Once the assesse files his return of income, irrespective of whether it is filed within the due date or in pursuance to a notice requiring the assesse to file his return, the department can initiate scrutiny proceedings if it has reason to believe that income is escaping assessment, i.e. income is under stated of expenditure is over stated. Therefore, a notice is issued on the assesse asking him to attend the department’s office and produce additional documents if any required.

1. What is Scrutiny?

A mere receipt of a notice does not indicate any crime; it simply indicates conducting of investigation to find out if any income has escaped assessment. Please understand that scrutiny is a tool used in an on-going assessment proceeding, so where the return per se is not filed, the question of issuing a notice does not arise.

The matters falling under section 45QA of the Reserve Bank of India Act, which were earlier within the purview of the RBI, have now been entrusted to the Company Law Board. The Central Government have accordingly amended RBI Act giving powers to the Company Law Board to deal with the applications filed by the aggrieved depositors of Non-Banking Financial Companies (NBFCs) under section 45QA of the RBI Act, 1934. It is one of the branches of high court with the tribunal being the other one. 123

2. Why is only my case chosen for Scrutiny?

If your return of income has been made subject to scrutiny, there necessarily has to be a reason for it. For each year, there is a pre-determined criteria that is followed by the department for identifying scrutiny cases. For instance, one of the criteria for financial year 2013-14 was to select cases where an addition in excess of Rs 10 lacs has been made in any of the previous years and which has not been set aside. The list of criteria was previously not accessible by general public however as per the recent High Court order, this information has now been made public and anyone can view it. The department also uses a software specifically designed for this purpose which enables the officer to identify potential tax evasion cases. The output of this software is based on inputs like short term capital gains earned by the assesse, deductions claimed, advance tax paid, etc. The software is intelligent enough to correlate all the data and indicate if anything looks fishy. Apart from cases which are generated out of these pre-determined criteria, there are other instances also where a scrutiny investigation is initiated.

3. What are the myths pertaining to the subject of Scrutiny?

There are lot of myths surrounding the topic of scrutiny. People make their own conclusions based on their personal experience. Some myths like filing returns online means higher chances of being subject to scrutiny or buying an expensive car will draw the attention of department are completely baseless. It is true that if you are declaring very low income as against an unreasonably high expenditure, it naturally indicates that the expenses are being funded through other sources of income that are not otherwise declared. But take example of a farmer who is filing return of income each year for say Rs 4, 50,000 only and in one particular year he sells a large piece of land for which he declares a gain of Rs 2 crore.

In this case, even if he buys 5 cars in the same financial year, there is a clear source of income for the expenses made and should proper disclosure be made it would be incorrect to assume that merely because cars are purchased, the case could be subject to scrutiny. On a technical side, one of the biggest myths which even Professional & qualified Accountants have is that the time limit for issuing notice is to be counted from the end of the relevant assessment year. This will not hold true where the filing of return of income itself is delayed as the computation of validity is to be counted from the end of the year in which return was filed and not from the end of the relevant assessment year.

4. What is the time limit for receiving the notice?

If 6 months have elapsed since the end of the financial year in which the return was filed, then a notice for scrutiny cannot be served upon the assesse. For instance, for the financial year ending 2013-14, assuming return of income is duly filed; notice cannot be served under whatsoever circumstances after 30th September, 2015. It is advisable that the assesse should always retain a copy of the sealed envelope which indicates the “date of receipt” of the notice. This helps in assessing the constitutional validity of the notice.

It may sound surprising but the fact is that if you do not raise an objection for being served a delayed notice, and at a later point of time, out of the blue, if you are bringing this to the attention of the tax officers, then there is a clear provision in the Act which says that your objection shall be rejected as you are deemed to have accepted the notice. So, before proceeding any step further, you must first check the date of notice in order to confirm its legality.

5. Are all inquiry notices received from department a subject matter of Scrutiny?

The department makes inquiry in pursuance to the return filed by you. As against the notice pertaining to “scrutiny” which generally requires the assesse to be produced before the department along with an exhaustive list of documents, a notice u/s 142(1) is a simple inquiry in order to complete the assessment wherein certain missing information or clarifications are sought for. Such notices are often confused by assesses as if a scrutiny has been initiated which although is not the case. In fact, most people would receive a notice u/s 142(1) and there is nothing prima facie to bother about it. Over and above these, there are other enquiry notices which are being served but on a very case by case basis.

What to do when a Scrutiny notice is received?

6. If you have received a notice from the department u/s 143(2) asking for additional information, you must co-operate. The notice generally requires the assesses to produce an exhaustive set of documents, like details of bank accounts, gifts made and received, copies of credit card statements, details of foreign travel and the source of expenditure, details on club membership and annual subscriptions, along with personally producing himself in front of the officer. If you feel that you do not have all the documents ready that have been asked for submission, you must convey properly to the department. Presence of a Chartered Accountant or any other professional can make the process efficient to a great extent.

7. What if I don’t respond or co-operate to a Scrutiny notice?

Failure to co-operate leads to completion of assessment on a “Best Judgment” basis, which means that the department can confirm the assessment and finalize your income and tax liability thereon as they deem fit, on the basis of information available to them. The assesse is given an opportunity of being heard but which generally becomes redundant for not choosing to answer the questions earlier posed. Apart from being fined on failure to respond, there is a possibility that your failure will lead to suspicion in the eyes of the department and such suspicions can be followed by initiation of a more detailed & painful investigation called “Survey”.