What Actually Happens After a Scrutiny Notice: The Full Journey No One Tells You About

Most taxpayers who receive a notice under Section 143(2) assume it is a routine administrative letter that they can respond to themselves. It is not. What follows is a sequence of notices — sometimes stretching over 12 to 18 months — that escalates steadily in legal severity. Each stage has a tight deadline. Missing any one of them makes every subsequent stage harder and more expensive to resolve.

Here is the complete, real-world sequence of what actually lands in a taxpayer’s inbox once a scrutiny case begins — covering not just the primary assessment process, but every penalty, every remedy, and every option available at each stage. The typical sequence is:

Stage 1 — Notice under Section 143(2): The Scrutiny Begins

The first notice informs you that your return has been selected for detailed examination. It does not ask for documents — it is an initiation notice. However, it must be responded to on the income tax portal within 15 to 20 days. Most taxpayers read this as routine and handle it themselves. This is where the first mistakes are made — because how you acknowledge this notice sets the tone for everything that follows.

Stage 2 — Intimation under Section 144B from the National Faceless Assessment Centre (NFAC)

Shortly after, you receive a formal communication from the National Faceless Assessment Centre (NFAC) confirming that your case has been assigned to a Faceless Assessment Unit. All proceedings will now be conducted electronically through the e-Proceedings section of the income tax portal. There will be no visits to any income tax office. Every notice, every document, every reply — everything happens online, with strict deadlines on each response.

This intimation is not a standalone notice. It is a procedural communication issued after the Section 143(2) notice is already on record. If you have received this 144B intimation, your 143(2) notice is already live — log in to incometax.gov.in → e-Proceedings → Pending Actions immediately.

⚠ Many taxpayers only discover pending notices in e-Proceedings when they receive an SMS or email weeks later — by which time the deadline has already passed. Check the portal the moment you receive any income tax communication.

Stage 3 — First Hearing Notice under Section 142(1): Documents Required

This is where the real examination begins. The 142(1) notice asks for proof of every deduction claimed, explanation for every credit entry in your bank accounts, source of large cash deposits, rental agreements, donation receipts, employer-related documents, mutual fund statements, and often much more. The Assessment Unit cross-references your ITR against Form 26AS, AIS, TIS, bank data, property registration records, and broker reports.

A vague or incomplete reply — such as “personal savings” or “loan from friend” without supporting documentation — does not get accepted. It triggers the next notice, and the one after that.

⚠ Special alert — if the 142(1) notice queries unexplained cash credits or loan entries: If your bank account has credits that you cannot explain through documented evidence — identity of the payer, their PAN, their bank statements showing source of funds, and genuineness of the transaction — the Assessing Officer will invoke Section 68 and treat the entire amount as unexplained income taxable at 60% flat under Section 115BBE, with a 25% surcharge. The effective tax rate is 78% if the amount was in your return, and 84% if it was not — plus a 10% penalty under Section 271AAC on top. No deductions or losses can be set off. An unexplained credit of ₹10 lakhs can generate a demand exceeding ₹9 lakhs. Engage a CA at the moment this query appears — not after the addition is made.

Stage 4 — Multiple Subsequent Hearing Notices under Section 142(1)

The Assessment Unit almost always issues further 142(1) notices after reviewing your first response — seeking clarification on specific items, asking for additional documents on points you may have addressed partially, or raising entirely new queries based on third-party data received from banks, mutual funds, and employers after your initial submission. Each round has its own deadline. Each response must be fully consistent with all previous responses — inconsistencies across rounds are treated as red flags and escalate the case significantly.

This is the stage where most clients who started handling scrutiny themselves come to us — exhausted by the process, uncertain about what they have already said, and worried about contradicting their earlier responses. The earlier a CA is involved, the more options remain available.

Stage 5 — Notice under Section 144 (Best Judgment Assessment): The Consequence of Non-Response

If you have failed to respond adequately to the 142(1) notices, the Assessing Officer issues a notice under Section 144 warning of a Best Judgment Assessment. The officer determines your income and tax liability without your input — using only third-party data available with the department. Best Judgment assessments almost always result in inflated tax demands, because the officer has no choice but to treat unexplained items adversely.

If you receive a Section 144 notice, engage a CA immediately. There is often still a short window to file a late submission before the order is actually passed — but it closes fast.

