What is Income Tax Notice?

Many of us have received income tax notices in the past. It can be intimidating at times, especially when one thinks that all the taxes have been paid properly and proper tax returns were filed on time. However, once we understand what such notices are in detail and how to respond to them, they may feel less intimidating.

Income tax notices are basically communication from the Income Tax Department that makes it mandatory for you to act upon them in a certain manner. They are different from income tax intimation that may not require any action to be taken.

Most notices come with a unique documentation identification number through a centralized communication system.

Income Tax Notice

An income tax notice is sent by the Income Tax Department to a taxpayer seeking some form of information or pointing out deficiency in any form or return filed by the assessee. The notice may or may not also include demand for payment of tax or penalty. It will, however, certainly include some information or clarification from the person.

Types of income tax notices and how to respond to them

A person can receive an income tax notice for various violations or clarifications and all these are filed under different sections of the Income Tax Act. Understanding these sections holds the key to learning what the notice is about and how to deal with them. Let us see some of them in details:

Notice under Section 142(1): This notice is given when the department needs some extra document from you to process the income tax return. It is a preliminary notice issued before the assessment.

How to deal with notice under Section 142(1): The notice has to be replied on the portal of the income tax department and there is no need to visit the I-T office. All a person has to do is furnish the document demanded or give reasons for not doing so. However, not responding at all is not an option.

Notice under Section 143(1): After a person files the income tax return, the tax department has the authority to serve notice under Section 143(1) for a year. Often called an intimation notice, it is sent after processing the return. The notice will intimate about any tax due beyond what has been declared as paid in the return or if any refund is due.

Mostly, the intimation under Section 143(1) is generated by computer and sent on the email ID of the person from the Central Processing Centre. A text message may also be sent to the assessee.

The notice may contain information about any deduction that may not have been allowed by the department or, discrepancy from Form 26AS, miscalculation of any penalty or interest etc.

How to deal with notice under Section 143(1): First, you have to decide whether you agree with the notice or not. If you agree, then in case the tax has to be paid, you can deposit the tax with the correct challan number. If it is a case of refund, then the refund will come into the account and you don’t have to do anything for the moment.

In case you don’t agree with the notice then you can file for online rectification under Section 154 or appeal under Section 246A.

Also, if there is no discrepancy in the assessment of the Income Tax Department and the return filed, then no action needs to be taken.

Notice under Section 143(2): Scrutiny is the key word for notices send under Section 143(2). This scrutiny could be random or through computer-based selection.

A notice under this section is sent to ensure that the taxpayer has not understated the income, computed excessive loss, or underpaid the tax in any manner.

The scrutiny could be limited—pertaining to certain section of the income or deduction; complete—when the entire tax return is selected for scrutiny; and manual—based on parameters set every year by the Income Tax department.

How to deal with notice under Section 143(2): When a scrutiny is ordered under Section 143(2) you have submit physical documents demanded by the department. In case the department finds them inadequate it can issue orders under Section 143(3) also.

If response is not sent within 30 days of the notice, the assessing officer can even send an order under Section 144.

Notice under Section 148: This notice is issued if an income tax assessing officer has reasons to believe that some income was not assessed. Basically, it means that there are reasons to suspect that you may not have disclosed full income. In such cases, a chance will first be given to the taxpayer to put in their case. Also, the assessing officer has to provide reasons for the suspicion for the escaped assessment.

If the assessing officers are not satisfied with the replies, they can issue notice for the reassessment.

How to deal with notice under Section 148: In case you get a notice under Section 148, you should first check the reasons provided by the assessing officer. If the notice has been sent for the right reasons you will have pay the tax and penalty. In case you find the reasons not valid, you can challenge the notice. 

Notice under Section 156: Unlike the previously mentioned notices, this is a notice of demand to pay tax or penalty. The notice will specify the amount to be paid and the due date, usually 30 days from the notice. 

How to deal with notice under Section 156: Usually there are three cases:

1) Agree with the demand: In this case you log into the https://eportal.incometax.gov.in/ and pay the demand after putting in the right challan number.

2) Disagree with the demand: In this case, too, you log into the portal and then give reasons for the disagreement. Also, it is suggested to go to court and try to get a stay order on the demand. Otherwise, you will have to pay a steep penalty on the demand, too.

