The Scrutiny Assessments under Income Tax Act 1961 are made u/s 143(3). For many years the returns of the assesses are accepted as they are being filed by the assesses and intimation is sent u/s 143(1) and only fewer cases are selected for scrutiny assessment based upon some predetermined criterias. Therefore every assessee desires that his return should be accepted as it is filed u/s 143(1) and not subjected to scrutiny. Some important points relating to the Assessment and scrutiny Assessment are discussed herein below:

When a case is selected for scrutiny:

 Where a return has been filed u/s 139 or in response to a notice u/s 142(1), the case can be selected for scrutiny Assessment if the assessing officer considers it necessary or expedient to ensure that:
– the assessee has not understated the income or has not computed excessive loss, or
-has not underpaid the tax in any manner.

Assessment Analysis Evaluation Measure Business Analytics Technology concept

Usually the amount of turnover, rate of gross profit, total income, quantum of loans taken, investments during the year etc are considered for selecting a case for scrutiny. However the selection is done on the basis of the instructions of the CBDT issued every year wherein some predetermined criteria’s are decided on the basis of which a case is selected for scrutiny Assessment. You can refer latest issued criteria for FY 2020-21 on below link “Compulsory Complete Income Tax Scrutiny Guidelines during FY 2020-21

The Honourable Supreme Court in (1999) 237 ITR 889 and (2004) ITR 272 has held that the assessing officer is bound by the instructions of the CBDT. The Delhi High Court giving reference of the above decision of the S.C.  has held in (2008) 169 Taxmann 4 / (2007) 295 ITR 256 that the A.O. cannot make Assessment of  any case in scrutiny outside the guidelines issued by the CBDT for selection of cases for scrutiny and if such Assessment is made then it will be illegal.

Time limit for issuing of Notice u/s 143(2):

As per section 143(2) the notice under section 143(2) must be served upon the assessee within six months from the end of the financial year in which the return is furnished. If the notice u/s 143(2) is not received within the prescribed time then no Assessment can be framed u/s 143(3).

Where the assessee affirms by way of an affidavit that notice u/s 143(2) was not received by him within the prescribed time, the onus lies with the department to conclusively prove that the notice was served upon the assessee within the prescribed time. Failure to do so shall lead to set aside of the Assessment as it was held in CIT v Lunar Diamonds Ltd.[2006] 281 ITR 1(Del.).

Section 292BB:

A section 292BB  provides that if the assessee has cooperated in the Assessment or re-assessment proceedings then it will be treated that the notice u/s 143(2) has been duly served upon the assessee and the assessee will not be able to object to the late or irregular service of notice.

The proviso to section 292BB makes it further clear that if the assessee has before the Assessment or re-assessment proceedings objected to the no service or late or irregular service of notice u/s 143(2) then section 292BB shall be not applicable.

Therefore if an assessee does not receive the notice or receives the notice u/s 143(2) after the due date and he cooperates in the Assessment proceedings and doesn’t object to the non receiving or late or irregular receiving of the notice then the Assessment proceedings and the assessment order shall be considered as valid and will not be quashed in the appeal.

What to do when notice U/s 143(2) is received:

When a case is selected for scrutiny Assessment the A.O usually ask for the following

-Books of Accounts

-Bank Statements

-Confirmation certificates of Loans if any

-Name and Addresses of Sundry Creditors, Debtors

-The account statements of Sundry Creditors and Debtors for verification of transactions

In case the A.O. finds any discrepancy the assessee may be asked to explain the same.

Mere filling of confirmatory letters and producing the loan creditors do not discharge the onus that lies on the assessee. The assessee has to prove the disputed transaction prima facie appearing in his books of accounts. The assessee needs to prove the following things:

-Proof of Identity of creditor

-Credibility or capacity of a loan creditor to pay or advance the money

– the genuineness of the transaction

If the assessee prima facie proves a transaction then the onus shifts on the department to rebut the same. The A.O can only ask for the evidence of the cash credit or the loans which have been taken or given in the relevant previous year and not about those appearing from preceding years.

The opportunity of being heard must be provided to the assessee:

The assessee must be provide a fair opportunity of being heard during the Assessment proceedings as it is a basic rule of Natural Justice. If the A.O makes any addition on the basis of evidence procured from other sources about which the assessee is not aware then the assessee must be given fair opportunity to rebut or cross examine such evidence.

