Income tax compliance is important for individuals getting income from salary, to help them in avoiding unnecessary scrutiny and legal complications with the income tax department leveraging advanced data analytics and artificial intelligence (AI) which is used to monitor these tax filings, making the chances to receive such notices relating to discrepancies have increased.
Such notices often stem from misreported income, excessive deductions, or errors in tax returns. In this article we will discuss the same along with the legal precedents and practical tips, to help salaried taxpayers to stay compliant and handle notices effectively, even I will suggest you to take up professional help in reply formation to avoid complicating your case more.
Now, what are the common income tax notices which are received by the salaried individuals?
Salaried individuals may encounter the following types of notices:
Section 143(1) Intimation Notice
This notice is sent after the initial processing of an Income Tax Return by the department. It compares the data filed by the taxpayer with the information available to the department, such as TDS in Form 26AS and reported income.
This notice outlines three possibilities, to be replied by the assessee when he or she get this notice either there is no discrepancy, or there is a demand for additional tax, or there is some refund due
For example, if you claim a tax refund of ₹10,000, but your Form 26AS shows a TDS deduction of only ₹5,000, then the intimation will raise a demand for the shortfall i.e. ₹5,000 in above case. Timely rectification of discrepancies or filing a response under Section 154 may resolve such issues without giving more pain to assessee or taxpayer.
Section 139(9) Defective Return Notice
This notice is issued when an ITR is deemed incomplete or defective due to errors like missing mandatory information, incorrect claim formats, or discrepancies between reported income and deductions.
For instance, if a salaried individual files an ITR-1 but also reports income from property, the return will be flagged as defective because the appropriate form (ITR-2) wasn’t used, I have already discussed about ITR forms in my previous articles at Tax Guru
link relating to ITR forms article: https://taxguru.in/income-tax/income-tax-returns-individuals-fy-2023-24-ay-2024-25.html for last year
The taxpayer is given a specified time to rectify the defect and file their IT return again. Failure to correct it may lead to the return being treated as invalid under the Income Tax Act which means it will be like you have not at all filed your ITR in that year.
Section 143(2) Scrutiny Notice
This notice is issued for a detailed examination of the ITR filed by the taxpayer. The scrutiny could be limited to specific areas like deductions claimed or extended to a comprehensive review of all financial data.
For instance, if a salaried individual claims a significant amount under section 80D which is relating to medical insurance but lacks supporting evidence, the department may issue a scrutiny notice. Taxpayers are required to furnish detailed explanations and supporting documents within the specified timeframe to satisfy the inquiry.
Section 148 Reassessment Notice
This notice is issued when the department believes that certain income has escaped assessment for a prior financial year. It enables the department to reassess the taxpayer’s income within the time limits prescribed by law (usually four years but up to ten years in cases of substantial evasion)
For example, if a salaried taxpayer sold property but failed to report capital gains, and this is discovered later via data analytics, the department may issue a notice under section 148. The taxpayer must respond by filing a return or providing an explanation.
Section 156 Demand Notice
A Section 156 notice is issued when any amount is due from the taxpayer, such as unpaid taxes, interest, or penalties. It specifies the outstanding amount to the taxpayer along with the last date to clear his dues i.e. deadline for payment.
For example, if upon processing your return, the department finds underreported income and calculates an additional tax liability of ₹25,000, a demand notice under section 156 will be issued.
Non-payment within the stipulated time can attract interest and penalties under Sections 220(2) and 221 of the Income Tax Act which means if a taxpayer fails to pay the entire amount of tax due within the above deadline, he shall be liable to pay simple interest at the rate of 1% per month or part of the month for the period of delay in making the payment maybe along with penalty
How to stay away from getting income tax notice?
Maintain accurate records by retaining all the necessary documents, including Form 16, Form 26AS, salary slips, as well as investment proofs, most of the time notice is received dueto HRA issues which I have already discussed in brief.
Keep receipts and invoices for deductions like HRA, 80C investments, and medical insurance
File ITR on Time as timely filing minimizes errors caused by last-minute rushes also filing ITR early allows you with the time for rectifications as per Section 139(5) which means any assessee who have filed their ITR may revise it in order to furnish the tax department with accurate information. Even individuals who file a belated ITR, or ITR filed after the deadline, are eligible to file a revised return.
cross-check form 26AS by verifying tax deducted at source (TDS) and tax collected at source (TCS) and to ensure consistency with the income records.
In CIT v. Kanpur Coal Syndicate [1964], it was held that the powers of the Commissioner (Appeals) are co-extensive, with that of the adjudicating authority also accurate reporting avoids unnecessary disputes
reconcile AIS and TIS data the new concept that came 3 years back AIS i.e. annual information statement summarizes financial transactions and TIS i.e. taxpayer information summary highlights tax payments and liabilities.