3) Partly agree with the demand: In this case, you partially pay the tax and penalty and give reasons for not agreeing with the rest of the demand. Again, here you should approach court and try to get stay on the demand notice.

Notice under Section 245: There may be times when you are supposed to get a refund. The tax department, however, may issue a notice under Section 245, adjusting this refund for some past tax liabilities.

How to deal with notice under Section 245: There are two responses to Notices under Section 245 – Agree or Disagree. In both cases, you have to first log into the tax portal. If you agree then a simple click is fine. However, if you disagree with the outstanding demand, then you have to provide the reasons for doing so.  

Notice under Section 139(9): When the tax authority has reasons to believe that the return filed by a taxpayer is defective it issues a notice under Section 139(9). A defective return may pertain to a calculation error or some information that is missing or incomplete. 

How to deal with notice under Section 139(9): Identify the mistake or missing information mentioned in the notice. Log into the tax portal and refile the return so that all the issues mentioned are rectified.

Common Reasons for Receiving Income Tax Notices

There can many reasons for receiving income tax notices including defective return or not paying proper tax dues. These reasons may also include:

1) TDS – If the amount that one claims as tax deducted as source (TDS) in return does not match the actual amount in tax department’s records or in Form 16 or in Form 26AS.

2) Income – In case the income mentioned the return is not matching with Form 26AS or with information available with the tax department.

3) Deductions – If the deductions claimed in the tax return are in excess of what can be rightfully calculated.

4) Return – If the tax return itself has discrepancy of any sort or is late or has not been filed at all.

6) Bank accounts, high value transactions – If you fail to report an active bank account or high-value transactions as required in the return from.

7) Random scrutiny – The tax department also picks up returns on random basis for scrutiny. If your return happens to be among them, then you may get a notice.

8) Change of job – Many times people forget to disclose income from previous employer when they change in the middle of a fiscal year.

Legal Implications and Consequences

All income tax notices must be responded to mandatorily. In case, a person fails to respond, they will be liable to pay a penalty or the refund amount can be adjusted against past dues. Most importantly, the person may be liable to legal action.

Hence, it is important to respond to tax notices within the due date. This will help avoid legal proceeding and losses. 

In case you disagree with the notice, it is better to get advice from a legal representative before contesting a claim.

Tips for Avoiding Income Tax Notices

Income tax notices create unnecessary hassle for receivers. It is best to take measures beforehand so that we don’t get such notices. Here are some examples:

1)  Always match your taxes paid in return with Form 26AS.

2) High-value transactions that are relayed to tax department. These may include:

a) Cash deposit or withdrawals of over Rs 10 lakh in a savings account or fixed deposits.

b) Total cash deposits or withdrawal of Rs 50 lakh in year from account.

c) Purchase of immovable property of over Rs 30 lakh.

d) Payment of credit card bill of over Rs 1 lakh by cash.

e) Sale of foreign currencies worth over Rs 10 lakh.

f) Cash payment of Rs 10 lakh for prepaid instruments.

3) Disclosures in ITR such as deposits of more than Rs 1 crore, foreign travel expenditure exceeding Rs 2 lakh, electricity bill of above Rs 1 lakh and income from foreign sources.

4) Keep your books of record clean and accurate.

5) Don’t wait for last date to file tax return.

6) Don’t understate income or overstate expenditure and deductions.

How to Respond to an Income Tax Notice

We have captured individual response measures above. But there are still some points to keep in mind when responding to a notice.

With so many online scams happening around it is important that you first authenticate the tax notice. Log into the e-filing portal and go to the link that says “Authenticate notice/order issued by ITD”. It will ask for you PAN and send OTP for verification. If the notice is not fake it will be displayed on the portal after that.

Also, all notices will have DIN number. Thereafter, most notices will have columns that allow a taxpayer to agree, respond with disagreement or link to upload a document.

Conclusion

An income tax notice can make anyone nervous. Many of these notices, however, may have been generated due to some silly omission or mistakes by the taxpayer in the return. So, one doesn’t need to fret over them.

However, these notices should not be taken lightly either. Go through the notice carefully, check if the demand made is genuine or not. If genuine, then pay the demand or submit the information sought. If you disagree, then it may be a good idea to seek help from an expert before responding.