Income Tax scrutiny assessments, governed primarily by Section 143 of the Income Tax Act, involve a detailed examination of an assessee’s financial declarations. Unlike routine assessments, scrutiny assessments focus on ensuring the accuracy and compliance of returns filed by taxpayers. These assessments help confirm that income is not understated, losses are not overclaimed, and tax liabilities are accurately computed.
Scrutiny assessments are detailed evaluations conducted by an Assessing Officer (AO) to verify the validity of claims, deductions, and other details disclosed in an income tax return. The main objectives include:
Unlike summary assessments, scrutiny assessments involve rigorous checks to ensure compliance with tax laws.
For a scrutiny assessment to commence, specific conditions must be fulfilled:
The AO initiates scrutiny when there is a need to verify:
The process is selective and based on predefined criteria to ensure fairness.
The scrutiny assessment officially begins with the issuance of a notice under Section 143(2). The steps involved include:
Issuance of Notice:
The AO serves a notice to initiate the process, which must be issued within a specified time to maintain procedural fairness.
Submission of Documents:
Taxpayers are required to submit supporting documents, statements, and evidence for the claims, deductions, and exemptions reported in their return.
Final Assessment Order:
After reviewing the submissions, the AO issues a final order under Section 143(3), detailing the assessed income or loss and the tax payable or refundable.
Scrutiny notices are categorized based on the scope and focus of the assessment:
Limited Scrutiny:
Complete Scrutiny:
Manual Scrutiny:
To ensure scrutiny assessments are handled by qualified personnel, Rule 12E mandates that notices under Section 143(2) can only be issued by income tax officials not below the rank of Income Tax Officer, as authorized by the CBDT.
Section 292BB addresses situations where procedural defects occur in the issuance or service of a notice. If a taxpayer participates in the scrutiny process and cooperates with the AO, they cannot later challenge the notice’s validity due to procedural flaws.
Failure to comply with scrutiny notices can lead to serious consequences:
Ex-Parte Assessment (Section 144):
Penalties (Section 272A):
Prompt responses and cooperation are essential to avoid unfavorable outcomes.
Charitable trusts, research institutions, and other tax-exempt entities are subject to additional scrutiny under Sections 10 and 2(15):
Commercial Receipts Threshold:
Trusts earning commercial receipts exceeding 20% of their total income lose tax exemption under Section 10(23C) for that year.
Withdrawal of Approval:
For institutions approved under Section 35, failure to meet conditions may result in the withdrawal of tax benefits after due process.
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