Stage 6 — Show Cause Notice with Proposed Additions: The Stage That Determines Your Penalty Exposure

Before issuing the Draft Assessment Order, the Assessment Unit issues a Show Cause Notice that does two things simultaneously: it sets out the proposed additions or disallowances to your income, and it asks you to show cause why penalty under Section 270A should not be initiated — either for under-reporting or for under-reporting in consequence of misreporting.

This is the stage that decides not just your tax liability but your entire penalty exposure and immunity eligibility. Here is why it is so consequential:

• If the notice frames the proposed addition as under-reporting (a genuine error, inadequate documentation, or a deduction disallowed on technical grounds), the penalty — if levied — would be 50% of the tax on the addition. More importantly, you remain eligible for immunity from penalty under Section 270AA / Form 68 (or Section 440 / Form 161 under the 2025 Act) after the Final Assessment Order, provided you pay the tax and interest in full and do not appeal.
• If the notice frames the proposed addition as misreporting — concealment of income, fabricated documents, false claims, or deliberate non-disclosure — the penalty rises to 200% of the tax. Critically, once the officer characterises the case as misreporting, immunity under Section 270AA / Section 440 is no longer available. You lose the option of paying and escaping the penalty. The only route left is contesting the penalty through appeal.

⚠ This is one of the most important stages in the entire proceeding for professional intervention. A well-drafted response to this Show Cause Notice can achieve two things: (a) substantiate your position and reduce or eliminate the proposed addition, and (b) ensure the case is not characterised as misreporting — preserving your eligibility for penalty immunity after the Final Order. A weak or absent response at this stage can result in an addition being confirmed and the misreporting classification being locked in — foreclosing immunity and guaranteeing a 200% penalty.

You are typically given a few days to 2 weeks to respond. The response must be point-wise, legally grounded, and supported by every available document. If you have not engaged a CA yet, this is the last stage at which doing so can still protect your immunity eligibility.

Stage 7 — Draft Assessment Order under Section 143(3): The Final Opportunity to Prevent Additions

After reviewing your response to the Show Cause Notice, the Assessment Unit issues the formal Draft Assessment Order proposing the final additions or disallowances, recomputed tax, and interest under Sections 234A, 234B, and 234C. You are typically given only 3 to 7 days to file written objections.

A strong, point-wise written rebuttal at this stage — backed by documents, CBDT circulars, and judicial precedents from ITAT and High Courts — can result in proposed additions being dropped entirely or significantly reduced. Failure to respond, or submitting a weak response, causes the draft to be finalised as the binding Final Assessment Order with no further opportunity to contest additions at this level.

⚠ Approaching a CA at this stage with just 3 days remaining is extremely high risk. Analysing the draft order, gathering documents, identifying relevant case laws, and drafting a structured rebuttal takes time. If you have engaged a CA from Stage 1, your defence is already built when the draft order arrives.

Special case — Draft Assessment Order under Section 144C for foreign companies, non-residents, NRIs, and transfer pricing cases: Section 144C applies not only to transfer pricing adjustments but to a broader category of “eligible assessees” defined under Section 144C(15). This includes:

• Any assessee where the Transfer Pricing Officer (TPO) has proposed an adjustment under Section 92CA — typically subsidiary companies, multinational group entities, and companies with international transactions with associated enterprises
• Any foreign company — including foreign companies with a branch, project office, or permanent establishment in India — where the AO proposes a variation to the returned income
• Non-residents and NRIs where the assessment involves international taxation issues and the AO proposes a variation prejudicial to the assessee

If you fall into any of these categories and the AO proposes a variation, the AO must issue a Draft Assessment Order under Section 144C before passing the final order. Failure to do so is a jurisdictional defect that renders the final assessment order void — multiple High Courts and ITAT benches have consistently so held.

Being an eligible assessee gives you a critical additional option: instead of responding only to the AO, you can file objections with the Dispute Resolution Panel (DRP) within 30 days of receiving the draft order. The DRP is a collegium of three senior Commissioners of Income Tax (with a dedicated panel in Bengaluru) and its directions are binding on the AO. The DRP must issue its directions within 9 months from the end of the month in which the draft order is forwarded, and the AO must pass the final order within 1 month of receiving DRP directions. If DRP directions are unfavourable, the assessee can appeal directly to ITAT without going through CIT(A). However, the DRP and CIT(A) routes are mutually exclusive — once you file objections with the DRP, the normal appellate route through CIT(A) is foreclosed. The choice must be made carefully within the 30-day window.

