Understanding a Scrutiny Notice (Section 143(2))
Notices issued by the Income Tax Department create apprehension and uncertainty, particularly if you do not know why your return has been selected and what the notice requires of you. It is important to understand that a scrutiny notice does not mean that you have reported an incorrect return or that you have evaded tax. Scrutiny notices are issued when the department wants to examine the details and information provided in your return.
It is important that you understand your obligations as an individual, salaried person, businessperson, professional, HNI, NRI, Start-up or entrepreneur. This may include providing supporting documents and information in support of your return and other returns filed by you or on your behalf.
This article provides you information about the scrutiny notice under section 143(2), the documents that you may expect to produce, the common mistakes made by taxpayers, and when to seek tax litigation support.
About the Income Tax Act: The procedure for scrutiny, the documents required to be produced, and time limits for various acts and procedures under the Income Tax Act are different. For assessment years 2026 and onward, the procedures for scrutiny will be different. However, for assessment year 2026 and earlier years, procedures will be as provided under the Income Tax Act, 1961.
What is a Section 143(2) Income Tax Notice?
A notice under section 143(2) of the Income Tax Act is issued by the Income Tax Department to scrutinize the return of a taxpayer and initiate an assessment.
The goal is to validate the accuracy and comprehensiveness of the information reported in the return. In the case where additional information is required, it may be requested from the taxpayer to provide information relating to, but not limited to, income, deductions, investments, expenses, transactions, tax credits, and others.
Ignoring a scrutiny notice is not advisable. The terms of the notice should be carefully considered to understand, among others, the year of assessment under which the notice is issued, what part or section of the notice requires attention, the information required to be provided, and the scrutinizers’ request for documents or explanations. Furthermore, it should be determined whether other notices or proceedings have been or will be issued.
The Electronic Proceedings (e-Proceedings) facility available on the website of the Income Tax Department enables taxpayers to view and respond to notices and communications online.
The reasons for the issuance of a scrutiny notice can include the need for the department to verify the information reported by a taxpayer in the return or to obtain further information in relation to, among others, the following:
Income and Tax
The Department may wish to have detail of the source of income and how the income is taxed.
Exemptions and Deductions
The Department may require support for large or unusual exemptions and deductions claimed.
Financial Transactions
Questions may be asked regarding the nature of investments and financial transactions.
Profession or Business
Books of account, GST records, documents, or information relating to business transactions may be required.
The details provided in the communication will assist in determining the reason for initiating the scrutiny. It is important not to speculate beyond what is stated in the communication.
Who Should Pay Attention to a Section 143(2) Notice?
This type of communication concerns:
Employees who have been notified of an examination of their pay and allowances.
Individuals who have diverse sources of income.
Businesspersons and/or small businesses.
Emerging Businesses (for example, a start-up).
Independently Practicing/For-Profit Persons.
Wealthy/High Net-Worth Individuals.
Persons who have a foreign source of income or investment.
Persons who have an interest in a business/profession.
Employers (for example, in connection with a TDS deducted and/or verified).
Persons who are being assessed for tax.
Persons who have received a communication from the department requiring a detailed reply.
Anyone who has received a communication from the department may take the assistance of a chartered accountant to prepare the reply if the communication pertains to a controversial tax issue and/or there is a likelihood of a material addition.
Evaluate if the question raised by the department is due to an actual difference, demand for clarification, or reporting of information already provided.
Step 4: Collecting Supporting Documents
Depending on the nature of questions/issues raised, the following documents may be required to be produced:
Copy of income tax return and computations
Form 26AS and/or Annual Information Statements (AIS)
Salary slips and Form 16
Bank statements
Investment-related documents
Documents relating to the sale of capital asset(s)
Loan-related documents and proof of interest paid
Receipts and other documents relating to expenses
Books of account
Returns relating to Central Excise, Service Tax, and VAT
TDS records
Other documents relating to income and assets outside India
Other documents supporting claims of deductions and exemptions
Depending on the facts of the case, the above-mentioned documents are to be submitted to the department.
Step 5: Reply to the Income Tax Notice
A point-by-point reply should be provided to questions raised in the notice. Unrelated and excessive information should not be included in the reply.
