Check the validity of the notice

First and foremost, you need to verify that this notice is valid. Any communication made to you by the Income Tax Authorities comes with a Documentation Identification Number (DIN). If the document does not carry the DIN, the Central Board of Direct Taxes (CBDT) treats it as invalid. If any communication comes to you and it does not carry a DIN, you do not need to respond to it at all. You can also check the validity online on the Income Tax Department's e-filing website. You need to find the Notice/Order Issued by ITD option and search for the relevant document.

Plan of Action

Once you have confirmed the authenticity of the tax notice, we will need to look at the type of notice you have received. Then we can move on to the best plan of action for the same.

Let’s look at them one by one:

#1. Demand Notice – under Section 156

It is likely a demand letter for you to pay your income tax, interest, penalty, fine or any other amount etc. Usually, these notifications arrive after the income tax return has been assessed. The Assessing Officer issues a notification informing the taxpayer of the amount due and requesting that they pay on time in order to avoid penalties.

In accordance with Section 220, interest is imposed at a rate of 1% for every month or part of a month up until the full amount of the outstanding debt has been paid. The Assessing Officer may also impose a fine equal to the amount that has not been paid (under Section 221).

Here’s what to do:

Pay the relevant dues within 30 days of the service of demand notice file it under the ‘Respond to Outstanding Demand’ option. The taxpayer might have less than a month to pay off the debt in exceptional circumstances, though.

#2. Customary Notice – under Section 143 (1)

There is no need to be concerned if such a warning has shown up at your door. A notice from the Income Tax department issued in accordance with Section 143(1) is just a typical cum intimation provided to an Income Tax - taxpayer as part of the department's ordinary operations. Most of the time, it is merely an indication that the income tax return has been handled correctly. The tax department has a year from the end of the fiscal year in which the return is filed to send this notification.

Here’s what to do:

Unless there is a mention of a mathematical error in the income claimed or some sort of mismatch while filing the returns, there is often no need to react to such warnings. If there is any unpaid balance, it must be resolved within a month.

Additionally, in order to avoid any issues or penalties, any necessary corrections to the information that needs to be filled out should be made right away.

#3. Inspection Notices – under Section 142(1) and 143(2)

When the governing authority needs to make any form of verification, explanation, or reassessment, such notices are sent out. The Income Tax department may publish the notification required by Section 142(1) following the conclusion of the relevant assessment year.

If the Assessing Officer is dissatisfied with the response or the failure to submit the required documents, the department will send the notice under Section 143(2) as a follow-up for the notice sent under Section 142(1).

Here’s what to do:

The person is required to respond to the notification under Section 142 (1) within the timeframe specified in the notice after receiving it. An individual may be required to appear before the Assessing Officer in person or through a representative for the notice under Section 143(2), which is a follow-up notice.

#4. Show Cause Notice under Section 148

When the Income Tax department believes that the taxpayer has hidden some sources of income in order to avoid paying taxes, a show cause notice in accordance with Section 148 is issued. If the income is up to Rs 1 lakh and was not reported, the department may send the notification within four years after the assessment year's end. If the income that was lost exceeds Rs. 1 lakh or if income from any asset that is outside of India but subject to tax is hidden, a notification may be given within six years.

The time limit to re-open income tax assessment cases has been reduced to 3 years from 6 years. Also, in case of serious tax evasion, the assessment can be reopened until 10 years, only when concealment of income is more than 50 lakh.

Here’s what to do:

File a return for the income under question within a month or the timeline mentioned in the notice. If you are not convinced of the claim, you can contest the notice. Moreover, the Assessing Officer has to provide the relevant reasons for issuing such notice if the taxpayer asks for the same.

#5. Refund Adjusted against the Tax Demand under Section 245

When a tax demand is outstanding with the Income Tax department and the sum has been claimed as a refund, this notice according to Section 245 is issued. The Assessing Officer would offset any tax demands owed by the tax payer (in full or in part) with the refund. The taxpayer may be served with or issued with such notification at any time.

Here’s what to do:

Within 30 days after receiving the letter or notification, the taxpayer must react. In the event that the taxpayer doesn't reply within the allotted time, the adjustment is made automatically.

#6. Notice under Section 139 (9)

If your ITR form is incorrect, you haven't paid all of the tax that is owed, you have claimed a refund for tax that was deducted but haven't specified the relevant income, there is a name mismatch between your name on the form and your PAN card, or you have paid taxes but haven't disclosed income, you will receive a notice under Section 139(9) of the Income Tax Act calling it to be a defective return.

Here’s what to do:

You need to check if you filled the wrong form or if you happened to make mistakes in your ITR filing.

Within 15 days after the assessing officer's notification, reply to the notice. If you need an extension, write to your local assessing office; but, if you don't respond, your return will be deemed invalid.

#7. Notice under Section 131 (1A)

When the assessing officer believes that the taxpayer is hiding their income, s/he will get the notice required by Section 131 (1A). This notice merely serves as notice that the assessing officer has opened an investigation, is looking into the situation, or has cause to believe you have hidden income.

Here’s what to do:

This categorizes you as an Income Tax Defaulter. Gather all the evidence and documents proving that the ITR contains true and accurate information.

Conclusion

In addition to the letters stated above, you might also receive a notice for things like large value transactions, significant investments made in the name of your spouse, failing to disclose assets that are subject to wealth tax, etc.

Do not hesitate to employ a tax adviser and resolve the matter right away if you are unsure of how to react to the notification received by the Income Tax department.

Steps to follow for responding to income tax notice :

  1. Log in to your account on the e-filing website by entering your credentials: User ID (PAN), password, and captcha code.
  2. Under the 'Pending Actions' tab, select 'Response to Outstanding Demand'.
  3. On your screen, details of outstanding tax demand will appear such as outstanding demand amount, accrued interest etc. If you agree to make the payment, then click on 'Pay Now'. You will be redirected to the e-Pay tax.
  4. If you want to submit a response, then click on 'Submit Response'. You will get three options:
    • If the demand is correct and you have not paid already
    • If the demand is correct and you have paid already
    • If you disagree with the demand (either in Full or part)
  • If you select option A

    When demand is correct and you have not paid already, then you cannot disagree with demand later on. Click on 'Pay Now' and you will be redirected to e-Pay Tax to make the tax payment. Once the tax payment is successful, keep the transaction ID safe for future reference.

  • If you select option B

    if demand is correct and you have paid already, then you cannot disagree with demand later on. You will be required to add details of the tax challan such as challan amount, BSR Code, serial number etc. You will be required to upload PDF copy of the challan. Click on 'submit' to submit the response.

  • If you select option C

    If you disagree with demand (either in full or part), you will be required to 'Add reasons' for disagreeing with the demand.

    Select from the options given reasons for disagreement and click on apply. You will be required to provide appropriate details for each reason selected by you. If you partially agree with the demand notice, then you will be required to make partial payment.