The Indian Tax regime is relatively complicated. Whether it is a small organization or a large-sized one, maintaining tax compliance is extremely important. It is our responsibility to ensure that our clients are regularly complying with Income Tax Act, Service Tax Act, VAT & Excise regulations. A small lacuna at one end can trigger the problem under all the tax regimes and therefore it is crucial to have thorough knowledge of all the taxation branches so that the client is given a 360 degree perspective on the possible solution keeping vivid angles in mind. We act as your single point of solution without pinpointing your mistakes.
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There is nothing that can bother a client more than a repeated and an on-going scrutiny assessment. It is extremely important to handle scrutiny cases carefully; one should go the roots of the subject and understand why and what is invoking a notice rather than addressing it on a short term basis. There are lot of myths surrounding this subject; we have therefore given a basic simple worded explanation for curious readers.
i. What is Scrutiny?
Once the assessee files his return of income, irrespective of whether it is filed within the due date or in pursuance to a notice requiring the assessee to file his return, the department can initiate scrutiny proceedings if it has reason to believe that income is escaping assessment, i.e. income is under stated of expenditure is over stated. Therefore, a notice is issued on the assessee asking him to attend the department’s office and produce additional documents if any required. A mere receipt of a notice does not indicate any crime; it simply indicates conducting of investigation to find out if any income has escaped assessment. Please understand that scrutiny is a tool used in an on-going assessment proceeding, so where the return per se is not filed, the question of issuing a notice does not arise.
ii. Why is only my case chosen for Scrutiny?
If your return of income has been made subject to scrutiny, there necessarily has to be a reason for it. For each year, there is a pre-determined criteria that is followed by the department for identifying scrutiny cases. For instance, one of the criteria is to select cases where an addition in excess of Rs 10 lacs has been made in any of the previous years and which has not been set aside. The list of criteria was previously not accessible by general public however as per the recent High Court order, this information has now been made public and anyone can view it. The department also uses a software specifically designed for this purpose which enables the officer to identify potential tax evasion cases. The output of this software is based on inputs like short term capital gains earned by the assessee, deductions claimed, advance tax paid, etc. The software is intelligent enough to correlate all the data and indicate if anything looks fishy. Apart from cases which are generated out of these pre-determined criteria, there are other instances also where a scrutiny investigation is initiated.
iii. What are the main myths pertaining to the subject of Scrutiny?
There are lot of myths surrounding the topic of scrutiny. People make their own conclusions based on their personal experience. Some myths like filing returns online means higher chances of being subject to scrutiny or buying an expensive car will draw the attention of department are completely baseless. It is true that if you are declaring very low income as against an unreasonably high expenditure, it naturally indicates that the expenses are being funded through other sources of income that are not otherwise declared. But take example of a farmer who is filing return of income each year for say Rs 4,50,000 only and in one particular year he sells a large piece of land for which he declares a gain of Rs 2 crore. In this case, even if he buys 5 cars in the same financial year, there is a clear source of income for the expenses made and should proper disclosure be made it would be incorrect to assume that merely because cars are purchased, the case could be subject to scrutiny. On a technical side, one of the biggest myths which even Professional & qualified Accountants have is that the time limit for issuing notice is to be counted from the end of the relevant assessment year. This will not hold true where the filing of return of income itself is delayed as the computation of validity is to be counted from the end of the year in which return was filed and not from the end of the relevant assessment year.
iv. What is the time limit for receiving the notice?
If 6 months have elapsed since the end of the financial year in which the return was filed, then a notice for scrutiny cannot be served upon the assessee. For instance, for the financial year ending 2015-16, assuming return of income is duly filed; notice cannot be served under whatsoever circumstances after 30th September, 2017. It is advisable that the assessee should always retain a copy of the sealed envelope which indicates the “date of receipt” of the notice. This helps in assessing the constitutional validity of the notice. It may sound surprising but the fact is that if you do not raise an objection for being served a delayed notice, and at a later point of time, out of the blue, if you are bringing this to the attention of the tax officers, then there is a clear provision in the Act which says that your objection shall be rejected as you are deemed to have accepted the notice. So, before proceeding any step further, you must first check the date of notice in order to confirm its legality
v. Are all inquiry notices received from department a subject matter of Scrutiny?
