Partner and Leader Personal Tax, PwC India
An enquiry from the tax authorities can create panic in most of us. Is there any reason to worry, or can this be handled without professional help? In this column the author analyses various circumstances in which you may receive such an enquiry, and offers tips on how to handle the situation
Our government has a particular focus on unearthing black money that’s stashed away, whether it’s in India or abroad. The black money may be in any form – investment, property, undisclosed bank account, benami asset, or even cash. The elevated use of technology and data analytics by the authorities leads to identification of financial transactions that are either high-value or suspected to be unaccounted. Either of these factors generally triggers an enquiry from the tax authorities in an attempt to verify the transaction. India has signed tax information exchange agreements with several countries. This automatic exchange of information provides authorities an opportunity to cross-check whether the overseas income and assets are duly accounted for in taxpayers’ returns or not. Apart from this, there could be a routine selection of taxpayers based on certain criteria decided by the authorities, whereby they audit them by issuing a notice.
Why an enquiry?
Given below are some of the circumstances that could possibly lead to an enquiry from the tax authorities. This is an indicative list and not an exhaustive one.
1. There are certain transactions where quoting of PAN is mandatory by virtue of Section 139A (5) of the Income tax Act, 1961 (Act) read with rule 114B of the Income tax Rules, 1962 (Rules). For example, sale or purchase of motor vehicles; opening of bank account/demat account; sale or purchase of immovable property exceeding`10 lakh; sale or purchase of unlisted shares exceeding `1 lakh; purchase of mutual funds/ debentures/ foreign exchange/ payment to hotels etc. exceeding `50,000; or any sale or purchase of any goods or services exceeding `2 lakh. If the PAN is not provided, or if you provided the PAN but the person filing the Annual Information Return (AIR) failed to furnish the details to the authorities or misquoted, it may result in communication from the tax authorities for verification of the transaction with your tax filings, etc.
2. Banks/ financial institutions/ stock exchanges/ certain other persons are required to file AIR under section 285BA of the Act in relation to certain financial transactions, viz. cash deposits/ term deposits/ purchase of bonds, debentures, shares/mutual funds, etc. of `10 lakh or more; purchase or sale of immovable property of `30 lakh or more; receipt of cash payment of `2 lakh or more for goods or services of any nature; and payment of credit card bill of `10 lakh or more. Tax authorities analyse these AIRs with the level of income and tax filings of the taxpayer. If they are not able to correlate the same, it may trigger an enquiry. Again, if the PAN is not quoted or misquoted in the AIR, it could lead to an enquiry.
3. You lent somebody money or made a large payment in cash, and the person to whom the money was lent is being audited by the tax authorities. As part of verifying the correctness of the transaction/ information, you may be asked to confirm the details.
4. You sold your house and the purchaser is being audited by the tax authorities.
5. You made cash payments towards insurance premiums.
6. You have overseas bank accounts or investments, and the tax authorities received details of the same under the tax information exchange agreement.
7. There are certain types of income such as interest income, which is reflected in Form 26AS, but you did not report it in your tax return.
8. You have some foreign income, and claimed the foreign tax credit in your tax return.
9. You disclosed the foreign income but did not provide details of your foreign assets in your tax return or vice versa.
10. Your income exceeds `50 lakh, and you have not provided accurate details in the assets and liability schedule of the return, or the details provided are not relatable with the level of income reported in your tax return.
11. Taxes paid by you are not reflected in your Form 26AS, and authorities are unable to relate the same with the taxes paid as claimed in your tax return, or there is a mismatch of credit/ income in your return vis-à-vis Form 26AS.
12. You gave or received a gift in foreign currency.
13. You claimed a refund in your return, and the same is adjusted by the authorities with any demand in the previous year.
14. Any mismatch in the PAN and the PAN mentioned in your return of income.
15. Any defect the authorities may identify in your filed return of income.
16. Inconsistent filing of your return
How to handle the enquiry
First of all, you need to check what communication you received and what section is mentioned in the letter. Notice may be issued under Section 142(1) or 142(2) seeking information, or it may be under Section 143(2) to audit the return you filed, or under Section 147, where tax authorities believe some income escaped taxation. The letter may also be issued under Section 131 of the Act seeking certain information. It may even, in general, seek certain details from you. If it’s not clear to you why the communication was issued, it is best to contact the department over email/phone or visit in person to understand the reasons clearly. Once you know the section or reference of the letter received, you need to check if the notice is under Section 143(2) or 147, and whether the same has been issued within the prescribed timeline and is not technically time-barred. Further, if the notice has been issued under Section 147, one should ask the reason for the issue of the notice. These factors will help determine whether the notice can be struck down on a technicality. In such circumstances, professional advice will be useful. Each letter issued by the tax authorities mentions a date and time by which you or your authorised representative needs to respond. You should prepare yourself in advance of such timeline and keep all the documents handy before submitting your response. If you need more time, acknowledge the receipt of the letter, and seek further time to respond. You can make a personal visit with your documents file and meet the tax officer issuing the communication. The name and office address of the concerned tax officer is always mentioned in the notice. In cases where you receive the notice/enquiry on your email ID, you have to log in to your income tax account and select the appropriate tab to file an online response. A physical visit may not be needed in such cases. Where the letter is of a more general nature or issued under Section 142(1) or 131, etc., seeking information, you should carefully compile and provide accurate details about the particular transaction or details asked for. In other cases of verification of details, such as foreign taxes paid, taxes not reflecting in your Form 26AS, adjustment of refunds, etc., enquiries should be responded to with the required details and proofs. Remember, in case details are not provided, tax authorities have the power to seek your personal presence. There are also provisions wherein you may be levied a penalty of `10,000, and prosecution can be initiated in extreme cases. Therefore, it is imperative that any communication from the tax authorities is diligently attended to. Important tip: keep records of all your bank statements, proofs of deductions/exemptions claimed in the tax return, bills of major purchases, investments, etc., so that if any questions are raised in future, these details are handy.
Disclaimer: The views expressed in the article are personal