Tax Assessment & Scrutiny Support

A Section 143(2) notice in your inbox changes the tone of the year. The Centralised Processing system has flagged something, the case has moved into faceless assessment, and the clock under Section 153 is already running. Every requisition you ignore, every working paper you submit late, every casual one-line reply becomes part of the record the Assessing Officer uses to draft additions.

Scrutiny defence is not about denying the AO's right to ask. It is about answering each question completely the first time, so proposed additions either never appear in the draft order or get dropped after rebuttal. The cases that go badly are the ones where the taxpayer treated 142(1) requisitions as routine paperwork. The cases that go well are the ones where each scrutiny issue had its own working paper from week one.

At a Glance

• Who needs this: Any taxpayer served with a Section 143(2) scrutiny notice, follow-up 142(1) requisitions, draft order under Section 144B, or final assessment under Section 143(3).
• Governing law: Income-tax Act 1961 — Sections 143(2), 143(3), 142(1), 144B, 153, 270A, 270AA, 250, 253, 260A.
• Forum: National Faceless Assessment Centre (NFAC). The proceeding is faceless throughout, with a virtual hearing on request.
• Response window: Each 142(1) requisition typically allows 7-15 days. Skipping a window has direct consequences in the draft order.
• Total cycle: 6-9 months from receipt of 143(2) to final 143(3) order for most contested cases.
• Section 153 limit: Assessment under 143(3) must be completed within 12 months from the end of AY 2027-28 for FY 2026-27 returns — i.e., by 31 March 2029 in the standard case.
• Penalty exposure: Section 270A imposes 50% of tax on under-reported income, rising to 200% where mis-reporting is held.
• Hearing right: Section 144B treats virtual hearing as a right where contested — refusal must be reasoned and challengeable.

What's New for FY 2026-27

Faceless assessment has matured. Here is what has changed for AY 2027-28 scrutiny cycles.

• AIS / TIS deep integration: Scrutiny notices now reference Annual Information Statement line items directly. Reconciliation has to happen at the AIS code level — bare return totals are no longer enough.
• Updated Section 153 timeline: For FY 2026-27 (AY 2027-28), the AO has 12 months from the end of the AY to complete 143(3) assessment. Limitation now drives every scrutiny calendar.
• e-Proceedings 2.0: Larger attachment limits, structured document tagging, and the AO can pull AIS data inside the response screen. Submissions need to anticipate what the AO sees, not what you see.
• VC hearing default: Under amended Section 144B, the virtual hearing is treated as a right where the taxpayer requests one. Reasoned refusal is rare and challengeable.
• Form 10F linkage: For cross-border scrutiny issues (royalty, FTS, NRI capital gains), the e-filed Form 10F now sits with the working papers as a baseline document.
• Section 270AA window applied strictly: The one-month window from the end of the month of order receipt is being applied literally. Portal acknowledgment timestamps decide eligibility.

Who Faces Scrutiny and Why

CASS (Computer-Assisted Scrutiny Selection) picks cases by risk profile. The common triggers in current cycles are:

• Cash deposits: Bank deposits during the year above the cash flow declared in the return.
• Large refund claims: Refund-heavy returns, especially TDS-driven, attract verification under CASS.
• Foreign assets: Schedule FA disclosures that look incomplete relative to outward remittance records or AIS-foreign-asset data.
• Capital gains mismatches: Broker reporting differs from AIS; ESOP gains where perquisite tax history is unclear.
• Loss returns: Business and F&O losses set off against salary or other heads — almost always reviewed.
• Share premium and credits: Private company books where premium received or fresh credits cannot be sourced.
• Charitable trust receipts: 80G donation receipts that do not reconcile across donor and donee returns.

How It Actually Works

Scrutiny defence is sequenced. Each phase has its own discipline and its own deadlines.

Step 1: Notice Triage and Scope Lock (Same Day)

The 143(2) notice tells you the scrutiny is on. The accompanying or follow-up 142(1) tells you what the AO is looking at. We read both together to confirm whether this is limited scrutiny (specific issues only) or complete scrutiny (full return open for examination). Limited scrutiny is treated as limited — the AO cannot drift into other issues without formal re-categorisation through PCIT approval. Locking scope early prevents months of unnecessary work later.

Step 2: Issue-Wise Working Papers (5-10 Days)

Each scrutiny issue gets its own self-contained file: the return position, the underlying facts, the source documents, the applicable Section and Rule, and the supporting case-law from ITAT and High Court. The working paper is written so the AO can decide the issue without further requisition. Where the issue involves valuation, we attach the valuation report; where it involves cross-border transactions, the TRC and Form 10F sit alongside the agreement.

Step 3: Submissions Through e-Proceedings (Per Requisition)

Each 142(1) is answered within its window through the e-Proceedings tab on the income-tax portal. Documents are uploaded with bookmarks and a covering note that walks the AO through what to look at and why. We never dump a 200-page PDF and hope. Structured responses get read; document dumps get ignored or, worse, become the basis for an addition because the AO did not find what was buried inside.

Step 4: Draft Order Rebuttal (10-15 Days)

Before the final assessment, Section 144B requires the AO to share a draft order with proposed additions. This is the most consequential window in the entire process. A reasoned point-by-point rebuttal, with case-law on point and any additional evidence permitted under the proviso, often gets proposed additions dropped or reduced before the final order is passed. Skipping this stage and waiting for first appeal is the most expensive mistake we see in scrutiny practice.

