Responding to Section 142(1) Scrutiny Notices for Business Income and Correcting Your Tax Return
- Rajesh Kumar Kar
- 6 hours ago
- 8 min read
Section 142(1) empowers tax authorities to demand documents, clarifications, or even a return if it's not filed. For businesses, this scrutiny isn't uncommon. However, how one responds defines the outcome. Mishandling it can result in penalties, incorrect assessments, or even prosecution. Let us explore what the notice means, how to respond, and how to correct errors in your tax return.
Table of Contents
What is Section 142(1) Scrutiny Notice?
A Section 142(1) notice is a formal request from the Income Tax Department asking for specific documents, explanations, or a tax return. It applies whether or not a return has been filed. For businesses, this could involve sharing profit and loss statements, sales ledgers, bank statements, or reconciliations. The notice reflects a gap or doubt in the data filed or available to the department.
Why Are Businesses Commonly Targeted Under Section 142(1)?
The Income Tax Department has enhanced its surveillance and data-matching capabilities through digitization and cross-verification tools. Today, various data sources such as GST returns, TDS filings, Form 26AS, and banking records are analyzed in sync to detect inconsistencies in reported income or expenses. When discrepancies surface, a Section 142(1) notice may be triggered to seek clarification or supporting documents.
1. Non-Filing of Return
If a business is required to file a return—based on income thresholds, TDS activity, or GST turnover—but fails to do so, the department may issue a Section 142(1) notice. This acts as a formal reminder compelling the business to submit its Income Tax Return (ITR). In many cases, this happens when:
GST filings show active turnover
TDS returns reflect salary or contractor payments
Bank transactions cross ₹50 lakh but no ITR is on record
2. High-Value Transactions Without Supporting Documentation
Large transactions, such as purchases of assets, cash deposits, or outward remittances, get flagged through Annual Information Statements (AIS) or GST data. If the taxpayer’s ITR lacks matching income or doesn't include sufficient supporting documentation, it raises a red flag. The AO (Assessing Officer) may issue a 142(1) notice to request:
Invoices
Payment proofs
Contracts or agreements
This is especially common in real estate, high-value consulting, and trading businesses.
3. Mismatch Between Income Reported and Form 26AS
Form 26AS consolidates all tax-related information: TDS deductions, advance tax, and high-value financial transactions. If a business reports income lower than what’s reflected in this form (e.g., lesser consultancy fees or rental income), it leads to suspicion. A notice is issued asking for reconciliation between:
TDS reported by deductors
Income declared in the ITR
Invoices or agreements for service provided
4. Suspicious or Round-Number Expenses
Unusually rounded or bulk expense entries—like ₹1,00,000 exactly for multiple vendors—may indicate fabricated or estimated expenses. These are flagged by AI algorithms during return processing. The Income Tax Department may then seek:
Itemized expense details
Ledger extracts
Payment proofs
This ensures that deductions claimed are real, necessary, and allowable under tax laws.
5. Sudden Changes in Income or Loss Declarations
A business showing sudden drops in revenue or declaring significant losses—especially without any valid explanation—may be scrutinized to prevent tax evasion. Common triggers include:
Claiming a loss in a profitable year
Sharp decline in gross receipts
Disproportionate increases in depreciation or provisions
In such cases, the AO may demand detailed income statements, explanations for loss-making decisions, or proof of extraordinary events (like a bad debt, lawsuit, or natural calamity).
How to Respond to a Section 142(1) Notice
Step 1 – Review the Notice and Timeline
Identify what’s being asked—whether it’s missing documents, transaction clarifications, or a revised return. Note the deadline.
Step 2 – Collect and Organize Required Business Documents
Gather sales invoices, purchase bills, expense proofs, bank statements, GST returns, and ledgers.
Step 3 – Clarify Discrepancies with Valid Explanations
Prepare clear, factual replies to all queries. Justify unusual transactions or variances with documentation.
