Black money chase: Don't panic if you receive a tax notice

Prepare your replies with expert help and keep relevant documents ready to support your replies

The government has asked banks to provide information to the Income-Tax (I-T) Department about savings accounts where deposits have exceeded Rs 2.5 lakh (Rs 12.5 lakh in the case of current accounts) after November 8. If the deposits are higher than past levels or deviate significantly from what a person’s savings are expected to be, based on the I-T returns he has filed in the past, he could receive a notice from the tax department. As the government has gone into overdrive against black money, many more notices are expected this year.
 
Type of notice received
 
First, you determine the type of notice you have received. Sometimes the tax department sends enquiry notices, where the officer asks for specific information. A tax scrutiny notice is for examining your I-T return in great detail. “For black money-related cases, the department could issue enquiry notices anytime, asking people to explain the source of large deposits in their savings accounts. Scrutiny notices will be issued only after the return is filed,” says Rahul Jain, partner-direct taxation, Nangia & Co.

 

The seriousness of your problem also depends on whether you have received a limited or detailed scrutiny notice. In the former, the officer can ask you to provide information only regarding limited points, say, about a mismatch between the tax return you have filed and the Annual Information Return (AIR) filed by a bank or mutual fund (MF) house for high-value transactions. A detailed scrutiny is a more holistic investigation. “A tax officer can convert a limited scrutiny into a complete scrutiny but not merely on the basis of suspicion or guesswork. He can do so, with the approval of a high-rank officer, only if he forms a reasonable view to believe income exceeding Rs 5 lakh (Rs 10 lakh in a metro) has escaped assessment,” says Kuldip Kumar, partner and leader (personal tax), PwC India.  

 
What should you do?
 
Just because you have received a notice does not imply wrongdoing on your part. Instead, you should set about dealing with it methodically. First, understand the objective of the notice: Is it a scrutiny notice or only asking for specific information? Next, establish whether it is a valid notice and if the tax officer has the jurisdiction or power to issue it. “The notice ought to specify the nature of proceeding and relevant provision under which the information is being requested.  Additionally, it needs to be checked whether the tax officer has appropriate jurisdiction to inquire about transactions of the taxpayer,” says Jiger Saiya, partner — direct tax, BDO India.

 
Next, prepare your replies and provide relevant documents to support your claim. The notice usually specifies the information you have to provide. If required, seek the guidance of a chartered accountant.
 
Under a new scheme that is being optionally tried out in seven cities, you can respond by e-mail. The taxpayer can also choose to respond and give supporting documents in physical form. Information should be properly vetted and only then submitted. Some notices require a personal hearing, where you are called upon to explain the submissions made. “The taxpayer needs to ensure he replies to the notice within the stipulated time. If he fails to do so, there could be a penalty. The tax officer also has the power to make a best-judgement assessment and there are also provisions for prosecution,” says Saiya.

 
After you have prepared and filed your returns for a year, store all the relevant documents, so that you can produce these in case of a scrutiny. “How long you need to preserve these documents depends on the source of income and limitation period to reopen assessments. In the case of income from foreign assets, you have to maintain records for 16 years. In case the of income from a domestic source, where the income escaped is more than Rs 1 lakh, you have to preserve these documents for six years. In other cases, it is for four years,” says Kumar.

Get the paperwork right
 

• Maintain books of accounts. Keep documents to show vendors’ genuineness
• Those who file returns under presumptive tax should preserve proof of sales and service tax paid
• To justify inventory, have purchase bills, sales invoices, record of opening and closing stock
• PPF passbook, mutual fund and home loan statements serve as proof for Section 80C deductions
• For significant transactions like property purchase, preserve sale deed
• Always keep a copy of your bank statement for the year
• Ensure gift deeds are in place for large gifts