ITR Scrutiny Notice u/s 143(2): What It Means and How to Respond
What a Section 143(2) scrutiny notice really means under faceless assessment, who gets one, how to reply on the e-Proceedings portal, and a worked AY 2025-26 ITR case.
The Central Board of Direct Taxes (CBDT) processed over 8.6 crore returns for FY 2024-25; roughly 0.3% to 0.5% are pulled for scrutiny under Section 143(2) of the Income-tax Act, 1961. This Tax Q&A walks through what a 143(2) notice says, how the e-Proceedings portal expects a reply, and a worked AY 2025-26 case where the Annual Information Statement (AIS) and the filed ITR do not match.
The Scenario
Take Priya, a 34-year-old product manager in Bengaluru. She filed ITR-2 for AY 2025-26 on 15 July 2025 declaring Rs 28,40,000 salary, Rs 1,40,000 dividend and Rs 4,75,000 long-term capital gains (LTCG) on listed equity. Her refund claim was Rs 92,400 because the employer deducted TDS without factoring in HRA of Rs 4,20,000 and Section 80C of Rs 1,50,000; she had opted out of the new regime under Section 115BAC.
On 22 February 2026 the portal threw up a notice dated 18 February 2026 under Section 143(2), issued by the National Faceless Assessment Centre (NaFAC), Delhi. The Document Identification Number (DIN) ran 23 characters and the response window closed on 04 March 2026, exactly 15 days later. The Limited Scrutiny flagged two issues: a Rs 1,18,000 variance between her AIS and ITR traced to a Specified Financial Transaction (SFT) reported by her broker, and a Rs 11,40,000 cash deposit on 12 December 2024 reported under Form 61A per Section 285BA.
Priya's three immediate questions are the ones every salaried taxpayer asks. Is this an audit? Will the officer disallow her HRA? And does she have to physically appear anywhere on or before 04 March 2026? The Statutory Answer addresses each, with citations to the bare Act on indiacode.nic.in and the procedural pages on incometax.gov.in.
Statutory Answer
Section 143(2) empowers the Assessing Officer (AO), or, since 1 April 2021, the NaFAC under Section 144B, to issue a notice where the AO considers it necessary to verify that income has not been understated, loss not over-claimed and tax not under-paid. The proviso, substituted by the Finance Act, 2021, bars service of any 143(2) notice after three months from the end of the FY in which the return is furnished; for returns filed up to 31 March 2021 the limit was six months. The amended text sits on indiacode.nic.in and incometaxindia.gov.in.
Once issued, the assessment under Section 143(3) must conclude within the Section 153 window: twelve months from the end of the assessment year for non-search cases, so AY 2025-26 must in most cases close by 31 March 2027. Transfer Pricing references attract a longer window under the proviso to Section 153(4).
CBDT classifies scrutiny into four buckets, all routed through the Computer-Aided Scrutiny Selection (CASS) cycle and, since AY 2020-21, the Faceless Assessment Scheme.
| Scrutiny type | Trigger | Scope of enquiry | Likely documents |
|---|---|---|---|
| Limited | CASS flag on 1-2 specific issues | Only the flagged issues | Bank statements, Form 16, AIS, broker contract notes |
| Complete | High-risk return: refund > Rs 5 lakh, foreign assets, large losses | Entire return | Books of account, vouchers, ledgers |
| Faceless (Sec 144B) | Default route since 1 April 2021 | Issue-based, e-Proceedings only | Soft copies, PDF responses |
| Search-based (Sec 143(2) r/w 153A) | Search/seizure under Sec 132 | Six prior assessment years | Seized material, statements u/s 132(4) |
The Faceless Scheme replaced jurisdictional assessment for most categories, so taxpayers no longer attend a ward office. All correspondence flows through the portal under e-Proceedings; hearings under Section 144B(7)(viii) are by video conferencing only, and the AO's identity is not disclosed.
Common CASS triggers, drawn from rule 114E of the Income-tax Rules, 1962 read with Section 285BA, are:
| Trigger | Reporting source | Annual threshold |
|---|---|---|
| Cash deposit in savings account | Form 61A (Sec 285BA) | Rs 10 lakh aggregate per FY |
| Cash deposit in current account | Form 61A | Rs 50 lakh aggregate per FY |
| Mutual fund purchase | AMFI / RTAs via SFT | Rs 10 lakh per FY |
| Equity, debenture or bond purchase | Brokers via SFT | Rs 10 lakh per FY |
| Property purchase or sale | Sub-Registrar via SFT | Rs 30 lakh per transaction |
| Credit card spend | Card issuers via SFT | Rs 1 lakh cash, Rs 10 lakh non-cash |
| Foreign remittance under LRS | Authorised Dealers | Rs 7 lakh (TCS u/s 206C(1G) at 20% above Rs 10 lakh) |
Worked Resolution
Returning to Priya, the response window of 15 days ends 04 March 2026. The procedure under paragraph 6 of the Faceless Scheme read with Section 144B(1) is:
- Login to the e-filing portal with PAN-linked credentials and Aadhaar OTP.