In CIT vs Eastern Commercial Enterprises 210 ITR 103(CAL) it has been held that an addition made without allowing opportunity of cross examination to the assessee, cannot be sustained.

Cases where amount deposited with the firm by the partners are not proved:

If the partners in a firm have deposited some money with the firm and the same is not proved as income of the firm by the A.O then such amount cannot be treated as income of the Firm but it will be treated as the income of the partners as held in (2001) 126 Taxman 533/252 ITR 344 P& H HC.

Amounts Received as gifts:

Where receiving of any gift by the assessee is in question in the Assessment proceedings then affidavit of the donor or the gift deed along with the PAN No of the donor, the source of the gift and the relationship of the donee with the donor should be produced to prove such gift.

Additions cannot be made merely on suspicion:

Any addition to the income of the assessee cannot be made only on the base of suspicion. If the assessee has proved the transaction in question then merely on the suspicion the addition cannot be made.

For Example if the assessee has sufficiently proved a deposit transaction from a person then the A.O cannot make addition merely on the ground that the assessee already had enough money on the day of deposit and there was no need for such deposit.

Request for summons to the non- cooperating loan creditor or depositors :

Sometimes it happens that the depositors or loan creditors do not cooperate with the assessee in the Assessment proceedings then in such cases the assessee should request  the A.O in writing to issue summons u/s 131 to such persons along with their books of accounts or bank statement or any other relevant documents.

Where a Deposit or loan transaction is not proved:

Sometimes due to non availability of proof regarding a deposit or loan transaction the assessee has to agree for surrendering such amount as his income. In my view while surrendering such transactions as income, the assessee should get it written in his statement that he is making surrender for mental peace and on the condition of non-levying of penalty. In my view in such case the penalty will not be imposed.

Additions on the base of inadequate withdrawals:

The assessing officer usually during the Assessment proceedings ask the information from the assessee about his household expenses including the number of family members, the children, the school in which they are studying, the expense on their studies, electricity bills, telephone bills, house rents if any, the salary given to any employee or the car scooter etc owned by them.

After considering all the above things the A.O estimates the household expenses of the assessee and after matching the same with the withdrawals shown, the assessing officer tends to make additions to the income of the assessee if the withdrawals are found to be inadequate.

The assessee should tell the A.O in detail about his household expenses and if any other family member of the assessee has also contributed towards the household expenses, the fact should be brought to the notice of the A.O.

Sometimes it is seen that the assesses show their withdrawals for household expenses collectively at the end of the year in which case the assessee has to face many difficulties during the Assessment proceedings. The withdrawals for household expenses should be shown in every month.

Inadequate withdrawals of partner shown in the books of accounts of firm:

Addition to the income of a firm cannot be made merely on the ground that the withdrawals for household expenses made by the partner from the firm is inadequate or very less. It’s not the firm’s responsibility to explain or prove that how the partners have managed their household expenses as it was held in (1997) 90 Taxman 330(magazine) Jaipur Tribunal.

Additions on the basis of inadequate expenses shown on the house or shop:

Generally additions are made during the Assessment proceedings on the basis of the less expenditure shown in building a house or shop of the assessee. If the A.O is not satisfied by the expenditure shown on building house or shop by the assessee and also from the valuation of Registered valuer then the A.O refers the valuation to the valuer of the Department and if the valuer of the department declares the value more, then the additions is made by the A.O on the basis of such valuation and penalty proceedings are also initiated.

It has been held in many cases that the A.O cannot refer the valuation to the department’s valuer without showing any mistake in the valuation of the registered valuer or the bills and records maintained by the assessee. Although it is not necessary for the assessee to keep the record of all the expenses incurred on building his house or shop. But at the appellate level the bills and records maintained by the assessee are given very much importance. Therefore it is advisable to keep such records.

*****

Read Other Articles from Advocate Amit Bajaj

(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar City (Punjab), Email: amit@amitbajajadvocate.com, M +919815243335)

Disclaimer: The contents of this article are for information purposes only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

(Republished with Amendments by Team Taxguru)

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52 Comments

  1. Rashmi Gohel says:

    Hello Sir,
    I Received scrutiny notice and advised to submit books of accounts and ITR. I duly submitted the same however during scrutiny assessment ITO Find sale of property which is not shown in ITR. now i received notice of demand U/s 156 in which ITO calculate the amount of capital gain based on value determined by stamp value authority and did not deduct the purchase price. now my question is that can i deduct the purchase price of the property and give effect of indexation?

