Notice from the Income Tax Department: Why You Might Receive One and How to Respond?
Receiving a Notice from the Income Tax Department can be stressful for any taxpayer. It is a confusing and concerning moment, especially if the notice is about something as technical as an incorrect claim under Section 143(1)(a)(ii).
Worry not, this article is intended to simplify the experience of taxpayers and give a walk through for understanding and responding to such notices with ease and confidence.
Table of Content
Understanding Your Notice
The Income Tax Department communicates with the assessee about the discrepancy or problem related to tax compliance through the issuance of a notice. Notices can be sent for a variety of reasons, one of which is an incorrect claim as per Section 143(1)(a)(ii). This simply means that the department has discovered discrepancies or inaccuracies in the deductions or exemptions claimed while filing the Income Tax Return (ITR). Likewise, there are multiple reasons for the issue of notice by the Income Tax department. Understanding the reason behind each notice and timely response to the same is the key for effective tax compliance.
Reasons for Receiving a Notice from the Income Tax Department
There are multiple reasons for which an Income Tax department may issue a notice to the assessee. Few reasons are highlighted below:
Discrepancies in the Income Tax Return: In case of discrepancy between the taxpayer’s declared income and the information available with the Income Tax department, a notice may be issued. The information with the Income Tax department is generally available through Form 16, Tax Deducted at Source (TDS) statements, or Form 26AS and AIS/TIS. Moreover, unreported income or inconsistencies in the information provided also lead to an issue of a notice from the income department.
Incorrect Claim under Section 143(1)(a)(ii): This notice is issued due to the discrepancy or inaccuracy observed in the taxpayer’s claim for deductions, exemptions or allowances. The Income Tax department’s automated system generally flags such claims which appear to be inconsistent with the rules or data in their database.
High Value Transactions: The Income Tax Authorities usually keep track of high-value transactions reported in various financial statements and Annual Information Returns (AIR). If those transactions are not reflected properly in the taxpayer’s income or taxes, a notice may be issued. Examples of high value transactions include: bank deposits made of large amounts, transactions involving purchase or sale of real estate, high value investments, and so on.
TDS/TCS Mismatch: A notice may be issued if a discrepancy is noticed between the TDS/TCS credit claimed by the taxpayer and the TDS/TCS credit reported on Form 26AS. This issue arises because of the errors in reporting by the deductor/collector or a failure to consider all the TDS/TCS certificates while filing the TDS return.
Non-Filing of Income Tax Return: Individuals required to file the Income Tax Returns (ITRs) as per the Income Tax Act but fail to do so within the stipulated time may receive notice for non-filing. These individuals include: individuals having taxable income, individuals who have undertaken high-value transactions, or those who have refunds.
Foreign Assets or Income: Taxpayers who have foreign sources of income are required to report such income in their tax returns. Failure to do so or incorrect reporting of such details may result in issue of notices. The information exchange between the countries have increased with the existence of global agreements.
Random Scrutiny: The Income Tax department also selects a certain number of cases for scrutiny each year on a random basis. It is done so to ensure compliance with the tax laws and verify the accuracy of the returns filed. Getting selected for scrutiny does not necessarily mean wrongdoing.
Claiming Refunds: If the refund claimed by the assessee is higher than what is expected by the department based on the income and tax details of the assessee, a notice may be issued. The department may request for additional information, details, or documents to verify the genuineness of the refund so claimed.
Investment/Expenditures Unmatched with the Reported Income: If there occurs any discrepancy in the investments or expenditures made by the taxpayer versus the reported level of income, a notice seeking clarification can be issued. For instance, investment made in a property or mutual fund beyond the income level may trigger an inquiry from the Income Tax department.
How to Respond to the Notice from the Income Tax Department?
To ensure timely response to notices, following points must be taken care:
Read Carefully: To understand the specifics of the discrepancies observed by the Income Tax Department, it is important to read the notice carefully.
Gather all the Documents: It is essential to collect all the financial documents in support of the claim made by the assessee which includes: bank statements, investment proofs, and relevant bills.
Seek Professional Help: If the notice is beyond the understanding and is complex, a professional help or advisor must be resorted to.
Respond within the Deadline: Ensure timely compliance to the notice through the appropriate mediums like: e-filing portal, or through physical notice reply, before the deadline stated in the notice.
Preventing Future Notices from the Income Tax Department
Few precautionary measures can be taken to prevent the future notices:
Maintenance of Accurate Records: It is essential to maintain accurate and detailed records throughout the financial year so as to be quick to respond to any income tax notices.
Obtain understanding of the Tax Laws: The assessee must stay updated about the recent amendments of the tax laws and regulations to ensure compliance.
Use of Professional Tax Services: Consider using services of trustworthy service providers to minimize errors and discrepancies.
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FAQ
Q1. What are the steps to be taken in case a notice is received from the Income Tax department?
Upon receiving the notice from the Income Tax department, it is essential to read the same carefully to understand the reason for issue of such notice. Moreover, it is important to respond to such notice within the stipulated time mentioned in the notice. The response can be made either by furnishing the requested documents or providing clarifications about the issues raised.
Q2. Why is notice under Section 143(1) issued?
A notice under Section 143(1) is a mere intimation sent by the Income Tax Department after processing the Income Tax Return (ITR) of the assessee. Such intimation could be for discrepancy observed in the tax calculation, tax demand, or refund. It is not necessarily a reason to worry but needs attention and timely response.
Q3. What does notice under Section 139(9) mean?
A notice under Section 139(9) is issued because of the defective return filed by the assessee. Reasons for defective return includes: ITR form being incompletely filed or missing attachments.
Q4. How to respond online to the Notice from the Income Tax department?
A response can be made to the income tax notices online through the e-filing portal of the Income Tax department. The steps for responding to the notice is simple: Login to the e-filing portal > navigate to ‘e-Proceedings’ section > submit response or requested documents.
Q5. Can the time period for responding specified in the notice be extended?
Yes. In most cases an extension can be granted. However, it is subject to the assessing officer’s approval. The extension request must be submitted well before the due date to avoid any complications.
Q6. What if an assessee ignores the notice?
The consequences of ignoring the notice are adverse including assessment order against the assessee, penalties, or even prosecution in severe cases. It is important to respond within the given time frame.
Q7. If an assessee has paid all the taxes, will a notice be still issued?
There are various reasons for issuance of a notice apart from the tax dues. This includes: seeking additional information for verification of transactions, discrepancies in ITR, or random checks. A notice does not always mean a tax is due to be paid.
Q8. After responding to the notice, how long does it take for the Income Tax department to issue a reply?
Usually, the Income Tax department’s response is expected within a few weeks or few months after the receipts of reply from the assessee. However, response time varies based on the complexity of the issue and the workload of the department.
Q9. Can the Income Tax department conduct an audit based on a notice?
Yes. If the discrepancy or issue involved are not satisfactorily resolved by the assessee, an audit or a detailed scrutiny of the tax returns and related documents may be called for by the department.
Q10. How to avoid receipt of notices from the Income Tax department?
To avoid future receipt of notices, it is important to file the Income Tax Return (ITR) accurately and timely, report all the sources of income, make the payment of all taxes in full, and maintain accurate records of financial transactions and tax documents.
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