How to handle Faceless Income Tax Scrutiny Assessments

The legendary investor Warren Buffet once said “If you can’t communicate, it’s like winking at a girl in the dark – nothing happens”.  This quote emphasizes the importance of communication skills for success. Essentially, having intelligence and good ideas is not enough; you need to be able to effectively convey those ideas to others. With faceless scrutiny assessment, its extremely important and vital that all your communication are in simple English and at the same time to the point, crystal clear, leaving no scope for any doubt, confusion, ambiguity or misinterpretation.

Key Steps to Handle Faceless Scrutiny Assessment:

1. Notice Issuance:

• Receiving the Notice: The process begins with the National Faceless Assessment Centre (NFAC) issuing a notice under Section 143(2), informing you that your return has been selected for scrutiny.
• Electronic Delivery: All notices are sent electronically to your registered account on the income tax portal and via email.

2. Response Submission

• Timely Response: You must respond to each and every notice within the stipulated time frame, including the initial notice u/s.143(2) informing you that your case is selected for scrutiny assessment.
• Do not take adjournment unless it is absolutely necessary.
• If you leave any notice unanswered or delay in responding, it is quite possible that the same could be used against you at a later date. Mind well that; a simple one-line sentence in the assessment order stating that “the assessee did not respond to so and so notice or did not submit timely reply” can potentially weaken your case.
• Documentation: Prepare and upload all relevant documents, evidence, and explanations supporting your return. Ensure that your response is comprehensive and addresses all queries raised in the notice.
• Respond to each and every query raised in the Notice, even if certain points may not be applicable or relevant in your case. Simply say that the same is not applicable.
• Try to answer every question raised in the same sequence or order in which it is raised in the Notice.
• It is a good idea to ask someone in the office not involved in the compilation of data to read your reply before it is submitted and ensure that he/she has fully understood the contents without leaving any doubt. This will help you get an independent perspective of the submission being filed.
• It is advisable to ensure that all your attachments are also serially numbered and it is in the same pointwise order in which you are submitting your written submissions. Do not leave any space in the description as it may face technical snag on the Income Tax Portal

For E.g.

1.LetterofAuthority

2.IncomeTaxReturn

3.ComputationofIncome

4.AuditeBalancesheet_P&L_Schedules_Notes

5.TaxAuditReport

6.ParticularsofBankAccounts

7.ParticularsofDirectors

…………………………………

………………………………..

• At a time 10 attachments can be submitted on the portal. In case there are more then 10 attachments, you can file the reply and repeat the process for another 10 attachments.

3. Details of Expenses

• Many a times notices are vague and simply ask you to submit details of expenses debited to P&L Account. In such cases, one can file details of Major Expenses debited to P&L Account such as Purchases, Salary & Wages, Legal and Professional Fees, Repairs & Maintenance, Sales and Business Promotion, Staff Welfare, Printing and Stationery, Travelling and Conveyance, Bad Debts etc.
• Purchases / Sales Details can be provided in the following format:

Even details of Sundry Debtors and Creditors can be shared in the above format with suitable changes.

• Salary & Wages details can be shared in the following format:

• In case of Other Expenses; depending upon nature of Expenses details can be shared in the following format:

• Details of Bad Debts written off can be filed in the following format:

• Details of Travelling and Conveyance can be filed in the following format:

• Ensure that total of each expense matches or ties up with the relevant nos. in the Profit and Loss Account. If required, reconciliation of expense too should be filed so that there is no confusion of any kind.
• Copies of sample invoices can also be shared with a remark in the written submission to the effect that “Copies of sample invoices of some of the major expenses are being submitted and further invoice/vouchers can be shared if required”.
• Do not submit Ledger A/cs. unless the same are requested. Make sure that narrations are not objectionable or controversial.

3. Details of Unsecured Loans:

 In case of Unsecured Loan details can be filed in the following format:

In support of the above, one can file:

• Ledger Confirmation of the Lender duly signed by him
• Copy of Bank Statement for the relevant period, highlighting the amount of loan given
• Copy of Return of Income of the Lender for relevant year
• Copy of PAN Card
• Copy of Aadhar Card

4. Information called u/s.133(6) or 131:

Many a times; during the course of the assessment proceedings, third party confirmation are obtained by the tax department by sending summons u/s.133(6) or Notices u/s.131 to the Vendor or Service Provider or the Lender, seeking verification of information submitted by the tax payer, whose case is under scrutiny. Whenever such a notice is received by any of these parties, make sure that before they file their response the nos. tie up with your nos. so as to avoid any adverse inference being drawn by the tax department against you.

4. Response to Show-Cause Notice:

The principles of natural justice requires that before making any addition to the total income the tax officer is required to issue a show cause notice. If and when such a notice is received:

• Once again re-iterate the submission made earlier.
• If any point was missed out earlier, cover it too
• Once again submit all the documentary evidence (even if submitted earlier)
• Try to figure out whether there is any mis-communication or mis-understanding in the earlier submission that has triggered the show cause. If so, clarify the issue
• Avoid quoting court judgements, unless it is the issue of legal interpretation.
• Make sure your response is comprehensive and detailed, as the same will be used even at the appellate stage
• Even if you know that the Officer on the other hand has made up his mind, do not file half hearted or incomplete response

By following these steps and best practices, you can effectively handle a faceless scrutiny assessment and reduce the risk of any adverse outcome.

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Disclaimer

The information provided in this article is for general informational purposes only and does not constitute legal, tax, or financial advice. While efforts have been made to ensure accuracy, tax laws and regulations are subject to change and can vary based on individual circumstances. Readers are strongly advised to consult a qualified tax professional or advisor before making any decisions based on this information.

The readers can reach out to the Author on [email protected] for any questions or query.