- Navigate to Pending Actions then e-Proceedings and locate the proceeding tagged with the DIN of the 18 February 2026 notice.
- Click Submit Response, choose Partial Response to seek a 7-day extension, and immediately upload what is on hand.
- For each issue attach a typed reply in PDF, capped at 5 MB per file and 50 MB per submission.
- e-Verify with Aadhaar OTP or a Digital Signature Certificate (DSC); a DSC is mandatory where tax audit under Section 44AB applies.
Her documentation pack would normally be:
| Issue flagged | Document | Why it answers the query |
|---|---|---|
| AIS variance Rs 1,18,000 | Broker contract notes for FY 2024-25 | Reconciles SFT-reported gain with the Rs 4,75,000 LTCG offered |
| AIS variance Rs 1,18,000 | Demat holding statement as on 31 March 2025 | Establishes acquisition cost and grandfathered value as on 31 January 2018 |
| Cash deposit Rs 11,40,000 | Cash flow note plus savings account ledger | Identifies source: gold loan repayment from a relative on 09 December 2024 |
| Cash deposit Rs 11,40,000 | Affidavit of relative plus Aadhaar copy | Substantiates relationship under Section 56(2)(x) |
| HRA Rs 4,20,000 | Rent agreement, owner's PAN, 12 rent receipts | Supports Section 10(13A) claim |
| Salary Rs 28,40,000 | Form 16 Part A and Part B | Reconciles with TDS and 26AS |
Assuming the documents reconcile cleanly, the likely numeric outcome of the assessment is:
| Particular | Amount (Rs) | Notes |
|---|---|---|
| Salary income | 28,40,000 | Form 16 |
| Less: HRA u/s 10(13A) | (4,20,000) | 12 months at Rs 35,000, Bengaluru is metro |
| Less: Standard deduction u/s 16(ia) | (50,000) | Old regime, AY 2025-26 |
| Less: Profession tax u/s 16(iii) | (2,400) | Karnataka |
| Income from salary | 23,67,600 | |
| Dividend (other sources) | 1,40,000 | TDS u/s 194 at 10% above Rs 5,000 |
| LTCG u/s 112A | 4,75,000 | 12.5% above Rs 1,25,000 (post 23 July 2024) |
| Gross total income | 29,82,600 | |
| Less: 80C (PPF + ELSS) | (1,50,000) | |
| Less: 80D (self) | (25,000) | Health insurance |
| Total income excluding LTCG | 24,07,600 | Rounded under Sec 288A |
| Tax on slab income (old regime) | 5,32,280 | Slabs up to 30% |
| Tax on LTCG above Rs 1.25 L at 12.5% | 43,750 | (Rs 4,75,000 - Rs 1,25,000) x 12.5% |
| Cess at 4% | 23,041 | |
| Gross tax liability | 5,99,071 | |
| Less: TDS as per 26AS | (6,91,471) | |
| Refund | 92,400 | Matches her ITR |
If the AO accepts the reconciliation, the assessment is completed under Section 143(3) and the refund is released with interest under Section 244A at 0.5% per month from 1 April 2025, a Rs 5,544 add-on if granted by March 2027. The income tax calculator and old vs new regime tool model both regimes side by side; the capital gains calculator handles the 23 July 2024 reset to 12.5% and the Rs 1,25,000 exempt threshold under Section 112A.
If Priya fails to respond by 04 March 2026, the AO may complete a best-judgement assessment under Section 144, disallow HRA, treat the Rs 11,40,000 deposit as unexplained money under Section 69A, and tax it at 60% plus 25% surcharge plus 4% cess under Section 115BBE: a 78% marginal rate. A Section 271AAC penalty at 10% of the tax can stack on top, and prosecution under Section 276C(2) becomes possible once wilful evasion exceeds Rs 25 lakh of tax. The TDS calculator helps confirm whether the employer's deduction trail already covers the bulk of any demand.
FAQ
How long do I have to reply to a Section 143(2) notice?
The notice itself sets the deadline, typically 15 days, occasionally 30 days. Additional time can be sought via Partial Response then Adjournment under paragraph 6 of the Faceless Scheme. The AO usually grants 7 to 14 more days if asked before the original deadline lapses; a second adjournment is rarely entertained.
Can a Section 143(2) notice be issued after three months from the end of the FY in which I filed?
No. The proviso to Section 143(2), as amended by the Finance Act, 2021, bars service after three months from the end of the FY in which the return is furnished. For an ITR filed on 15 July 2025 (FY 2025-26) the absolute outer limit is 30 June 2026. A notice served after that date is bad in law and can be challenged before the Commissioner of Income-tax (Appeals) under Section 246A.
Is a Section 143(2) notice the same as a Section 142(1) notice?
