Faceless Assessment: Criteria for Compulsory scrutiny of income tax notified


Faceless Assessment: Criteria for Compulsory scrutiny of income tax notified

Income tax Department is changing fast and taking all the steps to make it faceless, speedy, and taxpayer friendly.  The role is changing from an enforcement agency to a facilitator for better taxpayer services. The number of cases selected for in-depth scrutiny has reduced drastically over the years.


What is income tax Scrutiny?

  1. When the taxpayers files Income Tax Return for a particular assessment year, income tax department whether to verify the income of the taxpayers or not? In case there is any suspicion or doubt to the department, returns are picked up for further verifications & questioning.
  2. If the department decides to verify whether the income is properly & correctly reported or not, it is often referred to as income tax scrutiny by the income tax department.
  3. Only few years back, entire process of selection of cases for scrutiny was a manual exercise. This conventional system of scrutiny assessment involved a high level of personal interaction between the tax payer and the Income Tax Department officials and was subject to corruption, threatening & harassment. In the last few years, majority of the cases are now through Computer Aided Scrutiny Selection (CASS). However, still it was requiring personal interaction with the income tax authorities. But now, this personal and physical interaction has also been done away with after introduction of new faceless e-assessment system. Now, all the scrutiny proceeding will be through online e-portal only and no interaction will be possible personally on one on one basis. It will be the transparent, corruption free assessment proceeding without any favour or fear on either side of the tax department.
  4. Legal provisions:
    As per Income Tax Act, 1961, where a return has been furnished under Section 139, or in response to a notice under sub-section (1) of Section 142, the Assessing Officer (AO) or the prescribed income-tax authority, as the case may be, if, considers it necessary or expedient to ensure that the assessee has not understated the income or has not computed excessive loss or has not under-paid the tax in any manner, shall serve on the assessee a notice requiring him, on a date to be specified therein, either to attend the office of the AO or to produce, or cause to be produced before the AO any evidence on which the assessee may rely in support of the return. There is one condition however, that no notice will be served on the assessee after the expiry of six months from the end of the financial year in which the return is furnished.
  5. It may be noted that the number of cases selected for scrutiny of income tax returns have been reducing each year with an attempt to ease the burden of taxpayer. The level of scrutiny has reduced to 0.25% of all returns filed in 2018-19, versus 0.71% in 2015-16, according to details issued by the finance ministry. As of now, the scrutiny rate is the lowest in the past four assessment years. In 2016-17, 0.40% of returns filed were scrutinized while in 2017-18, 0.55% of the cases were taken up for scrutiny.

How the cases are selected for Scrutiny:

There are various parameters on which income tax department decides whether to select the case for scrutiny or not? Some of the common parameters are

  1. High value transactions by the taxpayers. It may be noted that the department is getting information from various sources like the transactions related to property above Rs. 30 Lakh, credit card transactions, cash deposit in bank transactions, mutual fund investment transactions, etc. Department software now compare the income & turnover of the taxpayers with the data received from various sources and then take a call for scrutiny.
  2. Not all the cases of high value transactions are taken for scrutiny. It decides the selection on the basis of taxpayers profile and then pick or drop the case. In variety of the cases now, personal element of income tax authorities is not there.
  3. Further, there are few cases which CBDT decides for compulsory scrutiny every year. It lays down the guidelines for compulsory scrutiny.
  4. For the FY 2020-21, CBDT has prescribed following 5 cases for compulsory scrutiny norms:
  5. All cases involving Search, Survey and Reopening of Assessment proceeding. It may be noted that it is compulsory so as to verify the material collected, information obtained, documents in possession of the income tax department, etc is correctly incorporated in the ITR. This selection criteria is common since long and in the past also, all such cases were subject to scrutiny proceeding.
  6. All cases were notice u/s 148 is issued. This is often referred to as the reassessment proceeding. Once the case is selected for reassessment, AO is duty bound to complete the assessment. This is also a regular feature.

iii.          An another selection criteria is with regard to the trust,NGO, NPO, etc. All cases where the registration u/s 12A or approval u/s 10(23c) has been revoked will now be subject to the income tax scrutiny. Cancellation of trust registration / approval carry heavy tax implications and it is on the basis of market value of all the assets. This is done to verify that the income tax law is correctly followed as far as tax revenue is concerned.

  1. All cases where notice u/s 142(1) has been issued will also be subject to income tax scrutiny. It may be noted that notice u/s 142(1) is issued to collect the information from the taxpayers and it requires taxpayer to submit/ file the information with the department.

The fixing of criteria well in advance will result in early & timely issue of notice. The taxpayers will be able to provide the information speedily if the time slot between return filing and verification is not much. It will provide real ease in compliance to the taxpayers. This move by the CBDT is indeed a highly welcome move.

It may be noted that this are the upfront selection criteria. In addition to this, new criteria and CASS process will also be there in due course of time for selection of income tax cases for scrutiny. The fact remains, lesser the time slot return filing and scrutiny, better will be the compliance from the end of the taxpayers.


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