Scrutiny Assessment (Section 143(3))
A scrutiny assessment under Section 143(3) is a detailed examination of a taxpayer's return and underlying records by the Assessing Officer, triggered by a notice under Section 143(2), aimed at verifying the correctness of income declared and taxes paid.
After a return is filed and initially processed under Section 143(1), the income tax department may select certain returns for a more thorough examination called scrutiny assessment. Notice under Section 143(2) must be issued within six months from the end of the financial year in which the return was filed — failure to issue this notice within the prescribed time bars scrutiny proceedings entirely.
The Computer-Assisted Scrutiny Selection (CASS) system is the primary mechanism for selecting returns for scrutiny. CASS uses rule-based filters and risk parameters to identify returns with indicators of under-reporting. Common selection triggers include: significant variation between current and prior year income without explanation, large refund claims, unusually high deductions relative to income, capital gains from unlisted securities or penny stocks, mismatch between ITR and AIS data, high-value transactions reported by third parties (banks, registrars, mutual funds) but not disclosed in the return, and random selection as a deterrent measure.
The FY 2023-24 CASS guidelines identified specific risk categories including high-value immovable property purchases without commensurate income, large cash deposits during demonetisation-era years still pending scrutiny, and returns with significant F&O losses where business income is claimed at below-normal margins under presumptive taxation.
All scrutiny assessments post-2022 are conducted under the Faceless Assessment Scheme, where the assessee does not interact with any identified AO but responds online through the e-Proceedings portal. Documents, replies to questionnaires, and submissions of additional information are all conducted digitally. The AO in a faceless assessment is assigned from a national pool, creating anonymity and theoretically reducing opportunities for corruption.
If the assessment results in additions to income, the draft assessment order is first shared with the assessee under Section 144B, giving an opportunity to make representations before a final order is passed. The final order must be passed within 12 months from the end of the assessment year in which the return was filed (extendable to 18 months in certain cases). An order under Section 143(3) can be appealed before the CIT(A) under Section 246A within 30 days of receipt.