Scrutiny assessment which is mainly governed by Section 143 of IT Act is in-depth process used by tax officers to ensure accuracy and compliance in a assesseeās return filled. It is not like regular assessment processes scrutiny assessments involve detail examination of assesseeās financial submission, claim, deductions, & overall tax liability as disclosed in return of income. Scrutiny is performed by assessing officer (AO) to verify that assessee has neither understated his income nor claimed excessive losses.
In this article we try to provides clear breakdown of scrutiny assessment process from issuance of notices i.e. from very initial stages Ā to types of scrutiny assessments & Ā conditions under which they apply. We have also covers implications of non-compliance & special provisions for entities like charitable trusts and research institutions.
By understanding these elements, assessee & professionals can better navigate complexities of scrutiny assessments and fulfill tax responsibilities with greater accuracy & compliance.
1. Scrutiny Assessment u/s. 143(3)
U/s. 143(3) of the IT Act, scrutiny assessment is a detailed process used to confirm validity of claims, deductions & other details provided by assessee in his return of income filled. It is not like summary assessments, scrutiny assessments involve a rigorous review by Officer to ensure that information submitted in the return is accurate and genuine.
- Objective of Scrutiny Assessment:
Main goal of scrutiny assessment u/s. 143(3) is to ensure:
- There is no understatement of income.
- Excessive losses have not been claimed.
- The tax amount is computed correctly without any less payment .
- The AO evaluates the return in detail to ensure compliance & to confirm that all income and deductions are reported according to the law.
Key Points:
- Section 143(3) is invoked when the AO believes there is need for detailed verification of the assesseeās return.
- This section empowers AO to examine relevant documents & records to determine accuracy of reported income, deductions, and tax liability.
2. Conditions for Scrutiny Assessment
For an assessment u/s. Ā 143(3) to be initiated, certain conditions must be satisfied. This confirms that scrutiny assessment are selectively applied only in cases where they are genuinely required.
- Filing of Return:
The assessee Ā must have filed a return:
- u/s. 139, which mandates regular filing for taxpayers with assessable income, or
- In response to a notice issued u/s. 142(1), which may be served when the taxpayer fails to file a return or when the AO requires additional information.
- Necessity for Verification:
The AO must find it necessary to verify that the return does not:
- Understate income.
- Overstate losses.
- Result in less – payment of tax.
Key Points:
- Scrutiny process is not arbitrary; it is based on specific criteria that justify the need for detailed review.
- Section 139 or section 142(1) filing is basic requirement for beginning scrutiny u/s. Ā 143(3).
3. Process of Scrutiny u/s. 143(2)
Scrutiny assessment process officially begins with issuance of a notice u/s. Ā 143(2). It serves as formal initiation of scrutiny process & assessee is required to cooperate with the AOās inquiries.
- Issuance of Notice u/s. 143(2):
- Officer must serve notice u/s. 143(2) within due time which ensures timely initiation of the scrutiny process.
- Appearance & Documentation:
- Assessee must submit documents, statements, and other supporting evidence as requested.
- These submissions allow officer to verify claims related to income, deductions, exemptions, and other aspects of return filled .
- Final Assessment Order:
- After considering evidence & submissions officer issues an assessment order u/s. 143(3). This order detailed assessed income or loss, as well as the tax payable or tax refundable.
Key Points:
- The notice u/s. Ā 143(2) must be issued within a specific time limit to ensure procedural fairness.
- Full cooperation and submission of documents by the taxpayer are essential to conclude the assessment favorably.
4. Types of Notices u/s. 143(2)
Section 143(2) allows for various types of notices & depending on nature & scope of scrutiny assessment required. Notices helps assessee on extent and focus of scrutiny.
- Limited Scrutiny:
- In limited scrutiny, officers focuses on specific issues or areas of return filled , often identified through Computer-Assisted Scrutiny Selection (CASS).
- In this limited scrutiny assessment include examining claims for foreign tax credit or verifying details of property sales. Limited scrutiny is less exhaustive and targets only flagged concerns as identified by system.
- Complete Scrutiny:
- Complete scrutiny involves detailed examination of all aspects of return filled. In this Cases selected for complete scrutiny typically have higher risk parameters.
- In this officer is authorized to scrutinize every part of return & supporting documentation within particular assessment year.
- Manual Scrutiny:
- Manual scrutiny cases are selected based on criteria set by Central Board of Direct Taxes (CBDT). These cases may include high-value transactions, complex tax structures, or other higher-risk scenarios that require detailed review.