Step 4 – Submit the Response via e-Proceedings
Log in to the income tax portal and submit the reply through the ‘e-Proceedings’ section.
Step 5 – Maintain Records of All Submissions
Save acknowledgments, PDFs of replies, and correspondence for audit trails.
Step 6 – Consider Professional Guidance
If the notice seems complex, engage a tax consultant to avoid mistakes or missed submissions.
Consequences of Ignoring or Mishandling Section 142(1) Notices
1. Penalty of ₹10,000 per Non-Compliance Instance under Section 271(1)(b)
If a taxpayer fails to comply with a notice under Section 142(1), the Income Tax Department may levy a penalty of ₹10,000 for each instance of default under Section 271(1)(b) of the Income Tax Act. This means that if a taxpayer ignores multiple notices or fails to submit specific documents as requested, the penalty could accumulate for each lapse.
This penalty applies even if the taxpayer ultimately files their return or responds later—non-compliance within the stipulated deadline itself can trigger this financial repercussion. It is a cautionary provision intended to ensure that taxpayers do not delay the assessment process.
2. Assessment Under Section 144 – Best Judgment Assessment
When a taxpayer does not respond to a Section 142(1) notice, the Assessing Officer (AO) is legally empowered to proceed with a Best Judgment Assessment under Section 144. In this scenario, the AO finalizes the tax liability based on information already available to the department or other third-party sources like:
GST filings
Bank transaction reports
AIS (Annual Information Statement) or Form 26AS data
Because no clarification or supporting documents are submitted by the taxpayer, the AO may disallow deductions or declare additional income based on assumptions, potentially inflating the tax liability significantly.
The final assessment under Section 144 may not reflect the business’s actual financial condition, and disputing it afterward becomes difficult without strong evidence.
3. Prosecution with Imprisonment up to One Year in Severe or Repeat Cases
In more serious cases of persistent non-compliance, especially where there is intent to evade tax, the Income Tax Department can initiate prosecution under Section 276D of the Income Tax Act.
This can lead to:
Imprisonment of up to one year, and
A fine, as determined by the court.
While prosecution is usually reserved for willful defaults or habitual offenders, even a single serious failure—such as ignoring multiple notices or refusing to furnish critical information—can trigger criminal proceedings. This step is taken to enforce discipline and compliance in tax administration.
Correcting Your Tax Return After Receiving a Scrutiny Notice
Businesses that realize errors in their original filing can file a revised return, provided it's still within the allowed timeline under Section 139(5). Mention the revised ITR acknowledgment number in your response to the notice. Clearly justify the corrections made and attach updated documents supporting the changes. Transparency helps avoid suspicion.
Best Practices for Business Tax Compliance and Notice Handling
Keep clean, real-time financial records
Reconcile books with bank and GST data periodically
Regularly monitor the compliance dashboard on the e-Filing portal
Respond to tax department notices without delay
Train staff or use software to reduce human errors in returns
How TaxBuddy Helps with 142(1) Scrutiny Notices and Tax Return Corrections
TaxBuddy simplifies the process with its expert-assisted services. From identifying the issues in a notice to compiling documents and filing revised returns, their team helps businesses navigate scrutiny stress-free. The mobile app provides alerts, record keeping, and easy document uploads, all under one dashboard.
Conclusion
Scrutiny under Section 142(1) is part of routine tax monitoring—but it's how businesses respond that determines the outcome. Timely, accurate, and well-documented replies can prevent larger issues. For seamless guidance and document support, it’s best to use professional tools. Download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy offers flexibility to cater to different user needs. For those comfortable managing their tax affairs, a self-filing option is available through an intuitive platform. However, for complex returns—such as those involving business income, capital gains, or multiple deductions—TaxBuddy’s expert-assisted plans provide professional guidance. These plans include document review, filing support, and post-filing assistance, ensuring full compliance and peace of mind.
Q2. Which is the best site to file ITR?