Stage 8 — Final Assessment Order, Tax Computation Sheet, and Post-Assessment Penalty Notices

The Final Assessment Order under Section 143(3) is now passed and is legally binding unless challenged. It is accompanied by a tax computation sheet showing recomputed income, additions made, tax due, interest under Sections 234A/B/C, and penalty. From Finance Act 2026, penalty under Section 270A is levied through the assessment order itself — no separate penalty order is required. The penalty demand hits simultaneously with the assessment order.

A very common and often overlooked problem: the computation sheet does not credit TDS already deducted from salary, bank interest, rent, or other income, or does not credit advance tax paid during the year. This results in a demand significantly higher than the actual tax payable. Do not pay the demand without verifying the computation against Form 26AS and TDS certificates. If there is an error, proceed to Stage 12 (Section 154 rectification) simultaneously with any appeal.

High-pitched assessment — if the demand appears grossly disproportionate: If the additions appear excessive, arbitrary, or made without adequate basis, file a grievance through the e-Nivaran portal at incometax.gov.in (target resolution: 30 days), or escalate to CPGRAMS at pgportal.gov.in. A written representation to the Principal Commissioner of Income Tax under CBDT’s high-pitched scrutiny assessment mechanism can result in administrative relief without waiting for the full appellate process. This runs parallel to — not instead of — a formal appeal.

Along with or shortly after the Final Assessment Order, the following additional penalty notices are received:

Penalty under Section 271A — not maintaining books of account: If the Assessing Officer found during proceedings that you did not maintain the books required under Section 44AA — because you are a specified professional (doctor, lawyer, architect, engineer, CA, and others) or a business with turnover above the prescribed threshold — a penalty of ₹25,000 is levied after the assessment order. The real consequence is that the absence of books already led to disallowances and additions in the assessment itself. Books of account must be retained for six years from the end of the assessment year.

Penalty under Section 271B — not getting accounts audited: If your turnover exceeds the tax audit threshold under Section 44AB and you did not obtain a tax audit report, a penalty of 0.5% of gross turnover or ₹1,50,000 — whichever is lower is levied after the assessment order. Important judicial principle: if you were already penalised under Section 271A for not maintaining books at all, the Karnataka High Court, the Allahabad High Court, and multiple ITAT benches have held that Section 271B cannot be simultaneously levied. Section 273B also provides a defence where a reasonable cause for the failure can be demonstrated.

Penalty under Section 272A(1)(d) — non-attendance or non-response to Section 142(1) notices: If you consistently failed to respond to hearing notices during proceedings, a penalty of up to ₹10,000 per default is levied under Section 272A(1)(d) alongside or after the assessment order.

Stage 9 — Penalty Immunity Application: Act Within One Month of the Final Order

If additions have been made but your case was characterised as under-reporting only (not misreporting) — which is why your response to the Stage 6 Show Cause Notice was so critical — you may be eligible for immunity from penalty and prosecution. Under the Income Tax Act, 1961 (applicable to AY 2025-26 and earlier), file Form 68 under Section 270AA on the e-Filing portal within one month of the Final Assessment Order, provided you pay the full assessed tax and interest within the demand period and do not file an appeal.

Under the Income Tax Act, 2025 (applicable from AY 2026-27), the corresponding route is Section 440 with Form 161.

The immunity application and a CIT(A) appeal are mutually exclusive — you cannot do both. The choice depends on a precise financial calculation: the penalty exposure versus the realistic prospects and cost of appeal. A CA must make this evaluation and file the right instrument before the one-month window expires.

Don't Miss This Important Update: Finance Act 2026 Introduces a Legal Way to Avoid the 200% Penalty Under Section 270A

Stage 10 — Demand Notice under Section 156: The 30-Day Window

A formal demand notice under Section 156 specifies the total amount payable — assessed tax, interest under Sections 234A, 234B, and 234C, and penalty under Section 270A. You have 30 days from the date of this notice to act. Within this window, you must take one of three actions:

• Pay the demand in full to stop interest from accruing under Section 220(2).
• File an appeal before CIT(A) within 30 days and separately apply for stay of demand — filing an appeal does not automatically stay recovery. Under CBDT instructions (OM dated 31 July 2017), if you pay 20% of the disputed demand and file a formal stay application, the Assessing Officer is expected to hold recovery of the remaining 80% in abeyance until the appeal is disposed. This 20% deposit rule is the standard protection against bank attachments and salary garnishee orders while your appeal is pending.
• Apply for payment in instalments under Section 220(3), along with a stay application supported by evidence of financial hardship.

