How to Effectively Respond to Income Tax Notices

In India, the synonym of receiving an Income tax notice would be the feelings of anxiety, panic and stress. What should you do next? Who can you turn to for help? Where do you need to go? Relax take a sip of water and no worries we got you covered.

The first step to deal with such stressful situation is to understand you situation and the relevant laws. In this blog, we will explore all around the income tax notices which can empower you to beat and conquer this challenge with confidence & knowledge.

Understanding Income Tax Notices

Simply, income tax notices are official communications from the Income Tax Department of India. They can be sent for various reasons, including discrepancies in your tax return, requests for additional information, or audit notifications. The main thing is to read the notice carefully and understand its purpose before responding.

Types of Income Tax Notices

There are different sections under which notices are issued by the Income-tax department as per the Income Tax Act, 1961 (“the Act”). Each section has its own specific purpose and circumstances under which a notice can be issued and the reply to these are formulated specifically. These are mentioned below:

1. Section 139(9) of the Act is defective notice issued when there is defects in income tax return.
2. Section 142(1) of the Act is an inquiry notice, questionnaire based which requests for information for assessment.
3. Section 143(1) of the Act is a return processing intimation which includes information regarding processing of returns and adjustments made.
4. Section 148 of the Act involves reassessment of income (income escaping assessment).
5. Section 148A of the Act provides taxpayers an opportunity to respond before re-assessment notices are issued under Section 148.
6. Section 156 of the Act covers demand notices for tax dues.
7. Section 158BC assesses undisclosed income discovered during a search operation, applicable to searches post 01.09.2024.
8. Section 270A imposes a penalty for underreporting income, which ranges from 50% to 200% of the unpaid tax, depending on the severity of the underreporting.
9. Show Cause Notice asks you to explain why certain actions should not be taken against you, often relating to penalties or tax liabilities.

How Income Tax Notices Are Issued

Now a days, most of the communication is done online after the introduction of faceless assessment procedure. However, these are the relevant modes through which you can get the notice/intimation:

1. Digital Medium:

a. e-Filing Portal: The Income Tax Department primarily communicates through its e-filing portal (https://www.incometax.gov.in/iec/foportal/). Assessees can log in to their profile to view any notices issued against them in e-proceeding section.

In this section, there will be two tab – one “For Your Action” & another “For Your Information”. All the active and on-going proceedings will appear in “For Your Action” and closed proceedings in “For Your Information”.

b. Email Notifications: Registered email addresses, which is mentioned on the assessee’s Income-tax profile, are also used to send notices. You should ensure that their email information is updated and correct.

2. Physical Medium:

1. Post: Notices can be sent via registered post or speed post to the assessee’s registered address. These are often issued for significant matters, such as assessments or inquiries.
2. In-Person Delivery: In some situations, tax officials may deliver notices directly.

How to Address an Income Tax Notice

Step 1: Read the Notice Carefully

The first and foremost thing is to read the notice keenly and thoroughly. Understand what the notice is about, the specific sections of the Income Tax Act referenced and the deadline for your response.

The important things to note is the date of issue, due date for response, the assessing officer, document identification number (DIN) or any reference number.

Step 2: Gather Relevant Documents

Once you understand the notice, gather all relevant documents and information that will help you formulate your response. These are added to the main response as annexures. This may include:

1. Income-tax Return: Your income tax return for the relevant assessment year to provide context.
2. Supporting documents: like bank statements, income tax acknowledgement, computation of income, stamp duty paid invoices and receipts to validate income sources.
3. Previous communication: along with replies, with the Income-tax department.
4. Income Statements: Salary slips, Form 16 and income from other sources.
5. Supporting Evidence: Any additional documentation requested in the notice.

Step 3: Draft the Response Letter

Response letter is the main body of matter in which you have to address the issue and detail the situation and reply to the notice of the Income-tax department. The following is necessary while drafting:-

1. Be clear and concise: Clearly address the points mentioned in the notice. Avoid unnecessary slogans and write only the facts.
2. Provide Evidence: You have to mention the documents that support your claims which forms part of annexures.

For instance, if you’re explaining a discrepancy, include bank statements or other relevant proofs or document (like purchase deed) evidencing the ownership of the capital assets.

• Stay Professional: Maintain a professional tone in your correspondence. Avoid being confrontational, even if you feel the notice is unjustified.
• Address All Points: If the notice raises multiple issues, ensure your response addresses each point. Answer each question separately.

