Income Tax Notices Decoded: What They Mean and How to Respond
CA Gagan Gupta
Founder & Principal, Kishnani & Associates
CA Gagan Gupta is a seasoned Chartered Accountant with extensive expertise in taxation, audit, financial consulting, and business advisory. A fellow member of the ICAI since 2021, he has been practicing since 2016, providing strategic financial solutions to businesses, startups, and individuals. Under his leadership, Kishnani & Associates delivers precise and ethical financial services, ensuring seamless regulatory compliance and sustainable growth for clients.
Receiving an income tax notice can often cause anxiety. However, not every notice indicates fraud, tax evasion, or penalty. With increasing digital compliance, receiving notices is a routine outcome of data matching or requests for clarification. This article explains the various types of income tax notices issued by the department, their meanings, and the correct way to respond.
What is an Income Tax Notice?
An income tax notice is a formal communication issued by the Income Tax Department to a taxpayer. It is typically sent for reasons such as non-filing of a return, a mismatch in data, scrutiny of claims, re-assessment of income, or discrepancies found in financial activities. Each notice is issued under a specific section of the Income Tax Act and specifies a deadline for the taxpayer to respond or take action.
Why Do You Receive a Tax Notice?
Notices may be triggered due to several reasons:
- Non-filing of Income Tax Return (ITR) despite having taxable income
- Discrepancies between reported income and data in Form 26AS/AIS
- High-value transactions not matching declared income
- Defective returns or incorrect ITR filing
- Cases selected for scrutiny
- Re-assessment of escaped income from earlier years
Common Income Tax Notices and Their Implications
1. Notice under Section 139(9) – Defective Return
This is issued when the return filed has errors or is considered incomplete. For example, missing income details or non-submission of mandatory data.
What To Do: Log into the income tax portal, download the notice, and correct the errors by filing a revised return within the stipulated time.
2. Notice under Section 142(1) – Preliminary Inquiry
This notice is sent when the department needs more information before completing the assessment. It may also be issued if you have not filed your return.
What to Do: Submit the requested details or file your return if pending. Failure to respond can lead to adverse assessment or penalties.
3. Notice under Section 143(1) – Intimation
This is typically a system-generated communication. It may:
a. Accept your return as filed
b. Indicate a refund
c. Show a demand due to errors or mismatches in computation
What to Do: If the figures are correct, no action is needed. In case of a tax demand, you can pay or file a rectification request if you disagree.
4. Notice under Section 143(2) – Scrutiny Assessment
This notice means your return has been selected for scrutiny. The officer may question deductions, exemptions, high-value transactions, or unusual claims.
What to Do: Cooperate fully. Submit the supporting documents as requested. It is advisable to consult a tax professional in such cases.
5. Notice under Section 245 – Refund Adjustment Against Previous Demand
This notice is sent when you are due for a refund, but the department adjusts it against old unpaid tax demands.
What to Do: If you agree with the adjustment, no action is needed. If not, respond within 30 days on the portal and submit clarifications or raise objections.
6. Notice under Section 148 – Income Escaping Assessment (Re-assessment)
This is a critical notice and is issued when the department has “reason to believe” that some income has escaped assessment during a previous financial year.
It is usually triggered by:
a. Information from third-party sources such as banks, registrars, or mutual funds.
b. Mismatches in reported vs actual income
c. Unexplained cash deposits, property purchases, foreign assets, or large investments not reflected in returns
Procedure:
- The department may issue a notice to reassess income under Section 148.
- From April 1, 2021, a prior opportunity to explain (via a Section 148A(b) notice) is generally given before initiating reassessment proceedings.
- The Assessing Officer will issue a show-cause notice under 148A(b), allowing you to explain within 7 days.
- Based on your reply, an order under 148A(d) is passed, determining whether a fresh assessment under 148 should proceed.
Time Limits:
Escaped Income Amount | Time Limit (Standard) | Revised Limit (from September 1, 2024) |
≤ ₹50 lakh | Up to 3 years from the end of the relevant assessment year | Up to 3 years and 3 months from the end of the relevant assessment year |
> ₹50 lakh | Up to 10 years from the end of the relevant assessment year | Up to 5 years + 3 months from assessment year-end |
a. Before September 1, 2024, longer timelines (3 or 10 years) applied depending on the amount of income escaping assessment.
b. From September 1, 2024, onward, the amended law shortens the extended timeline (for escaped income > ₹50 lakh) to 5 years + 3 months instead of 10 years.
Implications
- No extension or 6-year limit exists under current provisions.
- Notices issued beyond these revised timeframes are considered invalid and may be challenged legally (e.g., as ruled by ITAT in the Sonali Mhatre case for exceeding the 3-year limit)
- The AO must also follow the procedural safeguards under Section 148A (show-cause notice and hearing) before any Section 148 notice is issued.
Example
Suppose the relevant assessment year is AY 2021–22 (i.e., FY 2020–21 ending March 31, 2021):
1. If escaped income ≤ ₹50 lakh → Section 148 notice must be issued by March 31, 2024 (or by June 30, 2024 after September changes).
2. If escaped income > ₹50 lakh → previously allowed until March 31, 2031, nowshortened to March 31, 2026, or by June 30, 2026 after the September rules
What to Do:
- Respond promptly to the show-cause notice.
- File a return for the year in question, if asked under Section 148.
- Keep all financial and documentary records handy for verification.
- Seek assistance from a Chartered Accountant, especially in cases involving re-assessment.
How to Respond to a Tax Notice: Step-by-Step
- Review the Notice
Check the PAN, assessment year, section mentioned, and reason for issuance. Read it carefully. - Cross-Check with Records
Compare the contents of the notice with your ITR, Form 26AS, AIS, and other financial documents. - Verify Authenticity
All valid notices are available on the income tax portal. Cross-verify the notice by logging into your e-filing account. - Prepare a Response
Collect all required documents, proofs, and explanations before responding. - Reply on the Portal
Use the Income Tax e-filing portal → “e-Proceedings” section to respond online. For older notices, manual submission may be required. - Seek Professional Help
If the notice involves legal or financial complexity — like re-assessment, scrutiny, or high-value discrepancies — it’s best to consult a CA or tax lawyer.
What Happens If You Ignore an Income Tax Notice?
Ignoring a tax notice can lead to:
- Penalty for non-compliance
- Best judgment assessment (i.e., an assessment made without the taxpayer’s input)
- Prosecution in serious cases
- Interest on unpaid tax
- Blocking of refunds or deductions
How to Stay Compliant and Avoid Notices
- File returns on time and accurately.
- Reconcile income and TDS with Form 26AS, AIS, and bank accounts.
- Report all sources of income, including minor or passive ones.
- Avoid claiming deductions or exemptions without valid proof.
- Maintain transparent records of all financial transactions.
Conclusion
Income tax notices are part of a transparent and increasingly digitized compliance regime. While receiving one might initially feel stressful, most notices are manageable if approached systematically. Understanding the reason, responding on time, and maintaining proper records are crucial. Especially in serious matters like re-assessment under Section 148, a proactive and professional response is essential to protect your rights and avoid legal consequences.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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