If an error is found to have been made by the taxpayer, care should be taken in deciding the action to be taken to rectify such error.
Step 6: Send Reply through e-Proceedings
The Income Tax Department has an online facility of e-Proceedings to enable taxpayers to send their representations and supporting documents to the Department through the internet. A transaction ID is generated upon successful submission of the documents. The ID facilitates viewing of the submitted documents at a later date.
In case of a family member/authorized representative, the Department allows the representative to send the representation on behalf of the taxpayer.
Step 7: Preserve Your Submission Records
Maintain copies of the following records:
Notice issued to you
Your response to the Notice
Documents submitted in support of your response
Acknowledgement of submission
Transaction ID
Subsequent communications of the Department
If assessed, the order of assessment.
Well-documented records of your interactions with the Department may become useful to seek further clarification or support in an appeal or disputes with the Department.
Common Mistakes
Failure to respond to the notice
Ignorance to the notice may lead to compliance issues. Often, responding to a notice is considered as a best practice, and non-response may create an adverse impact.
Non-compliance with time limits
The Income Tax Department states that the acceptance of submissions is done based on the deadline to respond to the notice.
Submission of excess/irrelevant documents
The objective of the Notice is often to solicit information in relation to a particular query. Responding to the Notice with excess/irrelevant documents may lead to an unclear response.
Inconsistent information
Statements made in the response must be consistent with supporting documents.
Unsubstantiated statements
All statements/information must be documented.
Responding to a Notice without analyzing the query
In the case of a long/complex Notice, respondents may feel challenged to prepare a adequate response. It may be prudent to engage the services of a professional to assist in understanding and responding to a Notice.
Benefits of Our Chartered Accountant Services
Our chartered accountants are able to assist with the following:
- Review of scrutiny notice
- Identification of issues
- Review of the returned ITR and supporting evidence
- Reconciliation of income and tax
- Drafting of reply
- Substance of the evidence supporting the reply
- Reply and attached evidence
- Reply and attached evidence are transmitted through the appropriate online mode
- Attending the assessment proceedings
- Tax disputes and appeals
Clients can approach us for assistance in connection with their personal or business needs. Clients can also approach our tax litigation services for assistance during an assessment and other related services.
Frequently Asked Questions
What is an income tax scrutiny notice?
An income tax scrutiny notice is an intimation given by the department to the addressee that his/her income tax return is being assessed. Under Section 143(2) of the Income-tax Act, 1961, scrutiny of assessment may be initiated only after serving a notice on the assessee.
Can a Section 143(2) notice be served electronically?
Yes. A certain class of notices can be served electronically through the ‘e-Proceedings’ facility available on the e-Filing portal of the Department.
What are the documents to be produced for a scrutiny assessment?
The documents to be produced in a case depend on the issues required to be substantiated. Thus, the documents required to be produced in a case cannot be predetermined.
- Should I hire a CA to respond to an IT notice?
In the case of simple transactions, a taxpayer may be able to respond to a notice on their own. But, if there are large monetary transactions, complicated business deals, disputed business expenses, or or different sources of income, including income from outside India (NRI), or if there is a possibility of a difference of opinion, then it is better to take the help of a chartered accountant.
- What is next after responding to a scrutiny notice?
There may be a number of exchanges between the income tax department and the assessee during the course of assessment. These may include, notices requiring the assessee to produce documents or information or to attend a personal hearing. The next step will depend on the response given by the taxpayer to the notice and the further line of action taken up by the income tax department.
We provide assistance to taxpayers in need, and understanding the scrutiny process is the first step. Our chartered accountants can help you with the remainder.
We provide tax litigation assistance. Contact us for more information.
In addition to the services listed above, we provide various financial services, including auditing, GST, accounting, payroll services, and financial advisory. Contact us for more information.
We are available to speak with you regarding your requirements.
Call: +91 9844081653
Email: capavankumars@gmail.com
Address: Sannidhi, 26, RK Street, Jai Bheema Nagar, Seshadripuram, Bengaluru, Karnataka – 560020
The information provided in this blog is for educational purposes only and should not be construed as tax or legal advice. You should consult a licensed chartered accountant for tax advice.