The Nerve-racking Possibility of Being Non-compliant with Rules in India
This weekend was our planned day for weeding out unwanted paper going back over two decades. In space-starved Mumbai, a regular purge is a necessity; moreover,  nine years of ‘Digital India’ have hardly reduced the amount of paper that we are forced to generate even for simple services like opening bank accounts for companies or trusts.
Even as I was getting ready to dump waste paper with a vengeance, one email was enough to put a spoke in the plan. It read: “I understand from several people that they have received tax demand notices pertaining to Assessment Years (AY) of a decade old from the email  [email protected].” The writer says he has received the notice for a business that is now closed. The query was a decade old and a rectification request was filed and duly acknowledged at that time. Was the notice due to  a tech issue that would be automatically resolved by the department, or should the assessee get ready for a right royal run-around?
I looked for answers on social media. Scores of people confirmed that they had, indeed, received such notices.
  • VV has received a shocking demand for Rs430 pertaining to 2009, where the date of demand is February 2011.
  • NM says he has a demand for AY2011, apparently raised  in January 2013 and communicated in 2023.
  • A chartered accountant (CA) says his client has received a notice for 2002-03.
  • One person thinks that many notices relate to 2007-08 when tax deduction at source (TDS) was digitised, but this could not be confirmed.
  • A retired Central government employee received a notice for AY2006 in 2023 for tax dues plus interest. Fortunately, he retains his papers and got the issue sorted. 
  • One CA received a notice pertaining to 2010, where a duly acknowledged rectification application had already been filed. Fortunately, the papers had been retained so an order was passed in favour of his client.
So how long should one need to retain documents, just in case the tax department sends you a notice? Can it happen in perpetuity? The Income-Tax (I-T) Act is emphatic that you cannot get notices forever, except under specific conditions spelt out under Section 148 of the I-T Act. A reassessment notice cannot be issued if three years have passed since the end of the relevant assessment year or the assessing officer has specific information that certain income has escaped assessment. A notice can be issued beyond three years, if there is evidence of tax evasion of at least Rs50 lakh, but that too has to be within 10 years from the end of the relevant assessment year.
Even after amendments, the law does not provide for random notices for amounts as tiny as Rs430, but it has happened. Hence, most CAs, when asked, will tell you that it is best to keep documents, especially if there is a pending issue like a rectification. In many of the examples cited above, and others who did not share details, the notices seem to be spewed out by an automated system. This is strange, since a system is usually programmed to ensure that rules are followed unless there is a serious bug.
So, the guiding principle in India is that you can destroy documents by following the rule; but, if you are served a notice, be prepared for a harrowing time in getting things rectified and pray hard that you are not caught in such a situation. Neither rules nor the redress system is on your side.
PAN-Aadhaar Link
Another compliance horror was unleashed on 112.7mn (million) people on 1st July by deactivating their permanent account numbers (PAN), since it had not been linked to their Aadhaar. In response to a Right to Information (RTI) query filed by activist Aakash Goel, the I-T department admitted that 11,27,41,155 PAN numbers had been deactivated.
Mr Goel believes that a large number of these PAN holders may not be earning a taxable income and have been using PAN as an identity proof. But the I-T department denied information to his query on how many of those whose PAN was deactivated had bank accounts or were filing returns, saying it did not have the data collated. With ‘Ease of Living’ as a motto and technology to enable such data sorting, the finance ministry was expected to have done some work before unleashing a widespread punitive action that deprived access to people’s hard-earned, tax-paid investments and, worse, made the filing of tax returns impossible.
It turns out that the tax department was equal and democratic in this ham-handed move, since the wealthy and privileged have also been affected if they are foreign nationals living in India,  overseas citizens of India (OCI) or non-resident Indians (NRIs). In their case, it is collateral damage of the worst kind, since they are not even required to have an Aadhaar, let alone link it to bank accounts. (Read: NRIs, Who Are Not Required To Possess Aadhaar, Struggling To Reactivate Their PAN).
