ITR Filing: Reason why your ITR has been shortlisted for Scrutiny by Taxmen; Know Here

The Income Tax Department issued guidelines earlier this month for choosing tax returns for scrutiny in the financial year 2024-25. This is good news for taxpayers since it clarifies why their returns may be picked for further review.

Each and every year, the Tax department chooses certain ITRs for Scrutiny. The selection of those ITRs is made mainly based on Computer Algorithms termed Computer Assisted Scrutiny Selection (CASS) wherein the computer flags the assesses’ income tax returns for possible tax evasion based on risk parameters such as high refund claim, high deduction claimed, decline in gross profit or net profit, international transactions, increase in expenditure disproportionate to revenues, non-matching of opening stock with previous year closing stock, transactions with non-ITR filers, and so on.

In addition, specific cases are manually selected for Scrutiny assessments, and the Central Board of Direct Taxes (CBDT) issues rules for such Compulsory Manual Scrutiny selection each year.

CBDT has issued certain guidelines and specified criteria for choosing the ITRs for scrutiny. The breakdown of key criteria is given below:

Mismatched Information

Discrepancies between your ITR and information obtained from other sources, such as banks or law enforcement, could stir scrutiny. This could include undeclared income, suspicious transactions, or unreported tax returns.

Non-Filing of ITR

Failure to file your ITR after receiving a notice is an assured way to get on the scrutiny list. The department will look into the reason for non-filing and assess any owing taxes.

Tax Evasion as Red Flag

If the department suspects you are underpaying taxes, your return may be selected. This could be due to variables such as high expenses relative to declared income or living beyond your reported means.

An Advocate of the Supreme Court of India said, “Returns coming from surveys conducted under Section 133A of the Income-Tax Act of 1961 (the Act) that identify possible tax evasion would be subjected to mandatory scrutiny. Assessments produced from such surveys must be administratively approved and transferred to Central Authorities within 15 days for further review. Example: If during a surprise inspection, the tax department finds that the stated income does not match the real business operations, they would want to scrutinize the returns more closely.”

Specific Scrutiny Cases Beyond the Basics

The guidelines go deeper, detailing particular cases that require mandatory investigation:

Search and Seizure Operations

Tax assessments that arise from searches and seizures conducted before April 1, 2021, will also be scrutinized. This covers ITRs filed within the year preceding the search. If there is a raid at the office and irregularities are discovered in the financial records, the return may be picked for further investigation.

Sharing of Information

If a law enforcement agency produces specific evidence of tax evasion for a given assessment year and the taxpayer has filed an ITR for that year, the return must be scrutinized.

Failure to respond to Notices

Cases in which taxpayers do not react to notices provided under Section 142(1) of the Act will be scrutinized. The underlying documents that prompted these notices will be uploaded for assessment by the NaFAC, allowing for additional action in accordance with the Act’s requirements.

For example, if a person ignores a tax department notice requesting financial data for their business, his return may be picked for examination.

Repeating Tax Issues

Cases with significant tax additions in past assessment years that exceed defined levels will be examined. The Jurisdictional Assessing Officers will compile a list of such cases with administrative approval before submitting it to higher authorities.

CBDT also released guidelines for selecting the cases listed below for manual scrutiny assessment during the financial year 2024-25.

• Organisations that have not been given income tax registration or whose registration has been revoked but are still claiming income tax exemption.
• Even after the department has issued a notice, no return is filed.
• An issue that has been included in previous years and validated by appellate authorities concerning amounts greater than 25 lacs in metro cities and 10 lacs in nonmetro cities.
• The department carried out a search or survey.

The aforementioned scrutiny assessment will be mainly carried out in a faceless manner, wherein initial notices will be issued by the jurisdictional Income Tax officer and thereafter all the records will be transferred to the National Faceless Assessment Centre, which will carry out assessment in a faceless manner, i.e. the jurisdiction of the assessing officer is unknown and it is only during assessment proceedings before taking any adverse order that an opportunity of hearing is granted through video conferencing.

However, cases involving non-resident assesses, international transactions with sister concerns, and cases where a search and survey have been conducted will not be subjected to faceless assessment, but will instead be processed through e-proceedings, in which notices will be issued online and replies will be filed online; however, assessees may approach the officers because their jurisdiction is disclosed in the notices.

Breakdown of Scrutiny Process

The guidelines also outline the procedure for managing cases that have been selected for scrutiny.

Centralized Inspection

Many scrutiny cases will be moved to “Central Charges” under Section 127 of the Income Tax Act. This means that a dedicated team of tax officers will conduct the scrutiny procedure.

Issuance of Notice

The taxpayer will get a notice under Sections 142(1) or 143(2) of the Income Tax Act advising them of the scrutiny and describing the next steps.

Prior Approval

Certain cases, such as those involving information from law enforcement or search and seizure activities, require prior clearance from top tax officials before beginning scrutiny.

New Guidelines Main Objectives

Targeted Scrutiny

The guidelines specify criteria for selecting ITRs for scrutiny. This allows for a more focused investigation of potential tax evasion rather than random or haphazard decisions.

Streamlined Procedure

The new procedures are intended to streamline the scrutiny process. This involves using digital platforms like the National Faceless Assessment Centre (NaFAC) to conduct faster and more efficient assessments.

Fairness and Transparency

The guidelines prioritize transparency by helping taxpayers understand why their ITRs may be selected for scrutiny. This promotes a fairer system for all.