  2. sunil makhija says:

    dear Sir,

    Some of unsecured loans shown in my books of accounts for AY 2014-15 were squared off during the year…i.e. to say amount received and paid during the year…. and net outstanding is zero….Can ITO ask for confirmation of such unsecured loans…..Kindly advise

  3. Mayur says:

    Dear Experts,

    My father received Income Tax notice 142(2) in 2014 to declare the information about transactions. Father expired in Feb 2015. We are receiving the notices.

    How to deal with this situation ? How to close this case please ?

    Professional advise will be highly appreciated.

    Thanks,

    Mayur

  4. shiva says:

    dear sir,
    one of my client had received 143(2) for the A.Y 2012-13 and completed in 10-12-2014 and ITO added Rs.10 lakhs for under valuation of stock and to the income and my client paid the tax with interest.
    IT department adviced that u dont file a revised return for the A.ys2013,2014 by increasing opening stock of the year 1-04-2012. you please credit of undervaluation stock of Rs.10lakhs to the capital account of the running A.y2015-16.so we follow I.T department advice and not filed any revised returns for the A.ys 2013,2014 is it correct procedure.
    will you please advice
    thanking you sir
    yours faithfully
    shiva auditor

  5. naresh phoolwani says:

    Dear sir i would like to know if ito finaly assessed the scrutiny case of a.y. 2008-09. then he was transffered after newposted ito can repopen that assessed case.

  6. adv. dr.g.balakrishnan says:

    good. When CIT(A) adds cash deposited in bank a/c with sale proceeds of his flat, automatically the amount in bank gets accounted when how come AO can hold that amount is concealed money?
    so it shall be accounted, after all all flats sales have cash components as bank do not lend more money to borrowers on the basis of bank evaluation of properties which evaluation is always practically half of the market value of the properties;so cash transactions take place, if no cash element, no sale or buy of properties is possible then every thing becomes stagnant.

    In fact finance finance minister should permit cash transactions too, else every buyer or seller would get harassed by revenue unless the assessees do not grease the revenue palms…

    that means revenue men tend to become greatly corrupt just to ensure assessee is not caught, i have seen some consultants are conduits for such corruption..

    find a right way is the advice to PM Mr Modi

  7. SACHIN NALAWADE says:

    IN CASE OF ORDER ISSUED U/S 143 (1) THAT WILL BE ORDER LATER SCRUTINIZED OR NOT

    AND WHAT TIME LIMIT FOR SCRUTINIZED ORDER.

  8. Rattan Lal Vahi says:

    Dear Sir,

    I had submitted my return for A.Y,2010-11on 05-07-2010.

    The time whithen which this assessment must be completed may kindyly be indicated .

  9. T. MUDALAGIRIYAPPA says:

    it is very use full for making assessment                                                                                                                           

  10. rajendra kumar agarwal says:

    Dear sir
    Thanks for this article. I would like your views on the following.
    1. A person file return in India in assessment year 2009-10 on the income rec. from banks as interest on deposits,& he is working in another country.in period 2006 to 2011.
    2.During f.y.2008 -2009 he made F D in s b i by sending money from outside India.
    3.No notice of scrutiny notice received by assess y  
    4. A.O.sent final recovery order by taking F D as income in that year in Dec.2011.
    5.A.O. has not given any chance to assesses for clarification.
    6.what should be act of assesses.
    7 Assesses has file I T return in 2010,2011 also, however city was different as parents were shifting from one city to another city.
    8.Till Date NOTICE HAS NOT BEEN REC.
    I WOULD BE GREAT FULL TO YOU IF YOU MAY ADVICE ON THE MATTER
    THANKS WITH WARM REGARDS.
    R.K.Agarwal

  11. Pawan Sahni says:

    We have claimed salary paid to members of AOP and in personal return salary income has been shown and tax has been paid. The AO disallowed the salary paid to the members of the AOP. Is it possible to set off the tax paid by the members in his individual capacity on salary with the tax liability arises due to non allowance of salary as expenses. Thanks and regards

  12. Pawan Sahni says:

    Dear Sir, during assessment proceedings under section 153A the AO allowed jewellery to the extent of quantity mention in notification no 1916 and remaining jewellery has been added under section 69 of the act. The most of the jewellery has been acquired prior to the block period and whatever is acquired during block period has been shown in cash flow statement. How the addition can be challenged. Thanks and regards

