How to deal with income tax department notice?

It is very common to receive a notice from the Income Tax Department. These notices create a sense of panic amongst assessees. But to say the least, a lot of such notices are sent in the normal course of processing tax returns. It might be for routine inquiry or a request for clarification. So there is absolutely no need to panic in the first place.

Steps to deal with Income Tax Notice

  1. Don’t ignore the notice

    A lot of these notices can be attended by sincere communication. If you ignore it, you might end up paying penalty along with your income tax payments.

  2. Check the notice for your basic details

    Check PAN name, assessment year, assessing officer and income tax ward details. Make sure that the notice is intended for you only.

  3. Preserve the notice

     Whether received physically or via email preserve it. Because the notice contains the date of order and/or communication for further communication with the IT Department.

  4. Identify the reason for the notice

    In most of the cases, you would be able to identify the reason just by casually reading it. These reasons could be a mismatch in TDS or defect in return etc.

  5. Check the validity of the notice

    There are certain time limits prescribed by the IT department, subject to which any notice can be issued by the department. Check a section mentioned in the notice in pursuance of which the notice has been issued. For example, a notice under section 143(3) for scrutiny assessment has to be served within six months of the end of the financial year in which the return was filed. So, if the notice is served later than this period, it will be considered invalid.

  6. Provide Supporting

    The department would ask you to provide the supporting to support your defense. So the best way to respond to notice is with the help of supporting documents.

  7. In time response

    Even if you are unable to gather all the supporting documents, you should write the same to the office.

  8. Take professional help

    In case of serious matters involving scrutiny assessment, income concealment, etc take professional help from a Chartered Accountant.

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Common reasons for Notice and their resolution

 

Section Reason for Notice Probable resolution
139(9)

For filing a defective return

Identify the defect mentioned in “Annexure A” and submit a return in response to the notice of defective return u/s 139(9)

142

For not filing the income tax return or for the scrutiny of a documents & accounts in support of the return filed.

File the return within the time limit mentioned in the notice.

Submit a proper response if you are not required to file a return.

Present before assessing officer with books of accounts and supporting documents if demanded by Assessing Officer.

143(1)

For adjustment or additional tax demand if an error or incorrect information is detected in the return. 

Pay outstanding tax dues if any.

Correct the errors and file rectification return u/s 154 if required.

143(2)

For scrutiny assessment after a detailed inquiry by assessing officer.

Your case has been selected for scrutiny and you should provide all the relevant information, pieces of evidence as demanded by IT authorities.

148

For reassessment, if the officer believes some income has escaped assessment.

Provide all the relevant information, evidence as demanded by IT authorities.

156

For dues (tax, interest, penalty, fine or any other sum) payable by the assessee)

 

 

Submit a response to a notice from e-filing account.

Pay tax if you agree.

Provide a reason if you don’t agree with the demand.

245

For adjustment of a refund with any demand due

Your refund has already been adjusted against outstanding tax demand so no further action required.

FAQs

What is section 131(1A), and what are reasons to get notice u/s 131(1A)?

Assessing Officer is of the opinion that tax payer are concealing the income or likely to conceal income then tax payer will receive notice u/s 131(1A). This notice is basically intimation that AO is initiating an enquiry or investigate into the matter. The AO should expect the attendance of tax payer and books of accounts, statement of all bank accounts, details of all properties acquired during the financial year.

What is scrutiny assessment u/s 143(3)?

This is a detailed assessment and is referred to as scrutiny assessment. The scrutiny is carried out to confirm the correctness and genuineness of various claims, deductions, etc., made by the taxpayer in the return.

How do I respond to an income tax notice?

Login to your account on the e-filing website by entering your credentials: User ID (PAN), password, and captcha code.
Click on the ‘e-file’ tab and select ‘Response to outstanding Tax Demand’ option.

Understand Income Tax Notices

Identifying the type of Notice Taxpayer has Received

Before responding to any Income Tax notice, you need to make sure that it is a genuine notice and it is addressed to you. You can do that by checking the basic details as shown in a sample notice below:

You need to check:

  • Your name and address
  • Your PAN number
  • Assessment year, type return, ITR type
  • Name and designation of issuing officer
  • Communication reference number

Once you have verified the above details. Understand the intent of Income Tax Notice and requirements stated by the Department. Let’s take a look at the scenarios in which the income tax department may issue Notice.

