Income Tax ScrutinyIt seems that the government is all set to make Income Tax more complex and wipe away transparency from it. Taxpayers have not even recovered from the filing of cumbersome new ITR forms that it is reported by IT department to keep the scrutiny selection process away from the purview of RTI Act. This means an assessee will have no right to ascertain as why his case was selected for scrutiny by the department.

Moreover, the number of cases to be picked up for scrutiny will be increased from 1.5% to 2.5% of the returns filed in 2007-08 which will unearth more hidden income and thereby more tax revenue for the department. Around 15 % additional revenue is generated through the scrutiny assessments.

Scrutiny is the process of selecting some income-tax returns and examining them closely by calling for extra information and seeing if the details furnished are correct. It is an audit of the income-tax return filed by the taxpayer to assess his real tax liability.

The time limit for taking up a return for scrutiny is within one year from the end of the month in which the return is filed. For instance, if the return is filed on July 28, 2006 then the scrutiny notice can be served on the assessee upto July 31, 2007. The serving of the notice on assessee is important. If such notice is issued on July 29, 2006 but is received by assessee after July 31, 2007, it is not a valid notice. There is a penalty of Rs.10,000 for each failure to comply with the notice.

The scrutiny notice mentions assessee’s name, address, PAN and the year for which it has been issued. It will also give date and time when one has to appear before the ITO in his office with the required books of accounts and documents without pinpointing any specific allowance, claim, etc. made in the return. The ITO has the power to call for books of accounts of the assesse but not to detain them in scrutiny proceedings.

The assessment is completed after a number of hearings. One can personally attend the proceedings or engage a CA/lawyer to represent his case which requires a valid Power of Attorney/Vakalatnama.

Income-tax department selects cases for scrutiny through computer-assisted scrutiny system (CASS) which picks cases meeting parameters fed into it from amongst the returns filed. The system works in 60 cities well-connected through computer network. Besides, commissioners have also been allowed to pick up cases locally for scrutiny on account of specific information about an assessee. Moreover, information from third parties such as banks, credit card companies, mutual funds through Annual Information Returns filed by them also play an important role in selecting scrutiny cases.

The CBDT has prepared an elaborative plan for this fiscal to increase scrutiny in order to meet the hiked target of 2.5% of total returns :

  1. NSE 500 and BSE’s A group, comprising over 100 companies, non-banking financial companies or investment companies having a paid-up capital of more than Rs 10 crore will be compulsorily scrutinised.
  2. All stock brokers whose brokerage income is more than Rs 1 crore and also brokers who have claimed bad debts of Rs 10 lakh or more are set to come under the tax department’s scanner.
  3. All corporate entities that have witnessed a fresh capital infusion of more than Rs 50 lakh will face scrutiny.
  4. Companies that claim tax benefits under Section 72A of Income-Tax Act ( which allows companies undergoing an amalgamation or merger to set off losses against profits) can be scrutinised.
  5. Banks will now be required to furnish details on interest accruing on deposits even if the interest is less than Rs 5,000 and not liable to tax deducted at source.
  6. It is compulsory for firms to file their income tax returns even if they are exempt from tax.