Income Tax Assessment 

The term “assessment” in the context of income tax refers to the process where the Income-tax Department evaluates a taxpayer’s return of income. This evaluation is done to verify the accuracy and correctness of the information provided by the taxpayer in their Income tax return. The assessment process involves various methods, including:

• Regular assessments examine the details submitted in the taxpayer’s return for accuracy.
• Re-assessment might occur in specific situations as specified by thetaxlaws.
• Best judgment assessment under Section 144, where the evaluation is based on the best judgment of the Assessing Officer, is typically used when thetaxpayer fails to comply with specific requirements of the taxlaws.

Notably, the Finance Act of 2018 introduced Section 143(3A), which implemented an e-assessment scheme for regular assessments carried out under Section 143(3). Further expanding this, the Finance Act 2020 included the best judgment assessments under Section 144 within the scope of e-assessment. By leveragingdigital platforms, E-assessment aims to make the entire process more efficient and less cumbersome.

Notice under Section 143(2)

When the Income Tax Department selects your Income Tax Return for a detailed check, they issue a Notice under Section 143(2). This is a step towards what is known as a scrutiny assessment or thorough assessment under Section 143(3).

Under Section 143(3), the scrutiny assessment thoroughly reviews yourIncome Tax Return. The main goal is to verify the accuracy and truthfulness of various claims and deductions you’ve made in your return. Essentially, this process ensures that theincome you’ve reported and the taxyou’ve paid are correct.

The Key Objectives of Scrutiny Assessment:

• The scrutiny primarily aims to check three things:
• That you haven’t reported less income than you have.
• That you haven’t claimed excessive losses.
• That you haven’tpaid less taxthan you should have.

So, in summary, toconduct a scrutinyassessment under Section 143(3) of the Income Tax Act, the Income Tax Department issues a notice under Section 143(2). This notice is typically given within three months from theend of the financial year.

What Exactly is a Scrutiny Assessment?

A scrutiny assessment, as defined under section 143(3), involves a detailed examination of theincome tax return. During this assessment, thetax authorities meticulously check the authenticity and accuracy of variousclaims, deductions, and other details you have provided in your return.

Scope of Assessment under Section 143(1):

The assessment under Section 143(1) is essentially a preliminary check of theincome tax return filed by the taxpayer. At this stage, the focus is not on detailed return scrutiny. Instead, it involves a basicverification processwhere certain adjustments may be made to the income or loss reported by the taxpayer. These adjustments include:

• Correction of Arithmetical Errors: Any mathematical mistakespresent in the return are rectified.
• Identification ofIncorrect Claims: If any claims in the returnare incorrect, they are adjusted based on the information available in the return. This includes claims inconsistent with other entries in the return, claims lacking required substantiation, or deductions exceeding statutory limits.
• Disallowance of Loss Claimed: If the return for the previous year, for which a loss set-off is claimed, was submitted after thedue dateunder Section 139(1), the loss claim can be disallowed.
• Disallowance of Expenditure Not Accounted in the Total Income: If certain expenditures are mentioned in theaudit reportbut not considered in the total income calculation in the return, these can be disallowed.
• Disallowance of Certain Deductions: Deductions claimed under sections 10AA, 80-IA, 80-IB, 80-IC, 80-ID, or 80-IE can be disallowed if the return isfiled beyond the due datespecified under Section 139(1).
• Addition of Income Not Included in the Return: Any income that appears inForm 26AS, Form 16A, or Form 16, which has not been included in the total income stated in the return, may be added.

When Can a Scrutiny Assessment under Section 143(3) be Initiated?

Scrutiny Assessment  assessment can be started in the following situations:

• When youfile an income tax returnas per Section 139 or respond to a notice under Section 142.
• When the Assessing Officer or Income Tax Authority feels it’s necessary to audit your return to ensure the reported income and paid taxes are accurate.

Types of Scrutiny Assessments

Scrutiny assessments under the Income Tax Act can be categorized into manual and compulsory assessments.

•  Manual Scrutiny Assessments: These are selected on a case-by-case basis due to specific reasons. Assesses can often avoid manual scrutiny by exercisingdue diligence and careful compliance with taxlaws and filing procedures.
•  Compulsory Scrutiny Assessments: These are not within the control of the assessee and cannot be avoided. They are usually mandated by specific criteria set by the tax authorities.