The department makes inquiry in pursuance to the return filed by you. As against the notice pertaining to “scrutiny” which generally requires the assessee to be produced before the department along with an exhaustive list of documents, a notice u/s 142(1) is a simple inquiry in order to complete the assessment wherein certain missing information or clarifications are sought for. Such notices are often confused by assessees as if a scrutiny has been initiated which although is not the case. In fact, most people would receive a notice u/s 142(1) and there is nothing prima facie to bother about it. Over and above these, there are other enquiry notices which are being served but on a very case by case basis
vi. What to do when a Scrutiny notice is received?
If you have received a notice from the department u/s 143(2) asking for additional information, you must co-operate. The notice generally requires the assessee to produce an exhaustive set of documents, like details of bank accounts, gifts made and received, copies of credit card statements, details of foreign travel and the source of expenditure, details on club membership and annual subscriptions, along with personally producing himself in front of the officer. If you feel that you do not have all the documents ready that have been asked for submission, you must convey properly to the department. Presence of a Chartered Accountant or any other professional can make the process efficient to a great extent
vii. What if I don’t respond or co-operate to a Scrutiny notice?
Failure to co-operate leads to completion of assessment on a “Best Judgment” basis, which means that the department can confirm the assessment and finalize your income and tax liability thereon as they deem fit, on the basis of information available to them. The assessee is given an opportunity of being heard but which generally becomes redundant for not choosing to answer the questions earlier posed. Apart from being fined on failure to respond, there is a possibility that your failure will lead to suspicion in the eyes of the department and such suspicions can be followed by initiation of a more detailed & painful investigation called “Survey”.
[The above is an excerpt from the article that was authored by Utsav Rajiv Doshi and which was featured on India’s largest online tax knowledge portal taxguru.com]
Often termed as Raid by laymen, income tax survey and search are becoming increasingly common as businesses continue to grow. Apparently, there is no word called “raid” in the Income Tax Act. The two important tools which the department uses are survey and search and when one or both of these two operations get initiated, people term it as “raid”. Most people including savvy professionals intermingle the terms – survey, search & scrutiny. Although scrutiny is carried out only during the time of on-going assessment and stands on a completely different trajectory, search and survey are the mechanisms that may be used by the department independent to the assessment proceedings.
There are lot of myths surrounding this subject; we have therefore given some basic information for curious readers and which every tax payer must know for his own good:
It is first important to understand what actually leads to a search or a survey and the very basis of these two investigations. A search is generally carried out when there is a continuous non-compliance on part of the assessee to attend to the summons received from the department or showing negligence towards the I.T. notices or where the authorities have a clue as to undisclosed income including possession of cash, bullion, jewellery or such other valuable articles. A survey on the other hand is meant to discover assessee, who could have been in the limelight but have been managing to avoid so, by performing an on-site investigation so as to gather on-spot information including conducting inspection of stock and cash.
Following are the differences between the two:
If you are a party to a survey or search investigation, you must know the following:
Appeal can be filed before Commissioner (Appeals), when a tax payer is adversely affected by Orders as under passed by various Income tax authorities:
Tax payer can file appeal before the Income Tax Appellate Tribunal against the following orders:
Our specialised advisory desk is led directly by our key managerial partners. It includes advisory on sophisticated issues like domestic & international transfer pricing, seeking pronouncements on controversial issues from the authority for advance ruling (AAR), and other niche areas like representing matters before Charity Commissioner or CIT (Exemption) for the purposes of obtaining registration for your trust u/s 12AA of the Income Tax Act, representation against Central Board of Direct Taxes for condonation of delay u/s 119(2)(b) of the Income Tax Act, and special audit u/s 142(2A) of the Income Tax Act.