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Defective Return

In case of any defects in the Income Tax Return, Assessing Office can issue notice u/s 139(9). You need to file a return within 15 days of issue of notice in this case.

Here are some of the instances when a return can be considered a defective return:

  • Any required details are not provided in the annexures, statements and columns of the income tax return.
  • Any tax dues are not paid before filing the income tax return.
  • Assessee is required to maintain books of accounts but he/she has filed the return without providing details of the balance sheet and profit and loss account.
  • Details of auditor and audit report are not provided in case of audit applicability.

Probable resolution

In case of a notice of defective return u/s 139(9), the notice will contain ‘Annexure-A’. which will contain error description & probable resolution. Here’s an example:

Annexure – A
Sl. No Error Code Error Description Probably Resolution
1 31 Taxpayer having income under the income head “Profits and gains of business and profession” but has not filled balance sheet and loss account as required in explanation(d) under section 139(9) read with section 44AA The part A of the profit and loss account and part A of the balance sheet should be entered in the corrected return without which the return filed earlier is liable to be treated as invalid 

 

Time limit

The assessee has to rectify the defect prescribed in the notice within 15 days from the date of the notice. The Assessing officer may condone the delay and treat the return as a valid return. Provided a return is filed before completion of an assessment.

Scrutiny Assessment

Assessing officer (AO) may issue a notice for scrutiny assessment u/s 143(2) to confirm any of the following:

  • A taxpayer has not understated the income; or
  • Has not claimed excessive loss; or
  • Has not underpaid the tax in any manner

The AO will issue a notice requiring the taxpayer to attend his office or to produce any evidence, supporting documents or information in support of his return.

Probable resolution

The taxpayer or his representative has to appear before the assessing officer. Present his arguments, supporting documents and information on the matters/issues required by the officer.

Time limit

Notice issued by AO u/s 143(2) will contain date and time on which the taxpayer needs to appear in his office. The taxpayer may ask for an extension in case of unavoidable circumstances. Notice u/s 143(2) can be issued within 6 months from the end of the financial year in which return is is filed.

Tax Credit Mismatch

When TDS amount or self-assessment tax/advance tax details entered in return do not match with your Form-26AS then you will receive an intimation u/s 143(1) with a tax credit mismatch.

The notice will contain amounts entered by you and the amount calculated by the income tax department as shown below:

In case of any mismatch resulting in “TAX PAYABLE”. You will have to verify the details and take a proper course of action to correct any errors.

Probable resolution

It is possible that your employer/deductor has made any mistakes while filing TDS return. As a result, the amount which you have claimed and the amount in your Form-26AS will vary. You have to ask your employer/deductor to revise the TDS return. So that you can claim credit for TDS which was deducted from your income.

Once the return is revised and correct figures are reflected in Form-26AS. You have to rectify your return u/s 154 due to tax credit mismatch.

If the details entered are correct but the tax computation is not proper, then it will vary with the tax calculation provided by Income Tax Department. Here you may have to pay the remaining tax dues and submit the response for outstanding tax demand.

Tax Return not Filed

This is one of the most common income tax notices. In this case, the IT Department will send you a notice to file a return without further delay. Department can send a notice for past 6 assessment years.

Department also has a system called ‘Non Filers Monitoring System’.  Where based on your transactions, a department may send you a notice to file a tax return.

Probable resolution

The taxpayer needs to respond to a notice within the time limit provided in the notice. If his total income is not taxable then he can respond to notice and provide the same reason.

If his total income is taxable then he must file a return at the earliest otherwise he may be penalized. In case of delayed filing, the department can levy a penalty of Rs 5,000 per year. However, the penalty is not mandatory and depends upon the discretion of the assessing officer. However, if any tax is due, the department charges 1% interest per month from the due date of filing.

Discovery, Production of Evidence

In the case of concealment of income, IT Authority may issue notice u/s 131(1A). Present before him and produce books of accounts and other relevant documents. Failure to comply with this notice is punishable with a penalty of Rs. 10,000 for each default. The books of accounts and other evidence produced by the taxpayer may be impounded by IT Authorities for the proceedings.

