The below mentioned article broadly covers all important aspects relating to scrutiny proceedings carried out u/s 143(2)/(3) of the Income Act 1961.
What is a scrutiny?
It is not possible to the Income Tax Department to make regular assessment of all the returns filed by assesses in any assessment year. So, based on norms fixed by the CBDT and with the help of CASS (Computer Assisted Scrutiny System) Income Tax department selects some returns for regular assessment (scrutiny assessment) u/s 143(3).
The scheme of comprehensive scrutiny is as follows-
v A return of income (or loss) has been made u/s 139 or in response to the notice under section 142(1)
v The Assessing officer considers it necessary or expedient to ensure that the assessee has not-
• Understated the income (or)
• Computed excessive loss (or)
• Not under-paid tax in any manner
v A notice shall be served on the assessee under section 143(2) (ii). The notice requires the assessee to produce any evidence which the assessee may rely in support of the return.
Time Limit for serving notice
Notice is to be served within 6 months from the end of the FY in which return is furnished
From April 1, 2008
Notice was to be served with in 12 months from the end of the month in which return was filed
Up to March 31, 2008
If the notice u/s 143(2) is served beyond the prescribed time limit, the said assessment is invalid in law and has to be quashed, even though the assessee had not challenged the same- (CIT V. Mahi Valley Hotels & Resorts).
v After hearing such evidence produced by the assessee in response to the notice given u/s 143(2) the Assessing officer shall pass an assessment order in writing determining-
· The total income or loss of the assessee and
· The sum payable by the assessee (or refund of any amount due to him) on the basis of such assessment order
Aspects of income tax scrutiny
The main objective of the IT officer during scrutiny is to make sure that the income shown in the return is real and there is no tax evasion. The expenses incurred are also scrutinized to find out whether they were actually incurred and were not fictitious.
For this, the assessing officer generally calls for the following documents/information:
v Form 16 given by the employer and reason for deviations if any when compared with the details furnished in return of income.
v Details and proofs of rent paid during the year for which HRA has been claimed as exempt.
v Loan sanction letter and repayment schedule for the housing loans obtained, in cases where interest on housing loan and principal is claiming as a deduction.
v Details of additions to fixed assets with supporting bills/vouchers.
v Names and addresses of sundry debtors and sundry creditors for the amount exceeding a prescribed limit, for example Rs.1,00,000/- ( The limit may vary in case to case)
v Item wise break up and ledger extract copies of –
• Inventories (for manufacturing/trading concerns)
• Loans & Advances
v Investments made in immovable properties, FDRs, shares, debentures, bonds and sources of funds for making such investments by assessee and his family members.
v Summary of all the bank accounts and copies of the bank pass book/statement explaining each debit and credit.
v Details of secured loans obtained during the year with loan sanction letter from banks. In case, the facilities availed against the hypothecation, a copy of hypothecation document.
v Item wise break up and ledger extract copies of expenses as debited to P&L a/c-
• Major expenditure like Power & Fuel
• Repairs & Maintenance
• Professional charges
• Travelling expenses
• General expenses
v Ledger extract copies and item wise break up of
• Other/miscellaneous expenses etc.
v Justification in regard to payments made u/s 43B
v Details of TDS made during the year and to justify payments made in provisions of sec 40(a) (ia) of the IT act.
v Nowadays most of the assessees are filing returns electronically, where it is not possible to furnish reports and other documents. So, at the time of scrutiny they may further ask to furnish-
• A copy of tax audit report along with annexure if any
• A copy of annual report pertaining to relevant AY under scrutiny
• Deductions claimed if any under chapter VI-A, a copy of the relevant receipts along with exemption certificates.
• A copy of computation sheet which shows the working of tax computed at normal rates and computed u/s 115JB of the IT Act.
v If the return contains capital gain income, the assessee may be asked to produce sale deed, documents supporting to cost of acquisition and supporting evidences relating to cost of development etc. and also the documents for claiming exemption if any.
v Details of debtors whose debts are written off as bad debts, documents relating to legal proceedings and steps taken against the debtors for collection.
v Details of all 12 months credit card statements and source of payment thereof.
v Details of loans accepted and given during the year especially friends and relatives, and also confirmation from borrowers along with their respective PANs.
v Details of gifts given and taken during the year along with gift deeds.
v Statement of expenditure debited to profit and loss account and covered for FBT and TDS as well as the compliance thereof.
v Reconciliation of income with TDS certificates.