Doing nothing is not an option. Interest under Section 220(2) at 1% per month starts accruing after 30 days, and recovery proceedings begin automatically.

Stage 11 — Rectification under Section 154: Correcting Errors in the Order

If the Final Assessment Order or computation sheet contains an apparent mistake in law or fact — TDS not credited, advance tax not reflected, arithmetic error, incorrect application of tax rate, or double counting of income — file a rectification application under Section 154 on the e-Filing portal with supporting Form 26AS and TDS certificates. The officer must pass a rectification order within 6 months.

Section 154 is not an appeal. It corrects clear factual errors visible on the face of the order. You can file a Section 154 application and a CIT(A) appeal simultaneously for different aspects of the same order. The demand clock does not pause while rectification is pending — apply for stay separately if needed.

Stage 12 — Appeal Before Commissioner of Income Tax (Appeals)

If you disagree with the Final Assessment Order on merits — whether the additions are legally sustainable, whether evidence was disregarded, whether deductions were wrongly disallowed — file an appeal before the Commissioner of Income Tax (Appeals) under Section 246A within 30 days. The memorandum of appeal must set out each ground of challenge with a statement of facts and detailed written submissions.

The CIT(A) can confirm, reduce, enhance, or annul the assessment. It can also remand the matter to the Assessing Officer. If the CIT(A) order is unfavourable, the next forum is the Income Tax Appellate Tribunal (ITAT), then the High Court on questions of law, and the Supreme Court. Well-prepared appeals before CIT(A) with strong written submissions result in significant relief in the majority of cases without needing to escalate further.

Remember: simultaneously file the stay application and pay 20% of the disputed demand to protect yourself from recovery while the appeal is pending.

Stage 13 — Recovery Notice and Bank Account Attachment

If the demand remains unpaid after 30 days and no stay has been granted, the department issues a recovery notice under Sections 220 to 226. Interest under Section 220(2) at 1% per month continues to accrue on the outstanding amount.

If recovery proceedings progress further, the department issues a notice directly to your bank under Section 226(3) instructing it to freeze or debit funds up to the outstanding demand. Your bank is legally required to comply — often without giving you any prior notice. Salary credits, fixed deposits, and savings balances can all be attached in the same action.

If your account has been attached, immediate action is required: a writ petition before the High Court for stay of attachment, simultaneous filing of stay application and CIT(A) appeal if not already done, and coordination with the bank for partial release. Speed is critical — every day of delay means continued attachment.

Why Most People Who Start This Process Alone Cannot Finish It

The scrutiny process is not a single notice. It is a sustained legal proceeding across 8 to 14 stages, each with hard statutory deadlines, specific legal requirements, and compounding financial consequences. The pattern we see repeatedly is this: the taxpayer treats the first notice as routine, gives an incomplete or inconsistent response, finds themselves unable to defend that response at the Show Cause Notice and Draft Assessment Order stages, and comes to us having already lost options that were available two stages earlier.

By Stage 6 (Show Cause Notice with proposed additions), the character of the case — under-reporting or misreporting — is being set. By Stage 7 (Draft Assessment Order), the scope to contest additions is already narrowed by whatever was said at Stage 3. By Stage 13, the consequences have materialised in a bank account.

The most cost-effective moment to engage a Chartered Accountant is Stage 1. The most common moment is Stage 7. The most urgent — and most expensive — is Stage 13.

How Balakrishna & Co. Helps You at Every Stage

At Balakrishna & Co. Chartered Accountants, Bangalore, we have over 37 years of experience in income tax scrutiny assessments, penalty proceedings, transfer pricing disputes, and appellate matters. Our practice is built on one principle: every taxpayer — regardless of how complex or how far advanced their case has become — deserves a structured, legally sound defence delivered on time.