Step 5: Personal Hearing via Video Conference

Where the case is contested, we request a virtual hearing under Section 144B. The hearing is short but it matters — oral submissions clarify what the written record cannot. Pre-hearing notes are filed; the team appears for the taxpayer; a hearing brief is filed within 48 hours of the VC to lock the oral submissions onto the record.

Step 6: Final Order and Post-Order Decisions

The final 143(3) order is examined the day it arrives. Three decisions get made fast: is the order acceptable as it stands; is it a candidate for Section 270AA immunity; or does it require appeal under Section 250 to CIT(A). Demand notice, penalty notice, and limitation calendars are issued the same week — none of these timelines forgive delay.

A Real Example: ESOP Capital Gains Scrutiny

Here is a representative scrutiny we ran — names changed, structure typical.

• Facts: Mumbai-based founder sold ESOP-acquired shares of a listed startup during FY 2024-25. Sale value ₹3.6 crore; cost in records ₹40 lakh; LTCG of ₹3.2 crore declared at 12.5% under Section 112A.
• Notice: 143(2) issued under CASS; 142(1) sought cost basis substantiation, holding period evidence, and reconciliation with AIS, which reflected broker reporting at different numbers.
• Working papers: ESOP grant letter, vesting schedule, perquisite tax already paid on exercise (Form 16 supporting), exercise price challan, demat credit date. Demat statements independently confirmed the holding period.
• AIS reconciliation: Difference traced to a corporate action (share sub-division) that the broker reported on a pre-split basis. A one-page reconciliation closed the gap.
• Draft order: No additions proposed after rebuttal; AO accepted the cost basis and holding period analysis in full.
• Final 143(3): Returned income accepted. No penalty, no appeal.

Total elapsed time: five months from 143(2) to favourable final order. The case turned on the working papers being ready before the AO finished framing the question.

Penalty, Immunity and the Appeal Stack

Where additions survive the draft order, the penalty and appeal layer kicks in. Each step has a hard statutory deadline.

• Section 270A penalty: 50% of tax on under-reported income; 200% where mis-reporting is established. The distinction between the two is contested in almost every case — bona fide disclosure in the return is the central defence.
• Section 270AA immunity: Available where tax and interest are paid, no appeal is filed against the assessment, and an application is filed within one month from the end of the month in which the order is received.
• CIT(A) appeal under Section 250: Filed in Form 35 within 30 days of order receipt. Grounds of appeal must be specific and traceable to the assessment record.
• Section 220(6) stay: The AO can stay collection on payment of 20% of disputed demand pending the first appeal. CBDT instructions allow a lower deposit where genuine hardship is shown with evidence.
• ITAT appeal under Section 253: 60 days from CIT(A) order. Stay applications are heard separately and on independent merits.
• High Court appeal under Section 260A: 120 days from ITAT order, available only on a substantial question of law — facts found by ITAT are generally final.

Section 270AA immunity is available only once per assessment year, and only if you do not file an appeal. The choice between immunity and appeal must be made deliberately on the merits — never by default while waiting for limitation to run out.

Where It Goes Wrong

• Inbox neglect: Treating 143(2) as routine post and not opening the e-Proceedings tab for weeks.
• Single-line replies: Answering 142(1) with statements like 'noted, will provide' without actual documents attached.
• Unstructured dumps: Uploading 300-page PDFs with no bookmarks, expecting the AO to find what matters.
• Skipping draft order rebuttal: Assuming CIT(A) will sort it out later — the rebuttal window is far cheaper and far more effective.
• Waiving the VC hearing: Giving up the personal hearing right 'to save time' when that hearing is often where additions get dropped.
• Scope creep ignored: Letting limited scrutiny expand into complete scrutiny without challenging the lack of PCIT approval.
• Stale case-law: Citing decisions without checking subsequent overruling, distinguishing, or amendment of the underlying provision.
• Missing 270AA window: Letting the one-month immunity window lapse because the order email got filtered or was opened too late.

What You Receive at the End

• Issue-wise working paper set, indexed and tagged for retrieval
• Complete e-Proceedings submission archive with timestamps and acknowledgment numbers
• Draft order rebuttal with case-law compilation and additional evidence applications
• VC hearing brief and post-hearing note filed on record
• Final 143(3) order analysis with a three-option memo: accept, seek 270AA immunity, or appeal
• Section 270A penalty defence brief where penalty notice is issued
• Section 270AA immunity application kit where that route is chosen
• CIT(A) appeal memo, Form 35, and Section 220(6) stay application where appeal is chosen
• Limitation calendar covering Sections 153, 270AA, 250, 253, and 220(6)
• Full case file in indexed PDF for future reference, audit and successor counsel

How to Get Started

The moment a 143(2) or 142(1) notice arrives, time starts running. Forward the notice, the underlying return acknowledgment, AIS and 26AS extracts, and access to the income-tax portal e-Proceedings tab to our team. We triage scope, identify the issues, and build the response calendar within 24 hours of receipt.

For ongoing scrutinies that started elsewhere and need a fresh pair of eyes, we take over mid-stream — review what has been filed so far, identify gaps in the record, and rebuild the working paper set before the next requisition is due. The earlier in the cycle we engage, the more options remain open; the draft order rebuttal stage is the latest practical entry point before the dispute moves into the appellate layer.