Our international tax practice work includes representation on a variety of complex cross-border and domestic transactions encompassing areas such as:
This is the most crucial aspect of our advisory. While most clients would realise the importance of tax planning only when it is too late to achieve something meaningful, we have always stressed upon the need for timely tax planning; whether it is creation of a will for your family property, legacy & estate planning, avoiding unwarranted clubbing of incomes between husband and wife and likewise parents and minors, establishing proper legal structures for your international transactions, and managing the holding-subsidiary / associate relationships effectively so as to avoid transfer pricing issues.
Settlement of disputes relating to Income Tax and Wealth Tax is based on the objective of dispute resolution Alternate. It is in the nature of mediation or arbitration. The Settlement orders passed by the Income Tax Settlement Commission are final and conclusive in nature.
The application for settlement can be made only during the pendency of the assessment proceedings, whereas an appeal can be filed only after conclusion of assessment proceedings, against an order of assessment. For approaching the settlement commission, an applicant is required to disclose income which he has not disclosed before the Income Tax Department and also to pay applicable tax and interest on it before filing the application. No such conditions are needed for filing an appeal.
An application for settlement is statutorily required to be disposed of within 18 months failing which the same is abated to the concern Income Tax Authority. There is no statutory time limit for disposal of an appeal.
The Income Tax Settlement Commission conclusively decides the amount of tax and interest to be paid by the applicant in respect of tax disputes relating to the assessment years for which an applicant has approach the Commission. It also has powers to grant immunity from levy of penalty or institution of proceeding for prosecution under the Income Tax Act, 1961. However, no such immunity is available where the proceedings for prosecution were initiated before filing of settlement application. An immunity granted by the Commission is liable to be withdrawn where the Commission subsequently finds that the application had concealed material facts or given false evidence during the settlement proceedings.
The order of settlement passed by the Settlement Commission provides for the terms of settlement including any demand by way of tax, penalty or interest and also provides for the manner in which such demand is to be paid. Such an order shall also address other matters to make the settlement effective. The final settlement order of the Settlement Commission is applicable for the case of the particular applicant only and its ratio is not applicable for other cases and for proceedings before other authorities.
No. the Income Tax Settlement Commission is an independent quasi-judicial authority. It is an attached office of the Department of Revenue, only for its administrative matters.
An applicant can approach the Income Tax Settlement Commission in respect of a particular assessment year only if no assessment order is passed by the concerned income tax authority and the statutory time-limit for passing of assessment order for that year has not lapsed. The proceedings are considered to be pending from the first day of the assessment year and it is not needed that a return of income is filed or a notice for scrutiny is issued before failing of application.
The First condition that you need to satisfy for approaching the settlement Commission is that you have to disclose an additional amount of income tax before the Commission which is at least Rupees ten lakhs. This does not include the amount of interest chargeable on such tax. For cases involving Search and seizure assessment proceedings, the additional amount of income tax to be disclosed is at least Rupees fifty lakhs. You are also required to pay the entire amount of additional tax and interest before filling the Settlement application and attach the evidence of payment.
The Second essential condition is that you should not have made another settlement application, after 1st June 2007, which has been allowed to be proceeded with.
The Third essential condition is that no assessment order should have been passed by the concerned income tax authority for the assessment year for which you are approaching the Commission and the statutory time-limit for passing of assessment order for that year has not lapsed. An assessment shall be deemed to have been completed on the date on which assessment order is passed ( w.e.f 01.06.2007-CBDT circular 16/2014 dated 17.11.2014) .
There are other procedural requirements such as payment of prescribed fees and informing the concerned Assessing officer on the same date till the prescribed Form no.34 BA.
Settlement application is to be filed only in the prescribed Form No.34-B notified under the Income Tax Rules, 1962, which is to be signed by the applicant himself. The application can be made personally or by post. The applicant or his authorized representative can make application in person. Application can also be sent by registered post addressed to the Secretary of the concerned Bench of the income tax Settlement Commission.
The application should be accompanied by the proof of payment of additional Tax and interest under section 234B and 234C on it. The interest on the additional tax is chargeable till the date of admission of the application.
The application has to be accompanied by a copy of Challans of payment of tax which have to be attested by the applicant.
The application is also to be accompanied by the evidence of payment of the prescribed fee.At present the Amountof the fee is Fixed at Rs. 500/-.
