Scrutiny of Income Tax Returns

Dr. Sanjiv Agarwal

Once we file a return of income tax to the tax authorities, it has to be assessed as a correct return unless it is a self assessment return under section 139 of Income Tax Act. The assessment of returned income involves verification and scrutiny of the details of income submitted. However, this is not done in each and every case with such a huge volume of returns filed. Scrutiny of returns is done on a selective basis.

Every year the tax department selects several cases of tax returns for the purpose of scrutiny. This calls for a closer look at the details based on which there would be a final assessment made for the income declared and the details that have been filed by the individual for a specific financial year pertaining to the return.

There are several conditions that are laid out by the Department that will trigger the possibility of a tax scrutiny. There are two ways in which this procedure is actually triggered. One is a random process whereby the computer system pulls out several returns that would come under the scrutiny. Cases are being selected under Computer Aided Scrutiny Selection (CASS) on the basis of broad based selection filters. List of such cases is separately intimated by the DGIT (Systems) to the jurisdictional authorities concerned.

The other situation may be when there are specific conditions that are fulfilled by the taxpayer and in this case the tax authorities would manually decide that this is the return that has to be scrutinised and hence further action as required would be undertaken.

The criteria for manual selection of returns/cases for scrutiny during the financial-year 2014-2015 will include –

a. Cases involving addition in an earlier assessment year in excess of Rs. 10 lakhs on a substantial and recurring question of law or fact confirmed in appeal / is pending.

b. Cases involving addition in an earlier assessment year on the issue of transfer pricing in excess of Rs. 10 crore or more.

c. All assessments pertaining to Survey excluding the cases where there are no impounded books of accounts / documents and returned income excluding any disclosure made during the Survey is not less than returned income of preceding assessment year.

d. Assessments in search and seizure cases to be made and also for the returns filed for the assessment year relevant to the previous year in which authorization for search and seizure was executed.

e. Returns filed in response to notice

f. Cases where registration as charitable entity has not been granted or has been cancelled yet the assessee has been found to be claiming tax-exemption.

g. Cases where order denying the approval u/s 10(23C).

h. Cases in respect of which specific and verifiable information pointing out tax- evasion is given by Government Departments/Authorities.

Scrutiny is a closer look by the Department of the tax returns. This is undertaken to ensure that there is no income that is escaping the attention of the tax man as well as that the various details that are mentioned in the tax returns have done so properly. This will usually involve getting additional details of the various incomes that has been mentioned including minute details and proof of the expenses and income figures that are mentioned in the tax return. The tax authorities would then go through this and decide as to whether some income needs to be added or some expenses disallowed.

The triggers for scrutiny would include things like a very large amount of tax free income that exceeds the figure that has been set by the tax authorities for this purpose. It could also happen when there are large scale changes in the condition that is shown by the tax returns and hence this results in a need for the tax authorities to look at the details with greater attention. There could also be situation wherein if there is a notice given under certain sections of the income tax Act, the individual would be covered for scrutiny.

Once the case is selected for scrutiny, it would require the individual to submit various details for the purpose of completion of the assessment. The individual needs to keep all the required details ready with them so that they are able to give the required proof when necessary. Often the homework is not done and as such, when they are called for, there is a scramble to get the various documents and this could lead to some of them being missed out.

The individual may end up having to pay higher tax on the whole income because several of the expenses for which there is no adequate proof would be disallowed and hence this is something that has to be watched out for.

Being subjected to such scrutiny is not a bad sign but if you have all details and information ready or handy, it infact gives you an opportunity to get a sort of ‘clearance’ from the tax authorities that all is ok with your taxes and returned income.