Section 143(2) – Scrutiny Assessment Notice

The Income Tax Act, 1961, provides the framework for various types of assessments to ensure compliance and prevent tax evasion. While most Income Tax Returns (ITRs) undergo an automated preliminary processing under Section 143(1), some are selected for a more detailed examination known as a scrutiny assessment. The formal intimation of such an examination is conveyed through a notice issued under Section 143(2).

Recent Updates to Section 143(2) and Faceless Scrutiny

In line with the government's objective of promoting transparency and efficiency in tax administration, the process of scrutiny assessments, including the issuance and response to Section 143(2) notices, has undergone significant changes, primarily with the introduction of the Faceless Assessment Scheme. These key updates are:

• Faceless Assessment Regime: The traditional in-person interactions with tax authorities for scrutiny assessments have largely been replaced by a faceless system. All communications, from the issuance of the Section 143(2) notice to the final assessment order, are conducted electronically.
• Mandatory e-Proceedings: Taxpayers are now required to submit all their responses, documents, and explanations electronically through the designated e-filing portal. This system ensures a verifiable digital trail and enhances convenience.
• Data Analytics-Driven Selection: The selection of returns for scrutiny is increasingly driven by sophisticated data analytics and risk management systems. Discrepancies identified through vast amounts of information available to the department (e.g., from TDS, AIS, TIS, third-party reporting) are the primary triggers for issuing Section 143(2) notices.
• Centralization and Specialization: The faceless system involves specialized units (e.g., Assessment Units, Verification Units, Technical Units, Review Units) working remotely, ensuring a more objective and standardized assessment process.

What is a Section 143(2) Notice?

A Section 143(2) notice is a formal communication sent by the Assessing Officer (AO) to a taxpayer, informing them that their Income Tax Return, previously filed for a particular Assessment Year, has been selected for a detailed scrutiny assessment. The purpose of this scrutiny is to ensure that the taxpayer has:

• Correctly stated their income.
• Accurately computed their tax liability.
• Validly claimed deductions, exemptions, and allowances.
• Complied with all relevant provisions of the Income Tax Act.

This notice signifies the initiation of a formal audit process, requiring the taxpayer to provide explanations and documentary evidence for the information declared in their return.

When is a Section 143(2) Notice Issued?

A Section 143(2) notice can only be issued within a specific timeframe and based on certain triggers:

Time Limit for Issuance:

The notice must be served on the taxpayer within three months from the end of the financial year in which the return was furnished. For example, if a return for Assessment Year 2025-26 (Financial Year 2024-25) was filed on July 31, 2025, the financial year in which the return was furnished ends on March 31, 2026. Therefore, the Section 143(2) notice for this return could be issued until June 30, 2026.

Basis for Selection:

The selection of a return for scrutiny is generally based on criteria set by the Central Board of Direct Taxes (CBDT) and can arise from:

• Discrepancies: Mismatches detected during the preliminary processing under Section 143(1), or between information reported by third parties (e.g., banks, employers, property registrars) and the taxpayer's return.
• High-Value Transactions: Involvement in specific high-value transactions that are flagged by the department's systems (e.g., large cash deposits, significant property transactions (Section 194IA related), foreign remittances, sale of shares).
• Risk Management System: The Income Tax Department's automated risk management system identifies returns with a high probability of concealment of income or incorrect claims.
• Specific Information: Specific information received by the department about non-compliance by a taxpayer.
• Unsatisfactory Response to Section 142(1) Notice: If a taxpayer's response to a prior Section 142(1) notice (notice for inquiry before assessment) is deemed insufficient or incomplete, it can lead to a scrutiny assessment.

Types of Scrutiny Assessments Initiated by 143(2)

A Section 143(2) notice can lead to two main types of scrutiny assessments:

• Limited Scrutiny: This is the more common type under the faceless regime. The scrutiny is limited to the specific issues or discrepancies identified by the system (e.g., verification of a particular deduction claimed, a specific income source, or a large expense). The scope of inquiry is restricted to these flagged points.
• Complete Scrutiny: In rarer cases, based on the gravity of the issues or specific criteria, the AO may initiate a comprehensive examination of all aspects of the taxpayer's return and financial affairs for the relevant year.