The official government portal at incometax.gov.in is the standard platform for filing returns. However, third-party platforms like TaxBuddy offer added benefits—automated data extraction from Form 26AS, real-time error checks, expert support, and faster processing. For users seeking a smoother experience with professional backup, TaxBuddy is a trusted, authorized E-Return Intermediary (ERI) with user-friendly tools tailored to both individuals and businesses.
Q3. Where to file an income tax return?
Income tax returns can be filed either directly on the Income Tax Department’s portal or via authorized platforms like TaxBuddy. While the government site is free, portals like TaxBuddy offer added value through AI-driven tools, simplified workflows, and expert oversight. This is especially helpful when handling notices like Section 142(1), where professional input may be essential.
Q4. Can a business revise its return after receiving a Section 142(1) notice?
Yes, businesses can revise their tax return even after receiving a 142(1) notice—provided it’s within the timeframe allowed under Section 139(5). A revised return corrects errors or omissions and must be disclosed in the response to the notice. It’s important to attach the updated ITR acknowledgment number and supporting documentation to explain the changes transparently.
Q5. What documents are commonly requested in such notices for businesses?
Section 142(1) notices often request a range of business documents, including:
Profit and loss statements
GST returns and reconciliations
Sales and purchase invoices
Ledger books and bank statements
Proof of expenses claimed
Asset and liability details
These documents help the Assessing Officer validate income, deductions, and compliance with tax laws.
Q6. How long does one get to respond to a Section 142(1) notice?
The deadline is typically mentioned in the notice—usually ranging from 10 to 15 days. It’s crucial to act within this period to avoid penalties. If more time is needed due to the complexity of the documents or delay in retrieval, an extension can be requested through the e-Filing portal under the ‘e-Proceedings’ section.
Q7. What happens if a business ignores or delays the response?
Failing to respond to a 142(1) notice has serious consequences:
A penalty of ₹10,000 may be levied for each instance of non-compliance
The Assessing Officer can proceed with a Best Judgment Assessment under Section 144, estimating tax liability without considering your books
Repeated defaults can attract prosecution with potential imprisonment
It’s essential to respond promptly and thoroughly.
Q8. Is it necessary to upload documents through the Income Tax portal only?
Yes, all official communication and document submissions in response to a 142(1) notice must be made electronically through the ‘e-Proceedings’ tab on the Income Tax portal. Submissions outside the portal—like email or physical delivery—are not considered valid and may not be acknowledged by the department.
Q9. Can one respond partially if all documents are not available immediately?
If certain documents are unavailable by the deadline, a partial response can be filed. Along with it, the business should request an extension and clearly state the reason for delay. It’s advisable to avoid incomplete responses where possible. Providing a complete, accurate set of documents in the first go reduces the chances of follow-up queries or adverse outcomes.
Q10. What is the penalty for not responding to a 142(1) notice?
Each failure to comply with a 142(1) notice may attract a penalty of ₹10,000 under Section 271(1)(b). Additionally, the officer may move to best judgment assessment under Section 144 and issue further notices under other sections like 143(2) or 148. Ignoring a notice reflects poorly on the taxpayer and invites greater scrutiny in future assessments.
Q11. Does TaxBuddy assist in preparing revised returns and uploading replies?
Yes, TaxBuddy provides comprehensive assistance—from reviewing your original return to identifying gaps, drafting the reply, and uploading it via the official portal. Their expert-assisted plans cover revised filings, document preparation, and post-notice compliance to ensure businesses avoid errors, delays, or penalties.
Q12. Are notices under Section 142(1) common during business assessments?
Yes, especially during processing or scrutiny of business returns. Common triggers include mismatched income declarations, high-volume transactions, new business operations, or data inconsistencies between GST, TDS, and ITR records. These notices are a routine part of compliance checks and do not always indicate wrongdoing.
Related Posts
See All
TDS on interest income is often overlooked but frequently responsible for tax notices and delays in refunds. Section 194A of the Income...
Section 80G of the Income Tax Act offers taxpayers a smart way to contribute to nation-building while reducing taxable income. This...
Comments