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CA Umesh Sharma

CA Umesh SharmaArjuna (Fictional Character): Krishna, recently on 7th November 2014, the Central Board of Direct Taxes has issued instructions for reducing hardship of taxpayers in Income tax scrutiny. But Krishna, what is this scrutiny?

Krishna (Fictional Character): Arjuna, the taxpayer files his Income Tax Return. Income Tax Scrutiny means detailed assessment of Income Tax return by Income tax department. After collecting and verifying particular information about taxpayer, the filed return and books of accounts, etc. are examined by the department to check whether they are correct or not. Compliance of income tax provision by taxpayer is checked. Many myths and believes are there in the mind of the taxpayer regarding this.

Arjuna: Krishna, Please explain what is the method of Scrutiny?

Krishna: Arjuna, Income tax department now checks tax compliance with the help of Information Technology. Income Tax Department is choosing taxpayers for scrutiny by collecting information from various departments like Land records, sales tax, excise, etc. about taxpayers PAN, etc. According to section 143, Income tax Department issues scrutiny notice within six months from the end of the financial year in which return is filed. E.g. If return for F.Y. 2013-14 is filed on 25th September 2014, then Income tax department may issue notice up to 30th September 2015. After sending notice officer generally gives questionnaires to the taxpayer. As per questionnaire information is required to be given and on the basis of same Income tax liability is decided. All documents, supporting of expenses, books of accounts, etc. are required to be submitted to Income Tax Officer within specified time. Help of the tax expert can be taken by taxpayer if required. If the Income Tax Officer is satisfied and everything is correct as per law, then Assessment order is issued. Further if any dispute arises then the taxpayer and income tax department may appeal on the disputed matter.

Arjuna: Krishna, What are the criterias for selecting cases for scrutiny?

Krishna: Arjuna, generally department selects cases for scrutiny through: 1) Computer Assisted Scrutiny Selection (CASS) 2) Manual process, i.e., Income tax officer after permission of senior persons may issue scrutiny notice. There are various criterias for selecting cases for scrutiny which depends on case to case, some of the important out of them are:

  1. If taxpayers have income in 26AS statement and the same income is not shown in income tax return or if there is any major variation.
  2. If there is major variation in the Gross profit/net profit ratio of current year and previous year.
  3. If Rs. 10 lakhs or more cash is deposited in saving bank accounts.
  4. If Rs. 2 lakhs or more is spent through Credit card.
  5. If mutual funds were purchased for Rs. 2 lakhs or more.
  6. If immovable assets of Rs. 30 lakhs or more is purchased or sold.
  7. If there are huge debtors and creditors in books of accounts.
  8. If Information is collected from various departments like Sales tax, Service Tax, etc. and the same needs to be verified for probable tax evasion.
  9. If income tax department has issued AIR notice and taxpayer has not replied to the notice.
  10. If there is unsecured loan of huge amount.
  11. Cases involving addition in an earlier assessment year in excess of Rs. 10 lakhs on a substantial and recurring question of law or fact.
  12. If Taxpayer has received any notice under section 148 for escaped income.

These criterias may change from time to time. Further it’s the power of the department to issue notice or not in each case. Hence no perfect formula is there for selection of scrutiny.

Arjuna: Krishna, What’s there in New Instructions issued by CBDT?

Krishna: Arjuna, this Circular contains many instructions for implementation of non-adversarial tax regime. It contains that the Assessing officer should stick to reasons on the basis of which the case for scrutiny is selected. Mainly in cases of AIR/CBI/26AS, importance should be given to that point only. Unnecessarily confusion should not be created by issuing long and unrelated questionnaire. Similarly, order were high pitch assessment are made without any legal base should be avoided. While granting refund, it should be given according to the TDS certificates if difference in 26AS is found. Further it is also mentioned in this circular that Income tax officer should complete the scrutiny in the given time and legal frame. Tax payer’s grievances should be reduced and thus non-adversarial tax regime can be promoted. But in practical sense real picture may be different, due to excessive work load of income tax officer in some areas and due to ignorance of law and incomplete information provided by the taxpayer. For better tax compliance security measures are used by the department, which sometimes results in increase in revenue and sometimes increase in tension of officer and tax payer both.

Arjuna: Krishna, What should the taxpayer learn from this Scrutiny?

Krishna: Arjuna, many taxpayers become frightened after receiving scrutiny notice. It is rightly said, “Kar Bhala To Ho Bhala” if taxpayer pays proper taxes then he will not have to fear of Income tax Department. As Honeybee collects Honey from the flowers without hurting it, Income Tax Department should collect tax from taxpayer without hurting them, which is the also the ultimate intention of any revenue laws. But now-a-days the intention of many businessmen or taxpayers is at stake and complicated tax laws have worsened the situation. Hope non-adversarial tax regime leads to increase in tax compliance and collection.

Dear Tax guru lovers, your comment please, as they are very valuable and precious.

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Author Bio

1. Central Council Member of ICAI. 2. Vice-Chairman of WIRC of ICAI for the period 2015-2021. 3. Youngest Chairman of Aurangabad Branch of WIRC of ICAI in 2002. 4. Author of Popular Tax articles series based on Krishna and Arjuna conversation i.e “KARNEETI” published in Lokmat on every View Full Profile

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  1. SC says:


    I find the system to be pathetic.My family is suffering; when in reality we have not done anything wrong.My Husband’s accountant wrongly( I don’t know if willingly) did some mistakes and filled the written. We are doctors and have no clue about all this. After the first notice that we got, My husband hired a CA( thinking that we might get help from a professional) but to our utter surprise, he found this as a money minting opportunity and spoilt it further. Finally, we have to get an Income tax lawer. I can not explain the problems that we have faced because of all this non-sense; When in reality we have no intentions of doing anything wrong. My husbands practice has suffered badly because of this, to an extent that at one point of time he decided to stop practicing. Laws should be made to protect people and not to harass them. I really wish those Income tax guys to use their senses and consider people in front of them with dignity.

