ITR Scrutiny Gets Stricter: How To Respond To An Income Tax Notice?

Filing your Income Tax Return (ITR) is only the beginning of the compliance journey. The more challenging part could be if you receive a notice from the Income Tax Department for any potential error or mismatch of data in your ITR filing.

It’s important for taxpayers to know how to respond to an income tax notice effectively and avoid potential complications.

The Income Tax Department has picked nearly 1.65 lakh cases for scrutiny for Assessment Year (AY) 2026, which is three to four times more than usual.

Of these, over one lakh scrutiny notices have already been served under Section 143(2) of the Income Tax Act. This section empowers the I-T Department to conduct a detailed assessment of the return if it finds discrepancies or high-risk financial behaviour.

As per NDTV Profit, the red flags this year include:

• Unusual or large cash deposits

• Unexplained bank credits

• Undisclosed capital introduction

• Mismatch between ITR and GST turnover

• Irregularities in mergers and acquisitions

Cases are flagged through CASS (Computer Assisted Scrutiny Selection) — a risk-based, data-driven system. The department has also widened the net using its Risk Management Strategy (RMS) to catch high-risk non-filers, pushing the total number of flagged cases to around 2.5 to three lakh.

If you receive a scrutiny notice, don’t panic. Before responding to any communication claiming to be from the Income Tax Department, verify its authenticity. You can do this by using the notice/order verification feature available on the e-filing portal.

Once you have established the authenticity of the notice, here’s how you should respond:

• Read The Notice Carefully: Check which section the notice has been issued under (e.g., Section 143(2), 148, etc.) and understand the reason for the scrutiny.

• Check The Deadline: You’ll be given a specific time to respond. Delays or failure to respond can result in penalties or adverse orders.

• Gather Supporting Documents: Start collecting relevant documents such as bank statements, proof of income (salary slips, rental agreements, etc.), investment proofs, loan statements (if any) and GST filings or business turnover records.

• Respond Online Through The e-Portal: Most notices now come with an option to respond online through the Income Tax Department’s e-filing portal. Use the “e-Proceedings” section to upload your response and documentation.

• Consult A Tax Expert: Professional help can go a long way in ensuring your documentation is appropriate and responses are legally sound, especially in complex cases involving business income, capital gains, or foreign assets.

With scrutiny becoming sharper, backed by the latest technology, the age of loosely filed returns is over. Even minor mismatches or unexplained transactions could lead to a notice from the I-T Department. Stay compliant, document your finances well and if you do receive a notice, act promptly and transparently.