No. Section 142(1) is an enquiry notice asking for a return, accounts or specified information. Section 143(2) is the gateway to scrutiny under Section 143(3). A 143(3) assessment without a prior 143(2) was struck down by the Supreme Court in CIT v. Laxman Das Khandelwal (2019) 417 ITR 325 as a jurisdictional defect not curable under Section 292BB.
Will I have to physically appear before any officer?
No, in 99% of cases. Since 1 April 2021 all assessments under Section 143(3), other than certain international tax and search cases listed in CBDT Notification No. 61 of 2022, fall under the Faceless Scheme governed by Section 144B. Personal hearings under Section 144B(7)(viii) are conducted by video conferencing only on prior request, and the AO's identity is not disclosed.
What happens if AIS shows income I genuinely did not earn?
Submit feedback per AIS line item via Optional then AIS Feedback on the portal and pick an option such as 'Information is not fully correct.' The reporting entity is asked to confirm. Until corrected, attach a written explanation to the 143(2) reply. The perquisite tax calculator helps when AIS overstates rent-free accommodation or ESOP value.
Does responding to a 143(2) notice mean I lose my new-regime option?
No. The choice of regime under Section 115BAC is exercised when filing the original ITR or a valid revised return under Section 139(5); scrutiny does not reopen it. For AY 2025-26 the Section 87A rebate under the new regime is Rs 60,000 for total income up to Rs 12,00,000, and surcharge is capped at 25% in the new regime against 37% in the old. The new regime calculator lays this out for any salary plus capital gains mix.
What is the penalty if the AO finds under-reported income?
Under Section 270A the penalty is 50% of the tax on under-reported income, and 200% if it is due to misreporting (false claims, suppression, failure to record investments). On Priya's Rs 1,18,000 LTCG variance at 12.5% plus 4% cess, the additional tax would be about Rs 15,340 and the penalty Rs 7,670 to Rs 30,680. Section 273B allows waiver where the assessee proves reasonable cause, and contemporaneous documentation is decisive.
Sources & Citations
- Income Tax e-Filing Portal - e-Proceedings — Income Tax Department, Government of India
- Income-tax Act, 1961 - Bare Act and amendments — Income Tax Department, Government of India
- Income-tax Act, 1961 - Section 143 — India Code, Government of India
- CIT v. Laxman Das Khandelwal (2019) 417 ITR 325 (SC) — Supreme Court of India via Indian Kanoon
Frequently Asked Questions
How long do I have to reply to a Section 143(2) notice?
The notice itself sets the deadline, typically 15 days, occasionally 30 days. Additional time can be sought via Partial Response then Adjournment under paragraph 6 of the Faceless Scheme. The AO usually grants 7 to 14 more days if asked before the original deadline lapses; a second adjournment is rarely entertained.
Can a Section 143(2) notice be issued after three months from the end of the FY in which I filed?
No. The proviso to Section 143(2), as amended by the Finance Act, 2021, bars service after three months from the end of the FY in which the return is furnished. For an ITR filed on 15 July 2025 (FY 2025-26) the absolute outer limit is 30 June 2026. A notice served after that date is bad in law and can be challenged before the Commissioner of Income-tax (Appeals) under Section 246A.
Is a Section 143(2) notice the same as a Section 142(1) notice?
No. Section 142(1) is an enquiry notice that can ask for a return, accounts, or specified information. Section 143(2) is the gateway to scrutiny under Section 143(3). The validity of a 143(3) assessment without a prior 143(2) was struck down by the Supreme Court in CIT v. Laxman Das Khandelwal (2019) 417 ITR 325 as a jurisdictional defect not curable under Section 292BB.
Will I have to physically appear before any officer?
No, in 99% of cases. Since 1 April 2021 all assessments under Section 143(3), other than certain international tax and search cases listed in CBDT Notification No. 61 of 2022, fall under the Faceless Scheme governed by Section 144B. Personal hearings under Section 144B(7)(viii) are conducted by video conferencing only on prior request.
What happens if AIS shows income I genuinely did not earn?
Submit feedback on each AIS line item via Optional then AIS Feedback on the e-filing portal and select an option such as 'Information is not fully correct' or 'Information relates to other PAN/year.' The reporting entity is then asked to confirm. Until corrected, attach a written explanation to the 143(2) reply.
Does responding to a 143(2) notice mean I lose my new-regime option?
No. The choice of regime under Section 115BAC is exercised when filing the original ITR or a valid revised return under Section 139(5); scrutiny does not reopen it. For AY 2025-26 the Section 87A rebate under the new regime is Rs 60,000 for total income up to Rs 12,00,000, and surcharge is capped at 25% in the new regime.
What is the penalty if the AO finds under-reported income?
Under Section 270A the penalty is 50% of the tax payable on under-reported income, and 200% of the tax if the under-reporting is due to misreporting such as false claims, suppression, or failure to record investments. Section 273B allows waiver where the assessee proves reasonable cause, and contemporaneous documentation is decisive on that point.