Information/Documents Typically Requested

Upon receiving a Section 143(2) notice, the Assessing Officer will typically request a wide array of documents and explanations. These may include:

• Complete books of accounts (e.g., cash book, ledger, journal, bank books).
• Bank statements for all active accounts for the relevant period.
• Copies of bills, invoices, and vouchers supporting all major income and expense entries.
• Detailed computation of income under all heads of income (salaries, house property, business/profession, capital gains, other sources).
• Proofs for all deductions and exemptions claimed (e.g., premium receipts for health insurance, investment proofs for Section 80C, interest certificates for education loan).
• Details and supporting documents for high-value transactions, property sales (Section 194IA), or purchases.
• Confirmation of investments made and their source of funds.
• Copies of previous years' ITRs and assessment orders, if required.
• Any other specific information or clarification related to the reason for scrutiny.

How to Respond to a Section 143(2) Notice

Receiving a Section 143(2) notice is a serious matter that requires a well-planned and timely response:

1. Do Not Panic, But Act Promptly: Acknowledge the notice immediately. Ignoring it is the worst possible action and leads to severe consequences.
2. Consult a Professional: It is highly recommended to engage a qualified tax professional (Chartered Accountant or Advocate) immediately upon receiving the notice. They possess the expertise to understand the implications, prepare a robust defense, and represent you effectively.
3. Understand the Allegations/Reasons: Carefully read the notice to ascertain the specific reasons for scrutiny and the information/documents being sought.
4. Gather and Organize Documents: Collect all relevant documents and information meticulously. Ensure all evidence aligns with your return and explanations.
5. Prepare a Detailed Response: Your tax professional will help you draft a comprehensive and well-reasoned response, addressing each point raised in the notice with supporting documents.
6. Online Submission (e-Proceedings): All submissions must be made electronically through the Income Tax e-filing portal under the 'e-Proceedings' section. Keep proper records of all submissions and acknowledgements.
7. Adhere to Deadlines: Strict adherence to the deadlines mentioned in the notice is crucial. If more time is genuinely required, a request for extension should be filed online well in advance, stating valid reasons.
8. Virtual Hearings: Be prepared for virtual hearings via video conferencing, if called for by the Assessing Officer. Your tax professional can assist you in preparing for and attending these.

Consequences of Non-compliance or Adverse Assessment:

Failure to respond adequately or prove your case during a scrutiny assessment can lead to significant repercussions:

• Best Judgment Assessment (Section 144): If you fail to comply with the notice or provide satisfactory explanations, the AO may complete the assessment to the best of their judgment, often resulting in higher tax demands.
• Additions to Income: The AO can make additions to your declared income if they find unverified expenses, unexplained credits, or un-reconciled discrepancies.
• Interest Levy: Interest can be levied under Sections 234A (for delayed filing of return), 234B (for default in payment of advance tax), and 234C (for deferment of advance tax).
• Penalties: Significant penalties can be imposed for various defaults, including for concealment of income or furnishing inaccurate particulars of income under Section 271(1)(c) or Section 270A. These penalties can range from 50% to 200% of the tax sought to be evaded.
• Prosecution: In cases of serious defaults or willful tax evasion, prosecution proceedings may be initiated, which can lead to imprisonment.
• Notice of Demand (Section 156): If the scrutiny assessment results in an increased tax liability, a Notice of Demand will be issued, requiring payment of the additional tax, interest, and penalties.

Conclusion

A Section 143(2) notice for scrutiny assessment is a serious legal process. While the shift to faceless assessments aims for greater fairness and transparency, it places a higher onus on taxpayers for accurate and timely digital submissions. Proactive engagement, meticulous documentation, and expert guidance are indispensable to navigate the scrutiny process successfully and ensure compliance with the Income Tax Act.