Who Will Face Income Tax Scrutiny in TY 2026–27? India’s CBDT Rules Explained

CBDT has released its compulsory scrutiny guidelines for TY 2026–27, outlining high-risk triggers, such as search, survey, and transfer pricing disputes, that will mandate detailed tax examination. Businesses should review their documentation and compliance protocols immediately.

The Central Board of Direct Taxes (CBDT) has issued guidelines identifying the categories of income tax returns that the Income Tax Department will compulsorily select for complete scrutiny during tax year (TY) 2026–27. The guidelines apply to returns filed during FY 2025-26 and specify the circumstances in which tax authorities will conduct a detailed examination of a taxpayer’s return.

For businesses, multinational groups, investors, and tax-exempt entities, the guidelines provide a clear indication of where India’s tax authorities are likely to focus enforcement. Key scrutiny triggers include search and survey actions, reassessment proceedings, recurring tax disputes, transfer pricing adjustments, exemption claims without valid approval, and specific tax-evasion information.

ALSO READ: Income Tax Assessment in India (2025-26): Process, Rules & Reassessment

Why CBDT’s scrutiny guidelines matter for businesses and investors

Find Business Support

We help businesses navigate India’s tax assessment process, manage scrutiny and reassessment risks under the new framework.

The compulsory scrutiny framework has important implications for businesses, multinational groups, investors, charitable institutions, and other commercial entities. The guidelines indicate where tax authorities intend to concentrate enforcement efforts and provide insight into the types of transactions and compliance risks likely to attract closer examination.

For businesses, the framework reinforces the importance of maintaining robust tax governance, accurate reporting, transfer pricing compliance, and proper documentation. For investors, recurring tax disputes, reassessment proceedings, and search-related actions may signal potential tax exposures that could affect valuations, due diligence assessments, transaction structuring, and overall investment risk.

The guidelines also offer reassurance to compliant taxpayers by confirming that routine information mismatches arising from data-reporting systems alone will not automatically trigger compulsory scrutiny.

Categories of returns selected for compulsory scrutiny

1. Cases involving survey operations

The Income Tax Department will automatically scrutinize returns filed by taxpayers who were subject to a survey under Section 133A of the Income-tax Act, 1961, on or after April 1, 2024, except for certain limited categories of surveys specifically excluded by the CBDT.

2. Cases involving search and seizure proceedings

The IT department will compulsorily scrutinize returns filed by taxpayers against whom it initiated a search under Section 132 or a requisition under Section 132A on or after April 1, 2024.

Special treatment for searches conducted after September 1, 2024

For searches initiated or requisitions made on or after September 1, 2024, tax authorities will conduct scrutiny for the assessment year covered under Section 158BA(6), which forms part of the revised block assessment regime.

For businesses, this provision highlights the need to preserve records and maintain audit trails that can withstand examination under the expanded block assessment framework.

3. Reassessment cases under Section 148

Tax authorities may select for scrutiny returns filed in response to notices issued under Section 148. These cases generally arise when tax authorities identify income that may have escaped assessment, including matters connected to search and survey proceedings.

Businesses and investors should pay particular attention to reassessment notices because they often involve historical transactions, tax positions, or disclosures that require extensive supporting documentation.

4. Charitable and tax-exempt entities claiming benefits without valid registration

The CBDT has introduced a specific scrutiny parameter for trusts, educational institutions, hospitals, research organizations, and other entities that claim exemptions or deductions despite registration or approval-related deficiencies.

The department may select returns for scrutiny where:

• Registration or approval has not been granted
• Registration or approval has been cancelled, withdrawn, or denied
• The entity continues to claim exemption or deduction benefits in its return

This scrutiny category covers claims under Sections 12A, 12AB, 35(1)(ii), 35(1)(iia), 35(1)(iii), and Section 10(23C).

Relief where appellate authorities reverse cancellation orders

The CBDT has also provided an important safeguard. Tax authorities will not select a taxpayer under this category if an appellate authority subsequently overturns or sets aside the cancellation or withdrawal of registration or approval.

