent under different situations under the act. Popular sections under which notice are issued are 143(2), 142 (1), 139(9) and 148. 

Key Highlights

Popular notices issued by the Income Tax Department are:

• Defective notice u/s 139(9) - on mismatch between ITR and Form 26AS / AIS.
• Intimation u/s 143(1) - on mistake apparent on ITR returns.
• Section 142(1) notice - Inquiry before assessment.
• Section 143(2) - Scrutiny notice.
• Section 156 - Demand notice.

Intimation under Section 143(1)

• This is the most common notice, sent to almost every taxpayer as the initial communication by the Centralized Processing Centre (CPC) after processing their ITR.
•  During processing, the CPC checks for arithmetic errors and compares the information in the ITR with the information available to the IT department from various sources.
• Subsequently, the outcome of ITR processing is sent to the taxpayer's email address registered with the IT department. Three outcomes are communicated to the taxpayer, which are as follows:

No demand/ no refund: Here, the IT department accepts the ITR, and the tax paid by the taxpayer is the same as computed by the IT department.

Demand for additional tax: If the tax computed by the IT department based on the information from various sources (Form 26AS /AIS) is more than the tax paid by the taxpayer, the CPC will send a notice under section 143(1) for the amount of additional tax. 

Refund due: If the tax paid by the taxpayers is more than the tax computed by the IT department based on information from various sources (Form 26AS /AIS), the CPC communicates the amount of Refund due to the taxpayer from the IT department.

Defective Return Notice under Section 139(9)

• Under section 139(9), the IT department issues a notice in case of defects in the return such as:
  • Incomplete information 
  • Incorrect name 
  • Incorrect ITR 
  • Mismatches of income with TDS 
  • Non-reporting of income, TDS of which is utilized
  • Non-submission of documents like the Profit and Loss account, balance sheet, audit reports, etc.
• The taxpayer should rectify the defects within 15 days or the time extended by the Assessing officer after providing the condonation to delay. 
• If the corrected ITR is not submitted within the stipulated time, the return already filed will be considered invalid and not filed by the taxpayer.
• The consequences of non-filing of ITR include late filing fees, interest on tax, delayed return or loss of carry forward of losses to future years.

Inquiry Notice under Section 142(1)

• Notice under section 142(1) is known as Inquiry Before Assessment. 
• The Assessing Officer issues this notice to the taxpayer asking them to furnish documents such as bank statements, income sources, rent receipts, etc. to complete the assessment process. 
• This notice can be issued irrespective of return is filed by the taxpayer or not. 
• The time period to respond to the notice under section 142(1) is not more than 180 days.

Scrutiny Notice under Section 143(2)

• The Assessing Officer issues scrutiny notice to taxpayers whose ITR has been selected by the Computer Assisted Scrutiny Selection (CASS) based on predefined parameters, under the high-risk category. 
• The ITR of the high-risk taxpayers has been examined thoroughly to ensure that they have not underreported their income, overstated losses or deductions, or underpaid taxes. 
• The Scrutiny notice cannot be issued for more than 3 months from the end of the financial year in which the return is filed.

Click here if you want an expert to help you with your scrutiny notice. 

Demand Notice under Section 156

• The Assessing officer issues this notice after completing the assessment, including both the preliminary and the scrutiny assessment. 
• The notice is issued to demand the payment of taxes, interest and penalties.