Key Points:
- This type of scrutiny notice defines scope of the AOās examination.
- Limited scrutiny is focused on specific issues, whereas complete scrutiny reviews the entire return in detail.
5. Prescribed Authority for Scrutiny Assessment (Rule 12E)
To ensure that scrutiny assessments are conducted by qualified professionals, Rule 12E specifies the required authority for issuing a notice u/s. Ā 143(2).
- Authorized Officer :
- The authority to issue scrutiny notices u/s. 143(2) is limited to income-tax officials not below the rank of Income-tax Officer, as authorized by CBDT.
Key Points:
- This rule ensures that scrutiny assessments must handle by competent officers who have requisite experience & training.
- Assessees can be assured that scrutiny assessments follow strict procedural & hierarchical standards.
6. Validity of Notice u/s. 292BB
Section 292BB addresses situations where there may be procedural defects in issuance or service of a notice u/s. 143(2).
- Cooperation Waives Procedural Flaws:
- If assessee participates in assessment process and co-operates with officer in proceeding , any procedural flaws in notice (such as improper service) are deemed to be waived.
- It means that assessee cannot later claims that notice was invalid due to procedural defect if they have actively participated in entire process of scrutiny.
Key Points:
- Section 292BB prevents assessees from using minor procedural flaws to avoid scrutiny once they have engaged in complete process.
- Cooperation in assessment proceedings implies acceptance of notice’s validity.
7. Non-compliance with Notice (Section 144 and Section 272A)
Non-compliance with scrutiny notice has significant implications as detailed u/s. s 144 and 272A.
- Ex Parte (Best Judgment) Assessment u/s. 144:
- If a assessee fails to comply with scrutiny notice then AO may proceed with ex-parte assessment based on available information.
- In This “best judgment” assessment is often disadvantageous to assessee, as it relies on AO’s judgment without assesseeās input.
- Penalty u/s. 272A:
- Failure to respond to the scrutiny notices may lead to penalty u/s. 272A which can be ā¹10,000/-. This penalty is mainly imposed to encourage compliance with scrutiny process.
Key Points:
- It is very much crucial for assessees to respond promptly & comply with all scrutiny notices issued to avoid ex-parte assessment orders or penalties.
- Non-compliance increases non favourable assessment & financial penalties.
8. Assessment on basis of evidences (Section 143(3))
Assessment order u/s. 143(3) is based on detailed examination of evidence provided by assessee, along with any additional information AO may request.
- Process :
- After examining all evidence, documents AO issues written order that determines assesseeās total income or loss for year.
- This order also specifies tax payable by or refundable to assessee, based on verified return.
Key Points:
- The assessment order is a formal conclusion based on documentary evidence and records provided during the scrutiny process.
- Accurate and comprehensive documentation by the assessee can positively influence the outcome of the assessment.
9. Special Rules for Trusts and Institutions (Section 10 & Section 2(15))
Trusts, research institutions, and other entities with tax exemptions u/s. Ā 10 or Section 2(15) are subject to additional scrutiny conditions.
- Commercial Receipts Threshold:
- Trusts with commercial receipts exceeding 20% of their total receipts lose exemption benefits u/s. 10(23C) for that year. This rule ensures that only organizations with genuine charitable purposes benefit from exemptions.
- Withdrawal of Approval (Section 35):
- For research institutions approved u/s. 35(1)(ii) and (iii), AO may initiate action to withdraw approval if institution fails to meet required conditions.
- AO can send a recommendation to Central Government for withdrawal of tax benefits after giving institution an opportunity to respond.
Key Points:
- Trusts and institutions benefiting from tax exemptions must carefully monitor compliance with conditions u/s. Ā 10 and Section 35.
- Exceeding the commercial receipts limit or failing to adhere to guidelines can lead to loss of exemptions or approval withdrawal.
Conclusion
Scrutiny assessments u/s. Ā 143(3) serve as a cornerstone of tax compliance in India. By allowing AO to verify accuracy of tax returns through rigorous scrutiny, system ensures that assessees are fulfilling their obligations accurately. For assessees and professionals alike, understanding each aspect of scrutiny process is essential. Complying with notices, preparing accurate documentation, and maintaining transparency with the AO are all critical steps in navigating scrutiny assessments successfully.
Key Takeaways:
- Scrutiny assessments protect the tax system from evasion and inaccuracies.
- Complying with Section 143(2) notices & cooperating with AO is essential.
- Knowledge of the scrutiny process & Ā timely documentation can improve assessment outcomes.