How to Handle Scrutiny Notices for Underreported Salary or Business Income in Your ITR?
- Dipali Waghmode
- Jun 11
- 9 min read
Scrutiny notices under Section 143(2) of the Income Tax Act are issued when discrepancies arise in reported income, most commonly in cases of underreported salary or business income. These notices are not random; they are based on risk assessment using data from TDS, Form 26AS, AIS, and third-party sources. Ignoring or mishandling such notices can lead to penalties, interest, and even prosecution. Understanding the process, preparing the correct documentation, and responding clearly are crucial. Platforms like TaxBuddy can streamline this experience with expert-backed, AI-driven tax filing and notice resolution.
Table of Contents
What Triggers a Scrutiny Notice for Underreported Income?
A scrutiny notice is typically triggered when the reported income in your ITR doesn't align with third-party data available to the Income Tax Department. Key red flags include:
Mismatch between the salary reported in the ITR and Form 16 or Form 26AS
Business income not supported by GST returns or bank credits
Discrepancies in high-value transactions (cash deposits, property purchases)
Claiming deductions without documentation
Reporting income lower than peers in similar profiles (risk-based profiling)
These mismatches activate the department’s scrutiny mechanism to verify authenticity.
Step-by-Step Process to Handle a Scrutiny Notice
Receive and Review the Notice:
Notices are sent via email and uploaded on the e-filing portal.
They mention specific issues (e.g., salary discrepancy, expense mismatch).
Understand the Queries:
Read the reason carefully—whether it’s about specific income heads, deductions, or investments.
Collect Relevant Documents:
Gather salary slips, bank statements, business ledgers, expense bills, GST returns, and proof of deductions.
Draft Your Response:
Address each point clearly with reference to evidence. Avoid generic or vague explanations.
Respond Online:
Upload documents and reply via the Income Tax e-filing portal within the stipulated timeline.
Cooperate During the Process:
Provide clarifications if asked. Stay proactive and transparent in correspondence.
Assessment Order:
After evaluation, the AO will issue an order confirming, adjusting, or modifying your original filing.
Documents Required for Salary and Business Income Scrutiny
For Salaried Individuals:
Form 16 issued by employer
Salary slips (monthly)
Employment contract or offer letter
Form 26AS and AIS data
Bank statements reflecting salary credit
For Business Owners:
Profit & Loss account and balance sheet
GST returns and invoices
Books of accounts
Expense proof (rent, utility, travel, etc.)
Bank account statements (business and personal if mixed)
Having these ready ensures a smoother resolution process.
How to Reply to Scrutiny Notice on the Income Tax Portal
Log in to incometax.gov.in
Go to e-Proceedings → View Notices
Open the scrutiny notice under Section 143(2)
Click Submit Response
Upload relevant documents under each question raised
Use the remarks box to explain and link each document
Submit response before the due date
Track status under Assessment tab
Be precise and professional in your explanations. Avoid filler or emotional reasoning.
Consequences of Underreporting Salary or Business Income
Failure to report accurate income can lead to:
Additional tax liability
Penalty up to 200% of tax underreported
Interest under Sections 234A/B/C
Best judgment assessment under Section 144
Legal action in cases of willful misreporting
Increased future scrutiny
Prompt correction or disclosure helps reduce penalty exposure.
Common Mistakes That Lead to Scrutiny
Declaring income without reconciling with Form 26AS
Omitting side income (freelance, interest, rent)
Using the wrong ITR form
Claiming excessive deductions (e.g., HRA + home loan)
Failing to disclose foreign income or assets
Mismatches in GST and ITR for business owners
Such errors can be avoided by reviewing tax documents before filing.
How to Avoid Scrutiny in Future Income Tax Filings
Reconcile income details with Form 26AS and AIS
Report all income sources, including savings account interest
Use correct ITR form based on income head
Declare all high-value transactions (property, crypto, cash)
Keep proper books for business income
Avoid over-reporting deductions without proof
Platforms like TaxBuddy help validate returns using AI checks before filing.
