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Alankar Mishra

January 6, 2025

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Basics of GST

Demand Notice under Section 156 of the Income Tax Act

In India, every taxpayer is obligated to comply with tax laws. However, there may arise circumstances where a demand for payment of additional taxes is raised by the Income Tax Department, usually through a demand notice under Section 156 of the Income Tax Act,1961. Such a notice informs a taxpayer about the outstanding dues that the taxpayer owes due to undeclared income, non-declared income, wrong assessment and defaults. In this guide, we explain the features and process of a demand notice served under Section 156, what it entails, and what measures ought to be taken by the taxpayers in their self-defence.

What is a Demand Notice under Section 156?

A section 156 notice is a formal letter from the Internal Revenue Service which states the tax, interest, penalty, or other amounts owed by the taxpayer. Such a notice is issued in situations where:

1. A return or filing of a tax return finds the officer raising questions on it.

2. There are some dues outstanding post any assessment, re-assessment, or rectification.

3. Tax deducted at source (TDS) was not paid accurately.

4. Penalties or interest are accrued because of late filing or default.

When is a Demand Notice Issued?

Demand notices tend to emerge in the situations enlisted below:

1. Post Assessment or Reassessment: After evaluation of returns the department might notice additional tax likely to be payable.

2. Post-rectification of mistakes: Sometimes taxpayer ends up filing the self-assessment return on incorrect calculations.

3. TDS Default: A demand notice may arise in respect of a TDS default by an employer or deductor on deposits of TDS

4. Failure to pay Advance Tax: A tax notice may be issued for any shortfall in the payment of advance tax when it was required to be paid.

5. Fines / Interests: Due to late filling of forms, non-filling, or any other breach of compliance rules.

Components of a Demand Notice

As per the demand notice provided under Section 156, the following details need to be accounted for:

1. Taxpayer details: Name PAN (Permanent Account Number) and addresses

2. Details of demand: The assessment year, the section under which the demand has been raised, and the total amount due.

3. Reason for demand: Explanation of any inaccuracies or defaults which has led the appeal to be raised.

4. Payment Timeline: In most cases, the time frame given to satisfy the outstanding dues is around ‘30’ days.

5. Payment Methods: It also contains directions regarding the remittances to be made against the outstanding amount.

Steps to Handle a Demand Notice under Section 156

You might be overwhelmed after being served with the demand notice. However, dealing with compliance requirements in the letter of demand will ensure that you do not have to pay penalties again. Here is how to deal with it with a simple step-by-step approach:

‍Step 1: Verify the Notice

1. Log in to the Income Tax Department’s e-filing portal.

‍2. Access the notice in the “View Notices and Orders” section.

‍3. Match the notice details with your tax return and records.

‍Step 2: Identify the Reason for the Demand

1. Check if the demand is due to:

2. Clerical errors in your tax return.

3. Mismatch in TDS details.

4. Omission of income or incorrect deductions.

5. The notice will specify the relevant section and assessment year.

‍Step 3: Rectify Errors (if applicable)

1. If the demand arises from a clerical or computational error, file a rectification request online under Section 154.

‍Step 4: Respond to the Notice

1. If you agree with the demand, make the payment using the Challan ITNS 280 via the e-filing portal or authorised banks.

2. If you disagree, file a response online within the stipulated time:

3. Select "Disagree with Demand" and provide supporting documents.

4. Include Form 35 if appealing against the notice.

‍Step 5: Appeal Against the Demand

1. In cases where there are disagreements, you may even go to the Commissioner of Income Tax (Appeals) or even higher authorities.

2. There are deadlines for such submissions usually 30 days or earlier, be sure to meet them.

‍Step 6: Keep Records

1. It will be beneficial in future to keep a record of all communication, notifications, payments or appeals made.

Penalties for Ignoring a Demand Notice

If one ignores a demand notice, the following situations can arise:

1. Interest under Section 220: Failure to make payment will entail an interest charge of 1% per month or part of a month.

2. Prosecution under Section 276C: A continuous failure to comply will attract prosecution which may entail fines or imprisonment.

3. Attachment of Assets: To collect taxes due, the Income Tax Department may attach bank accounts or other assets.

‍4. Reduced Credit Score: A failure to pay tax obligations will affect your credibility in the financial system.

How to Pay the Amount Stated in a Demand Notice

To settle arrears with the Income Tax Department, please follow the steps indicated below:

Step 1: Log in at the E-Filing Portal of the Income Tax Department.

Step 2: Get to the 'Pay Tax' section and choose Challan ITNS 280.

Step 3: Provide requisite details in particular (more specifically the amount payable, assessment year and PAN).

Step 4: Specify the amount through net banking or any other available option.

Step 5: And, the final step involves uploading the payment challan receipt on the portal.

Common Reasons for Receiving a Demand Notice

1. Discrepancy in TDS: TDS component underreported or not claimed at all.

2. Filing of Income Tax Return: Any arithmetic or clerical mistake.

3. Additional income not disclosed: Additional income sources are not declared in the return.

4. Filing of return after due date: Extra tax due to the filing of the return beyond the due date.

5. Not paying enough advance tax: Shortfall in advance payment of tax obligations.

Key Tips to Avoid Demand Notices

1. Be sure to report in the right way all your income and losses deductible.

2. Before submitting the tax return, check that the TDS is correct and that it agrees with Form 26AS.

3. Advance tax should be paid promptly if shortfalls are to be avoided.

4. Returns should be submitted by the due date to avoid penalties.

5. The documentation of all transactions should be done in a once-off transaction form.

Conclusion

Essentially, a tax demand notice under Section 156 is a proclamation that outstanding tax dues are due, and need to be addressed immediately. Breaching that inclusion by doing nothing, or doing something (payment, rectification, or appeal) is assuring and avoids penalties. Furthermore, the notion of being quiet should not exist. Taxpayers need to file their returns, organize their respective documents, and be prepared for great volatility in the disputes available for resolution. If done right, there isn’t a daunting procedure of tax compliance at all.

FAQs

What is the timeline for paying the demand under Section 156?

The assumption must be cleared within the timeframe of 30 days from receipt of the notice unless otherwise specified.

Can I dispute a demand notice if I believe it is incorrect?

A rectification request can be filed online or an appeal with supporting documents concerning the notice has been made.

What happens if I ignore the demand notice?

This letter shall be ignored and may result in interest, penalties, prosecution and/or recovery by the Income Tax Department.

How do I verify the authenticity of a demand notice?

To check the demands notice, log in to the Income Tax Department e-filing portal under the “View Notices and Orders” link.

Can I pay the demand amount in instalments?

In some extraordinary circumstances, the assessing officer, may, on the request of the taxpayer, allow the payment to be made in instalments.

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