Types of Income Tax Notices

As we know, an income tax notice is a formal written communication issued by the tax authorities to certain taxpayers or entities regarding their income tax returns or other tax-related matters.

Understanding the various types of income tax notices is crucial for individuals and businesses alike to effectively address tax-related matters. This article aims to provide a comprehensive overview of the 7 types of income tax notices that taxpayers may encounter.

Here are the different types of income tax notices:

1. Intimation under Section 143(1)
2. Defective Return under Section 139(9)
3. Inquiry Before Assessment under Section 142(1)
4. Scrutiny Notice under Section 143(2)
5. Income Escaping Assessment under Section 148
6. Notice of Demand under Section 156
7. Set Off Refunds against tax remaining payable under Section 245

Let's explore each one in detail.

1) Intimation under Section 143(1)

Intimation under Section 143(1) of the Income Tax Act 1961 is generated by the Central Processing Centre (CPC) after the successful processing of the taxpayer's ITR. The main objective is to inform taxpayers about the outcome of their tax return processing and provides a summary of the computed tax liability, deductions claimed, and any discrepancies identified during the assessment. The intimation under Section 143 provides a detailed breakdown of the taxpayer's income, deductions, and tax calculations. It also displays the total income considered for taxation, the applicable tax rates, and the tax liability arrived at after considering deductions, exemptions, and rebates. In the event, any discrepancies are detected during the processing, such as mismatches between the income reported during the tax return and the information available with the tax department (e.g., TDS details, Form 26AS, etc.), the intimation will highlight such discrepancies. It may also adjust, if necessary, to rectify the apparent errors and arrive at the correct tax liability.

2) Defective Return under Section 139(9)

This kind of notice is issued to taxpayers regarding the defects or inconsistencies identified in their filed income tax return by the Income Tax Department. It serves as an opportunity for taxpayers to rectify the errors or omissions in their return within a specified timeframe which can range from incomplete or inaccurate information to non-compliance with the prescribed formats or provisions under the Income Tax Act. This timeframe is generally 15 days from the date of receipt of the notice, although it may vary based on the discretion of the tax authorities. It also highlights any discrepancies between the taxpayer's return and other available information, such as Form 26AS (Annual Tax Statement) or other relevant documents.

In the event, the taxpayer fails to rectify the defects within the given timeframe or does not respond to the notice, the return may be treated as invalid and will be considered as if it was never filed. Non-compliance with the notice might also lead to penalties, prosecution, and other legal consequences.

3) Inquiry Before Assessment under Section 142(1)

An income tax notice of "Inquiry Before Assessment" is a communication issued by the Income Tax Department to taxpayers as a part of the assessment process to ensure the accuracy and completeness of the taxpayer's assessment. It is generated when the Assessment Officer (AO) finds it necessary to conduct an inquiry or gather additional information regarding the taxpayer's income, deductions, expenses, or any other relevant aspects. Upon receiving this notice, the taxpayer is required to cooperate with the AO and provide the requested information, documents, and explanations. The AO may ask for supporting evidence, financial statements, invoices, bank statements, or any other relevant records to verify the taxpayer's claims and ensure compliance with tax laws. 

The inquiry may cover various aspects, such as assessing the nature of income, verifying deductions claimed, examining expenses, cross-verifying information with third-party sources, or conducting any other investigation deemed necessary for a fair and accurate assessment.

4) Scrutiny Notice under Section 143(2)

An income tax scrutiny notice is a communication issued by the Income Tax Department to the selected taxpayers, stating that their tax returns will undergo a thorough examination. The purpose of this notice is to ensure the accuracy and compliance of the taxpayer's reported income, deductions, and other relevant aspects. Upon receiving the scrutiny notice, the taxpayer is required to provide supporting documents, financial statements, books of accounts, and other relevant records as requested by the AO. Upon receipt of the documents, the AO may conduct inquiries, seek clarifications, and cross-verify information with third-party sources, such as banks or employers. The objective of such notice is to verify the accuracy of the taxpayer's reported income and deductions and assess the correct amount of tax liability.

5) Income Escaping Assessment under Section 148

It is a process undertaken by the department to assess and tax any income that has escaped or not been disclosed by the taxpayer in their original tax return. This formal procedure is initiated when the AO has reason to believe that certain income has not been declared or has been underreported by the taxpayer. The purpose is to ensure that taxpayers accurately disclose their income and pay the correct amount of tax as per the law. The AO will gather information and evidence from various sources, such as third-party reports, bank statements, property transactions, or any other reliable sources, to substantiate the suspicion of income escapement. The department will also conduct internal assessments and data analysis to identify discrepancies or anomalies in the taxpayer's financial records.

6) Notice of Demand under Section 156

A notice of demand in accordance with Section 156 of the Income Tax Act 1961 is a communication issued by the department to a taxpayer demanding the payment of outstanding tax dues. This notice serves as an official intimation to the concerned taxpayer for the amount of tax liability determined by the AO after the completion of the assessment process. The object is to inform the taxpayer about the amount of tax that is due and payable according to the assessment carried out by the AO. The notice is a breakdown of the tax calculation, including the assessed tax amount, any applicable interest, penalties, and other charges. It specifies the total outstanding amount that the taxpayer is required to pay to settle their tax liability. The notice of demand also provides information on the acceptable modes of payment, such as online banking, cheque, demand draft, or any other method prescribed by the tax department.

Non-payment or delayed payment of the tax amount mentioned in the notice of demand can result in additional interest charges, penalties, and legal actions by the tax department, so the taxpayer must comply with the payment deadline to avoid further complications.

7) Set Off Refunds against tax remaining payable under Section 245

It is a kind of notice issued to set off tax refunds against any outstanding tax liability. The department adjusts or sets off any eligible tax refunds due to a taxpayer against the tax amount remaining payable by the taxpayer. Through this notice, the taxpayer is informed about the department’s intention to set off their tax refunds against any remaining tax liability. The notice specifies that the tax refunds due to the taxpayer will be utilized to offset or reduce the outstanding tax liability. Further, the set-off is carried out by the department by adjusting the refund amount against the tax payable, including any interest or penalties.

To set off the refund the department verifies the eligibility of the taxpayer and only those refunds that are legally available and eligible can be utilized for this purpose. Upon receiving the notice, the taxpayer is required to respond within the specified time frame. They may either agree to the set-off or provide reasons to contest it, if applicable. Upon receiving the taxpayer's response is evaluated by the department, and appropriate action is taken accordingly.

The notice offers various benefits and implications for both the taxpayer and the tax department. For taxpayers with an outstanding tax liability, it provides a mechanism to offset the liability using their eligible tax refunds. This reduces the financial burden on the taxpayer and streamlines the payment process. The tax department ensures effective recovery of taxes by utilizing the taxpayer's refunds.