INTRODUCTION: There has been a spike in the number of tax notices to Assessees because the Income tax department is now equipped with an integrated database on taxpayers which allows them to track almost all financial transactions by analyzing information through Annual Information Return (AIR), Statement of Financial Transactions (SFT), Centralized Information Branch (CIB), TDS/TCS Statement, Securities Transaction Tax (STT), exchange of information with various entities having MOU with CBDT etc.
The 10-digit PAN, which’s mandatory for all high value transactions, not only enables the tax department to know how much you have earned, but also provides information on how you have been spending and investing this money. There may be many types of discrepancies found in the ITR filed by you like concealment of taxable income, non-filing of ITR, etc. The Income Tax Department issues notices under sections-139(9),143(2),148,156 and 245 of the Income Tax Act, 1961 seeking the satisfactory answers in this respect.
Common reasons that might fetch taxpayers a tax notice from the department:
- NON-DISCLOSURE OF ASSETS AND INCOME: It is mandatory for the taxpayers qualifying as ROR to disclose assets held by them outside India anytime during the year in the ITR. Foreign assets to be disclosed in the ITR include foreign bank accounts, immovable property, financial interest in any entity, other capital assets, etc. Taxpayers are also required to disclose the income from such assets along with its nature and the head of income under which the income has been offered to tax. The Income Tax Department may send you a Tax notice related to this type of money or asset, asking you to declare all your income sources and assets in and outside India. Notification No. 41/2015 Dated 15.04.2015.
- NON-FILING OF INCOME TAX RETURN: Individual are required to file the income tax return only if income exceeds the basic exemption limit. A lot of taxpayers don’t file the return presuming that return is mandatory only if they have the tax liability. For instance, a person with a salary income of Rs 4 Lakh and deduction of INR 1.50 Lakh is required to file the return of income, as income before claiming the following deductions or exemptions, is above basic exemption limit even though the tax liability is Nil. Non- filing of return shall result in notice. Filing of return of income is mandatory irrespective of the amount of gross total income if an assessee’s case is covered by the seventh proviso to Section 139(1). An individual, being a resident and ordinary resident in India, shall file his return of Income, even if his income does not exceed the maximum exemption limit, if he is a beneficial owner or has signing authority in any account or is a beneficiary of any asset located outside India.
- MISMATCH IN INCOMES REPORTED IN 26AS, TDS AND INCOME TAX RETURN: Assesssee must be conscious about the fact that while filing returns, TDS should match Form 26AS and Form 16 or 16A. There may be chances that some details in the TDS may mismatch to the Form 26AS or Form 16 or 16A. However, the major cause of getting the notice is that the TDS reported by the deductor does not match the TDS claimed by the assessee. The taxpayer may not reconcile the incomes which may cause difference between reported income and actual income.
- DEFECTIVE RETURN FILED: When the assessee has filed defective return, notice is issued u/s 139(9). The reasons may be details of taxes paid are provided in the return but the income details are not provided, tax deducted has been claimed as a refund, but no income details are provided in the return, taxes have not been paid in full and the return is filed, Assessee is required to maintain Balance Sheet and Profit & Loss statement, but have not filed the same, when total presumptive income under Section 44AD is less than 8% / 6% of gross turnover or receipts, ITR-3 has to be filed. A notice is sent when the return form filed is ITR-4 instead of ITR-3 or the name mentioned on the Income-tax Return does not match with the name on the PAN card or any other reason as considered by the Income-tax department.
- UNDERREPORTING OF INCOME: Income tax department is now equipped with an integrated database on taxpayers which allows them to extract information of taxpayer’s income via banks, employers, broking institutions etc. If a taxpayer fails to provide the accurate knowledge of his income in the ITR then it will get mismatched with the data already available with the tax governance which will lead to the notice issued by authorities. If your actual income, expenditure or investments differ from the one declared in your income tax return, you can get an income tax notice under Section 143(2)/147.
- NON-REPORTING OF INCOME FROM PREVIOUS EMPLOYER: If a taxpayer has changed jobs during the financial year both employers may have given the taxpayer benefits under Section 80C and other benefits. If he ignores the income from his previous employer, he would have a lower tax liability and would be detected by the department by tracing the TDS deposited by the previous employer.
- UNUSUAL DROP/RISE IN INCOME: A sudden volatility in the income of businessman and traders may invite notice from Income tax department seeking financial statements such as Profit and Loss account, Balance sheet, Bank accounts and capital accounts.
- CLUBBING OF INCOME: Taxpayers often make certain transactions which may attract clubbing provisions. A taxpayer is required to club income of all the specific persons which relates to the investment and income of the taxpayer. For e.g., Non-disclosure of investments made in the name of spouse.
- MISREPRESENTATION OF LTCG IN ITR: While filing ITR, you need to show the long-term capital gains from equity-linked mutual funds and listed equities. In a year, more than 1 lakh LTCG is taxed on listed equity and mutual funds. Keep in mind that you correct all the calculations and fill in all the information correctly. A small mistake of calculation can also give you a notice of income tax.
- TAX DUE BUT CLAIMING REFUND: If you have claimed refunds in tax while you have a tax arrears earlier, you can get a notice. For this, you are sent a notice under section 245. The department gives you information in writing and can ask to adjust the last year’s tax in the refund amount.
- RANDOM SCRUTINY: The Income Tax department also performs random checks on the returns submitted. Hence, receiving a notice does not necessarily mean submission of a wrong Income Tax return. In such cases, the steps mentioned in the notice should be followed and provision of requested documents should be made to the IT department so they can complete their checks and close the case.
- NON-DISCLOSURE OF EXEMPT INCOME: One of the reasons for income tax notice is that the investment by taxpayer is not in accordance with the income of the taxpayer. There are lot many taxpayers who don’t discloses exempt income on the presumption that it does not carry any tax liability. Often the amount of exempt income is in lump sum and invested back by the taxpayers in other investment driveways. All the income should be accounted for while filing income tax return such as interest earned from PPF or tax-free bonds, interest from post office savings account, money back from LIC, gifts from relatives, interest on income tax refund etc.
- ENTERED HIGH VALUE TRANSACTIONS: For all the high-value transactions (Section-285BA R/w Rule 114E) that you enter into with some entity or individuals, you have higher chances of getting a notice from IT Department.
CONCLUSION: As they say prevention is better than cure try to be a prudent taxpayer by declaring all incomes and taking every preventive measure to avoid notice from department. In the worst case if you get any notice from the tax department then revert to the notices within the time assigned to you. In case of a scrutiny, provide all the relevant details the department seeks from you.