Receiving an income tax notice can be intimidating, especially when it concerns old assessment years and large transactions. In this blog, we share how our Chartered Accountant (CA) firm navigated a particularly complex case and successfully defended our client, demonstrating the critical role that skilled tax professionals play.
The Background: When the Notice Strikes
Our client, Mr. Manoj , a Non-Resident Indian (NRI), had not filed his Income Tax Return (ITR) for Assessment Year (AY) 2017-18. He had:
- High-value mutual fund investments.
- Significant fixed deposits.
- Interest income from HDFC Bank.
- Employment history showing foreign income.
The Income Tax Department flagged these transactions through their Risk Management System (RMS) and issued a Show Cause Notice under Section 148A(b), stating that income appeared to have escaped assessment.
The Legal Framework: Understanding Section 148A
Section 148A, introduced to ensure procedural fairness, mandates that before issuing a notice under Section 148 for reassessment, the taxpayer must be:
- Informed of the reasons.
- Given an opportunity to respond.
After evaluating the taxpayer's reply, the department decides whether reassessment proceedings should be initiated.
Our Client’s Challenges
- Non-filing of ITR: Although he believed no return was required due to NRI status, non-filing is risky when high-value transactions are involved.
- Mismatch in Salary Information: The department incorrectly recorded salary income for AY 2017-18, which actually pertained to a later period.
- Documentary Proofs: The department required solid evidence of NRE status, source of investments, and taxability.
Step-by-Step: How We Resolved It
1. Immediate Validation of Notice
We first validated the authenticity of the notice using the Document Identification Number (DIN) on the Income Tax e-filing portal.
2. Strategic Response to 148A(b) Notice
We compiled a detailed and well-structured response:
- Provided the passport copies showing days outside India.
- Shared the appointment letter and relieving letter from previous employment abroad.
- Furnished the Form 26AS to show no domestic salary income.
- Explained that NRE account interest is exempt.
- Justified mutual fund and deposit transactions as repatriated foreign income.
3. Handling Subsequent 142(1) Notices
Despite our comprehensive reply, multiple Section 142(1) notices were issued, requesting:
- Original bank statements highlighting NRE deposits.
- Proofs for mutual fund purchases.
- Computation of total income and exemptions.
We meticulously collected:
- Original bank statements with annotations.
- Foreign remittance certificates.
- Mutual fund investment proofs.
- Detailed computation sheets.
4. Addressing Scrutiny Under 143(2)
When the 143(2) notice for scrutiny came, we were ready. We preemptively answered every possible query:
- Point-by-point clarifications.
- Corroborative evidence linking remittances to investments.
- Cross-referencing Form 26AS with bank credits.
5. Key Arguments We Presented
- Residential Status: Meticulously established that our client was an NRI, thus exempt from filing ITR if income in India was below the basic exemption limit.
- Source of Funds: Traced every rupee used for investments to foreign-earned income.
- Exemption Proofs: NRE account interest and non-taxable foreign income.
6. The Outcome: Notice Successfully Closed
With strong documentation and clear explanations, the assessing officer was convinced:
- The salary attributed to AY 2017-18 was incorrect.
- Investments were from tax-free foreign income.
- No taxable income had escaped assessment.
The reassessment was dropped, and the proceedings were successfully closed.
Key Lessons for Taxpayers
- Always file an ITR if there are high-value transactions, even if not mandatory.
- Keep thorough records of foreign income, remittances, and investments.
- Respond timely and completely to tax notices.
- Engage a professional for complex cross-border or high-value tax matters.
Final Thoughts
Tax notices can be stressful, but they are also opportunities to clarify your position. Our case shows that with the right expertise, detailed preparation, and clear communication, even complicated notices can be resolved smoothly.
Facing a tax notice? Reach out to a qualified CA — the right help can make all the difference!
Need help with a tax notice? Contact our expert CA team for a consultation today!
Disclaimer: This blog is for informational purposes only and should not be considered legal advice. For specific tax concerns, consult a professional.
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