IN the last column, we discussed what happens after you file your tax return. The real worry starts if your case is chosen for scrutiny. The assessing officer selects 3-5 per cent of returns filed for detailed scrutiny assessment under Section 143(3). We will now discuss how cases are chosen and how you can be best prepared if your tax return is among the chosen few. You'll know that the return has been picked for scrutiny when you find a notice at your door.

How Are The Cases Chosen?

The tax department lays down norms from time to time for choosing cases for scrutiny (See 'Will Your Case Come Under Compulsory Scrutiny?'). There are cases which do not come under these norms, but are chosen because the assessing officer believes scrutiny is required for specific reasons. For example, cases of builders/contractors who follow project completion method to declare their income, or cases with prima facie evidence of dividend/bonus stripping. The cases are selected after recording the reasons in writing and with prior approval of the chief commissioner of income tax concerned.

What To Do When Under Scrutiny?

Prepare for a long haul. The assessment is completed after a number of hearings. One can personally attend the proceedings or engage a CA/lawyer to represent his case. Your best friends in the scrutiny stage are your supporting documents. Keep them ready. Normally, the assessing officer asks for the following documents/information during scrutiny assessment:

(i) A detailed analysis of bank passbook explaining each debit and credit.

(ii) Investments made in immovable properties, FDRs, shares, debentures, bonds and sources of funds for making such investments.

(iii) Details of loans accepted and given during the year, along with confirmation from other party.

(iv) Details of gifts given and taken during the year.

(v) Details of motor vehicles purchased during the year and the sources of funds thereof.

(vi) Details of household expenditure, including expenditure on telephone bills, electricity bills, children's education expenditure, kitchen expenditure and movable assets purchased for personal use.

(vii) Details of drawings made to meet household expenditure.

(viii) Details of foreign travel undertaken and expenditure thereon.

(ix) Details of assets held by minor children and the source of acquisition.

(x) Details of assets held by spouse and sources of acquisition of the assets.

(xi) Details of income of minor children.

(xii) Details of immovable property constructed during the year and the expenditure incurred thereof.

(xiii) Details and proofs of rent paid during the year for which HRA has been claimed as exempt.

(xiv) Details and proofs of donations made for which deduction has been claimed U/S 80G.

(xv) Details of various payments and reimbursement received from the employer in case of a salaried class person.

A Stitch In Time: The Assessment Stage

Remember the following points during the assessment stage to avoid problems:

(i) You should analyse all passbook entries to ensure that the incomes are accounted for in the income tax return. It is advisable to prepare a balance sheet every year even though it is not legally required. This helps in tracking income in the long run.

(ii) Keep proper records of investments made along with their sources. If the sources of investment are not explained to the satisfaction of assessing officer, then such unexplained investment is treated on income of the assessee, and taxed.

(iii) Do not accept or repay any loan or deposit of Rs 20,000 or more in cash. Use a crossed cheque because the penalty is enormous. Any loan accepted/repaid in cash above the specified limit attracts a penalty equal to the amount of loan accepted/repaid.

(iv) Keep a record of gifts accepted during the year including the gift deed, permanent account number of donor and bank statement of donor. It may be noted that if gift of money exceeding Rs 25,000 is accepted on or after 1 September 2004 from non-relatives, such gifts are treated as income of the receiver.

(v) Ensure that proper withdrawals are made from income for monthly household expenditure. If withdrawals are less than the household expenditure estimated by the assessing officer, the shortfall is treated as income.

(vi) Include the income of minor child in the income of the parent whose total income is highest. In other words, if the total income of the father is higher than that of the mother, then the income of the minor child will be included in the father's income.

(vii) If some assets have been transferred to the spouse at lower than the market rate, or if the spouse has purchased assets from money gifted by you, then any income from such assets should be included in your income and not in the income of spouse.

(viii) Ensure that if any house is constructed during the year, the expenditure on construction is properly accounted for. If as per the assessing officer, the cost is Rs 4 lakh and the cost of construction as per the assessee is Rs 2.5 lakh, then Rs 1.5 lakh will be taxed as income.

(ix) If exemption for HRA is claimed, then the proof of rent paid has to be furnished. Also ensure that if rent is paid to your father, mother or any relative, then the rent has to be shown in the return of income of the person receiving the rent.

Till When Can The Scrutiny Go On?

The scrutiny assessment must be completed within two years from the end of the relevant assessment year (AY). Therefore, for the financial year ending 31 March 2003, the AY is 2003-04 and scrutiny assessment should be completed by 31 March 2006.

What Is The Penalty?

In scrutiny assessment, you not only have to pay the tax on the addition to your declared income, but also a penalty for concealment of income unless the addition is on account of interpretation of law. The minimum penalty of concealment of income is 100 per cent of the tax sought to be evaded, and the maximum penalty for the same is 300 per cent of the tax.

The author is a practising chartered accountant and a tax expert. Send your queries to pf@bworldmail.com.