Reasons for which you may receive an Income Tax Notice
Mr. Abhijit Ghosh, a regular income tax payer, one day while checking his mailbox, was shocked to see a notice from the Income Tax Department. He was wondering what went wrong and why he received a sudden notice from the IT Department?
He thought he had been found guilty of some financial crime. Thankfully, that was not the case, and the IT Department just wanted to cross check the tax returns filed by him.
However, notice from the IT Department may not always be as simple as that, and one may receive a scrutiny notice from the IT Department for various other reasons. The intimation from the IT Department comes under section 143 of the IT act.
Let us have a look at some of the reasons for which you may receive the Income Tax scrutiny notice:
1. Not filing IT returns
Filing income tax return is the duty of every individual earning more than the basic exemption limit, even if the tax is deducted at source. In case you have not filed your Tax returns for the current financial year within the stipulated date, or for any of the previous financial years, then it is likely that you will soon get an income tax scrutiny notice from the Income Tax Department.
2. Proclaiming lesser/higher income
A sudden drop/rise in your income may ring the bell for the IT Department, and they may well be interested in knowing the reason for the same. This is usually not the case for salaried income people as there will not be much variation in their income. But this may well be the case for the businessman and traders, as their income is highly volatile. The IT Department may send them the income tax scrutiny notice asking for the financial statements such as P&L account, balance sheet, bank accounts, capital accounts, etc.
3. High-value transactions
Any high-value transaction done by you may well seek the attention of the IT Department. These transactions could be; a credit card usage of Rs. 2 lakhs per annum, purchasing a real estate property for a value higher than Rs. 30 lakhs, investing more than 2 lakhs in mutual funds, depositing more than 10 lakhs in your bank account, FD investments of more than 5 lakhs, etc. All these transactions are reported by the respective companies to the IT Department and could be the reason for income tax scrutiny notice from the IT Department.
4. Interest earned from FDs/ Savings account
If you have opened an FD in your bank, then the bank will deduct 10% as TDs from the interest earned on the FD and will return the rest of the money to you. However, that’s not the end. Depending on the tax bracket you fall in, you have to pay the remaining tax on the interest earned on your FDs.
Let me illustrate this with an example:
Suppose you have done an FD of Rs. 3 lakhs for a year and the interest rate is 7.5% per annum, then the interest earned on Rs. 3 lakhs will be Rs. 22,500. Now the bank will deduct 10% TDS on this amount i.e. Rs. 2,250. However, if you fall in the 20% tax bracket, then the actual tax amount that you are liable to pay is Rs. 4,500(20% of Rs. 22,500) which means you still have to pay the remaining amount i.e. Rs. 2,250 (Rs. 4,500- Rs.2,250) at the end of the financial year as tax. If you don’t do so, you may well invite the trouble from the IT department.
5. Conflict in TDS credit amount
There might be instances where the TDS has been deducted from your account but has not been remitted from the TDS payer’s account. In this case, there will be a discrepancy between the income tax returns you are claiming and the TDS amount updated in your form 26AS.
Hence, it is important to reconcile form 26AS before you claim for the IT returns. Always check with your employer whether TDS has been paid to the government, check with your banks whether they have paid TDS on the interest earned in your account. Otherwise, this may result in income tax scrutiny notice from the IT department.
Also read: Understanding TDS, Form 16/16A & Form 26AS
6. Double benefits due to job change
Many a time it happens that the salaried employees change their job and fail to declare the income from all their employers, as a result of which they pay only the taxes which are due. People tend to forget about informing their previous income to the new employer when they change their job during a year. Or even if they have revealed it, they forget to make sure that it has been correctly included for the calculation of tax liability. As a result of which, they get the tax benefit from the new employer as well.
Hence, there is a shortfall in the tax which was actually supposed to be paid. So make sure that you are declaring your income and benefits from the previous employer properly so that you don’t get stuck in the web of the IT Department.
7. Non-declaration of exempted income
There are a bunch of incomes which are exempted from the tax deduction. Few among these are gifts from your relatives, long-term capital gains on selling of shares, dividend income from equity mutual funds, etc. Even though you are not liable to pay taxes on these incomes, it is prudent to declare all such income to the IT department as you don’t’ have any reason to hide them. If you don’t do so, you may well invite the trouble from the IT Department.
8. Large Refund claims
There might be instances in the past where claiming large refunds from the IT Department may have resulted in scrutiny. In such a scenario, IT Department might want to look at your credentials and question you for the reason of large refund claims as they have to return a higher amount.
So, if you have got the notice from the IT Department, it may be just a routine enquiry or a simple clarification which they are seeking from your end.
What if you have received a notice?
If you have already got a notification from the IT Department then you may certainly take the steps below:
1. Don’t ignore any notice from the IT Department as it may complicate the things resulting in IT Department considering you as a defaulter.
2. Disclose all the information sought by the IT Department correctly and timely.
3. Any notice issued by the IT Department will be under your PAN and not the name. So, if you have received any notice check whether it’s under your PAN or not.
4. Note down the document identification number if you have received the notice through email. It will be helpful in further correspondence with the IT Department.
5. Check the details of the issuer such as the department ID, seal, office-in-charge, officer’s designation and signature, etc. so that you don’t get stuck in the trap of fraud.
6. You can also take the help of a chartered accountant in case the information sought by the IT Department is unclear.
As the saying goes, “prevention is always better than cure”, it would be prudent to ensure that you file your returns on time, declare all your income and take precautionary measures mentioned above so that you don’t have to face any scrutiny from the IT Department.