Income Tax Demand Clearance

• Understanding Income Tax Demand
• a. What is an Income Tax Demand?

• Definition: An income tax demand is a notice issued by the Income Tax Department indicating that additional tax is payable by the taxpayer. This can arise from discrepancies found during the assessment, reassessment, or scrutiny of tax returns.
• Notice Format: Typically issued in the form of a demand notice under Section 156 of the Income Tax Act, detailing the amount payable and the deadline for payment.
• b. Common Reasons for Tax Demands
• Discrepancies in Tax Returns: Differences between reported income and actual income, incorrect deductions, or unreported income.
• Assessment Orders: Additional tax liabilities determined during scrutiny or reassessment.
• TDS Mismatches: Differences between the TDS (Tax Deducted at Source) reported by the taxpayer and the TDS details available with the department.
• 2. Receiving and Understanding the Demand Notice
• a. Notification
• Electronic and Physical Notices: Demand notices are sent electronically to the registered email address and can also be accessed through the Income Tax Department’s e-filing portal. Physical notices may also be sent to the registered address.
• Contents of the Notice: The notice includes the amount of tax due, the reasons for the demand, and the deadline for payment.
• b. Verification
• Check the Details: Verify the details mentioned in the notice against your records, including the amount of income, deductions claimed, and TDS.
• Form 26AS: Compare the demand with the tax credit statement (Form 26AS) available on the e-filing portal to ensure all taxes paid are accounted for.
• 3. Responding to the Demand Notice
• a. Accepting the Demand
• Payment: If you agree with the demand, pay the amount due before the deadline specified in the notice. Payments can be made online through the Income Tax Department’s e-payment portal or via authorized banks.
• Challan Details: Use the correct challan (Challan No./ITNS 280) and provide accurate details to ensure the payment is correctly credited.
• b. Disputing the Demand
• Rectification Request: If you believe the demand is incorrect, you can file a rectification request under Section 154 of the Income Tax Act. This is done online through the e-filing portal.
• Supporting Documents: Provide supporting documents and explanations to substantiate your claim and correct the discrepancy.
• Appeal Process: If the rectification request is denied or partially accepted, you can file an appeal with the Commissioner of Income Tax (Appeals) or higher appellate authorities.
• 4. Steps to Clear the Demand
• a. Log in to the E-Filing Portal
• Access the Portal: Log in to the Income Tax Department’s e-filing portal using your credentials (PAN and password).
• View Outstanding Demands: Go to the ‘E-File’ section and select ‘Response to Outstanding Demand’ to view the details of the demand.
• b. Select the Appropriate Response
• Agree with Demand: If you agree with the demand, select the option and proceed with the payment.
• Disagree with Demand: If you disagree, select the option and provide the necessary details and supporting documents to contest the demand.
• Partially Agree: If you partially agree with the demand, specify the amount you agree with and provide explanations for the disputed amount.
• c. Make the Payment
• Online Payment: Use the e-payment option on the e-filing portal to make the payment. Ensure you fill out the challan correctly with the demand reference number and other details.
• Payment Confirmation: After making the payment, retain the payment receipt for your records and confirm the payment on the e-filing portal.
• 5. Post-Payment Actions
• a. Update the Demand Status
• Payment Verification: The Income Tax Department will verify the payment and update the status of the demand on the e-filing portal.
• Demand Clearance: Once the payment is confirmed, the demand status will be updated as ‘Cleared’ or ‘Resolved’.
• b. Follow-Up
• Check for Errors: Periodically check the status of your outstanding demands on the e-filing portal to ensure there are no errors or discrepancies.
• Communicate with the Department: If the demand status is not updated after payment, follow up with the Income Tax Department and provide the payment receipt and other relevant details.

• Receipt of Demand Notice The taxpayer receives a demand notice under Section 156 of the Income Tax Act. The notice details the amount payable and the reason for the demand.
• Verification of Demand Verify the details mentioned in the demand notice. Compare the notice with your filed return and supporting documents. Check for any errors or discrepancies.
• Response to Demand Notice If you agree with the demand: Pay the demanded amount within the specified time frame. Payment can be made online through the Income Tax Department’s e-filing portal or through authorized banks. Post payment, update the details on the e-filing portal to reflect the clearance of the demand. If you disagree with the demand: File a rectification request under Section 154 if the demand is due to an apparent mistake. Provide the necessary documentation and explanations to support your claim.
• Filing Rectification or Dispute Resolution Log in to the e-filing portal and navigate to the rectification request section. Choose the correct assessment year and provide details of the discrepancy. Upload supporting documents and submit the request.
• Response from Income Tax Department The department reviews the rectification request and supporting documents. If the request is accepted, the demand may be reduced or canceled. If the rectification is not accepted, the demand remains, and the taxpayer must pay the outstanding amount.

1. Basic Documents

• PAN Card: Permanent Account Number card.
• Aadhaar Card: Linked with PAN for verification purposes.

2. Demand Notice

• Copy of the Demand Notice: Issued by the Income Tax Department detailing the outstanding tax liability.

3. Income Tax Return (ITR)

• Copies of Filed ITRs: For the relevant assessment year(s) for which the demand has been raised.
• Acknowledgment Receipts: Proof of filing the ITR.

4. Tax Payment Receipts

• Challan Receipts: Proof of tax payments made (Advance Tax, Self-Assessment Tax, TDS, etc.).
• Form 26AS: Annual tax statement showing the tax credit and TDS deducted.

5. Financial Statements

• Books of Accounts: Detailed ledgers, journal entries, and trial balance for the relevant period.
• Profit and Loss Account: For the financial year.
• Balance Sheet: Statement of assets and liabilities as of the end of the financial year.

6. Bank Statements

• Bank Account Statements: Statements for all bank accounts held by the taxpayer during the relevant financial year.

7. Supporting Documents for Deductions and Claims

• Investment Proofs: For deductions claimed under various sections (e.g., Section 80C, 80D, etc.).
• Proof of Expenses: Invoices and receipts for business expenses or other deductions claimed.
• Home Loan Statements: For interest and principal repayment claims.
• Health Insurance Premium Receipts: For deductions under Section 80D.

8. Correspondence with Income Tax Department

• Previous Notices and Correspondence: All prior notices, communications, and responses related to the demand.
• Rectification Application: If a rectification request (under Section 154) was filed to correct any errors in the demand.

9. Assessment Orders

• Copies of Assessment Orders: Related to the assessment year for which the demand has been raised.
• Intimation Orders: Orders under Section 143(1), if applicable.

10. Details of Disputed Demand

• Explanation for Dispute: A detailed explanation of why you believe the demand is incorrect (if disputing the demand).
• Supporting Evidence: Any additional evidence supporting your claim that the demand is incorrect.

11. Payment Proof (if paying the demand)

• Payment Challan: Proof of payment of the demanded tax amount.
• Bank Statements: Showing the payment made to clear the demand.