  13. Pawn sahni says:

    During search operation I have surrendered income from house property and accordingly filed return under section 153A. Deduction on account of repair has been claimed on surrendered house income as well. The AO denied the deduction on the ground that the surrendered income is over and above the regular income. Kindly advice whether the action of the AO is correct. Kindly also suggest some case laws for the same.   Thanks and regards

  14. VINOD VAID says:

    Dear Sir, I would like to know that one of my client’s security assessment for A.Y 2009:2010 is under the jurisdiction of Rohtak Income tax officer and ITO of that concerned ward made the assessment and created a demand and there is less than one month left for the appeal to ACIT. And the same assessee has filed his income for the assessment year 2011:2012 from delhi. Can the assessee appeal for the secrityn assessment A.Y 209:2010 in delhi. And how he can transfer the case to delhi ward for furture assessments. Just let me know the procedure in detail.
    Thanks and regard

  15. SUNIL GUPTA says:

    1. asssessing officer has made addition on account of squared up credit enteries , assessee has submitted the 1) proof of identity 2) confirmation 3) source of income 4) zeniuneness of transaction.

    2. Assesseing officer while making an order , has not quoated the section under which addition has been made, (he should quote section 68 )

    Whether the assessee will get favour in appeal.

  16. ganesh says:

    sir
    one of my clinets case a milk vendor was taken up for scrutiny and it was found that he had two bank accounts and the statement was obtained by the ao. he had pointed out that the gross credits appearing in the bank statement works out to around rs 3 crores. he had sent a letter to treat the said Rs. 3 crores as the turnover. but my client says that he received the amount from various persons (other milk vendor) which were deposited in his account and transferred the same to the seller. My client says that he received a commission of Rs.0.10 paise per 100 litres and had offered the same in his return of income. Please give your suitable suggestion for handling the situation.

  17. ganesh says:

    sir
    one of my clients viz., ‘b’ case was selected for scrutiny. After examination by the ao he has pointed out that ‘A’ sister concern (sundry creditor) closing balance shows a sum of Rs. 30 lakhs abd ‘C’ sister concern (sundry debtor) closing balance Rs. 40 lakhs. When confirmation letters were received by the AO, he had noticed that C had given a confirmation letter confirming the sum of Rs. 40 lakhs, whereas A has given a confirmation letter for Rs. 70 lakhs. After going through the confirmation letters received from the AO, I noticed that on the last date of the financial year it was noticed that the closing balance of Rs. 40 lakhs shown in the account of C had been transferred to A account resulting in rs. 70 lakhs and the account of C was squarred off. The ao has called for an explanation

  18. ganesh says:

    sir
    at the time of scrutiny assessment, my boooks were examined by the AO, wherein he had submitted that two payments made to a sundry creditor ‘A’ has not been recorded in the books. Similarly he has also pointed out that the payment made to the above said sundry creditor and the source though it is reflected in the bank statement had not been accounted for in the books. He had called for an explanation before making an addition.

  19. Raman Preet Singh says:

    sir satsri akal
    i want to know is If creoss 18 year of age a unmarred douters Can a Father Enjoy the rebate of Her Douthers Collage Fees In His persionl Income Tax Return

  20. Amit Baja Advocate says:

    ussualy the bank statements of only the relevant financial year which is under scrutiny assesment can be asked for. The bank statements of earlier year may be asked for if they are relevant to the entries in the year in question.

    However no addition can be made in my view on the basis of an entry existing in any year other than the relavent year in question.

  21. gurmukh says:

    sir thanx for nice article, my question is how old bank statements could be asked during income tax scrutiny. suppose someone is having account with abc bank for last 12 years then how how old bank statements can be asked during scrutiny

  22. B.Suresh says:

    Sir,assessee is a clearing agent and incurred transport expeses on behalf of client.these expenses were reimbursed by client,but client has made tds on this amount treating it as payment to contractor.Whether AO is justified in treating these reciepts as income of assessee?

  23. AMIT BAJAJ ADVOCATE says:

    Yes the time limit for finalising the scrutiny assessment is 21 months from the end of relevant assessment year.