Probable resolution

The taxpayer or his representative has to appear before the assessing officer. Present his arguments, supporting documents and information on the matters/issues required by the officer.

FAQs

How do I respond to an income tax notice?

Login to your account on the Income Tax e-filing website by entering your credentials: User ID (PAN), password, and captcha code.
Click on the ‘e-file’ tab and select ‘Response to outstanding Tax Demand’ option.

What is intimation u/s 143(2)?

The notice u/s 143(2) is issued with the aim of ensuring that the taxpayers has not understated any income or shown excessive loss or has paid lower tax. This notice is also known as scrutiny notice. Moreover, notice u/s 143(2) can only be issued if income tax return has been filed by the taxpayer.

Consequences for non-payment of tax demand?

1. Non payment of tax demand attracts penalty and prosecution as per the provisions of the Income tax Act,1961.
2. You are also liable to pay simple interest at the rate of one per cent for every month or part of a month for the period of default in accordance with section 220(2) of Income Tax Act, 1961

Income Tax Notice u/s 139(9) : Responding to defective return notice

What is a defective return?

Filed ITR is defective if any:

  • Discrepancy or
  • Mistake or
  • Information is missing

A notice u/s 139(9) is sent by the IT Department if the return is found defective.

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Defective Return Notice u/s 139(9)

Notice u/s 139(9)

How will I receive notice u/s 139(9)?

Communication on Email

  • The system auto-generates the notice u/s 139(9) and communicates to the assessee on the email entered while filing the income tax return.
  • The sender of these email is usually CPC i.e. Central Processing Centre.
  • The subject of the email is “Communication u/s 139(9) for PAN AWZXXXXXXK for the A.Y.2019-20”. The PAN and AY (Assessment Year) would be different in each case.
  • The notice is attached to the email. It is password protected . The password to open is PAN in lower case and the date of birth in DDMMYYYY format. Eg: aagpr1212a02101980 for PAN: AAGPR1212A and DOB: 02/10/1980.

What are the reasons for defective return notice u/s 139(9)?

Common reasons for defective return notice are as follows:

Mismatch in TDS and Income Details

Defective Return notice u/s 139(9) is issued when there is a discrepancy between Income details filed in ITR & TDS deducted as per Form 26AS. Following are the common reasons for mismatch notice if TDS is deducted under section:

  • 192 but Income is not taxed as salary income,
  • 194J but income is not taxed as business and professional income,
  • 194H but Income is not taxed as business and professional income,
  • 194A but Income is not taxed under Income From Other Source,
  • As per Form 26AS but income is not shown in filed ITR.

To know the exact defect look at the TDS Section mentioned in your Form 26AS and Income Details in ITR.

Example

Ajay earned income from freelancing during FY 2018-19. Freelancing income is considered as Professional Income and TDS is deducted u/s 194J of TDS. However, he reported the income under the head Salary. Here he would receive defective return notice with a mismatch in TDS and Income Details. Form 26AS with TDS Section 194J

ITR filed with Salary Income

Part B Gross Total Income
B1 Income from Business and Profession
Note – Enter value from E8 of Sch BP
0

B2


Salary / Pension

(i) Gross Salary 685074
(ia) Gross Salary as per 17(1) 685074
(ib) Value of
perquisites as per section 17(2)
0
(ic) Profits in lieu of salary as per section 17(3) 0

Return is Filed with Tax Dues

Defective return notice u/s 139(9) is issued when there is a discrepancy between total taxes paid as per Form 26AS and total taxes payable in filed ITR. Following are the common reasons for tax dues:

  • Income added in return but filed without payment of tax dues,
  • Income is added in return but filed without TDS details,
  • The Income added in return but filed without self-assessment tax payment challan details,
  • Income and TDS are added in return but filed without payment of penalty interest.

You can know the defect from ITR and Form 26AS. Let’s take an example: Vijay is a salaried individual with freelancing income. His employer deducted his TDS on salary, However, no TDS was deducted on his freelancing income. While filing ITR-4 for FY 2018-19, he offered all his incomes but forgot to make payment of self-assessment tax before filing ITR. In this case, he would receive defective return notice for return filed with tax dues.