Measures to be taken during assessment stage
Generally all the measures should be undertaken at the time of preparation of income tax return and presented before Assessing officer during scrutiny proceedings if called for. Few such measures are mentioned below-
v All the credits of income appearing in the bank statement/pass book must be matched with the income as shown in the return. A balance sheet should be prepared for each year which keeps a proper track of assets and incomes.
v Care should be taken that adequate withdrawals (cash or bank) are made for personal and household expenses. Generally an estimate can be made as to how much money a family would be requiring for household needs (based on the size of family and cost of living in the city) and compare it with withdrawals made by the assessee for the given purpose.
v Ensure that payment for the expenses charged on the credit cards is done through regular bank account.
v A proper record should be maintained of the investments made along with their sources and supporting documents. All unexplained investments would be added as income.
v Income of minor child should be included in the income of parent whose total income is higher, before including the income of minor child.
v If HRA exemption is claimed, then the proof of rent paid has to be furnished. Also ensure that if rent is paid to one’s parents or any relative and then ensure that the rent is shown in the return of income of the person receiving the rent.
v If any asset is purchased by spouse out of the money gifted by assessee then the income from such asset would be included in the income of assessee.
v One should generally not give interest-free loans when one has already borrowed money and is repaying that with interest. The most common disallowance/addition that is being made nowadays in the scrutiny assessment orders is the addition of notional interest on interest free loans given to someone. It has to be proved that the loans are genuine and reasons for giving interest-free loans are also genuine.
v Proper record should be maintained of the gifts received including gift deed, PAN and bank statement of donor.
With effect from April 1, 2006, gifts received in cash from non relatives in excess of Rs.50,000/- would be taxable as income of receiver. However, gifts from relatives and those received on occasion of marriage of individual are exempt irrespective of the limit.
From the AY 2010-2011, gifts received in kind are also liable for tax, so details of persons from whom gifts received in kind are also required to be maintained.
Time limit for completion of scrutiny
The scrutiny assessment must be completed within 21 months from the end of the relevant assessment year. For instance, the scrutiny for assessment year 2007-08 has to be completed by December 31, 2009.
Other important points relating to scrutiny
v The assessing officer may call for the information relating to the FY which is under scrutiny. However he cannot call for earlier year’s information.
v Maintenance of books of accounts is compulsory only in case of incomes received from business or profession or income from other sources.
v According to Sec 44AA specified professionals and others who satisfy conditions specified therein are required to maintain books of accounts. If these persons face scrutiny, they are supposed to produce books of accounts maintained by them at the time of scrutiny if required by assessing officer.
v The assessee is not permitted to produce any record or evidence before the Appellate Authority which was not produced before the assessing officer during the course of proceedings before him. Hence care should be taken that all the evidences are filed before the Assessing Officer only.
However the Appellate Authority may allow production of additional evidence by the assessee if the conditions specified in Rule 46A of Income Tax rules are satisfied.
Provisions Amended by Finance Act, 2008
The old procedure of processing of returns under section 143(1)(a) has come back with wider scope but without the sting of additional tax. From 01-04-2008 all returns have to be processed wherein arithmetical mistakes and incorrect claims apparent from the information in the return will be added back and intimation will be issued demanding the additional demand or refunding the excess taxes paid. Such intimation can be issued only within one year from the end of the financial year in which such return was filed. No intimation will be issued if no demand or refund is due. Provisions for making centralized processing of Returns were also made.
Incorrect claims is defined as-
· Inconsistency in figures in the entries in return
· Where evidence is required to be filed as per various provisions of the act, but not filed
· Where deduction exceeds the limits prescribed under various provisions of the act
No doubt, the scrutiny process causes hardship to the assessee as the main focus of the IT department is to recover as much tax as possible. But taking proper measures from the beginning it can mitigate the trouble.