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:

1. In a survey, the income tax authorities have a right to enter only those places which are deemed to be your place of business or profession, whereas in a search operation, they can search any place including your residential premises, vehicle, or any other place, without any restrictions of whatsoever nature, which they believe is required to be searched.
2. During a survey, the authorities can only impound your books of accounts whereas in a search operation, the power of seizure can be exercised to seize not only the books of accounts but also money, bullion, jewellery or other valuable articles (there are some exceptions to it one of which is stock-in-trade
3. It should be noted a person cannot be physically searched during the course of a survey although physical inspection of all the members present at the premises, including the ones who are about to leave or about to enter, is permitted in a search
4. The right of recording the statements made by the assessee is given to the officers in a survey In both the operations, the officers are authorized to record the statement of an assessee or any other relevant person; however, in the case of a search operation a statement made by the assessee can also be taken on oath which has severe implications. It may happen that even where the assessee has done something transparently and genuinely, his inadvertent remarks can create a situation for his own-self; therefore it is extremely advisable that the assessee acts in abona fide manner and makes his statements consciously.

If you are a party to a survey or search investigation, you must know the following:

• Material conducted in a survey or search investigation is valid for other kinds of investigation even if it is subsequently proved that the department had conducted a bogus investigation. So even if you, as a victim, are capable of proving that the investigation was not demanded, still the material once gathered is legally usable by the department for other proceedings in your case. This sounds strange but it is true!
• The investigation can only be commenced during normal working hours of the business although once commenced it can go round the clock
• You are entitled to call a Doctor if you need one. The officers cannot deny this right under any circumstances. Also, children are allowed to go to school. The woman of the house shall be inspected by a lady officer only and in certain religions where it is customary for women to not appear in front of public, i.e. in front of an unknown third person, then such women even where a search is on-going can legally walk away from that place. This is a special privilege because in normal circumstances people are neither allowed to enter nor allowed to leave the place till the time the entire investigation is completed
• Try to attack the problem, and not the departmental officer. Always, keep yourself cool and conscious
• Never give inaccurate details. If you don’t know something that belongs to previous years, you can always say let me verify before answering it to you. Take help of the books of account and other documents and give all the possible information, which is readily available
• Assessee may insist that he will give answer only once he is in a mental state of mind fit enough to provide the information required. Investigations generally go round the clock, and it is common to find officers and accountants spending 24-36 hours together at a stretch at the business premises. Take rest.
• If stock verification is being conducted by the department, or if counting of cash or jewellery is being done, always verify the details once the exercise is complete. You should check the particulars recorded and ensure that the method adopted is appropriate; price / rates considered are in line with the market, and finally arithmetical accuracy. Errors, if any, should be immediately brought to the notice of the personnel.
• The owner of the premise need not be present for an investigation to begin. Some people have an apprehension that without me being personally present, who will answer and what if someone gives a wrong answer. But such an excuse is not tenable in the eyes of law and irrespective of which corner of the world you are sitting in, the process will still continue the way it should.
• In a survey, the departmental personnel are not authorized to break open any lock or door
• If anything unaccounted for is identified during the investigation, remember your taxability will be at a flat rate of 30%, over and above which a handsome penalty can also be levied depending on further facts of the cas
• Last but not the least; never keep “irrelevant” data on your computer hard-disk. This is an advice better received sooner than later. In the author’s experience, it is not uncommon to find clients regretting the fact that some Sensitive data got confiscated along with the financial data. Remember, once the confiscation process starts, it is not permissible to ask the income tax officer to delete the client’s personal data and keep only official data on the hard disk taken under custody

Appeal can be filed before Commissioner (Appeals), when a tax payer is adversely affected by Orders as under passed by various Income tax authorities:

1. Order against tax payer where the tax payer denies liability to be assessed under Income Tax Act;
2. Intimation issued under Section 143(1) making adjustments to the returned income;
3. Scrutiny assessment order u/s 143(3) or an ex-parte assessment .order u/s 144, to object to income determined or loss assessed or tax determined or status under which assessed;
4. Order u/s 115WE/115WF/115WG assessing fringe benefits;
5. Re-assessment order passed after reopening the assessment u/s 147/150;
6. Search assessment order u/s 153A or 158BC;
7. Rectification Order u/s 154/155;
8. Order u/ s 163 treating the taxpayer as agent of a nonresident;
9. Order passed u/s 170(2)/(3) assessing the successor to the business in respect of income earned by the predecessor;
10. Order u/s 171 recording finding about partition of Hindu undivided family(HUF);
11. Order u/s 115VP(3) refusing approval to opt for tonnage-tax scheme by qualifying shipping companies;
12. Order u/s 201(1)/206C(6A) deeming person responsible for deduction of tax at source as assessee in default on failure to deduct/ collect tax at source or to pay the same to the Government;
13. Order determining refund u/s 237;
14. Order imposing penalty u/s 221 / 271 / 271A / 271AAA / 271F / 271FB / 272A / 272AA / 272BB / 275(1A) / 158BFA(2) / 271B / 271BB / 271C / 271CA / 271D / 271E

Tax payer can file appeal before the Income Tax Appellate Tribunal against the following orders:

1. Order by Commissioner(Appeals) u/s 250/154/271/ 271A/272A;
2. Order by Assessing Officer u/s 158BC(c) in respect of search action initiated during 30.6.1995 to 1.1.1997;
3. Order by Assessing Officer u/ s 115 VZC excluding the tax payer from tonnage tax scheme;
4. Order by Commissioner u/s 12AA on registration application by a charitable or religious trust;
5. Order by the Commissioner u/s 80G(5)(vi) regarding approval of a charitable trust for donations made after 31.3.92;
6. Order by Commissioner u/s 263 revising Assessing Officer’s order considered prejudicial to the interest of revenue;
7. Order by Commissioner u/s 154 to rectify an order u/s 263;
8. Penalty order passed by Commissioners u/s 271 or section 272A;
9. Penalty order passed by Chief Commissioner/ Director General/Director u/s 272A;
10. Order passed by Assessing Officer u/s 143(3)/147 in pursuance of direction of Dispute;

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.

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• Globalization of Indian enterprises abroad
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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.