5. Cases involving recurring tax disputes

The department may scrutinize returns where a taxpayer has faced significant additions in earlier years on recurring issues of fact or law and those additions have either become final or received appellate confirmation.

The scrutiny trigger applies only when additions exceed the following thresholds:

Transfer pricing disputes remain a key focus area

Find Business Support

Managing Cross-Border Tax Risks in India? Speak with Our DSA India Tax Advisory Team

The CBDT has expressly included transfer pricing adjustments within this category. As a result, multinational enterprises should closely monitor recurring transfer pricing disputes and assess whether previously sustained adjustments could increase scrutiny risk. This provision is particularly relevant for foreign investors, multinational groups, and companies operating cross-border business models.

6. Cases based on specific tax-evasion information

The department will compulsorily scrutinize returns when it receives specific information indicating potential tax evasion from the following:

• Investigation agencies
• Intelligence agencies
• Regulatory authorities
• Law-enforcement agencies
• Other competent government bodies

Importantly, the guidelines require specific and actionable information linked to a particular assessment year rather than broad allegations, generic risk indicators, or unsubstantiated suspicions.

Important clarifications issued by CBDT

The CBDT has clarified that taxpayers do not face compulsory scrutiny merely because they file returns in response to notices generated from:

• Annual Information Statement (AIS)
• Statement of Financial Transactions (SFT)
• Centralized Processing Cell for Tax Deducted at Source (CPC-TDS) data
• Non-Filer Monitoring System (NMS)
• Information received from the Directorate of I&CI

The department will select such cases for compulsory scrutiny only if they independently satisfy the tax-evasion information parameter.

This clarification assumes particular significance as tax authorities increasingly use data analytics, information matching, and digital compliance systems to detect potential non-compliance. Businesses can therefore take comfort that routine reporting mismatches alone do not automatically result in mandatory scrutiny.

Statutory deadline for scrutiny notices

The Income Tax Department must issue notices under Section 143(2) on or before June 30, 2026, for returns filed during FY 2025-26.

Businesses, investors, and other taxpayers that fall within any compulsory scrutiny category should closely monitor communications from the department before the statutory deadline expires.

Business scrutiny risk checklist

Businesses should review whether they have:

• Received a survey, search, requisition, or reassessment notice
• Faced recurring additions in prior tax assessments
• Had transfer pricing adjustments sustained in appeal
• Claimed exemptions or deductions without valid approval or registration
• Received notices linked to specific tax-evasion information
• Reconciled AIS, SFT, TDS, GST, and financial reporting data
• Maintained supporting records for tax positions, deductions, exemptions, and cross-border transactions

FAQ: Responding to an income tax scrutiny notice under Section 143(2)

What types of scrutiny assessments can taxpayers face?

1. Limited scrutiny: Under limited scrutiny, the department examines only specific issues identified in the notice. These cases are typically selected through risk-based systems and focus on particular transactions or reporting discrepancies. Examples include capital gains from property sales, foreign tax credit claims, and mismatches between income reported in the return and information available through tax reporting systems. The assessment generally remains confined to the issues specified in the notice.

Find Business Support

De-Risk Your Asia Business with a Company Health Check Review and Professional Advisory

2. Complete scrutiny: In a complete scrutiny assessment, the department reviews the entire return and supporting documentation. Tax authorities may examine multiple aspects of the taxpayer’s financial affairs for the relevant assessment year. Businesses should expect requests for extensive documentation, including books of account, invoices, contracts, bank statements, and supporting records.

3. Manual scrutiny: The CBDT prescribes certain categories of cases for compulsory scrutiny each year. Tax authorities may manually select taxpayers falling within these categories for detailed examination. Examples may include search cases, survey cases, reassessment proceedings, recurring disputes, and cases involving specific tax-evasion information.

What is the time limit for issuing a Section 143(2) notice?

