Afraid of income tax scrutiny?

File AIR for high-value deals; ensure that bank statements and transaction records are in place.

A scrutiny letter from the income tax (I-T) department is always a scary proposition. But, you can receive it even if there is no major problem with your return. For instance, there can be a scrutiny call if the returns are filed past the due date, there is a refund on the revision of returns, or, if the refund is a significant amount.

“Typically, a random check by the department comes up due to a mismatch between income and transactions,” says Kaushik Mukherjee, executive director, PricewaterhouseCoopers.
 

KEEP IN MIND The following AIR transactions need to be reported when filing returns:

Cash deposits of Rs 10 lakh and above  Credit card bills of Rs 2 lakh and above  Mutual fund investment of Rs 2 lakh and above  Purchase of bonds/ debentures worth Rs 5 lakh and above  Purchase of stocks worth Rs 1 lakh and above  Purchase of immovable property worth Rs 30 lakh and more Sale of immovable property worth Rs 30 lakh and above  Purchase of RBI bonds worth Rs 5 lakh and above

 

Let’s say, you bought a property and made the down payment from your father's  account. If the amount is significantly higher than your income, the taxman can start digging into your statements. Usually, scrutiny notices are issued due to high-value credit card payments (for example, using your card to buy jewellery worth Rs 10 lakh or more, international business class tickets), property transactions and, sometimes, international travel.

To be prepared for being scrutinised, you should keep all bank statements and transaction records in place. Also, there has be clarity about the source of income. If unsatisfied, you’ll be asked to produce more documents supporting your case.

The Central Board of Direct Taxes (CBDT) issues a list of high-value transactions every year, which can land you in the scrutiny net. These transactions constitute the Annual Information Report (AIR) under Section 285BA, rule 114E, which requires certain 'specified person(s)' to file the report every year.

When you make high-value transactions — investment in property and/or mutual funds — your bank or the respective financial institution (mutual fund house, for example) reports this to the I-T department through an AIR. The department keeps track of such transactions through your permanent account number (PAN).

You need to report it to the I-T department at the time of filing returns. “You should disclose all information related to your income or expense, as the department is aware of all the transactions in advance through financial institutions,” says Homi Mistry, tax partner, Deloitte, Haskins and Sells. 

Remember that you can file only one AIR for a financial year. However, if you want to rectify a mistake or want to furnish additional information in the report, you can file ‘supplementary information'.

“There are three situations when you may need to file supplementary information. (a) When you respond to a notice from the I-T commissioner (central information branch) within the time allowed by the commissioner. (b) To furnish additional details not submitted in the original AIR (c) In response to any deficiency indicated by the tax information network (TIN) in the provisional receipt,” said a Pune-based chartered accountant.

Supplementary information should be furnished according to the data structure specified by the I-T department and should be incremental, that is, contain information only on reported transactions which have to be revised. It should be filed at the same TIN facility centre where the original was filed. If the latter was filed online, supplementary information also should be filed online.

You have to pay (service tax additional) for the AIR and supplementary information. the charges are Rs 25 for 100 records, Rs 150 for 100-1,000 records and Rs 500 for more than 1,000.

In March this year, CBDT issued a circular to streamline the scrutiny procedure. “Scrutiny of returns has evoked concern from small taxpayers and senior citizens about prolonged enquiries and the same cases year after year,” said the circular.

For the financial year 2011-12, the CBDT decided that senior citizens and small taxpayers, filing income-tax returns in ITR-1 and ITR-2, will be subject to scrutiny only when the department has credible information.

“For this purpose, senior citizens would be individuals who are 60 years or more. Small taxpayers would be individual and HUF (Hindu undivided family) taxpayers whose gross total income, before availing deductions under Chapter VIA, does not exceed Rs 10 lakh,” the circular said.