IT ScrutinyModus Operandi of Income Tax Scrutiny

The main objective of the IT officer during scrutiny is to make sure that the income shown in the return is real and there is no tax evasion. The expenses incurred are also scrutinised to find out whether they are actually incurred and are not fictitious. For this, the assessing officer calls for the following documents/information:

  1. Summary of all the bank accounts and copies of the bank pass book/statement explaining each dedit and credit.
  2. Details of the family members living with assessee.
  3. Investments made in immovable properties, FDRs, shares, debentures, bonds and sources of funds for making such investments by assesee and his family members.
  4. Details of all 12 months’ credit card statements and source of payment thereof.
  5. Details of loans accepted and given during the year especially friends and relatives, and also confirmation from borrowers alongwith their respective PANs.
  6. Details of gifts given and taken during the year.
  7. Details of household expenditure and drawings made to meet it.
  8. Details of foreign travel/ packaged tour undertaken and expenditure thereon.
  9. Club membership and annual subscription.
  10. Details and source of expenditure on children’s education.
  11. Details and source of expenditure on family weddings, parties and any other festive occasion held during year under scrutiny.
  12. Details of motor vehicles held and source of purchase thereof.
  13. Details and proofs of rent paid during the year for which HRA has been claimed as exempt.
  14. Details and proofs of donations made for which deduction has been claimed u/s 80G.
  15. Source of income of minor child and assets held by him.
  16. Details of household electricity expenses and the electronic gadgets in home.

Help during assessment stage:

  1. It should be ensured that all the credits of income appearing in the bank statement/pass book have been shown in the return. A balance sheet should be prepared for each year which keeps a   proper track of assets and incomes.
  2. Adequate withdrawals (cash or bank) should be made for personal and household expenses. The ITO would be smart enough to make an estimate that how much money a family like yours would be requiring for household needs (based on the size of family and cost of living in the city) and compare it with withdrawals made by the assessee for the given purpose. If there is shortfall then it is presumed that there is supply of black money which is generally spent on day-to-day expenses.
  3. Ensure that payment for the expenses charged on the credit cards is done through regular bank account and not secret bank account.
  4. A proper record should be maintained of the investments made along with their sources and supporting documents. All unexplained investments would be added as income.
  5. Income of minor child should be included in the income of parent whose total income is higher, before including the income of minor child.
  6. If HRA exemption is claimed, then the proof of rent paid has to be furnished. Also ensure that if rent is paid to one’s parents or any relative, then the rent is shown in the return of income of the person receiving the rent.
  7. If any asset is purchased by spouse out of the money gifted by assessee then the income from such asset would be included in the income of assessee.
  8. One should generally not give interest-free loans when one has already borrowed money and is repaying that with interest. The most common disallowance/addition that is being made nowadays in the scrutiny assessment orders is the addition of notional interest on interest free loans given to someone. It has to be proved that the loans are genuine and reasons for giving interest-free loans are also genuine.
  9. Proper record should be maintained of the gifts received including gift deed, PAN and bank statement of donor. With effect from April 1, 2006, gifts received from non-relatives in excess of Rs.50,000 would be taxable as income of receiver. However, gifts from relatives and those received on occasion of marriage of individual are exempt without any limit.

The scrutiny assessment should be completed in 21 months from the end of the relevant assessment year. For instance, The scrutiny for assessment year 2005-06 has to be completed by December 31, 2007.

No doubt, the scrutiny process causes hardship to the assessee as the main focus of the IT department is to recover as much tax as possible. But taking proper measures from the beginning itself can mitigate the trouble.