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All about Scrutiny Assessment

Saurabh Maheshwari 
on 23 May 2013

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In continuation of my previous article on Income Tax procedures, I have once again come up with next part having special focus on scrutiny assessments.

Links to previous parts:

Part 1: Income Tax Practical Procedures in FAQ Style

Part 2: Common Income Tax Procedures at one place

Happy Reading.

Q-1 What is meant by Scrutiny Assessment? What its purpose and what is mechanism to pick returns for scrutiny?

Ans- Picking up the returns on a scientific basis and then making detailed checking of the assessee’s return in order to make sure that:

(a) The assessee has not concealed/understated any income

(b) The assessee has not claimed excess loss

(c) The assessee has not underpaid tax

(d) The assessee has not claimed excess refund.

Scientific basis means the various criteria prescribed by Central Board of Direct Taxes (CBDT) on the basis of which the returns are to be picked up for scrutiny. Computer Assisted Scrutiny Selection System (CASS) picks up the returns for scrutiny which meets those criteria.

The detailed checking of the returns are made by asking assessee to:

(i) submit various supporting evidences used by him in preparing his ROI ,  

(ii) also asking the assessee to explain various claims made and

(iii) such other enquiries as they AO feel it necessary to complete  the assessment.

Q-2 What is the process of scrutiny assessment?

Ans-2 Process starts with issue of Notice and ends with the passing of Assessment order.

The scrutiny process goes like this:

(a) Service of Notice u/s 143(2) by AO to the assessee asking him to attend the office of AO-

The notice is like that……In connection with the ROI furnished for AY xxxx-xx I have certain points to discuss with you so you are requested to attend my office in person or by an **authorized representative on such and such date at  such and such time (11:00AM-most probably)

(**A CA/CS/CMA can be authorised representative(AR) only upto stage of tribunal….in the High courts and Supreme court, only and only an Advocate can be a authorised representative)

(b) Asking for various details like books of accounts, supporting documents  & explanations by sending the questionnaire u/s 142(1)(ii)….some  questions are  generally the same in every questionnaire irrespective of the assessee(indiv,firm,co),  size and nature  of business. But some questions differ from assessee to assessee due nature of business, its size and other factors. It is worth noting that questionnaire can be issued many times if the AO need additional information.

(c) Discussing various points with assessee where the AO has difference of opinion…the AO will give a chance to the assessee to justify his point.

For Eg-Assessee claimed a particular exp as revenue exp  but AO want to disallow the same by treating it as capital exp….here AO will give assessee /his AR an opportunity to justify the treatment made by the assessee.

(d) Passing of Assessment order u/s 143(3) with Notice of demand, if any – Completing the assessment

If the assessment has the effect of:

(a) Increasing the income declared or

(b) Decreasing the loss claimed or

(c) Increasing the tax liability

(d) Reducing the refund claimed

(e) In any way penalizing or prosecuting the assessee.

Then AO will give various supporting provisions and decided cases laws relied on by him in framing the assessment.

Effect of Assessment:

Total Income as per ROI

Xxxx

Add: Additions made as discussed in order:

1. Short Term Capital not offered to  taxed

xxxx

2. Unexplained cash credits etc. u/s 68,69

xxxx

3. Exps disallowed u/s 40A(3)&40(a)(ia)

Xxxx

Xxxxx

Total Income assessed u/s 143(3)

Xxxxxx

Tax payable:

Tax on assessed income

Xxxxx

Add: Interest u/s 234B&C

Xxxxx

Xxxxx

Less: Prepaid Taxes(Adv tax, TDS/TCS, MAT credit)

(xxxxx)

Net Tax payable on a/c of assessment u/s 143(3)-separate notice u/s 156 required to raise the tax demand.(to be attached with the assessment order)

Xxxxx

 

Special Note-If the assessment has the effect of increasing the tax liability of assessee then the assessment order must be accompanied with a notice of demand u/s 156 …if assessment order passed without such notice then the assessment is not complete. (As held by Hon’ble Gujarat High Court in case of Purushotamdas T. Patel)

Q- 3 Questions asked in questionnaire issued u/s 142(1)(ii)?

Ans -Few examples of such common questions:

1. Furnish detailed particulars of business operations undertaken during the relevant year like nature of trading/service/manufacturing operations.

2. Full particulars of principal place of business, head office and branches , factories, godowns

3. Copies of Audited Balance Sheet, P/L , Cash Flow Statement, Audit report(Stat & Tax Audit) for the  AY under scrutiny and its previous AY.

4. Details of investments made during the FY with supporting certificates and other docs.

5. Copies of your bank /credit card stats and briefly explaining all dr. and cr. entries in excess of Rs. 30,000.

6. Transactions relating to sale/purchase of capital assets with supportive documents and agreements

Also detailed calculations of capital gains.

7. Ledgers of Secured and Unsecured borrowings along with loan agreements and PANs of lenders.

8. In case of indiv/HUF the AO always ask the assessee about the monthly household expenditure of the family.

9. Details of deductions claimed under Chapter VI-A(80C to 80U)…..also submit various docs and evidences for supporting the same.

10. Details of Incomes on which tax was deducted

11. Details of incomes claimed exempt

12. Details of shares/MF purchase and sale transactions entered into the year.

13. Any other information which the AO need …off course such needs are different in case of different assesses, their size and nature of business.

Other points to be remembered:

1. Time limit for serving notice u/s 143(2)-

(a) No notice to be served after the expiry of the 6 months from the end of FY in which return was filed. Therefore, if return was for AY 2013-14 is filed on Sept 30, 2013 then notice to be issued before Sept 30,2014.

