Demystifying Income Tax Assessment: How to respond to an Income Tax Notice?

Filing income tax returns (ITR) is an essential obligation for all individuals and organizations operating in India. Once you have filed your ITR, the next crucial step is to verify the details provided. The Income Tax Department (IT Department) thoroughly examines the income declarations and tax payments to ensure accuracy. If any discrepancies are found, the department may issue a demand notice. In this article, we will guide you on how to respond to an income tax demand notice in accordance with the Indian Income Tax Act 1961.

Understanding Income Tax Notices

It is crucial to differentiate between an intimation and a notice from the IT Department. An intimation informs the assessee about the progress of their ITR application and usually requires no action. On the other hand, a notice demands a response from the taxpayer within a specified time frame.

Types of Income Tax Notices

• Non-Disclosure of Income: If the disclosed income in the ITR is less than the actual income, the IT Department may issue a notice under section 139(9) or 143(1). This notice will require the taxpayer to explain the discrepancies and provide supporting documentation.
• Delay in Filing ITR: Reminders are sent to taxpayers under section 139(1) to file returns on time. Failure to do so may result in a notice under section 142(1)(i) demanding the return filing. In such cases, the taxpayer must respond promptly and provide a valid reason for the delay.
• Tax Evasion: If the department suspects tax evasion, a notice under section 143(2) may be issued, requiring the taxpayer to explain discrepancies in investments or undeclared income. The taxpayer must provide a detailed response with evidence to justify their income declarations.
• Notice of Demand: When the IT Department orders the payment of tax, interest, or penalty, a notice of demand under section 156 is issued, and the taxpayer must pay the amount within the specified period. The taxpayer should respond promptly and acknowledge the demand, or in case of disagreement, provide a valid reason for their submission.
• Setting off Refunds Against Tax Payable: Under section 245, the IT Department may offset any refunds against outstanding dues and notify the taxpayer accordingly. In such cases, the taxpayer must respond promptly to acknowledge the offset or provide relevant information if they disagree with the offset.

Responding to an Income Tax Demand Notice

Step 1: Log in to the Income Tax Department's e-filing website at www.incometaxindiaefiling.gov.in using your user ID and password (PAN number). Ensure you have access to all relevant documents and information related to your income and tax payments.

Step 2: Click on 'E-file' and select 'Respond to Outstanding Tax Demand.' Carefully review the details of the demand notice displayed, including the assessment year, section code, demand notification number, date of demand, outstanding demand amount, and other relevant information.

Step 3: Choose the relevant option for your response based on the nature of the demand:

Option 1: Demand is correct

• If you agree with the demand, select this option, and a pop-up message will appear stating that you cannot disagree with the demand once confirmed. Click on 'Submit' to proceed.
• If a refund is due, the outstanding amount and interest will be adjusted against the refund due. Otherwise, you must pay the demanded amount immediately.

Option 2: Demand is partially correct

• If you believe the demand is partially correct, enter the correct and incorrect amounts per your understanding.
• Provide the necessary details to justify your disagreement with the department's calculation. Depending on the reason for partial correctness, you may need to provide specific information such as the Challan Identification Number (CIN) for a paid demand, details of rectification or appellate orders, or stay petitions filed, among others.
• Upload relevant documents and remarks to support your response.
• Click on 'Submit' to proceed.

Option 3: Disagree with the Demand

• If you disagree with the demand, provide detailed reasons for your disagreement.
• Choose the appropriate reason for your disagreement from the available options.
• Upload any necessary supporting documents and remarks to substantiate your stance.
• Click on 'Submit' to proceed.

Step 4: A transaction ID will be generated after submitting your response. Keep checking your e-filing account for any follow-up notices or communications from the IT Department.

Read more: What to do if you receive a notice?

Responding to an income tax demand notice is a crucial responsibility for taxpayers in India. The income tax department now uses a faceless and digitalized system, making filing responses more accessible. It is essential to accurately disclose all incomes and investments in the ITR to avoid future complications. Always respond to any notice within the specified time frame to maintain a clear tax track record and comply with the Indian Income Tax Act, 1961. By following the step-by-step guide provided in this article, taxpayers can handle income tax notices effectively and efficiently.