Addressing Salary Mismatch in Form 16 and ITR
A common reason for scrutiny is a mismatch between the salary reported in ITR and what’s reflected in Form 16 or Form 26AS. Causes may include:
Multiple employers during the year
Non-inclusion of certain perquisites or reimbursements
Timing difference in TDS credits
To handle this:
Reconcile gross income using Form 16 and salary slips
Match TDS with Form 26AS
Explain differences in the response and provide evidence
Handling Business Income Scrutiny for Cash Transactions
For business owners, scrutiny often revolves around financial inconsistencies—especially cash-related activities. The Income Tax Department closely examines returns where declared business income doesn’t align with external records such as GST filings, bank transactions, or reported sales figures. The presence of unexplained or irregular cash flows often prompts further investigation.
Key Triggers of Scrutiny:
1. Unexplained Cash Deposits: Large or frequent cash deposits in business or personal accounts that are not supported by declared turnover or sales often raise red flags. If such deposits are not explained with invoices, contracts, or recorded sales, the Assessing Officer may consider them as undisclosed income.
2. Mismatched Turnover Between GST and ITR: If the turnover reported in GST returns (GSTR-3B or GSTR-1) differs significantly from what's mentioned in the Income Tax Return, it signals underreporting. Even timing differences between accrual and actual receipt must be clearly documented and explained.
3. Sudden Spikes in Income or Expenses: An abrupt rise in income, revenue, or expenses, without a corresponding trend in business activity or explanation, can look suspicious. The department may question the legitimacy of such figures, especially if used to offset taxable income.
How to Manage Cash-Related Scrutiny:
1. Maintain a Clean Cash Book with Daily Entries: Ensure every cash inflow and outflow is documented daily in a structured cash book. The entries should clearly mention the date, purpose, payer/payee details, and associated invoice numbers. Cash books should align with bank deposits and withdrawals and be signed periodically if maintained in physical form. Digital accounting tools like Tally or Zoho Books are also accepted if audit trails are preserved.
2. Reconcile Cash Deposits with Sales Invoices or Contracts: Each cash deposit in the bank should have a corresponding sales invoice, purchase agreement, or customer contract. These documents serve as the legal basis for proving the source of cash. For example, if ₹2,00,000 is deposited on April 10, the matching invoice for the same amount dated close to that day should be submitted.
3. Submit Supporting Documents: Compile a set of documents that support the authenticity of transactions:
Tax invoices with GSTIN (if registered)
Payment receipts with customer signatures or digital confirmations
Purchase bills for inventory, supplies, or raw materials
Transport or delivery challans to prove physical movement of goods
Work contracts, if income is service-based
Bank account statements showing the deposit trail
Ledger accounts for major clients and vendors
4. Clarify Nature of Transactions and Justify Large Cash Flows: In the written response to scrutiny, explain the background of any high-value cash transaction:
Was it an advance from a customer?
A one-time project or seasonal spike?
Settlement of a credit sale?
Add contextual details like festival demand, bulk order fulfillment, or delayed customer payments that resulted in lump sum collections. If cash was used for business purchases or expenses, ensure corresponding bills are attached.
Proper documentation and a proactive explanation can prevent adverse assumptions during assessment. If assistance is needed, TaxBuddy’s expert-assisted plan helps business owners prepare clean books, review inconsistencies, and file timely replies that align with legal expectations.
Should You Revise Your ITR During Scrutiny?
Yes, if you discover a genuine error in the original return, filing a revised ITR before completion of assessment is allowed.
Use the e-filing portal to file revised ITR
Clearly mark the revision as a response to scrutiny
Mention the error and correction in your reply
This step often helps reduce penalties and builds trust with the AO.
Is Physical Appearance Required During Scrutiny Assessment?
Most assessments today are conducted online under the faceless assessment scheme.
However:
AO may request a virtual hearing if clarification is needed
Physical appearance is rare and only needed for complex or serious cases
Notices will clearly specify if physical attendance is required
TaxBuddy enables you to handle most of the scrutiny process digitally with expert guidance.
Conclusion
Scrutiny notices are not to be feared—but mishandling them can be costly. Responding with accurate documents and a clear explanation helps resolve issues efficiently. Whether you're salaried or self-employed, being prepared is half the battle. For anyone looking for assistance in tax filing, it’s advisable to 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 provides flexibility for all types of taxpayers. Users who are comfortable with filing their own tax returns can choose the self-filing plan, which comes with guided assistance and automated error checks. Those who prefer personalized support can opt for expert-assisted filing, where a qualified tax professional handles the entire process—from document verification to final submission—ensuring compliance and peace of mind.