  2. adv. dr.g.balakrishnan says:

    Good article.
    Tax law is a highly technical fiscal Act.Must be strictly construed. No laxity is permitted. Any laxity would jeopardice both tax payer and ITO. Order to be passed with a lot of care for it affects both that lead meaningless litigation.Rights of assesses need to be recognized, like u/s 143(2)(ii) ,else bad in law Notices surface. Hon tibunals cannot remand such cases to AOs as that would confound further confusion. in such cases wednesbury principle of unreasonableness under arbitrary behavior that way High courts look at under writs filed under Art 226 if tribunals make mistakes or remanding back in such serious bad in law notices.

    it is a settled law the courts look primarily under principle of proportionality and in case of violation of Art 14 under Wednesbury principles.

    these principles well described in case law by hon SC – (2001)2 SCC 386 – Om kumr n others v UOI. (a service law matter)

    Again in Md Haneef v CIT, 17 NN 1954 = CIT 1955 27 ITR 447 Allahabad HC ;

    Article is good on scrutiny cases by umesh (Krishna)for its lucid discussion.

  3. dr.g,balakrishnan says:

    i made one mistake in my comment that is instead of saying Art 265 i mistyped the number as 256, please pardon me commentators. Art 265 is taxing related article, so clearly means revenue cannot overstep the taxing Article of the constitution of India,

    i understand in legal aspects very basic notices are bad in law notices. When so what AO would verify if the matter is reverted back by ITAT or HC that way there is no meaning to refer back to ITOs or AOs, is it not?

    Such bad in notices should be declared void ab initio and cancelled forthwith by Appellate authorities , else no point wasting time at appellate tribunals.

    that would mean square up with AOs/ITOs is it not? Otherwise what referring back suggests Lord Krishna!

  4. N.K.Goel says:

    In maximum cases – Only Gandhi Ji plays its role – ” Kar Bhalla ho Bhalla ” . Other wise all the professional and departmental brothers knows the facts about scrutiny assessment cases.

    One thing should be ensured by CBDT or its subordinates associated with framing the selection norms that any Case selected for two-three years in a block of 5-7 years and where the additions are less than Rs. 3-5 lacs should not be selected for scrutiny for next 5 years or like that. A case which is selected for 2 years continuously with no substantial addition on any substantive grounds should be exempted for selection for next , at least, three years.If, by chance or mistake, it is selected it has to be disposed off in a summary manner.

  5. adv. dr.g.balakrishnan says:

    story good.
    Unnecessary tensions increase meaninglessly. All these happened thanks to great economic liberalization And high to very high salaries thanks to pay commissions. Disproportionate assets increase even in public servants, more so with revenue officers too as corruption is promoted by cash payments to a lot of people;

    Legislature governance seems to be at some wits end is the fact.

    Art 256 is clear no taxation without due process but where is the due process now Lord Krishna!

    i find ITAT account members just want to refer back to AO in regard to bad in law notices issued by AOs, as if some kind of quid pro seems any one could assume!

    When appeals at ITAT are filed against ITOs not CIT(A) Though CIT (A) IF misunderstands the very statute – i wonder how come CIT(A) is not conversant with income tax Act 1961? How come these worthies do not understand the limitation u/s 143(2)ii when they decide appeal cases when filed in form 35 by assessees – still interesting ITAT account members ask appellant – tax payer raises bad in law notices- why the appellant did not raise the issue before the CIT(A)? WHILE taxpayers are always not experts on tax laws but just depend on consultants – CAs/tax Advocates or others, when so how come Account members ai ITAT ask such funny questions even though the appeals before them on ITOs/AOs concerned…i wonder how sec 254 is misunderstood by some account members at ITATs, it is clear in (2008) Fin Act reverted to 6 months rule of bar in sec 143(2)ii from 12 months rule… obviously to keep revenue men on tenterhooks of limitation but yet many a time AOs issues bad in law notices followed by summary assessments under sec 144…that shows Account members at ITATs want to be sympathetic to ITOS not to tax payers in obvious;
    when sec CASS related notices are issued with utter negligence of AO as he tends to ignore CBDT INSTRUCTIONS on CASS matters.. when from AO generates authority of jurisdiction by virtue of his bad in law notices…ITAT cannot refer back to AO as is decided in deepak agro foods. v/s st of Rajasthan.(2008)(7)TMI 553 – SC held HC wrongly remanded back to AO and by doing so, the statutory period prescribed for completion of assessment has been illegally extended by conferring jurisdiction upon AO…BUT HOW COME ITAT Account members in ITAT Suggest remanding back such appeals before them, can you explain Lord Krishna!

  6. A, ABUBAKER says:

    Dear Sir,
    Being I am retired Income tax Officer, I wish to state that a prudent Assessing Officer should apply his mind in scrutiny cases, He should call for details in pertinent to the assessee and assessment year. He has scrutinize the financials with reference to the books of account. If there is difference he should add to the total income after giving opportunity to the assessee.
    A. Abubaker

  7. S. Krishnamoorthy says:

    Lucidly and well-written.
    One of the problems faced by the tax payers in scrutiny cases is the property purchase total value as furnished by the tax payer and as assessed by the ITD. Amenities like club membership one time fee and the difference noticed between the guide line value and the actual amount for which registration has been done in the case of multi-storeyed flats which have common undivided share of land. We accept what the Assessing Officer decides as final. Can some light thrown on this problem?

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July 2024