Receiving a notice from the income tax department can be a daunting and unpleasant experience, leaving many wondering what to do next. There can be several reasons for receiving a notice. For example, some taxpayers claim deductions like House Rent Allowance (HRA) or Section 80C without them being reflected in their Form 16 issued by their employer. While some of these claims may be genuine, the tax department may give the notice to investigate whether these claims are indeed authentic.
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To help you avoid such tax notices here are some of the top reasons for which you may receive a notice from the Income-tax department.
Mismatch with Form 26AS or Annual Information Statement
The Annual Information Statement (AIS) provides a detailed overview of a taxpayer’s financial transactions, including interest on savings accounts, interest on deposits, securities transactions, mutual fund transactions, foreign remittances and dividend. Your AIS statement can be used to go back and recall financial transactions done in the last financial year, which we sometimes forget because of preoccupied schedules. By scurrying through your AIS you can have a broad overview of transactions that happened last year and on which tax is due. Similarly, you can view all financial transactions involving tax deducted and collected at source (TDS/TCS) for the relevant financial year in Form 26AS.
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“A mismatch between the TDS credit claimed in your return, and the amount reflected in your Form 26AS can lead to a notice from the income tax department to inquire about the inconsistency. This can cause undue hassle and delay in processing your tax return, as the credit may be disallowed. To avoid any such discrepancy, it is essential to cross-check the TDS credit claimed in your return with the amount reflected in your Form 26AS before filing your tax returns,” says Tarun Kumar – Head of Direct tax practice at Coherent Advisors.
The mismatch could be on account of tax credit or a mismatch in income. “For example, say an employee does not file a declaration with their employer and claims a gross deduction under 80C while filing their income tax return. In this case, the income under Form 26AS will not tally with the income tax return and the employee may receive a notice under section 142(1) asking for information. For mismatch in tax credit, notice is generally issued under section 154,” explained Neeraj Agarwala, Partner, Nangia Andersen India.
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High-Value Transactions
Do you know that your high-value transactions are shared by banks or other third-party sources with the income tax department? If these details do not tally with the income tax return of the taxpayer, one may receive a notice under section 142(1) read with section 143(2) for additional information and scrutiny.
“Suppose you have engaged in high-value transactions like purchasing property or paying huge credit card bills, but your reported income does not match the level of these transactions. In that case, you may receive a notice from the income tax department seeking clarification on the source of funds used for these financial transactions,” noted Kumar.
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Set off of refund against the demand for past years
The income tax department has the power to set off refunds due for one year against outstanding demand of any other year. There is no time limit prescribed for issuing this notice. “This means that if as per the department, a taxpayer has an outstanding demand for AY 2000-01, and for AY 2023-24 the same taxpayer has a refund due, the tax officer can set off the refund with the outstanding demand. However, before making this adjustment, the tax officer is required to issue a notice under section 245 providing an opportunity to the taxpayer to file objections, if any,” said Agarwala.
Non-filing of Income Tax Return
The Income-tax department conducts an e-campaign to notify taxpayers who still need to file their Income tax return for a specific assessment year. “If you have missed the deadline for filing your original or belated return of income, the option is to file an updated return of income. This can be done within 24 months from the end of the relevant assessment year, even if you have not previously filed a return for that year. It is important to note that an additional 25 per cent or 50 per cent tax must be paid along with the updated return,” noted Kumar.
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Notice for defect in the income tax return
A notice under section 139(9) is a notice of a defective return. This is a system-generated notice you would receive when the tax department encounters a defect or an error while processing the income tax return. “For example, if a taxpayer fails to verify the income tax return filed online, they may receive a notice of defective return. In response to this notice, the taxpayer is required to file a revised income tax return, after removing the defects within the time limit allotted by the income tax office,” explained Agarwala.
What to do if you receive a tax notice?
If you receive a notice from the income tax department, it is essential to understand the reason for the notice. You should carefully review the notice and seek guidance if necessary to ensure that you respond appropriately.
“You should be proactive and vigilant with your tax filings, ensuring accuracy and completeness. It is crucial to cross-check the TDS credit claimed in your tax returns with the amount reflected in your Form 26AS. Reviewing your AIS and Taxpayer Information Summary (TIS) before submitting your income tax return can help identify any inconsistencies or errors. Furthermore, if you have claimed deductions such as HRA or Section 80C in your tax return, it is essential to ensure that these claims are genuine and supported by relevant documentation. This can help avoid potential mismatches and validity issues, reducing the chances of receiving a notice from the income tax department seeking clarification,” said Kumar.