  24. Amit Bajaj Advocate says:

    Dear Hitesh ji more facts are required to suggest the grounds for appeal. Like on what grounds the loss declared is ignored or the details of the documents found during search.

  25. Hitesh Maniya says:

    sir,if there is loss as per return of income filed and after scrutiny assessment loss has been ingnore than what would be ther grounds to appeal for said. and if there is adhock increment in income of basis of documents found from premises u/s.132 then what woild be the situatuation to fight for said.

  26. Amit Bajaj Advocate says:

    Dear Nilratan Datta ji, Sundry Creditors can be disallowed only when the credit standing to their account is not proved and confirmed.

    The comments I have made is out of my personal experience and interpretation of the law.

    Although I dont have the ready reference of relevent case laws to provide you the same immidiately but will try to find out for you.

  27. NILRATAN DATTA. FCA says:

    Please refer the case laws relating to dsiallowance of sundry creditors and added to the income of the current year.Matter has been refered but case case laws has been cited. Only it is stated that creditors cannot be disallowed but reason has been specifdied. Please clarify the matter in an elaborate way.

  28. NILRATAN DATTA. FCA says:

    Please refer the case laws relating to dsiallowance of sundry creditors and added to the income of the current year.Matter has been refered but case case laws has been cited. Only it is stated that creditors cannot be disallowed but reason has been specifdied. Please clarify the matter in an elaborate was.

  29. Amit Bajaj Advocate says:

    The mere fact that the sundry creditors were not paid during the relevent year cannot be a ground for making addition to the income of the assessee, where the creditors actualy exists.

    If the balance of the creditors stand proved and confirmed there is noway the A.O. can make addition to the income on the ground that creditors are not paid

  30. Amit Bajaj Advocate says:

    The disallowing of the purchases of the previous year cannot be done u/s 143(3) during the assessment proceedings of current year.

  31. Amit Bajaj Advocate says:

    The transcations of the previous years resulting in the carried forward balance of sundry creditors and existing in the relevent current year, cannot be called in question during the assessment proceedings u/s 143(3)of the current year.

    To make additions in the income on the basis of such transactions is to make reassessment of the previous year to which such transactions belong but that too can only be done where some new material or information has come to the notice of the assessing officer.

    1. CA Sandeep Kanoi says:

      dear Sir,
      Its a free site managed by few persons in their free time. We reply when we have time. Comments section is for our visitors to interact with us and other visitors.

      Whenever our experts will have time they will reply.

  32. NILRATAN DATTA. FCA says:

    We are not getting any answer in respect of problem when the past Sundry Creditors against purchase been disallowed and added to the income of the current year in scrutiny assessment. Please refer with case laws on the point. Whether the A.O. has the power to disallow when the assesse maintaining his accountants on mercantile bases.

  33. NILRATAN DATTA. FCA says:

    Has the Assessing Authority has the power to disallow the past Sundry Creditors on scrutiny assessment and added to the income of the current year as it was nt paid. What is the solution in regard to this problem.

  34. NILRATAN DATTA. FCA says:

    Whether Past Sundry Creditors against purchase be disallowed in scrutiny assessment and added to the income of the current year as this was not paid.

  35. V.Durga Rao says:

    I have really enjoyed reading the article and expecting to see more articles of this kind in future too. All my appreciation and also my respect.

  36. CA.SUBHASHCHANDRAPODDER says:

    THANK YOU FOR KEEPING UPDATED I WILL SEE LATTER ON MAKE MY COMMENT IF ANY. BUT ACCEPT MY DEEP APPRECIATION FOR KEEP ME UP DATED.

  37. Amit Bajaj Advocate says:

    Dear Rajgopalan.R the words mentioned in the above stated judgement are “and the same is not proven as income of the firm” The A.O has to prove the cash credit by the partners appearing in the books of accounts of the firm as the income of the firm.

    If it is not proved as the income of the firm specificaly by the A.O then such cash credit cannot be treated as income of the firm per se and such cash credit will be the income of the partners.

  38. Rajagopalan.R says:

    The view, “If the partners in a firm have deposited some money with the firm and the same is not proved as income of the firm by the A.O then such amount cannot be treated as income of the Firm but it will be treated as the income of the partners as held in (2001) 126 Taxman 533/252 ITR 344 P& H HC”
    is not correct. The settled law is that if the unproved cash credits appear in the firm’s books, it is in the firm’s hands that the credits have to be assessed u/s 68.

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