Criteria for Selecting Cases for Scrutiny Assessment  

A case is typically selected for scrutiny assessment by the Income Tax Department under certain circumstances:

•  Non-filing of Tax Return: If theassesseedoes not file the tax return, it can trigger a scrutiny assessment. This is particularly relevant when the assessee has ataxable income but fails to file the required returns.
•  Incomplete or ErroneousTax Return: Cases where the tax return is filedbut lacks necessary information or contains errors may also be scrutinised. This includes inaccuracies inincome reporting or taxcalculations.

Common Reasons for Scrutiny Selection

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

• Individuals with gross income above the exempted limit (e.g., Rs 2,50,000 for individuals below 60 years) mustfile an ITR.
•  Residents who own foreign assets or have authority over foreignbank accountsmust file an ITR regardless of income level.
• Filing is necessary even if the employer has deducted TDS.

Reason 2: Errors Related to TDS

• Discrepancies between TDSamountsreported in the ITR and those recorded on the Traces website can trigger scrutiny.

Reason 3: Non-disclosure of Other Incomes

• All incomes, includinginterestfrom savings accounts and fixed and recurring deposits, must be reported.
• Issues arise when TDS is deducted at a lower rate than theassessee’s taxslab.

Reason 4: Unnatural or High-Value Transactions

• Transactions significantlyhigher than the incomedeclared can lead to scrutiny. For example, extensivedeposits in bank accountsthat don’t correspond with the reported income.
• Suchtransactions are often reported to the tax departmentby banks and other financial institutions.

Reason 5: Defects in Income Tax Return

• Errors in filing, such as using the wrongITR formor omitting mandatory information, can result in a notice.
• Thetax departmentmay direct the filing of a revised return under Section 139(9) to correct any inaccuracies.

Procedure for Scrutiny Assessment in Income Tax

Income Tax Notice under Section 143(2) and Scrutiny Assessment Process is explained here:

Starting a Scrutiny Assessment – Income Tax Notice u/s 143(2)

When an Income Tax officer needs to conduct a scrutiny assessment, they first issue a notice under Section 143(2). This notice asks the taxpayer to show up in person or through an e-assessment. The taxpayer must also provide any documents or information the officer thinks are essential for determining the taxableincome and taxowed. This notice must be sent within six months after theend of the financial year the tax return was filed. 

For example, if a return is filed on November 2, 2018, the notice can be sent until September 30, 2019. However, if the notice is sent on September 29, 2019, but reaches the taxpayer after September 30, it’s invalid.

Participating in the Scrutiny Assessment

The taxpayer or their authorized person can meet with the Assessing Officer to discuss and present evidence or arguments about different issues as requested by the officer.

Conducting the Scrutiny Assessment Hearing

During this hearing, thetaxofficer gives the taxpayer plenty of chances to be heard and to show documents or evidence supporting their tax return. If the taxpayer doesn’t provide theneededinformation or doesn’t cooperate, the officer can do a best judgment assessment under Section 144.

If the taxpayer cooperates and provides all the information, the Assessing Officer will review this evidence and decide. Once the officer makes a decision, the taxpayer has a few choices:

• Accept the decision and eitherpay any extra tax, get a refund, or accept the loss determined.
• Apply for a correction under Section 154 if there’s a clerical mistake.
• File a revision application to the Commissioner of Income Tax under Section 263/264.
• Appeal the decision if they disagree with it.

During the scrutiny process, the Assessing Officer (AO) focuses on ensuring:

• No Underreporting ofIncome or Overstating of Losses: The AO verifies that the assessee has not underreported income or overstated losses in their taxreturn.
• SufficientTax Payment: The AO checks if the assessee has paid the correct tax due. Any shortfall intax paymentcan be a point of examination.

In conducting these assessments, the Assessing Officer must adhere to the guidelines and norms set by the Central Board of Direct Taxes (CBDT) and follow the precedents and rules established by theSupreme Court. This adherence ensures the scrutiny process is consistent, fair, and in line with legal standards.

Time Limits for Conducting Scrutiny Assessments as Per Section 153

The duration allowed for completing a scrutiny assessment under Section 143(3) is outlined in Section 153 and varies based on the assessment year:

• For theassessment year 2017-18 or earlier: The scrutinyassessment must be concluded within 21 months from the end of the assessment year when the income was first subject to tax.
• For theassessment year2018-19: The scrutiny assessment should be completed within 18 months following the end of the assessment year in which the income was first assessable.
• For theassessment years starting from 2019-20onwards: For the assessment years beginning in 2019-20 onwards, including the current assessment year, the rule is that the scrutiny assessment must be completed within 12 months after the end of the assessment year in which the income was first considered taxable.