Return filed without P&L and Balance Sheet

Individuals should maintain P&L and Balance Sheet under the following two conditions:

  • Business & Profession income is earned and,
  • An individual is not eligible to opt for presumptive taxation scheme u/s 44AD, 44ADA and 44AE.

IT Department issues notice u/s 139(9) if return filed with P&L and Balance Sheet details and assessee files return is without it. Following are the common reasons for defect:

  • Business & Professional Income is added without details in P&L and Balance Sheet,
  • Income of Business & Profession is added in P&L but Balance Sheet is not filed,
  • Business & Professional Income is added in P&L but the Balance Sheet is partially filled.

You can check the Schedule P&L and Schedule Balance Sheet in filed ITR to know the defect.

Example

Aman is a general commission agent. And he earns commission income from different companies during FY 2018-19. In this case, his income falls under the head Business & Profession. And he is not eligible to opt for presumptive taxation scheme u/s 44AD. He did maintain P&L and Balance Sheet. But while filing his ITR for FY 2018-19, he forgot to fill details in Balance Sheet. In this case, he would receive defective return notice for return filed without P&L and Balance Sheet.

Filed Return without Tax Audit Report

Individuals are required to get their books of accounts audited in the following cases:

  • Total sales, turnover or gross receipts, in business, exceeds INR 1 Crore in any previous year,
  • Gross receipts in profession exceed INR 50 Lakh in any previous year,
  • The income from business/ profession is lower than the presumptive income calculated as per section 44AD/44ADA and the total income is more than INR 2,50,000.

Any Practising Chartered Accountant can carry out tax audit on books of accounts of a taxpayer. The prepared tax audit report is required to be submitted on the income tax e-filing portal. It also needs to be approved by a taxpayer before filing ITR. In following cases you can receive defective return notice when returns are filed without an audit report:

  • Carried out by CA,
  • Submitted by CA or,
  • Accepted by a taxpayer.

For example, Bharat is a salaried individual who also does F&O Trading. His turnover from trading is INR 2.5 Crore. Here, he is required to get his books of accounts audited. But while filing ITR-3 for FY 2018-19, he did not get his books of accounts audited. In this case, he would receive defective return notice for the return filed without a tax audit report.

How to respond to defective return notice u/s 139(9)?

  1. Visit e-Filing portal

    Login to the e-Filing portal using valid credentials and click on Pending Actions > E-Proceedings from the dashboard.

  2. Click on Self

    Navigate to the Self section and click on “View Notices

  3. Notice or Letter

    Click on Notice/Letter pdf. and scroll down and you will have the option to download the notice.

  4. Submit Response

    Click on the submit response option.

  5. Agree or Disagree

    Choose from the options provided as to whether you agree with the terms of the notice or disagree.

  6. Agree with the Notice

    If you select Agree, then select Mode of Response as Online (Click Proceed with ITR and you will be able to open the ITR form online for the correction of defect) or Offline (upload the correct XML/ JSON file as applicable) and click Continue.

  7. Disagree with Notice

    If you select Disagree, then select the reason from the list of options given in the dropdown and click Continue.

  8. e-Verify the Response

    Select the Declaration checkbox and click Proceed to e-Verify.

  9. Successful Submission

    After successful e-Verification, a success message is displayed along with a Transaction ID. Please keep a note of the Transaction ID for future reference. You will also receive a confirmation message on your email ID registered on the e-Filing portal.

FAQs

What are the consequences of not filing a response to notice?

If you don’t file a response within 15 days then your return can be treated as an Invalid Return. Invalid return means no return has been filed for that year. And you can end up with penalties for failure to file return in time. However, you can file a revised return afterwards to save yourself from a penalty.

Do I need to e-verify the ITR filed in response to defective return notice?

No. There is no need to e-verify the ITR filed in response to defective return notice.

How can I download an acknowledgement of ITR filed in response to defective return notice?

You will receive an acknowledgement to your email mentioned in return. You can also download the same from your account on the income tax e-filing portal.

What should I do if the time limit has expired and I wish to file a response?

You can file the revised return from your login on Income Tax E-filing Website. However this return is to be filed u/s 139(5) and not under 139(9) with details of the original return. For FY 2018-19 (AY 2019-20) the due date to file revise return is 31/03/2019.