Stage / Notice	What we do
143(2) notice & 144B intimation	Review scope (limited or complete scrutiny), assess risk, advise on immediate steps, and start building the document file before the 142(1) notice arrives
142(1) hearing notices — all rounds	Prepare complete indexed document packages; draft legally sound, consistent written responses; review all earlier submissions for consistency before each new response
Section 68 / unexplained credits	Identify and obtain documents to establish identity, creditworthiness, and genuineness; advise on voluntary disclosure and 115BBE payment strategy where applicable to avoid the 271AAC penalty
Show Cause Notice (proposed additions + 270A SCN)	Draft point-wise response to contest proposed additions; ensure the case is not characterised as misreporting to preserve immunity eligibility; this is the stage that determines penalty exposure
Post-assessment penalties u/s 271A, 271B, 272A	Assess reasonable cause defence under Section 273B; invoke the 271A/271B mutual exclusivity principle where both are levied; contest 272A penalty where non-attendance was not deliberate
Draft assessment order u/s 143(3) / 144C	Prepare point-wise legal rebuttal with case laws, CBDT circulars, and ITAT (Bangalore Bench) precedents; calculate revised tax and penalty exposure; file within the 3–7 day deadline
Section 144C — foreign companies, NRIs & transfer pricing	Identify whether assessee is an “eligible assessee” under Section 144C(15); evaluate DRP versus CIT(A) route within the 30-day window; prepare and file DRP objections; represent before the DRP panel; advise on APA or APAT filings if relevant
High-pitched assessment grievances	Draft e-Nivaran and CPGRAMS representations; prepare written submissions to the Principal Commissioner under CBDT’s high-pitched scrutiny mechanism
Final order & demand notice	Verify computation against Form 26AS and TDS certificates; identify TDS non-credit and other errors; advise on the right combination of appeal, immunity application, and rectification
Penalty immunity — Form 68 / Form 161	Assess eligibility for immunity under Section 270AA / Section 440; calculate financial comparison between immunity and appeal; file Form 68 or Form 161 within the one-month window
Appeal before CIT(A) / ITAT	Draft memorandum of appeal with grounds and written submissions; simultaneously file stay application and pay 20% deposit; represent at hearings; escalate to ITAT if required
Section 154 rectification	File rectification application with Form 26AS and TDS evidence; track disposal within the 6-month statutory period; apply for stay of demand pending rectification
Recovery notices & bank attachment	File urgent stay application; advise on and coordinate writ petition before the High Court for stay of attachment; coordinate with the bank on partial release of funds

Why Taxpayers Across India Choose Balakrishna & Co.

• 37+ years of complex tax practice — not return filing, but dispute resolution, scrutiny defence, penalty proceedings, transfer pricing, and appellate representation
• Pan-India service — because faceless assessments are entirely electronic, we serve clients anywhere in India; no visit to our Bangalore office is required
• Complete case management — one point of contact from the first 143(2) notice through to ITAT; nothing falls through the gap between stages
• Deadline-driven practice — income tax proceedings have hard statutory deadlines that cannot be extended; we build internal timelines and ensure every filing is within time
• Legal depth — our responses cite CBDT circulars, ITAT orders (including Bangalore Bench), and High Court decisions, not just bare law provisions
• Transfer pricing expertise — Bangalore is home to IT companies, global capability centres (GCCs), and subsidiaries of foreign companies with significant transfer pricing exposure; we handle TPO proceedings, DRP filings, and ITAT appeals for such clients
• Transparent fees — our professional fee is discussed and agreed before engagement; no surprises at later stages of the case

Received a Notice? Here Is What Happens When You Contact Us

1. Initial review:Share copies of all notices received. We identify the exact stage, assess the risk level, and advise on the immediate next step — at no charge for this initial assessment.
2. Document checklist:We identify every document needed for the stage you are at and give you a clear, prioritised list to gather.
3. Response drafting:We prepare every written response, with your review before submission. Nothing is filed without your approval.
4. Portal submissions:We handle all e-Proceedings submissions, appeal filings, stay applications, DRP objections, and rectification applications on the income tax portal.
5. Ongoing monitoring:We check the e-Proceedings portal for new notices and keep you informed at every stage so no deadline is ever missed.

Have you received a scrutiny notice, draft assessment order, penalty notice, demand notice, or bank attachment order?

Contact us today. The earlier you engage a professional, the more options remain available — and the lower the ultimate tax, penalty, and interest burden.

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