Our ministers have been waxing eloquent about the virtues of artificial intelligence (AI) and policies to govern it, but good old application of mind and empathy was all that was needed to weigh the consequences of universal deactivation of PAN. Instead, we, the people, ought to have anticipated the suffering and hardship that has followed every game-changing action by the government such as demonetisation, introduction of MCA21’s new versions, goods and services tax (GST) or even the operation of the Aadhaar database itself.
Predictably, there was a furore on social media and WhatsApp groups sprang up to offer ‘jugaad’ remedies. Many NRIs have already got themselves an Aadhaar, perhaps knowing full well that a government system would never be programmed to recognise their non-resident status. They were saved. OCIs, who refused to get an Aadhaar, either on principle or because they were legally not required to, were caught in the crossfire.
The tax department will claim that it has a Twitter handle that immediately responds to issues or provides email IDs and helplines for quick resolution. But one example is enough to show how this  generates wrong or irrelevant answers or draws a blank.
Mr MN (name withheld), a British national, resident in India, who does not have an Aadhaar was among the 112.7mn Indians hit by the deactivation. This means that he cannot file his tax returns or access his mutual funds and depository accounts. So he began a correspondence with the tax department’s helplines asking them to unblock him. He wrote that his PAN was blocked, despite a specific notification exempting foreigners (Notification No 37/2017 dated 11th May 2017) from linking the Aadhaar number in India to PAN. The helpline response was to instruct him on how to link PAN to Aadhaar.
In response to another email, the tax department decided that he is an NRI and asked him to submit documents to establish that status. As an aside, the tax department responded to the chaos on 18th July and asked NRIs, whose PANs are inoperative, to “intimate their residential status to their respective JAO (jurisdictional assessing officer).” But most of them, living abroad, are clueless about how to do so, since no link or details are provided.
NM is more fortunate than others. After considerable emails and help in pushing his case on social media and offline with the market regulator and central depository, his PAN has been unblocked, on the very day that the tax department issued a clarification to help mitigate the problem (18th July).
In a detailed tweet that day, the tax department responded to harried NRIs and OCIs by clarifying that they “can still file returns even if their PAN was made inoperative.” However its action continues to remain unfairly punitive. It says, “they will not receive pending tax refunds and interest on these refunds…” Read details here: NRIs, OCIs Can File Tax Returns Even with Inoperative PAN: I-T Dept
But consider the cascading impact of the PAN deactivation. Since the National Securities Depository Ltd (NSDL) runs the tax information network and depends on the PAN database, the deactivation of PAN automatically blocked access to depository accounts and mutual fund investments. Computer Age Management Services (CAMS), which is the largest registrar and transfer agent (RTA) for mutual funds, and CDSL Ventures Limited (CVL), which handles customer profiling and record keeping for mutual fund investors, in turn, blocked their accounts.
Chaos reigned for a fortnight. The Association of Mutual Funds of India (AMFI) made a representation to the market regulator to go by the status reflected in the RTA database as declared by the individual. But, before the Securities and Exchange Board of India (SEBI) could respond, the social media noise finally got the tax department to recognise the issue and offer a partial solution.
Even in Amritkaal, change is a slow, step-by-step process and it is our kartavya (duty) to bear difficulties with equanimity and never complain. After all, Ease of Living is a Western concept and has, perhaps, been discarded, without any of us noticing it.
9 months ago
The problem is the system has numerous bugs in it, which has second order effects once rectified. It's even more tricky to try and refine (or indeed, iterate) an existing system with so many bugs than create one from scratch (which might be the best possible outcome).
9 months ago
@SuchetaDalal - Agree with you on demands raised for old Assessment years (more than 5-10 years) and communicated recently. Recently I had a demand for AY 2015-2016 & AY 2016-2017 that was raised in 2022. I have had several run ins with the Income Tax Department over the last 10+ years, mostly on account of wrong demands, assessments & devious tactics adopted by them, and twice on account of mistakes made by my auditor. The most common methodology adopted by Income Tax is to send fresh but backdated assessments & demands for 5-10 years old assessment years. Over the years I have learnt the devious ways the Income Tax Department operates. So, here's what I do to be one step ahead of them to thwart their devious extraction attempts

