Top 5 Income Tax Notices & How to Avoid Them

The Income Tax Notices act as a tool to assess the Income Tax Return (ITR) filed by the taxpayers to prevent understating income, overstating losses/ deductions or underpayment of taxes. After the taxpayer has filed the ITR, the Centralised Processing Centre (CPC) Bengaluru process the ITRs filed by the taxpayers and sends a preliminary communication to the taxpayer about the outcomes of their ITRs being filed. To ensure the genuineness of the information provided by the taxpayer, the IT department undergoes several stages of evaluation. To attain the completeness of information about every taxpayer’s Income chargeable to tax, they communicate with the taxpayers by issuing notices for different purposes under various sections of the Income Tax Act. This article will describe the top 5 Income Tax Notices issued by the Income Tax Department and how to avoid them.

Top 5 Income Tax Notices

The top 5 Income Notices that taxpayers most often come across are as follows:

Intimation under Section 143(1)

This notice is the most common and is sent to almost every taxpayer as the initial communication by the Centralised 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)

If there are defects in the ITR filed by the taxpayer, then the IT department will send a notice under section 139(9) to inform the taxpayer that the processing of their ITR cannot be completed because of the defects in their ITR. The reasons for issuing defective return notices include incomplete information, incorrect name, incorrect ITR, mismatches in the income and non-reporting of income corresponding to TDS claimed, 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, it 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.

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 to both types of taxpayers who have/ have not filed their returns. The time period, including the extended time period to respond to the notice under section 142(1) is not more than 180 days.

Notice under Section 143(2)

This notice is known as a Scrutiny Notice. The Assessing Officer issues this 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.

Notice under Section 156

This notice is known as a demand notice. 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.

What is Scrutiny Assessment?

The tax department examines the returns filed and if it has any reason to believe that the information declared by the assessee is incorrect or incomplete then the case is taken up for scrutiny assessment. The assessee is informed through issue of a notice and is supposed to take the required action as communicated by the department.

Types of Cases for Scrutiny

There are two types of scrutiny assessments: Manual and compulsory scrutiny cases. While the reasons for manual selection for scrutiny are case specific and can be avoided with little care on part of the assessee, the compulsory selection can’t be prevented.

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

The following are the most general reasons for selection of your case for scrutiny along with ways to dodge them.

Reason 1: Non-filing of Income Tax Return (ITR)

• Any person whose gross income (without any deductions) is above the exempted limit (Rs 2,50,000 in case of individuals below the age of 60) is required to file annual Income tax return in due time
• If you are a resident Indian and you own a foreign asset or are a signing authority in a foreign bank account, you have to file tax return irrespective of your income
• Even where your employer has already deducted TDS from your pay you need to file your return to avoid a notice

How to avoid

Pay your advance taxes on time and file returns within the due date.

Reason 2: Error with respect to TDS

The TDS that you show in your return and what is actually shown on the Traces website might not match. When there is such a mismatch, there are high chances of getting a notice.

How to avoid

• Request your employer or any person who is deducting TDS on your income to deposit the amount with government treasury and file TDS return in due time
• Always first reconcile the actual TDS that has been deducted from your income with your Tax Credit Statement (Form 26AS) Report the deductor if you find any discrepancy

Reason 3: Non-disclosure of Other Incomes

• Every income that has been earned in the financial year is required to be reported in the tax return. People generally ignore interest income on the savings account, fixed deposits and recurring deposits
• There are many cases where TDS is deducted at a lower rate by your banker but you belong to a higher tax slab. For example, banks deduct TDS on interest at 10% while you may be falling in tax slab of 30%. In such cases, you might come under scrutiny for non disclosure of complete information or an attempt to minimise tax liability

How to avoid

• At the year end, request your banker to give interest statement of your deposits in various bank accounts
• Report all the income from any source in your tax return even if that amount is exempt from tax

Note: Penalty for concealment of income can be up to a maximum of 200% of tax payable

Reason 4: Unnatural or High Value Transaction

Incidences where the transaction value is a lot higher considering the disclosure of your income in the return can attract issue of notice. For example, a salaried individual whose salary is Rs 4,00,000 but he made a total deposit in his bank account exceeding Rs.10,00,000.When such transaction comes in knowledge of the department, a notice can be expected. The thing to be noted is that all these transactions are reported directly to the tax department through annual information return filed by institutions like your broker, bank etc.

How to avoid

Report every transaction that you may have made. Even if there is loss, like the loss in share trading, it has to be reported to the department to avoid notice.

Reason 5: Defect in Income Tax Return

• An Income tax return is a statement of income by the taxpayer to the tax department. At times, out of ignorance or lack of knowledge, people end up filing the wrong ITR form, may skip any mandatory information or commit some other error
• If the return is not filed accurately, the tax department on its own discretion may issue a notice to you under Section 139(9) and direct you to file a revised return on income after correcting the error

How to avoid

• Keep all your documents ready before you sit to file your ITR
• Take help of an expert wherever you find difficulty in filing your return