I-T Dept’s Criteria For Selecting ITRs For Scrutiny: Check Details To Avoid Penalties

Taxpayers can now understand why their income tax return (ITR) has been selected for scrutiny by the Income Tax Department (I-T) starting this financial year. The Central Board of Direct Taxes (CBDT) recently released guidelines on May 3, 2024, which, the board says, have to be followed for compulsory selection of ITRs in regards to complete examination for the financial year 2024-25. Every year, the I-T department selects some ITRs for scrutiny, these selections are done mostly based on Computer Algorithms known as Computer Assisted Scrutiny Selection (CASS). ITRs filed by taxpayers are picked by the algorithm for any possible tax evasion, among other reasons.

Also Read: Planning To Sell Your Inherited, Gifted Gold Jewellery: Know The Tax Rules

CASS scrutinises the ITRs using risk parameters such as:

- Discrepancies in Reported Income

- High refund claim

- Decline in gross profit or net profit

- High deduction claimed

- Foreign transactions

- Non-matching of opening stock with the previous year's closing stock

- Transactions with non-ITR filers, etc.

The circulars issued by CBDT provide guidelines for the compulsory selection of ITRs for complete scrutiny as well as for the procedure for compulsory selection in such specified cases. Moreover, certain cases are selected manually for scrutiny examination, and parameters for such ‘Compulsory Manual Scrutiny’ selection are issued by the CBDT every year.

What can trigger scrutiny of an ITR by the IT dept in FY 2024-25?

“The cases identified in the guidelines where the IT department will be scrutinising the tax returns are survey cases, Search cases, Reassessment cases and where addition in earlier assessment years on the recurring issue of law or fact has become final and no further appeal is preferred against the order,” surmises Rony Antony, Partner & Leader, Corporate Tax (South), Tax and Regulatory Services, BDO India.

Chartered Accountant Manas Chugh, Head Regulatory Services, Osgan Consultants (Delhi-based business and tax consultancy firm) explains in detail the parameters for the compulsory selection of returns for complete scrutiny during FY 2024-25:

1. Search and seizure: In a case where Survey/ Search and Seizure has been conducted on one person by the Income Tax Department and it has been found out that he has entered into transactions with another person, then such other person’s return would be selected for complete scrutiny.

2. Cases of no returns: If any person has not filed their ITR in response to the notice issued by the Income Tax Department (u/s 142(1) of the Act), then the case shall be selected for complete scrutiny.

3. Cases, where it has been found that any income of a person has escaped such as cash deposits, incomes not offered to tax, etc., shall be selected for complete scrutiny.

4. Cases, where registration/approval under various sections have not been granted or have been cancelled/ withdrawn by the Competent Authority, yet the assessee has been found to be claiming tax-exemption/deduction in the return, shall be selected by the department for complete scrutiny. However, where such orders of withdrawal of registration/approval have been reversed/set aside in appellate proceedings, those cases will not be selected.

5. Cases involving addition in an earlier assessment year(s) on a recurring issue of law or fact and/or law and fact

Cases involving addition in an earlier assessment year(s) (AYs) on a recurring issue and addition exceeding Rs. 25 Lakh in eight metro cities or exceeding Rs. 10 Lakh in other cities; and where such an addition has become final or has been upheld by the Appellate Authorities in favour of Income Tax Department, shall be selected by the department for complete scrutiny.

6. Tax Evasion: Cases, where the return for that AY is furnished by the person and in respect of which specific information related to tax evasion for the relevant AY is provided by any law-enforcement agency, shall be selected by the department for complete scrutiny.

The cases can also be selected for compulsory scrutiny by the International Taxation as per the above-mentioned parameters.

The last date to serve notice u/s 143(2) of the Act in cases selected for Compulsory Scrutiny is 30 June 2024.

Taxpayers keep this in mind to avoid penalties

“During the course of the scrutiny by the IT Department, taxpayers need to be vigilant and submit accurate details to the department and in a timely manner,” Antony states.

- There are provisions where the tax department can impose penalties for delayed or non-furnishing of information.

- Taxpayers should also revisit all the disclosure and information supplied while filing the tax returns and ensure they are accurate. In case of any inaccuracy, the taxpayer should use the scrutiny as an opportunity to highlight and correct the record to avoid future penalties.

- Taxpayers should also take care as to what information is being submitted during assessment. Submitting irrelevant information can be counterproductive.