The suggested format of the letter can be:

I. HEADER: The header includes your name, PAN, address and date.

II. RECIPIENT DETAILS: Address the letter to the assessing officer mentioned in the notice.

III. MAIN CONTENT:

1. Subject Line: Clearly state the notice number, along with the document identification number (DIN) and type (e.g., “Response to Notice under Section 139(9)”).
2. Acknowledgment: Start with a statement acknowledging receipt of the notice.
3. Body:
   • Address each point raised in the notice while provide clear and concise explanations.
   • Using lists can improve the overall presentation of your response and are useful to address each point of the notice in a chronological manner.
   • Reference attached documents explicitly in your response.
   • If there’s any differences, explain the reasons factually.
   • Try to maintain a formal and polite tone throughout with including legal terminology like the Learned Assessing Officer, etc.

Step 4: Attachments

Add the attachments of the supporting documents to the response letter. Keep in mind to clearly label each document (e.g., “Annexure 1: Salary Slip for FY 2024-25”). Be sure to include the soft copies in case of online submission and hard copies (not originals) in case of physical submission and ensure they are relevant to the response.

Step 5: Submit Your Response

Once you’ve crafted your response to the income tax notice, it’s time to submit it according to the instructions provided in the notice. This is how to do this, whether you choose to submit online or offline.

First and foremost, carefully read the notice again to identify how the tax department wants you to respond. This could involve:

• Sending a physical letter to Income-tax department.
• Using the Income Tax Department’s e-filing portal for online submissions.
• E-mail submission to the tax authority

One thing to note here is that the proof of submission (acknowledgement, copy of e-mail & stamped copy of physical submissions) needs to preserved for future communication and reference in case.

Online Submission

1. Log in to the e-filing portal: Go to the official Income Tax Department e-filing website and enter your login credentials.
2. Navigate to the “e-proceedings” section: Once logged in, click on the “e-proceedings” tab then select “Submit Response” for the relevant notice.
3. Upload your response: Follow the prompts to upload your response letter and any documents you need to attach. Ensure everything is in the required format and size (like PDF or JPEG).
4. Acknowledge receipt: After submitting, you should receive an acknowledgment. Save this receipt as well as screenshots, it serves as proof that you responded to the notice.

Offline Submission

1. Prepare your documents: Print your response letter and gather any relevant documents that support your case.
2. Send your response: Use registered post or speed post to send your response to the address specified in the notice. These options provide tracking, which is important for confirmation of delivery. Otherwise, you can visit the Income-tax department for physically submitting the response.
3. Keep a tracking receipt: After sending your documents, make sure to save the tracking receipt. This will help you verify that your response was sent and received.

Make sure you send your response before the deadline mentioned in the notice. Before submitting, review your response and documents to ensure all information is accurate and complete.

If the authorities do not rule in your favor, you have the option to appeal before the relevant higher authority.

Key Considerations for Litigation Process

As we have gone through all steps through which a reply to notice can be handled, these are some actionable steps you must take.

• Read Carefully: Understand the specific issues raised in the notice and note any sections of the Income Tax Act mentioned.
• Respond Promptly: Always reply before the deadline mentioned in the notice or the relevant section. Delaying your response can lead to penalties.
• Be Honest and Accurate: If there are mistakes in your return, acknowledge them and provide corrected information. Honesty is crucial.
• Stay Professional: Use a respectful tone in your response. Avoid emotional or confrontational language.
• Provide Documentation: Attach all necessary documents, such as income statements and receipts, clearly labeled and referenced in your response.
• Keep It Clear: Write in straightforward and simple language that is easy to understand. Use bullet points or lists to address multiple issues for clarity.
• Seek Help if Needed: If you’re unsure how to respond, you can contact a tax consultant for guidance.
• Maintain Records: Keep copies of all communications and your responses for future reference.
• Prepare for Follow-Up: Be ready for potential questions from the tax department after your submission.

Conclusion

Income-tax litigation has its own set of rules and standards which should be handled with care and experience. They demand timeliness, thoroughness, and accuracy in your responses. While it is necessary to stay informed and enlighten about the laws and your delicate case, it is wise to seek the guidance of experienced income tax consultants like Master Brains for ease and taking right decision at right time.