Procedure for Scrutiny Assessment by Income Tax Department

In cases selected for scrutiny, the assessing officer serves a notice under section 143(2)(ii) of the Income Tax Act, within six months from the end of the financial year in which the return was filed. For example, in respect of the returns filed during the financial year 2011-12, the notice has to be issued by 30-09-2012. The assessee is asked to produce any evidence which he may have relied on to compute the income stated in the return. The evidence will include books of accounts and other documents. In addition to what the assessee produces in support of his return, the assessing officer may call for more information and details for ensuring that the income declared is correct and the expenses claimed have been genuinely incurred.

The deductions claimed are also verified. If there is any information with the department with regard to any investment or expenditure or any other financial transaction, that, too, is verified with reference to the return of income. The assessing officer may also conduct appropriate inquiries for verification of facts stated in the return of income.

Scrutiny provides the assessing officer an excellent opportunity to fully examine the complete financial affairs of the assessee for the year for which the return is being scrutinized. For doing so, the assessing officer may call for the following information:


  • Copies of bank statements along with explanations for all debit and credit entries,
  • Credit card statements and source of payment thereof,
  • Investments made during the year in immovable property, fixed deposits, shares, debentures, bonds, etc., and sources thereof,
  • Proof for claims of deductions and expenditures,
  • Details of claims of business expenses and genuineness thereof,
  • Names and addresses of sundry creditors and sundry debtors,
  • Details of loans, gifts taken and given,
  • Confirmations from sundry creditors and persons who have given loans or gifts,
  • Quantum of household expenses band sources thereof, and
  • Reconciliation of income with TDS certificates, etc.

The above is only an illustrative list of information that may be called for. The actual questions to be asked would depend upon the facts of the case and the ability of the assessing officer to probe meaningfully.

There is a provision in the Income Tax Act which enables the assessing officer to get the accounts of an assessee audited from an auditor nominated by the Chief Commissioner or the Commissioner of Income Tax. This is resorted to in cases where the accounts are complex and the assessing officer feels that it will be in the interest of the department to do so. This is called special audit and can be resorted to even in cases where the accounts have been already audited for any other purpose. The power of special audit is a very potent tool of investigation in tile hands of the assessing officer for a professional examination of accounts and records in complicated cases. Search and seizure cases are often subjected to special audit.

The assessing officer may also make independent enquiries, collect evidence and record statements of the assessee and witnesses on issues that may arise during examination. He may also verify the genuineness of all claims. If the assessing officer is taking an adverse view on any of the issues, he is required to give an opportunity to the assessee to explain the same. The result of the entire process is then crystallized in the form of an assessment order, which specifies the taxable income determined by the assessing officer and the tax payable on the same.


Interest to be charged for defaults in filing of return of income or payment of advance tax, etc., if warranted, is also calculated. If scrutiny rec1ts in detection of concealment of income, penalty proceedings are also initiated.

If the assessee is aggrieved by the assessment order and feels that the additions made to the income stated in the return are not justified and the income assessed is not correct, he may appeal against the order. The appeal against the order is to be filed with the jurisdictional Commissioner of Income Tax (Appeals), called CIT (Appeals), within thirty days of the receipt of the assessment order. The CIT (Appeals) gives both the assessee and the assessing officer an opportunity to put forth their arguments, decides the appeal and passes an order covering all grounds of appeal.

If the assessment order passed by the assessing officer is found to be erroneous, one more remedy is available to the assessee He may file an application with the concerned Commissioner of Income Tax for revision of the assessment order. A revision petition can be filed within one year from the date of receipt of the assessment order. The Commissioner of Income Tax may also suo motu revise the assessment order if he realises that the order is erroneous and prejudicial to the interests of the revenue. He gives the assessee an opportunity of being heard before revising the order.

If the assessment order shows any apparent mistakes in the computation of taxable incdme or the tax payable thereon, the same can be got rectified from the assessing officer himself by filing an application in this regard. The request for rectification can be made within four years and the assessing officer has to pass the order of rectification within six months of the receipt of the application.

It must be clearly understood that while scrutiny assessments are a vehicle for investigation, investigations carried out through inquiries, surveys and searches have also to culminate in scrutiny assessments. This is the final action as concealed income is quantified and further punitive action in the form of penalty and prosecution is also initiated during these proceedings.
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