(b) Service of notice means dispatching  the notice to assessee….if a notice is prepared by AO but not dispatched  then it cannot be said to have been served…So date at which notice was handed over to postal deptt is treated as date of service of notice irrespective of any date put on the notice. Once the notice as such is dispatched/served to the assessee before the limitation period he  cannot challenge the validity of assessment even if he could not receive the dispatched notice.

2. Time Limit for completion of Assessment –

(a) AO cannot take the scrutinise lightly and does not have any privilege to complete the assessment by taking his own sweet time.

(b) Sec 153 read with Sec 153B require that an assessment has to be completed with the following time period otherwise the asst proceedings will get invalid and the assessment will become time barred.

Particulars

Earlier Time limit for completion of assessment

Revised Time Limits(wef July 1,2012)

Asst u/s 143(2) without making reference to Transfer Pricing Officer(TPO)

21 months from end of relevant AY(relevant  AY = AY to which return relates)

24 months from end of relevant AY

Asst u/s 143(2) in which Trf pricing issues involved and a    reference was made to Transfer Pricing Officer(TPO) in respect of transfer Pricing determination

33 months from the end of AY

36 months from the end of AY

Case study-

AO passed assessment order of  Sunset Ltd. for AY 2011-12 on 31.03.2014, the said order had the effect of increasing assessee’s tax liability and the same asst order was served on 02.04.2014, but AO forget to serve notice of demand u/s 156…..as soon as he noticed his mistake he passed demand order on 03.04.2014 and served the same on 04.04.2014.

The assessee challenged the validity of asst. and argued that assessment has become TIME BARRED.

View of Court(case similar to Purushotamdas T. Patel)

The court held that if the assessment order passed without such notice of demand then the assessment is not complete and in the above case assessment completed **only on 03.04.2014 and not on 31.03.2012** (i.e date of passing demand order after asst order)……..since the assessment could not be completed before the prescribed period of 2yrs from 31.03.2012(end of relevant AY)

Therefore, a small mistake of AO has invalidated whole assessment proceedings.

Classic definition of Assessment as given by Hon’ble Gujarat HC in the above case-

Assessment is an integrated process involving not only the determination of total income but also the determination of tax payable. Therefore, the assessment can be said to be complete only when income is determined and tax thereon is levied through a notice of demand u/s 156.

4.Service of Notice beyond the prescribed time(Sec 292BB)

Scrutiny Asst Notice to be served before the expiry of the 6 months from the end of FY in which return was filed.

For Example: Abhay Ispat P. Ltd. filed its ROI for AY 12-13 on Sept 30,2012…..AO served  scrutiny assessment notice u/s 143(2) on Oct 25,2013.The notice is said to be time barred as the proper service in this case only upto Sept 30,2013.

Improper Notice valid even if time barred in some cases-

Where the assessee has appeared in any proceedings or co-operated in any inquiries relating to assessment or reassessment, then it shall be deemed that the proper notice as required to served upon him has been served and assessee shall be precluded/prevented for raising any objection challenging the validity of the notice.

However, nothing in this sec will apply if the assessee has challenged the validity of assessment before the completion of assessment (passing of assessment order and demand notice)

Continuing with the above example of Abhay Ispat (above), if the directors of Abhay Ispat appeared before AO, AO after taking inquiries as he felt necessary, passed assessment order within required time.

Now, Assume in this case the assessment had the effect of increasing tax liability of the assessee…. Directors now read Income Tax Act and found themselves cheated by the Assessing Officer ……They filed an appeal before CIT(Appeals).

But now this appeal will not make any sense because Sec 292BB has already made fool of directors.

So as per Sec 292BB due to assessee’s co-operation in assessment it will be deemed that the service of notice was proper and the assessment order passed is valid.

But if slightly modify the case and assume that director after first hearing came to know that he is being cheated by AO …Now if the director  challenges the validity of assessment (off course  before passes order) then the whole proceedings will get invalid and AO will have nothing to left except than to  scratch his head.

Therefore, it is always advisable to challenge the validity of such time barred notice at the time of appearing for the first time before AO……just prepare a letter addressing to Inc Tax Officer(ITO) that the notice served by you is time barred and I am co-operating under protest… retain one copy of such letter bearing the seal of ITO ward. If AO agree then it’s ok, otherwise let him frame the assessment because he the assessment is anyway void from very beginning.

5.Power to call information by issue of Summons u/s 133(6)-

AO may require any person (including a banking company or its any officer) ,

(i) To furnish information in relation to such points or matters, or

(ii) To furnish such statements of accounts in the manner specified by the Assessing Officer.

Practically, summons are issued during the course of assessment proceedings to cross verify the transactions as recorded by the assessee in the books of accounts.

For Example- X Ltd. have shown purchases of Rs. 5 crores from Y Ltd.in books …If AO has doubt then he may issue summon to Y Ltd. and make ask a copy of ledger of X  Ltd. in the books of Y Ltd.

6. Guidelines issued by CBDT in respect of picking scrutinise:

(a) Only 3 to 5 % assessees returns to be picked up for scrutiny. Therefore, informally officers are require to recover all  the taxes from these 3-5 % as evaded by other 95-97%.That’s why these officers are supposed to leave not a single stone unturned while assessing these 3-5%.

(b) Small assessees filling return in form ITR-1, ITR-2 will not be picked up for scrutiny unless and until the assessing officer has some cross evidence in his hand and as a result having some doubts in his mind. The purpose seems to be clear that very common people need not be unnecessarily harassed.

In the next article, we will be discussing reassessment and appeals.

Any sort of comments, suggestions and queries are most welcomed.

Thanks for reading.

With Warm Regards

Saurabh Maheshwari

Final CA

Ahmedabad

Email:saurabhchokhra92@gmail.com

If you make mistakes, every day  make a new one so that could get a chance to learn something new everyday.smiley


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