Income Tax Scrutiny: Criteria behind Selection of ITRs for scrutiny
I-T Scrutiny: The Income Tax Department recently released guidelines outlining how they will select tax returns for scrutiny in the financial year 2024-25. These guidelines offer taxpayers greater transparency, helping them understand why their returns might be chosen for closer examination.
Computer-Assisted Scrutiny Selection (CASS)
The primary method for selecting Income Tax returns (ITRs) for scrutiny is through Computer-Assisted Scrutiny Selection (CASS). This system uses sophisticated algorithms to flag potential cases of tax evasion based on various risk parameters, including:
High Refund Claims
High Deduction Claims
Decline in Gross or Net Profit
International Transactions
Disproportionate Increases in Expenditure
Non-Matching Opening Stock with Previous Year’s Closing Stock
Transactions with non-ITR Filers
Manual Scrutiny Selection
In addition to CASS, some cases are selected manually based on specific parameters set by the Central Board of Direct Taxes (CBDT) each year.
Key Criteria for Scrutiny Selection
The CBDT has outlined several specific criteria for selecting ITRs for scrutiny:
- Mismatched Information: Discrepancies between your ITR and data from other sources, such as banks or law enforcement agencies, can trigger scrutiny. This includes undeclared income, suspicious transactions, or missing tax returns.
- Tax Evasion Red Flags: Suspicions of tax underpayment can lead to scrutiny. Indicators include high expenses relative to declared income or a lifestyle that exceeds reported means.
- Surveys and Surprise Checks: Returns from surveys under Section 133A of the Income-Tax Act, revealing potential tax evasion, will undergo compulsory scrutiny. These cases require administrative approval and are transferred to Central Authorities within 15 days for further assessment.
- Unfiled Returns: Failing to file an ITR after receiving a notice will ensure scrutiny. The department investigates the reasons for non-filing and assesses any outstanding taxes.
Specific Scenarios for Compulsory Scrutiny
- Information from Law Enforcement: If law enforcement agencies provide evidence of tax evasion for a specific year, the ITR for that year will be scrutinized.
- Search & Seizure Operations: Tax assessments from search and seizure operations conducted before April 1, 2021, will be scrutinized, including ITRs for the year preceding the search.
- Non-Response to Notices: Ignoring notices under Section 142(1) will result in scrutiny. Relevant documents are uploaded for assessment by the National Faceless Assessment Centre (NaFAC).
- Registration/Approval Denials: Claims for tax exemptions without proper registration or approval will be examined. Jurisdictional Assessing Officers compile these cases for submission to higher authorities.
- Recurring Tax Issues: Cases with significant tax additions in previous years, exceeding specified amounts, will be scrutinized.
Manual Scrutiny Parameters for FY 2024-25
- Unregistered Organizations Claiming Exemptions: Organizations without registration or whose registration has been cancelled but still claim exemptions will be scrutinized.
- Non-Filers After Notice: Cases where no return is filed despite receiving a notice.
- Significant Additions in Previous Years: Issues confirmed by appellate authorities involving amounts exceeding ₹25 lakhs in metro cities and ₹10 lakhs in non-metro cities.
- Search or Survey by the Department: Cases following searches or surveys by the department.
Scrutiny Process
Scrutiny assessments will mainly be carried out in a faceless manner. Initial notices are issued by jurisdictional officers, and then records are transferred to NaFAC. However, cases involving non-residents, international transactions with sister concerns, and search & survey operations will not undergo faceless assessment but will be processed through e-proceedings with disclosed jurisdictions.
Breakdown of the Scrutiny Process
- Prior Approval: Certain cases require prior approval from senior tax officials before scrutiny.
- Centralized Scrutiny: Many cases will be transferred to “Central Charges” under Section 127 of the Income Tax Act.
- Notice Issuance: Taxpayers will receive a notice under Section 142(1) or 143(2), informing them of the scrutiny and outlining next steps.
Objectives of the New Guidelines
- Targeted Scrutiny: Establishes specific parameters for selecting ITRs, focusing on potential tax evasion rather than random selection.
- Streamlined Process: Utilizes digital platforms like NaFAC for efficient assessments.
- Transparency and Fairness: Enhances transparency by clarifying why ITRs might be chosen for scrutiny, fostering a fairer system.
By understanding these guidelines, taxpayers can better prepare their returns and avoid potential scrutiny, ensuring compliance with tax regulations.
To Access the e-Proceedings user manual in IT portal CLICK GERE
Also Read: RBI Excluded from Higher TDS/TCS Rates for Non-Filing of ITR: CBDT Notification 45 & 46 of 2024
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