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How to respond to CBDTs tax compliance notice
January, 11th 2017

The income tax department can contact you if it believes that you may have taxable income but have not filed a tax return. Find out how it selects the non-filers, and what to do if you get a notice

In the last week of December 2016, the income tax department released a press note, which said that—with the help of data matching processes—the department has identified 6.75 million potential non-filers of income tax returns. This is 11.5% of the total number of people registered on the income tax e-filing portal as on 31 December 2016.

The department says they had carried out high-value transactions in the financial year (FY) 2014-15 but did not file any return of income for the assessment year (AY) 2015-16. The identification of such potential non-filers was conducted through the Non-filers Monitoring System (NMS). Read more about how this system identifies potential non-filers and what the non-filers need to do.

The monitoring system

In the NMS, various financial data are collected and analysed by the income tax department to identify potential non-filers. The specific information is collected from sources such as: annual information return (AIR), centralised information branch (CIB), tax deducted at source and tax collected at source statements. “Based on data mining and analytics, NMS identifies potential tax liabilities of tax evaders,” said Suraj Nangia, partner, Nangia & Co.

AIR is filed by ‘specified persons’ under section 285BA of the Income-tax Act, 1961. These specified persons include banks, mutual fund companies, institutions issuing bonds, and registrars or sub-registrars. These persons are required to report the high-value financial transactions, which were registered or recorded by them during the financial year.

For instance, a bank has to file an AIR, when the aggregate cash deposits of a savings bank account holder exceed Rs10 lakh in a year. Mutual fund companies have to report if someone invests more than Rs2 lakh or more in a single scheme or fund. Similarly, registrars and sub-registrars have to file AIR for purchase or sale of immovable property (land, house or building) by any person, if the property is valued at Rs30 lakh or more.

However, after demonetization, the Central Board of Direct Taxes (CBDT) has amended certain income tax rules, such as rule 114E of the Act, to track unaccounted money. Cash deposits in bank and post office accounts above Rs2.5 lakh—between 9 November and 30 December 2016—will now get reported to the income tax department.

Apart from these, CIB data includes transactions related to sale of motor vehicles, purchase of bank drafts of more than Rs50,000 in cash and so on.

“After applying the various data analytics tools, information about such people can be extracted for further monitoring. The department sends this notice, and the source for this information is also disclosed therein, to let the person make an informed response,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP.

According to income tax department, it has identified 1.29 million such non-filers from the year 2013; 2.21 million from 2014 and 4.41 million from 2015 (up to 31 March 2015), using the NMS. These people have not filed returns but they may have tax liabilities.

As a result of the exercise, more than 3 million new returns have been filed and additional tax of Rs4,733.61 crore was collected in the years 2013, 2014 and 2015 (up to 31 March 2015).

Further, in the year 2015, another 5.9 million potential non-filers were identified. “The identified non-filers are informed by SMS, e-mails and letters,” said Nangia.

Responding to notices

“There is no need to panic on receiving a non-compliance notice; rather one should simply file a response to the notice on the portal,” said Nangia. You can reply to almost all the tax notices online, through your tax filing account on www.

For each tax notice, a particular response procedure has to be followed. Once you receive such an email, access your income tax account, and under the head “Compliance” you will find “View and Submit Compliance”.

“In case the taxpayer has not filed a return, and can substantiate the same with the fact that her income was below the basic exemption limit, she should file an appropriate response,” said Nangia.

However, if the taxpayer has not filed the return of income but her income was beyond the basic exemption limit, she should file the return of income after paying the appropriate taxes along with interest, he added.

As mentioned above, you may receive a notice based on the high-value transactions done by you during the year, which do not match your earnings in that year.

In such cases, “if there were legitimate reasons for not filing the return—the investments or expenditures reported may have been done through exempt income or through past accumulated savings, or the information itself does not belong to her—the system has drop-down options to submit such responses,” said Maheshwari.

In any case, you should not ignore or avoid responding to the tax notices. Non-compliance of a tax notice can attract penalty of Rs10,000, beside penal interest on the due taxes.

In some cases, it may also lead to jail for up to 1 year, along with fine. However, if you need more time to reply to the tax notices than what is stipulated, you can request the assessing officer for an adjournment.

In case you find it difficult to respond to the tax notice, take advice from a tax expert or a charted accountant to file a proper response.

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