An application can be rejected by the Commission during the course of proceedings under section 245D (1) within 14 days of filling of the Settlement application. If the application is not rejected by the Commission within 14 days, it is deemed to have been admitted by it.
The Commission can reject the application, if the applicant does not satisfy the 3 essential condition mentioned in answer no. 5 above. Further, an application not accompanied by the proof of payment of full amount of additional tax and interest and the prescribed fee of Rs. 500/- is also liable to be rejected. A copy of the application is to be sent to the concerned income tax Authority on the date of application, failing which it may be rejected.
An applicant whose application has been rejected under section 245D (1) can still file another application for settlement.
No, an applicant cannot withdraw the application after filling before the Settlement Commission.
(i) You can make application by registered post addressed to the Secretary of the concerned bench of the settlement commission. However in case of a postal application, the date of receipt in the Commission shall be treated as date of application.
(ii) On your behalf, an authorized representative can also make application in person. An "authorised representative" means a person authorised by you in writing to appear on your behalf, being:
The application filed by you is considered admitted and allowed to be proceeded with if it is not rejected by the Commission within 14 days under section 245D (1). After this, the Commission forwards the copy of application along with ammexures and calls for the report of the Commissioner of Income Tax under section 245D (2B). The Commission may treat an application as valid by passing an order under Section 245D(2C), If the report of the Commissioner is not received within the period of 30 days from the day the letter from the Commission is received by him, or on the basis of its satisfaction on the basis of the report of the Commissioner. The order of the Commission is to be passed within 15 days of the expiry of the period of 30 days given to the Commissioner for submitting the report.
The Commission is required to give an opportunity before rejecting the application under section 245D (1) or before treating the application as invalid under Section 245D (2C).
Once a Settlement application has been held as valid, the Commission calls for Commissioner's reports within 45 days under rule 9. A copy of this report is shared with the applicant to allow him to give rejoinder. The Commission takes into account both and provides opportunity to both sides, i.e. the Income Tax Department and the applicant by fixing hearings on different dates. The Commission is required to pass the final Settlement order under section 245 D (4) within 18 months on the application.
If the Settlement Commission is not able to pass Settlement application within 18 months, the case gets abated to the concerned income tax Authority.
This will depend upon whether the settlement application relates to only one previous year or more and whether any return of income for the relevant previous year(s) has been filed or not.
Where the income disclosed in the application relates to only one previous year-;
The additional amount of income-tax payable in respect of the income disclosed in the application relating to the previous year referred to in sub-section (1B) shall be,-
For calculating interest under section 234B & 234C of the Income Tax Act, 1961, calculate additional tax as explained in answer no. 13 above. Check up whether you were liable to pay advance tax under section 208 or not. If you were liable, calculate interest for default in payment of advance tax under section 234B and for deferment of advance tax under section 234C, for each assessment year included in the settlement application, separately.
(1)-where an application under sub-section (1) of section 245C for any assessment year has been made, the assessee shall be liable to pay simple interest at the rate of one per cent. for every month or part of a month comprised in the period commencing on the 1st day of April of such assessment year and ending on the date of making such application, on the additional amount of income-tax referred to in that sub-section;
(2) For calculating the interest for deferment in payment of advance tax under section 234C, you have to work out the shortage in payment of advance tax as per the prescribed schedule.
For calculating the interest under section 234C for each year included in the settlement application, calculate the shortfall in payment of advance tax against the additional tax calculated as explained in answer 13 above for each scheduled date above. Calculate 1% of the shortfall, wherever occurring, for a period of 3 months.
For the exact manner of calculation of interest, please refer sections 234B & 234C.
Once you file an application before the settlement Commission, your jurisdiction for the purpose of Income Tax Act and the Wealth Tax Act, gets shifted to the Income Tax Settlement Commission for the assessment proceedings for which you have filed settlement application. However, sometimes Income Tax Settlement Commission authorises the Commissioner of Income Tax to carry out specific investigation to assist the Income Tax Settlement Commission in the matter. You may however like to verify whether the Commissioner has been authorised by the Income Tax Settlement Commission or not.
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