The department must issue a scrutiny notice within three months from the end of the financial year in which the taxpayer filed the return.

For example, if a taxpayer files a return during FY 2025-26, the department must generally issue a Section 143(2) notice on or before June 30, 2026.

Notices issued beyond the statutory time limit may be subject to legal challenge.

How will taxpayers receive a scrutiny notice?

Under the faceless assessment regime, the Income Tax Department primarily serves notices electronically.

Taxpayers may receive notifications through:

• The Income Tax e-filing portal
• Registered email addresses
• SMS alerts sent to registered mobile numbers.

Businesses should establish internal controls to regularly monitor tax portal communications and prevent compliance deadlines from being missed.

How should businesses respond to a Section 143(2) notice?

Taxpayers should carefully review the notice and identify the specific issues raised by the department.

A typical response process involves:

1. Logging into the Income Tax e-filing portal.
2. Accessing the “e-Proceedings” or relevant compliance section.
3. Reviewing the notice and document requests.
4. Preparing supporting explanations and documentation.
5. Uploading the required information within the prescribed timeline.
6. Maintaining records of all submissions and acknowledgements.

Businesses should ensure that finance, tax, legal, and compliance teams coordinate their responses to maintain consistency across filings and supporting documents.

What documents may the tax department request?

Depending on the nature of the scrutiny, tax authorities may seek the following:

• Books of account and financial statements
• Tax audit reports
• Bank statements
• Invoices and supporting vouchers
• Contracts and agreements
• Transfer pricing documentation
• Details of investments and capital transactions
• Evidence supporting deductions, exemptions, and tax credits.

Commercial taxpayers should maintain organized documentation to facilitate timely responses.

What happens if a taxpayer ignores the notice?

Failure to respond can result in serious consequences.

These may include:

1. Penalties for non-compliance with departmental notices
2. Best judgment assessment by the assessing officer based on available information
3. Additional tax demands
4. Interest and penalty exposure
5. Challenges in contesting the assessment at later stages
6. Prosecution proceedings in serious cases involving deliberate non-compliance.

For businesses and investors, unresolved scrutiny proceedings can also create uncertainty during audits, funding rounds, mergers and acquisitions, and other strategic transactions.

How long does the department have to complete the scrutiny assessment?

The statutory timelines for completing scrutiny assessments have progressively shortened over the years.

For recent assessment years, tax authorities generally must complete the assessment within 12 months from the end of the relevant assessment year, subject to specific exceptions and extensions permitted under law.

Businesses should therefore prepare for relatively compressed assessment timelines and respond promptly to departmental requests.

Can the department issue a Section 143(2) notice if no return has been filed?

No. A scrutiny assessment under Section 143(2) presupposes that the taxpayer has already filed a return of income.

If a taxpayer has not filed a return, the department typically initiates proceedings through other statutory notices, including notices requiring the taxpayer to furnish a return or provide information.

What are the key compliance considerations for businesses and investors?

Businesses, multinational groups, startups, investors, and other commercial taxpayers should:

• Maintain robust tax governance and documentation processes.
• Reconcile income tax, GST, TDS, and financial reporting data regularly.
• Retain records supporting significant deductions, exemptions, and losses.
• Review transfer pricing positions and cross-border transactions carefully.
• Monitor notices and communications received through the tax portal.
• Respond promptly and accurately to all departmental queries.

A well-documented compliance framework can significantly reduce scrutiny-related risks and help taxpayers navigate assessments more efficiently.

Managing tax in India is critical for FDI companies to stay compliant with local regulations, GST requirements, and global standards such as IFRS, navigate complex filings, and apply correct tax treatments. A well-structured tax process helps to avoid penalties and stay 100% compliant.

Divyansh Shrivastava

Assistant Manager

Talk to an expert at India@dezshira.com

Or request a consultation at +91 0124 4001785 ext. 202

• Previous Article Building HR Compliance Readiness Under India’s Labor Codes
• Next Article