How to respond to income tax notices?

An encounter with the income tax department is usually not a very pleasant experience. However, one should also keep in mind that not every communication is frightening since lately the department has increased the frequency of sending income tax notices.

Through this blog, I am going to answer the most basic question- What to do when you receive an income tax notice?

Following are the major points to be taken care of:

1. Read the letter: One must never make pre-judgments in this case as often the letter is just in the form of intimations or simply a confirmation. So it is important to maintain your calm and read the letter carefully.
2. Analyze what the department requires and the validity of the notice: Not every income tax notice is frightening, so relax! Try to understand what the department requires from you. There might be chances that the notice is time barred, so you also need to be aware of the relevant timelines.
3. Check the calculations and determine its accuracy: Again, the foremost thing is to read the communication very carefully and understand the reason for the same. So one should carefully analyze whether what is written in the notice is accurate or not.
4. Time to consult an expert: If even after a careful read, you are confused, do not hesitate in contacting a professional who is an expert in the field.
5. Timely response: This goes without saying that one must respond to the communication on time as this can have some serious implications in the form of penalties and may even lead to prosecution. It should also be ensured that the reply is in a clear and concise manner and should include the relevant information asked. In case the department wants you to appear in person, then either attend his office in person or through a duly appointed authorized signatory.

Once you know how to approach the authority, it would be useful to understand different kinds of communications that might be received from the department. I have made an attempt to discuss the major ones below:

1. Notice under section 142(1): This has two sub parts to it, as follows:

• Notice requiring filing of income tax return within a specified time: If a person who is required to file an income tax return has not filed the return within the due date, i.e. 31^st July, the person is most likely to receive such notice from the income tax department. It is very important to file a return within the specified time mentioned in the notice as the failure to do this can initiate a best judgment assessment, without even giving you an opportunity of being heard by furnishing a show cause notice.
  It is recommended to file an Income tax return even if your income is below the maximum exemption limit as discontinuation of return filing most likely attracts an income tax notice under this section.

• Notice calling for information: This notice basically requires you to furnish basic documents and information to start with the scrutiny proceedings. This basically marks the initiation of your proceedings. It is pertinent to furnish a suitable reply alongwith the relevant documents and information.

2. Notice under section 245 adjusting the previous years’ refunds: Lately, this has been the most common communication being received by the individuals. This happens whenever you claim a refund in your income tax return and your refund is adjusted against any pending demands. Before adjusting the refund, the department does give you a 30-day period to respond to the notice. The first and the foremost thing to do here is examine the previous year pending demands that are intended to be adjusted. Once you are aware of the pending demands, either file a rectification/ revision keeping in mind the relevant timelines of filing the same. Once you are done with this, just prepare a suitable reply to the department within 30 days.

3. Notice under section 139(9) for filing a defective return: This is received when your return is defective. The department gives you a chance to rectify the return. The time period to reply to such notice is 15 days. A return is considered as defective due to the following reasons:
   1. If you have filed your return without paying required tax amount
   2. In case you have not attached the balance sheet, profit and loss account or a tax audit report, when you were required to do so.
   3. In case you have not attached the proofs of taxes paid

4. Mismatch in tax credit: This mainly happens when you fail to cross check your form 26AS* with your form 16/ 16A while claiming tax credits at the time of filing the return. It is pertinent to note that the department will always go by form 26AS and in case of any discrepancy in the form and your return, it will issue a notice requiring justification for the mismatch. In such cases, you need to identify the reasons for such discrepancy and intimate the mismatch to the vendor who has deducted your tax at source or your employer who has either deposited the tax with the wrong amount or deposited in someone else’s PAN. In either cases, you would need to revise the return or ask the vendor or your employer to make the necessary changes in his TDS return.

*Form 26AS is a document issued by the Income tax department that includes all the details of your tax deducted at source, advance taxes paid, self-assessment tax paid, refunds issued.

5. Intimation under section 143(1): This intimation is basically received once the tax department has performed an arithmetical accuracy check on your return filed. This is basically issued if there is a demand or a refund on a preliminary check of your return. If there is a demand, you must pay the demand within 30 days if no rectification or revision is being filed for the same.

6. Notice under section 143(2): This is basically your scrutiny notice and you should immediately consult your tax consultant on receiving the same who can assist you in filing an appropriate reply to the same and also act as your authorized representative in the subsequent hearings.

7. Notice under section 148: A notice under section 148 is issued when the tax officer has reasons to believe that your income has escaped assessment in the previous 4 or 6 or 16 years (time period depends on the income likely to be escaped assessment and the asset to which the income relates to). This notice generally intimates the fact that your previous year’s assessment has been opened or re-opened and a return is mandatorily to be filed in response to this notice within the specified time. Again, it is highly recommended to hire a consultant for the same.

Always remember that if you are not involved in any kind of tax evasion or concealment of income, you have no fear and you should approach the authorities confidently. In no case you should ignore the notice as non-responding to the notice could cost you a lot more time, money and unnecessary harassment than filing an appropriate timely response.