1. Take periodic screenshots of your IT account portal especially the pages related to work list, e-proceedings, pending action, outstanding demands. I take screenshots of these pages every month, and have been doing this for the last 7 years. I have thwarted a few extraction attempts by throwing back the data to prove that it was a backdated devious notice & assessment, and in both cases I was able to back up with papers to also prove that their demands were also wrong. The Income Tax Department quietly withdrew the demand notice once, and on another time kept it pending. I used an RTI query on that demand notice to withdraw the demand notice. My advice is to take screenshots at least every quarter, if not every month. That way you can prove that there were no pending notices & demands and this is backdated.

2. Even when you respond to demands, e-proceedings & queries and also pay outstanding taxes, the demands / notices & e-proceedings are never closed, it is kept open. Use RTI (use the Govt of India online RTI Portal, it is very easy, simple & effective) to generate response from the Income Tax and get them to act. I have used it several times and it is very effective and it works. I have closed several wrong notices / demands & pending closures using RTI.

3. Keep your paper work in order, at least digitally of all IT workings, supporting papers, tax paid challans, filed & processed ITR’s, etc. Always expect unreasonable demands, notices. If your paper work is in order you can push back.

4. Respond to Income Tax Department in their own language. Every demand notice is sent to assesses in a very threatening tone. Remind the IT Officers that we are the reasons of their existence and respond to them in the same language with an advice to behave properly with assessees failing which inform the officer that he they will be reported for such behavior in the ACR (Annual Confidential Report) maintained by the Directorate of Income Tax. Every single Government employee is afraid of black mark in their ACR’s as it will hamper all promotions & move. Even if you have made a mistake they have no business to send you a threatening notice
Replied to krish.queries comment 9 months ago
Very useful insights. Can you elaborate on how to use RTI in such cases i.e.what information are you exactly seeking?
9 months ago
While we are upgrading our systems, it looks no sane mind is looking at a holistic picture of its impact or software services not running an audit check on their software with external professionals. Common today in this digitised age to blame everything on software glitch ignoring the process followed to computerize it.
9 months ago
This time the IT statement of the Dividend income and TDS also included the Equity sales from my Sundaram SISOP PMS. Obviously it is not credited to my Bank account. These equities are never held by me directly. I hold PMS for several years and never the TDS, if any on the sale of equities by the PMS were in the statements by IT dept. I believe I will have the TDS only when I sell the PMS. Can someone enlighten me (and IT Dept) on this matter?
I also hold several Mutual funds. The MF manager also sell and buy Equities, but Only when I sell the MF, the TDS is applicable on the profit.
Can someone enlighten me (and Others). I am sure there must be many more like me.
9 months ago
Its a royal mess. The long clarification given by IT department is total nonsense. I have written to JAO who doesn't reply. My tax returns have been filed every year in a NRI designated ward. 20% TDS was deducted on my property sale few years ago, a draconian provision reserved for NRIs. Yet we are running around from pillar to post, only to get more red tape and being pushed to the next desk.

I also have the privilege of a wrong tax demand of 2009 being raised repeatedly every 3 years even till date. They raise the wrong demand, then adjust it against current year refund, then I have to apply for rectification again by sending them their own admission or error in the past and then they give the refund. Then the cycle repeats after 2-3 years again. I have got the same error rectified 3-4 times and yet they adjusted that demand from my refund last year again. Finally I have run out of energy to keep fighting and will probably just let the deaf and dumb finance minister be happy with that money. There is only so much you can fight a draconian system.
9 months ago
Digital India is even more dangerous as you can't argue with opaque computers and systems.
9 months ago
Please forward it to someone who can raise this question to Nirmala Sitaraman in the current Parliament session.
Replied to shetyerb comment 9 months ago
No way, you may get a response, "since I don't file Income Tax i don't know the issues faced by the tax payers"
Replied to shetyerb comment 9 months ago
Deaf can't hear.
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