Q2. Which is the best site to file ITR?
While the Income Tax Department’s official portal is functional and free, platforms like TaxBuddy offer a much smoother experience. TaxBuddy simplifies filing by offering AI-powered form checks, real-time validations, expert reviews, and notice handling support. For those unfamiliar with tax laws or who want to avoid errors, it’s a more efficient alternative.
Q3. Where to file an income tax return?
Income tax returns can be filed through the government’s e-filing portal at www.incometax.gov.in. Alternatively, taxpayers can use trusted platforms like TaxBuddy, which integrates directly with the portal while providing added services such as document management, pre-filled forms, and post-filing support for scrutiny notices.
Q4. What is the time limit for receiving a scrutiny notice after filing my ITR?
A scrutiny notice under Section 143(2) can be issued up to three months from the end of the financial year in which the return was filed. For example, if you filed your ITR for FY 2024–25 on July 30, 2025, a scrutiny notice may be sent anytime until June 30, 2026. Notices beyond this timeframe are considered invalid unless covered by extended timelines under reassessment provisions.
Q5. What documents should I keep ready for scrutiny?
The required documents vary based on your income source. Salaried individuals should keep Form 16, monthly payslips, Form 26AS, bank statements, and any deduction proofs (such as rent receipts or insurance premium slips). Business owners should maintain books of accounts, GST returns, invoices, bank statements, and expense records. Having these ready ensures a quick and effective response to the Assessing Officer’s queries.
Q6. Can I get help from a tax expert for responding to a scrutiny notice?
Yes. Responding to a scrutiny notice requires accuracy, clarity, and a strong understanding of tax laws. TaxBuddy’s expert-assisted services connect you with experienced CAs and tax professionals who can help interpret the notice, draft responses, organize documents, and reply through the e-filing portal—ensuring timely and compliant resolution.
Q7. What happens if I ignore a scrutiny notice?
Ignoring a scrutiny notice is a serious mistake. The Income Tax Department may proceed with a “best judgment assessment” under Section 144, meaning they can estimate your income and tax liability without your input. This often results in inflated tax demands, penalties up to 200% of tax due, and even prosecution in extreme cases. Responding promptly is critical to avoid such consequences.
Q8. How can I avoid scrutiny notices in the future?
Scrutiny notices can often be prevented with simple precautions:
Always match your reported income with Form 26AS and AIS.
Use the correct ITR form based on your income heads.
Avoid overclaiming deductions without proper documentation.
Report all income sources, including interest, freelance work, and capital gains.
Keep clean records, especially for business transactions and cash deposits.
Using tools like TaxBuddy’s smart filing assistant reduces the chances of triggering red flags.
Q9. Can I respond to a scrutiny notice without visiting the tax office?
Yes. Under the faceless assessment system introduced by the Income Tax Department, almost all scrutiny-related communication happens online. You can reply to the notice, upload documents, and even attend virtual hearings through the e-filing portal. A physical appearance is only needed in rare and complex cases, and the notice will specify it explicitly.
Q10. Is it mandatory to reply to every point in the notice?
Absolutely. Every issue raised in the notice must be addressed separately and clearly. Each point should be supported with relevant documents and logical explanations. A partial or vague response may lead the Assessing Officer to reject your claims or proceed with adverse assumptions. Platforms like TaxBuddy help draft structured, point-wise replies that improve your chances of a favorable outcome.
Q11. Can revised ITR be filed after receiving a scrutiny notice?
Yes, if you realize there's an error or omission in your originally filed ITR, you can still revise it before the completion of assessment. However, the revised return must be filed promptly and the reasons for revision should be explained in your reply to the scrutiny notice. This demonstrates good faith and can help reduce penalties.
Q12. Is TaxBuddy’s mobile app useful for scrutiny replies?
Definitely. The TaxBuddy mobile app allows users to track notice timelines, upload documents securely, consult tax experts, and monitor case progress—all from their phone. It’s especially helpful for salaried professionals and small business owners who want to manage their compliance without visiting offices or managing piles of paperwork. The app brings expert-assisted scrutiny handling into your palm.
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