Mandatory ITR scrutiny: How the Income Tax Department selects returns for assessment

The process of mandatory scrutiny of Income Tax Returns (ITRs) is a critical aspect of tax administration aimed at ensuring compliance and accuracy in financial reporting. The Income Tax Department employs specific criteria and guidelines to select ITRs for complete scrutiny, identifying cases that require detailed assessment to verify the accuracy of reported income and tax payments.

Let’s delve into the criteria and selection process revealed by the Income Tax Department for the scrutiny of ITRs.

Criteria for Selection of ITRs for Scrutiny

The Income Tax Department employs various criteria to select ITRs for compulsory scrutiny, ensuring that cases with potential discrepancies or irregularities are thoroughly examined. Some common reasons for the selection of ITRs for scrutiny include:

1. Non-filing of Income Tax Return (ITR)

Individuals with gross income exceeding the exempted limit or those with foreign assets are required to file an ITR. Failure to file despite having taxable income can trigger scrutiny.

2. Errors Related to TDS

Discrepancies between reported TDS amounts and those recorded on official platforms can lead to scrutiny.

3. Non-disclosure of Other Incomes

Failure to report all sources of income, including interest from savings accounts, can prompt scrutiny, especially if TDS is deducted at a lower rate than the tax slab.

4. Unnatural or High-Value Transactions

Transactions significantly higher than the declared income, such as large bank deposits inconsistent with reported earnings, can trigger scrutiny.

5. Defects in Income Tax Return

Errors in filing, omission of mandatory information, or using the wrong ITR form can result in scrutiny and may require a revised return under Section 139(9).

Selection Process for Scrutiny Assessment

The scrutiny assessment under Section 143(3) can be initiated when a taxpayer files an ITR as per Section 139 or responds to a notice under Section 142. The Assessing Officer or Income Tax Authority may initiate scrutiny to ensure the accuracy of reported income and taxes paid.

Types of Scrutiny Assessments

  1. Manual Scrutiny Assessments: These are selected on a case-by-case basis due to specific reasons, and compliance with tax laws can help avoid manual scrutiny.
  2. Compulsory Scrutiny Assessments: These are mandated by specific criteria set by the tax authorities and cannot be avoided by the assessee.

Understanding the criteria and selection process for mandatory scrutiny of ITRs is essential for taxpayers to ensure compliance and accuracy in their financial reporting. By adhering to tax laws, disclosing all sources of income, and filing accurate returns, individuals can minimize the risk of scrutiny assessments and navigate the tax assessment process effectively. The guidelines provided by the Income Tax Department aim to streamline the scrutiny process, promote tax compliance, and ensure the integrity of the tax system.