A scrutiny notice under Section 143(2) is not an accusation. Selection is mostly automated, and a good number of scrutiny assessments close with no addition at all. But a scrutiny assessment that goes badly is expensive, and the way it goes is usually decided in the first few weeks: what you check, what you send, and what you choose not to send. This note is the first-response checklist we use.
Which law applies
The Income-tax Act, 2025 came into force on 1 April 2026. Its scrutiny provisions sit in Section 270, with the notice under Section 270(8) and its time limit in Section 270(9). The new Act applies from tax year 2026-27. For returns of earlier years, which is every scrutiny notice being issued today, the Income-tax Act, 1961 continues to apply, so the notice will be under Section 143(2). The substance of the rules discussed below is the same under both.
Step 1: Check the notice itself
Before you look at the questions being asked, look at the notice.
Was it served in time? A Section 143(2) notice cannot be served after three months from the end of the financial year in which the return was filed. A return filed in October 2025 falls in FY 2025-26, so the notice had to be served by 30 June 2026. Note the word “served”. Check the date it reached your registered email and appeared on the e-filing portal, not just the date printed on it. A notice served late is invalid, and an assessment based on it fails with it.
Does it carry a DIN? Every communication from the department has to carry a computer-generated Document Identification Number. A notice without one is treated as not issued. You can verify the DIN on the e-filing portal.
Is it limited or complete scrutiny? A limited scrutiny notice lists the specific issues for which the return was selected. The officer is expected to confine the assessment to those issues. Expanding into other areas needs approval from a higher authority, following CBDT’s instructions. Note the issues listed. They define the scope of what you need to answer.
Step 2: Understand what is being asked
The Section 143(2) notice is usually followed, sometimes on the same day, by a notice under Section 142(1) with a detailed questionnaire. Read the questionnaire against the issues listed for selection. In most cases the selection reasons point to one of a handful of things:
- A mismatch between income reported in the return and information in the AIS or Form 26AS
- Large cash deposits, particularly in a year where cash sales do not support them
- Unsecured loans or share capital received during the year
- A sharp fall in gross profit or net profit compared with earlier years
- Large refunds claimed
- Purchases from parties flagged elsewhere as accommodation entry providers
- Capital gains, especially on property where stamp duty value exceeds the sale price
Knowing which of these you are dealing with tells you what evidence you will need, and who else you may need to get it from.
Step 3: Build the reconciliation before the reply
Do not start writing the reply until the numbers reconcile. For the common issues:
- AIS mismatch: a line-by-line reconciliation between every AIS entry and the books, explaining each difference. Duplicate entries, receipts belonging to another year and amounts wrongly mapped to your PAN are common.
- Cash deposits: cash book, daily sales register, bank statements, and a month-wise comparison of cash sales with deposits.
- Unsecured loans: for each lender, the three things Section 68 looks at: identity, creditworthiness and genuineness. That means PAN, address, the lender’s bank statement showing the source of funds, their income tax return, and a confirmation. Get these from the lenders now. They take time.
- Fall in profit: an explanation grounded in the business: input price changes, loss of a major customer, a one-time write-off, with documents behind each point.
Step 4: Write the reply
Replies are filed through the e-Proceedings section of the e-filing portal, within the date given in the notice. A few principles:
- Answer the question asked. If the officer asks for details of loans above a certain amount, give exactly that, properly. Volunteering unrelated material only widens the inquiry.
- Index the annexures. Number every document, refer to it by number in the reply, and keep file sizes within portal limits. An officer working through dozens of cases will appreciate a reply that can be followed.
- Be consistent. What you say now will be compared with what you said in the return, in earlier years and in any later reply. Contradictions are what turn an ordinary scrutiny into a difficult one.
- Ask for time when you need it. An adjournment request through the portal, with a short reason, is far better than a hurried, incomplete reply.
Step 5: Watch for the show cause notice
Under the faceless assessment procedure, before the officer makes an addition, a show cause notice or draft order setting out the proposed variation is issued. This is the most important document in the whole process. It tells you exactly what the officer intends to add and why. Reply to it point by point. If the proposed addition is significant, request a personal hearing by video conference, which the faceless scheme allows.
What not to do
- Do not ignore the notice. Non-compliance leads to a best judgment assessment under Section 144, where the officer estimates your income on whatever material he has, plus a separate penalty for non-compliance.
- Do not file a revised return in response to scrutiny unless you have taken advice. It can be read as an admission.
- Do not let the reply be the first time you look at the issue. The reconciliation has to come first.
If the order goes against you
The assessment order comes with a demand notice under Section 156. If there are errors apparent from the record, rectification under Section 154 is quicker than appeal. Otherwise, an appeal lies to the Commissioner (Appeals), and the time limit for filing it runs from service of the order, so it should be prepared without delay. A stay of demand normally requires payment of 20% of the disputed demand while the appeal is pending.
The quality of the record you build at the scrutiny stage decides much of what happens in appeal. If you have received a scrutiny notice, send us the notice, the questionnaire and the return for that year, and we will tell you what we think the officer is looking for and what you will need to show.
Related service: Income tax notices and appeals.
This note reflects the law as of November 2026. It is general information and not advice on any particular case.