Explained: How limited scrutiny approach can avoid pendency of tax litigation cases, arrears and delays

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New Delhi | Published: July 3, 2018 2:05 AM

tax, income taxBy resorting to limited scrutiny, pendency, arrears and delays can be avoided, which have become a feature of the tax department, courts and tribunals.

With the Modi government tightening its noose on tax evaders, there has been a tremendous rise in the number of prosecutions initiated by the income tax department. Taxpayers are receiving notices requiring them to furnish details of transactions. The government is gearing up for stricter enforcement, especially in cases where there is wilful attempt to evade taxes or penalty.

The plethora of information obtained by demonetisation and GST filings have given the government an opportunity to dig in and explore. It has taken various steps to come down heavily on tax evaders. For instance, GST returns are now tied to the returns submitted to the department making manipulation of sale figures tough, almost impossible.

High value transactions

Moreover, to keep a watch on high value transactions undertaken by taxpayer, it has framed the concept of Statement of Financial Transaction or Reportable Account (SFTRA), earlier called Annual Information Return (AIR). With the help of SFTRA, tax authorities are collecting information on certain prescribed high value transactions undertaken by a person during the year. A variety of information is required to be filed in the SFTRA, which includes investments of value above `10 lakh, new fixed deposits with banks, post office or finance companies; purchase or sale of immovable property of value exceeding `30 lakh (as computed by the Stamp Valuation Authority), purchase of foreign exchange of `10 lakh or more, etc. Additionally, certain cash transactions are also required to be reported like cash deposits in bank accounts or purchase of bank drafts in cash above certain limits, etc. The government is also using technology extensively to conduct detailed analysis of the taxpayers’ financial data and personal data in order to find the gap between income spent and income declared. Even Income Tax Return forms have been revised to seek additional information from taxpayers.

Detailed scrutiny

However, despite so much information available at hand, the department is still conducting detailed/ complete scrutiny of various cases, even where only a simple cross-verification of facts/transaction is required to clarify a mere mismatch or inaccurate reporting of income. The process can be easily expedited by means of a limited scrutiny assessment. Under a limited scrutiny assessment, the assessing officer is required to limit the enquiry to the specified case/transaction only, without going into details or conducting roving enquiries leading to delay in the proceedings. In limited scrutiny cases, a questionnaire is required to be filled in by the taxpayer, which is confined only to specific reasons/ issues for which it has been picked up for scrutiny. Further, the scope of enquiry is also required to be restricted to the limited scrutiny issues.

Limited scrutiny

By resorting to limited scrutiny, pendency, arrears and delays can be avoided, which have become a feature of the tax department, courts and tribunals. These issues hamper dispute resolution, contract enforcement, stall projects, hamper tax collection, stress taxpayers and escalate legal costs. The concept of limited scrutiny also protects the interest of revenue collection. If during the course of assessment proceedings in limited scrutiny cases, it comes to the notice of the assessing officer that there is potential escapement of income, requiring substantial verification on any other issue(s), then, the case may be taken up for complete scrutiny with the approval of the Commissioner concerned.

The writer is partner Nangia Advisors LLP. Inputs from Vasudha Arora

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