With over 165,000 cases selected for tax scrutiny, there has been a significant increase in income tax notices for the financial year 2024-25. The reasons for this surge are varied, ranging from unusual cash deposits and unexplained bank credits to mismatches with GST data, among others. As you prepare to file your income tax return (ITR) this year, remaining vigilant is crucial. To ensure transparency in the system, the Central Board of Direct Taxes (CBDT) has released guidelines outlining the parameters for selecting ITRs that will undergo complete scrutiny in the financial year 2025-26. These guidelines focus on specific categories that have historically presented risks of tax evasion, including search and survey cases, as well as recurring contentious issues. To make things easier for you, we have summarised the important points from the latest guidelines so that you don’t have to navigate this complex web alone.
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What is ITR scrutiny?
The Income Tax Department examines all income tax returns submitted by taxpayers to verify their accuracy and authenticity. ITR scrutiny is a detailed examination of your return to ensure that all details, including income, deductions, exemptions, and other reported information, comply with the provisions of the Income Tax Act and that there is no scope for tax evasion. If any information in your ITR is found to be incomplete or inconsistent, your ITR may be selected for scrutiny.
The tax department informs taxpayers about this scrutiny through a notice. During scrutiny, the department may request supporting documents or clarifications regarding specific entries in the return. While it is not necessarily a cause for concern if your return is selected, responding timely and accurately is crucial.
What are the types of ITR scrutiny?
- Compulsory Scrutiny: This type of scrutiny involves comprehensive examination of income tax returns, usually triggered by high-risk parameters such as large refunds claimed, mismatches in TDS, high-value transactions, or complex business transactions. These cases are selected for scrutiny under Section 143(2) of the Income-tax Act, 1961. For example, a sudden dip in income despite consistent profits in earlier years or disproportionately high business expenses.
- Limited Scrutiny: This is a focused examination of one or more specific issues or transactions identified through the Income Tax Department’s risk-based parameters or when limited mismatches or red flags appear. Examples include discrepancies between TDS reported and income declared, high-value foreign travel with low declared income, differences in property sale value and stamp duty value, or large cash deposits during the year.
- Manual Scrutiny: This selection of cases is carried out manually based on specific criteria defined by the CBDT. It includes cases flagged outside the automated system, such as returns filed in response to notices or where prosecution proceedings are initiated. Examples include cases involving information from law enforcement or intelligence agencies, or cases reopened under Section 147 (income escaping assessment).
- Computer-Assisted Scrutiny Selection (CASS): This is a system-driven, algorithm-based scrutiny selection mechanism that categorises cases for complete or limited scrutiny. CASS examines ITRs based on risk assessment rules using analytics and data integration. Examples include large refund claims, declines in gross or net profit, excessive deductions, foreign transactions, mismatched stock figures, and issues with non-ITR filers.
What are the new CBDT ITR compulsory scrutiny guidelines for FY 2025-26?
The Central Board of Direct Taxes (CBDT) has identified six cases that will be subject to compulsory scrutiny during FY 2025-26, according to its latest guidelines:
a) Survey-based cases under Section 133A
If the Income Tax Department conducts a survey on a taxpayer on or after April 1, 2023, the ITR for the corresponding financial year will be mandatorily scrutinised. Note that even if there are no apparent irregularities in your ITR during FY 2025-26, if a survey occurred in previous financial years, your income tax return must be reviewed this year.
b) Search and requisition cases under Sections 132 and 132A
If a search under Section 132 or a requisition under Section 132A occurs between April 1, 2023, and March 31, 2025, the ITRs related to those cases will automatically be scrutinised. Scrutiny for searches conducted after September 1, 2024, will be limited to the assessment year 2025-26.
c) ITR-7 filers claiming exemptions without valid registration
Taxpayers who file ITR-7 and claim exemptions under Sections 12A, 12AB, or 10(23C) will be scrutinised if the relevant registration was not granted or was canceled by March 31, 2024. Claims made in the return will not be considered valid unless reversed by an appellate body.
d) Recurring additions in previous assessment years confirmed by appeal
If a taxpayer has previously encountered repeated additions in assessments arising from a consistent legal or factual issue, the current ITR during FY 2025-26 will be closely examined if:
i) The addition has been affirmed on appeal
ii) The amount involved is ₹50 lakh or more in metropolitan areas or ₹20 lakh or more in other locations.
This scrutiny also extends to transfer pricing issues and comparable disputes.
e) Specific tax evasion cases
Returns will be scrutinised if there are credible alerts or reports of tax evasion from law enforcement agencies, regulatory bodies, or intelligence departments. This scrutiny occurs regardless of the risk profile and is based on external intelligence. It includes reports about undisclosed foreign income, benami transactions, bogus donations, or GST mismatches flagged by other departments.
f) Scrutiny notices must be issued by June 30, 2025, for ITRs filed during FY 2024-25
For ITRs filed during FY 2024-25 (AY 2025-26), the Income Tax Department must issue notices under Section 143(2) by June 30, 2025. If the notice is not issued by this date, the scrutiny will be considered legally invalid.
For which ITRs will the new ITR compulsory scrutiny guidelines be applicable?
The guidelines released by the CBDT on June 13, 2025, will apply to income tax returns filed during the financial year 2025-26. This means that these rules will apply to income tax returns filed for the financial year 2024-25, or the assessment year 2025-26. Note that the last date to file income tax returns for the financial year 2024-25 is September 15, 2025.
What happens if your ITR is selected for compulsory scrutiny?
- Notice issued: You will receive a notice under Sections 143(2) and 142(1) asking for documents to support your ITR.
- Submit necessary documents: You must then submit the required documents through the income tax e-filing portal.
- Faceless evaluation: The review for compulsory ITR scrutiny is conducted online, eliminating the need for meetings with officers, ensuring fairness.
- Final order: After reviewing your documents, the tax department issues a final order.
Does the ITR compulsory scrutiny apply to everyone?
No, only ITRs filed during FY 2025-26 that match the specific high-risk categories listed by the CBDT will be subject to compulsory scrutiny.
Can I avoid compulsory ITR scrutiny?
You cannot avoid scrutiny if your case falls under the categories listed above. However, to reduce the chances:
- File your ITR accurately.
- Cross-check details with Form 26AS, Annual Information Statement (AIS), and Taxpayer Information Summary (TIS).
- Keep all supporting documents, such as receipts or bank statements, readily available.
- Report only what you can prove with evidence.
