The Income Tax Department has issued a rare notice under Section 142(1) of the Income-tax Act, 1961, seeking detailed information on personal expenses. This kind of notice is unusual as it demands a breakup of household withdrawals and detailed expenditures incurred by the taxpayer and their family members.
Why Did the Taxpayer Receive This Notice?
The notice suggests that the household withdrawals made by the taxpayer are low, prompting the department to verify whether the declared income is sufficient to meet their lifestyle expenses. The authorities suspect an understatement of income and, therefore, require a breakup of personal expenses to check for any discrepancies.
Details Sought by the Income Tax Department
The notice demands detailed expense records under the following heads:
Family Details:
- Names of family members
- PAN numbers
- Annual income of each member
Monthly Household Expenses:
- Ration expenses: Wheat, flour, rice, spices, oil, gas, etc.
- Electricity & utility bills
- Clothing & footwear purchases
- Cosmetics, perfumes, and hair care expenses
- School/college fees of children
- Rent and car-related expenses
- Insurance expenses: Health, life, and building insurance
- Building maintenance and repairs
- Gifts given to relatives and others
- Dining out, get-togethers, and social event expenses
Consequences of Not Submitting These Details
If the taxpayer fails to provide a proper breakup of expenses, the department may assume an estimated household withdrawal of ₹10,00,000 for the financial year under review. This can lead to a higher tax liability and possible scrutiny of the taxpayer’s financial records.
Implications of This Notice
- The notice indicates that the department is closely monitoring cash flows and lifestyle expenses to detect tax evasion.
- Mismatch between declared income and expenses can result in additional inquiries, reassessments, and penalties.
- Individuals with high expenses but low declared income are more likely to receive such notices.
- Proper documentation and record-keeping of income, withdrawals, and expenses can help in responding effectively to such notices.
How to Respond to This Notice?
- Collect and organize expense details in the format requested.
- Ensure that all family members’ income is properly declared and supported with documents like bank statements, salary slips, and investment records.
- Provide breakup and proof for all major expenses, including rent, school fees, insurance, and social expenses.
- If some expenses are borne by other family members, their income details should also be provided.
- Consult a tax professional to draft a proper response and avoid unnecessary scrutiny.
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