Income Tax Scrutiny Notice Under Section 143(2) — Complete Response Guide for Companies in 2026

Income Tax Notices
Tax Litigation
Emergency Response
July 2026  ·  15-min read

For CFOs, Business Owners, and Finance Heads who have received a Section 143(2) notice on the Income Tax e-filing portal. Covers: why your return was actually selected · how the e-Proceeding process works · the eight areas AOs examine most closely · what happens if you don’t respond · the appeal path after an adverse assessment · How Rudra Capital helps · 8 expert FAQs

A Section 143(2) notice appearing on your income tax e-filing portal means one specific thing: your return has been selected for detailed scrutiny assessment, and the Assessing Officer intends to examine it in detail before accepting the income declared. This is meaningfully different from — and more serious than — a routine intimation or a simple document request under Section 142(1). A 143(2) notice opens a full assessment proceeding under Section 143(3), during which the AO can examine any aspect of the return, not just the issue that may have originally triggered selection.

This guide explains exactly how the process works in 2026 — through CBDT’s e-Proceeding portal — what the AO is actually looking for, and what you need to prepare to get through scrutiny without an adverse addition to your assessed income.

Why Was Your Return Selected? Understanding CASS and Manual Selection

CASS — Computer Assisted Scrutiny Selection: The majority of scrutiny notices in 2026 originate from CBDT’s algorithmic CASS system, which flags returns based on specific risk parameters — turnover-to-income ratio anomalies, high-value transactions inconsistent with declared income, TDS credit claims not matching Form 26AS, significant year-on-year variance in deduction claims, and cross-referencing with GST and SFT (Statement of Financial Transactions) data. CASS selection is not personal — it is a statistical flag, and the notice itself typically will not specify the exact reason.

Manual selection: A smaller proportion of cases are selected manually by the jurisdictional AO — typically where specific information suggests under-reporting, following an audit observation in a prior year, or where the case involves a specific high-risk category (search and seizure follow-up, information from another agency, or a pattern flagged in a related entity’s assessment).

The e-Proceeding process — how scrutiny is actually conducted in 2026: Nearly all scrutiny assessments now proceed through the Income Tax Department’s e-Proceeding portal, part of the Faceless Assessment framework. The AO issues specific questionnaires and document requests through the portal; the taxpayer responds by uploading documents and written submissions within the specified timeline (typically 15 days per notice, though extensions can be requested). Video conferencing hearings are available on request where the taxpayer wishes to make oral submissions. Every submission becomes part of the permanent case record — meaning responses must be precise, consistent, and complete, since there is limited scope to walk back an earlier submission later in the same proceeding.

The Eight Areas Assessing Officers Examine Most Closely in 2026

1. Related-party and group company transactions: Loans, advances, and supply arrangements with sister concerns or promoter-owned entities, examined for arm’s length pricing under Section 40A(2) and for deemed dividend implications under Section 2(22)(e).
2. Large or unexplained cash transactions: Cash purchases, cash payments above disallowance thresholds under Section 40A(3), and any cash deposits inconsistent with declared business turnover.
3. TDS compliance and Section 40(a)(ia) disallowance exposure: Cross-verification of TDS deducted against Form 26AS and payment ledgers, flagging any category with non-deduction or short-deduction.
4. High-value deduction and exemption claims: Claims under Sections 80IC, 80IB, 10AA, and similar provisions tested for continued eligibility and supporting documentation.
5. Share capital and premium received (Section 56(2)(viib)): Where shares are issued at a premium, the AO examines whether the fair market value methodology and the investor’s financial credibility support the valuation.
6. Provisions and contingent liabilities: Whether provisions charged to the P&L meet the specific ascertainability test required for tax deductibility, versus being merely contingent.
7. Capital gains and property transactions: Stamp duty value versus declared consideration under Section 50C, and holding period classification for long-term versus short-term treatment.
8. International transactions and Transfer Pricing (Form 3CEB reference): Where applicable, a reference may be made to the Transfer Pricing Officer under Section 92CA for separate examination of international related-party transactions.

