Saturday, 1 November 2014

7 Income Tax Notices startups must know

The most common coffee discussion these days is about Income Tax Notices, it seems the IT department is in love with sending tax notices to tax payers for host of reasons, which were never heard off in past.
Usually notices sent are in relation to issues in the income tax returns filed. Notices can also be for initiating scrutiny or for opening of assessment of past years.  
Taxpayers with limited tax knowledge are bound to panic, but instead of panicking the right course of action should be to understand the reason for the notice and act accordingly. 
In this article we will discuss about different notices that may be served to small business and startups.

1.Notice under section 142(1) – Enquiry before assessment
This notice is usually served to call upon documents and details from the tax payers, and this is basically done to take a particular case under assessment.   By serving a notice u/s 142 (1) the assessing officer, in appropriate circumstances, may call upon the assessee:-
  • To furnish a return of his income or the income of any other person in respect of which he is assessable, where he has not filed his return of income within the normal time allowed or before the end of the relevant assessment year.
  • To produce or cause to be produced accounts or documents which the AO may require for the purpose of making an assessment under the Act.
  • To furnish in writing  any information on any point of matter including statement of the assessee
Compliance with this notice u/s 142(1) is mandatory even if the tax payer is of the opinion that the accounts/documents requested are irrelevant.

2. Intimation under section 143(1) – Summary Assessment
This is intimation cum notice for processing of income tax return filed. This intimation is usually received via email from centralized processing centre, Bangalore.  The income tax return would be processed in the following manner: 
  • The total income or loss shall be computed after making adjustments with regard to any arithmetical error in the return or an incorrect claim, if such incorrect claim is apparent from any information in the return or, an incorrect claim apparent from any information in the return shall mean a claim, on the basis of an entry, in the return,
  • The tax and interest, if any, would be computed on the basis of the total income computed, and the amount of refund due to the taxpayer would be determined.
  • In case where no sum is payable or refundable and where no adjustment has been made, the acknowledgment of the return shall be deemed to be the intimation and no further intimation shall be sent.

3.Notice under section  143(2) – Regular Assessment
This is a service of notice for regular assessment.. It is mandatory for carrying out scrutiny assessment. It can be served only if a return has been filed. It has to be served within the time limit of 6 months from the end of the Financial Year in which return of income is filed. It requires the assessee or his representative to be present before the AO on the desired day and time.

4. Notice under section 156 – Notice of Demand
Where any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed, the AO shall serve upon the assessee a notice of demand, specifying the sum so payable.
The tax so demanded is payable, generally within 30days of the service of notice of demand, which may be reduced by the AO with prior approval of JCIT.
In case of delay in payment of tax, the assessee shall be deemed to be in default and liable to pay simple interest u/s 220 (2) @ 1% for every month or part thereof from the end of the period allowed u/s 156, further penalty u/s 221(1) may be imposed.

5. Notice under section 139(9) – Defective return
If the AO considers that the return filed by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within 15days from the date of such intimation or within such extended period as may be allowed by the AO.
If the defect is not rectified within the aforesaid period, the return shall be considered as an invalid return and accordingly the assessee will be deemed to have furnished no return.

6. Notice under section 245: Set off of refunds against tax remaining payable
Where under any of the provisions of this Act, a refund is found to be due to any person, in lieu of payment of the refunded or any part of that amount, against the sum, if any, remaining payable under the Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this section.
Let say Mr. X filed his return of income for A.Y.2011 – 12 and the tax payable is Rs. 1000. Mr. X is unaware of this outstanding demand. Mr. X has filed his income tax return for A.Y.2012-13 and the refund is due to him Rs. 5000.
Now while processing the income tax refund of Rs.5000 to Mr. X, the income tax department deducts the tax payable which is outstanding for A.Y. 2011-12 and will play the remaining Rs. 4000 to the assessee. But the department can do so, only after intimate the same to the assessee by giving intimation u/s 245.

7. Notice under section 147:- Income escaping assessment
If the AO has reason to believe that any income chargeable to tax has escaped assessments, he may assess or reassess such income, other than the income involving matters which are the subject matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.
To initiate proceedings under 147 the AO is required to have a reason. This tangible reason should give him a belief that there is income which has expected assessment. The Supreme Court has clarified that the act nowhere states that the belief should ultimately culminate into escaped income in order to be valid reason.
To conclude - Getting notices are common these days and needs to be handled with proper care so that we don’t have any further problems.
Startups should look to engage professional expert in this field so that they do not miss out anything and the matter can be handled with utmost care as these can be a barrier for growth of startup businesses.

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