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Income Tax Notices and What To Do Next

Posted by: adpindia on 29 August 2017 in ADP News, HR, Payroll

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Tax compliance is very important – this isn’t any doubt about that. We are all, whether an individual or a company or trust or any other organisation, always under strict compliance duty of the income tax department. In the modern digital world, the income tax (IT) department has access to a wide range of financial information of taxpayers through a computer-aided scrutiny system (CASS), which identifies cases where there is some discrepancy in the income tax return data. This system is used to identify potential cases of tax evasion and/or tax fraud.

You wouldn’t want to be caught up in the IT department’s net. To make the laws clearer, to ensure proper adherence towards tax laws and to keep a check on tax evasion, the IT department authorities issue notices under various provisions of Income Tax Act.

Why would the IT department issue notices?

Some common reasons to receive a notice from the IT department are:

  1. Escaped Income
    This refers to income on which tax was not paid, whether knowingly or unknowingly, by the assessee 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 lakh) for the relevant year.
  1. Not declaring income
    An assessee is required to pay taxes on his or her total taxable income during the year. Total income is the sum of all incomes from salary, business income, house property, capital gains and other income.
  1. Mismatch 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 assessee for that financial year. There should not be any difference between the TDS (tax deducted at source) details as per Form 26AS, and the details filed in your income tax return. Both should be reconciled, and any differences should be rectified, before filing the income tax return. If there is a mismatch of details, the assessee is bound to get a notice.
  1. Mismatch in income, expenses and investments
    In normal scenarios, all investments and expenditure of the assessee should match with his or her income for that relevant financial year. If the expenses or investment of the assessee is more than the income earned, it may create suspicion of escaped income, which may lead to a notice from the department.

Know your Notices

What are the income tax sections and provisions that govern the rules and regulations under which notices are issued? And what actions can the assessee take to avoid consequences in case they have been non-compliant?

Here’s a handy list:

Inquiry before assessment: Notice under Section 142(1)

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

Solution: The assessee must provide all documents and details asked for under the notice issued u/s 142(1)

Consequence of Non-Compliance: If the assessee does not comply with the provisions of this section, for each failure or may be prosecuted under Sec 276D which may extend up to one (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.
(Note: Where the assessee 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.)

Solution: The assessee must provide all relevant documents and details asked for under the notice issued u/s 143(2) to avoid further scrutiny.

Consequences of Non-Compliance: If the assessee does not comply with the provisions of this section, he or she may be penalised under Sec 271(1) for each failure, or may be prosecuted under Sec 276D which may extend up to one (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 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 the officer’s computation shows amount excessively paid by the assessee and the same needs to be refunded.
  3. Demand Notice: This notice is released in case the officer’s computation shows a shortfall in your tax payment. The assessee has to make the tax payment within 30 days of receipt of notice.

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

Solutions:
– Refund notice: The tax payer has to do nothing about it; simply wait for the refund amount to be transferred into the respective account.
– Demand Notice: The assessee has to make the requisite payment of tax within 30 days of receipt of this intimation.

Consequences of Non-Compliance: If the assessee does not comply with the provisions of this section and doesn’t pay the required tax before the due date, then the assessee may be prosecuted and the 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.

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

Consequences of Non-Compliance: If the assessee does not comply with the provisions of this section, then he or she may be prosecuted and the respective penalty would be imposed.

Notice of Demand: Notice under Section 156

Notice: The notice under this section is served in case the assessing officer has assessed the assessee’ 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.

Solution: The assessee, if he or she agrees with the order, must make the requisite payment of tax within 30 days of receipt of this order. In case the assessee is not satisfied with the demand, he/she may file an objection against the order.

Consequences of Non-Compliance: If the assessee does not comply with the provisions of this section and doesn’t pay the required tax before the due date, then the assessee may be prosecuted and the respective penalty would be imposed.

 

As you settle your tax matters, a final point to remember: always verify that the notice is indeed from the IT department, especially when it is via email. There have been cases of fake emails purportedly from the IT department, urging the recipient to pay his/her outstanding amounts immediately. Do your due diligence before you follow any such instructions from an email. Ensure the notice is indeed from the Income Tax Department before you even respond to it.

 


Disclaimer: The information provided herein is general and not intended as legal, regulatory, tax or accounting advice and you should obtain your own independent advice regarding the matters dealt with herein. ADP assumes no liability or responsibility for any errors or omissions in the content of this document or publication and for your use of any information provided. The information contained in this document is provided “as is” without warranty of any kind, either express or implied, including without warranties of merchantability or fitness for a particular purpose, and non-infringement. All materials contained in this are protected by copyright laws, and may not be reproduced, republished, distributed, transmitted, displayed, broadcast or otherwise exploited in any manner without the express prior written permission of ADP. ADP’s names and logos and all related trademarks and other intellectual property are the property of ADP and cannot be used without its express prior written permission.
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