What Happens If You Don’t Respond — The Best Judgment Assessment Risk

If a taxpayer fails to comply with the notices issued during a Section 143(2) proceeding — missing deadlines, providing incomplete responses, or ignoring the process entirely — the AO is empowered under Section 144 to complete a Best Judgment Assessment. This means the AO estimates the taxable income based on whatever information is available, typically applying conservative, taxpayer-unfavourable assumptions given the absence of cooperation. Best judgment assessments consistently produce higher additions than a well-defended scrutiny response — and they also carry a heightened risk of penalty proceedings under Section 270A for under-reporting, since the taxpayer’s non-cooperation is itself viewed unfavourably by the reviewing authority.

The Appeal Path If the Assessment Goes Against You

If the final assessment order under Section 143(3) includes additions you disagree with, the escalation path is: CIT(A) (first appeal, filed within 30 days of the assessment order, using Form 35) → ITAT (second appeal, within 60 days of the CIT(A) order) → High Court on substantial questions of law. Unlike GST, income tax appeals to CIT(A) generally do not require a mandatory pre-deposit, though the AO can still pursue recovery of the disputed demand unless a stay is separately obtained — making a timely stay application, filed alongside or immediately after the appeal, an important practical step many taxpayers overlook.

How the Faceless Assessment Scheme Actually Changes Your Strategy

No single point of contact — and why that matters for how you respond: Under the Faceless Assessment Scheme operating through the National Faceless Assessment Centre (NFAC), your case may be assigned to an Assessing Officer in a different city, with no in-person interaction at all in the ordinary course. This has a specific practical consequence: your written submission is the entire case — there is no informal conversation to clarify an ambiguous point, no opportunity to read the officer’s reaction and adjust your explanation in the room. Every document, every line of explanation, must be complete and self-contained the first time it is submitted.

The video conferencing right — underused by most taxpayers: Where a taxpayer specifically requests it, or where the NFAC proposes an adverse view, a video conferencing hearing must be offered under the faceless assessment framework. This is one of the only opportunities to directly address the officer’s specific concerns in real time rather than through another round of written exchange — and specialist representation at this hearing, prepared with the right technical framing, materially improves outcomes in contested cases.

A Real Example: How a Related-Party Loan Query Became a ₹2.1 Crore Addition

Consider a representative scenario reflecting the pattern Rudra Capital sees repeatedly in scrutiny assessments involving group companies. A manufacturing company received a Section 143(2) notice with one specific query: explain an interest-free loan of ₹1.8 crore extended to a sister concern during the year. The company’s internal finance team responded with a one-line explanation — “temporary business support to group company” — without any board resolution, loan agreement, or benchmarking of what an arm’s length interest rate would have been.

The AO treated the absence of documentation and the absence of interest charged as indicative of a wider pattern of undisclosed inter-company dealings, and expanded the scope of the assessment to examine all related-party transactions for the year — ultimately making an addition of ₹2.1 crore combining notional interest income under Section 40A(2) principles and a separate deemed dividend addition under Section 2(22)(e) on a portion of the same transaction. The original query was about one transaction worth ₹1.8 crore. The final addition, driven by an inadequate first response, was larger than the transaction itself and touched an entirely separate provision. This illustrates the single most important lesson of scrutiny assessment: an incomplete answer to one specific question routinely invites broader examination, not narrower.

Section 143(2) Scrutiny vs Section 148A Reassessment — Why the Difference Matters

A poorly handled Section 143(2) scrutiny for the current year frequently generates the very “new information” that triggers a subsequent Section 148A notice for prior years on the same issue — meaning a weak response today can create a second, separate legal problem for earlier assessment years that were otherwise closed and settled.

How Rudra Capital Helps — Scrutiny Assessment Management

Rudra Capital’s Tax Litigation team manages the entire scrutiny lifecycle for Indian companies — from the first e-Proceeding notice through final assessment and, where necessary, appeal.

FAQs — Income Tax Scrutiny Notice Section 143(2) 2026

Related reading: Why Your Company May Be One Notice Away From Major Tax Litigation · GST DRC-01 Demand Notice — How to Reply ·Tax Litigation Advisory — Contact Rudra Capital