One should compare these reports with the taxpayers or one’s own records to address discrepancies if any
Claim Deductions Prudently by deducting only eligible and substantiated amounts.
In J.K. Industries vs. CIT [1993], overstated claims were penalized.
What you should avoid? Else you may get a notice
Do Not Conceal Income as non-disclosure of secondary income, such as rent or freelance work, invites scrutiny under CIT v. Calcutta Discount Co. Ltd. [1973].
What is this case all about?
CIT v. Calcutta Discount Co. Ltd. [1973] 91 ITR 8 (SC) is a landmark judgment by the Supreme Court of India concerning the scope of reassessment under Section 147 of the Income Tax Act.
The case revolved around whether the reassessment of income was valid when the original assessment was based on full disclosure of facts. the supreme court held that reassessment under Section 147 cannot be initiated merely because the Assessing Officer changes their opinion on the same set of facts.
The court emphasized that for reassessment, there must be new tangible material that indicates income has escaped assessment. this judgment reinforced the principle that reassessment powers cannot be misused for reviewing completed assessments arbitrarily, ensuring fairness and stability in tax proceedings.
Next one is to avoid ignoring notices, we should respond them promptly to prevent ex-parte decisions, as highlighted in CIT v. Multiplan India (P) Ltd. [1991] also to avoid penalties under Section 271(1)(b).
Let me tell you CIT v. Multiplan India (P) Ltd. [1991] 38 ITD 320 (Delhi ITAT) is a notable case concerning the consequences of non-compliance by a taxpayer during appellate proceedings.
In this case, the Income Tax Appellate Tribunal dealt with a situation where the taxpayer failed to appear for hearings or provide explanations despite multiple opportunities. The ITAT held that persistent non-compliance justified the dismissal of the appeal due to the absence of prosecution. It was decided that the tribunal could dismiss appeals for non-appearance or non-cooperation by the appellant under Rule 24 of the Income Tax (Appellate Tribunal) Rules, 1963.
Refrain yourself from Relying on Unverified Sources as base decisions on official government portals or professional advice to avoid misinformation, and prone to scams or frauds.
Steps to Take When You Receive an Income Tax Notice
Step 1: Verify the Authenticity of the Notice as all notices from the income tax department carry a unique document identification number, you may check the validity of the DIN on the official income tax portal.
Step 2: Understand the Notice by reading it carefully to identify the issue and the required action.
Step 3: gather supporting documents by organising all relevant records like Form 16, bank statements, and investment proofs and prepare a proper file of the same
Let’s discuss some case laws:
Now however rules are strict and most of the provisions are already added in various finance acts still I will discuss three main case laws with you
CIT v. P. Mohanakala [2007]
In this case, the Supreme Court examined whether unexplained cash credits in a taxpayer’s account could be treated as income and taxed accordingly under Section 68 of the Income Tax Act.
The taxpayers had received substantial foreign remittances, which were claimed as gifts. However, they failed to provide sufficient evidence to establish the identity, capacity, and genuineness of the donors.
The Court held that mere declarations or unsupported explanations are insufficient to justify such credits. The judgment emphasized that unexplained discrepancies or unsubstantiated claims attract penalties and tax liability. It reinforced the principle that the onus lies on the taxpayer to substantiate the legitimacy of transactions, especially in cases involving significant amounts.
Dalmia Cement Ltd. v. CIT [1999]
This case addressed the taxpayer’s obligation to promptly and completely respond to income tax notices. The taxpayer delayed providing crucial information requested during an assessment, which impeded the proceedings.
The Court held that failure to cooperate with tax authorities or delays in submitting responses can lead to adverse inferences against the taxpayer.
CIT v. Walchand & Co. [1967]
In this landmark decision, the Supreme Court upheld that the taxpayer has the obligation to substantiate all deductions and exemptions claimed in their income tax return.
Walchand & Co. had claimed certain expenses as business deductions without adequate documentation or proof that these expenses were incurred wholly and exclusively for business purposes.
The Court ruled that deductions under the Income Tax Act must be justified with credible evidence, and unsupported claims would be disallowed. This judgment set a precedent for strict scrutiny of claims made by taxpayers and reinforced the need for accurate and comprehensive documentation to support deductions and exemptions.
Conclusion
Salaried individuals can minimize the risk of receiving income tax notices by maintaining proper and correct records, filing returns on time i.e. before 31st July, and reconciling financial data with official statements. If a notice is received, it is crucial to address it calmly and promptly.
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