Let's break the whole journey in some stages. I will not focus on time limits, also the relevance of sections is not much useful, because now Income Tax Act 2025 is into force. But still, to make a flow, I am using section references from 1961 Act.
Stage 1 – Filing of Return (Starting Point of Compliance)
Filing of return is second thing, before this, during the year, we deposit advance tax / self assessment tax / someone deducted TDS while making payment to us.
Then we file return u/s 139(1).
Once the return is filed, it is processed by CPC (Centralized Processing Centre, Bengaluru) u/s 143(1), where basic checks are carried out such as:
• arithmetical errors
• incorrect claims
• mismatch of TDS
• mismatch with AIS / Form 26AS
An intimation u/s 143(1) is issued showing:
• refund
• demand
• no adjustment
At this stage, after return filing and before issue of intimation, following notice may be received by any Assessee:
1. Defective Return Notice u/s 139(9)
If return contains defect such as:
• missing financial statements
• mismatch in audit report details
• incomplete ITR fields
• incorrect selection of ITR form
• DSC not attached where required
Department issues notice asking to correct defect.
2. Notice for Mismatch u/s 143(1)(a)
Department may send communication where:
• high value transactions reported
• income mismatch observed
• TDS mismatch exists
3. Notice u/s 245 – Adjustment of Refund against Demand
If taxpayer has old demand pending. Then Department may propose:
To adjust current refund against previous demand. Opportunity is given to respond.
Stage 2 – Selection for Scrutiny (Beginning of Litigation Risk)
Some returns are selected for detailed verification through risk-based parameters.
Common triggers:
• high-value transactions
• unusual deductions
• international transactions
• mismatch in income
• search/survey related cases
• industry risk parameters
If selected, notice under section 143(2) is issued. This notice makes starting of assessment proceedings.
After issuing notice u/s 143(2), the Assessing Officer starts inquiry proceedings.
Notice u/s 142(1) may be issued asking for:
• books of accounts
• invoices
• agreements
• confirmations
• explanations of transactions
The assessing officer may also collect information from third parties using powers under sections:
• 131 (summons powers)
• 133(6) (information from banks or parties)
At this stage, detailed verification of return takes place.
Stage 3: Transfer of assessment to TPO (Transfer Pricing Officer) (not for all Assessee, in very limited cases)
Where the taxpayer has international transactions with associated enterprises, the case may be referred to Transfer Pricing Officer (TPO) under section 92CA.
TPO examines whether transactions are at arm’s length price.
Process generally involves:
• issue of TP notices
• benchmarking analysis
• comparability adjustments
• TP order u/s 92CA(3)
TPO generally passes order 60 days before assessment limitation date. But if case referred to TPO, then total time limit of assessment increases extra 12 months.
Stage 4: After several 142(1) notices asking information and documents, Show Cause Notice issued (Point where dispute begins)
If the assessing officer proposes any addition, a show cause notice is issued giving opportunity to explain why addition should not be made.
Typical additions proposed:
• disallowance of expenses
• unexplained cash credits u/s 68
• disallowance u/s 40(a)(i) or 40(a)(ia)
• transfer pricing adjustment
• PE income attribution
Proper reply at this stage can prevent litigation.
Stage 5: Draft Assessment Order (Special procedure for eligible cases)
In cases involving:
• transfer pricing adjustment
• foreign company
• eligible assessee
Assessing officer (AO) first passes Draft Assessment Order under section 144C.
Taxpayer/ Assessee has option to:
accept variations proposed in Draft Order OR file objections before Dispute Resolution Panel.
(DRP Facility is a Panel of 3-4 senior tax officers, who settle dispute at early stage, to avoid further litigation. This facility is made for Foreign/ Non resident companies, companies involved in international transactions, Transfer Pricing cases.)
If Assessee accepts variation, then within 30 days of draft order, Final Assessment Order is passed.
If Assessee files objections before DRP, then DRP hearing happens within 9 month, and then DRP gives their opinion (order) which is called DRP Directions. Basis that Directions, now AO passes Final Assessment Order within 1 month of receipt of DRP Directions.
DRP can:
confirm addition
reduce addition
enhance addition
delete addition
But DRP cannot set aside the matter.
Stage 6: Passing of Final Assessment Order
Final order u/s 143(3) passed after following: (please link this with above discussion)
1. After SCN, if there is assessment of domestic company, and no international transactions involved.
2. After Draft Order, if Assessee accepts draft order, or decides not to go for DRP route.
3. After DRP Directions, if Assessee opts DRP route after draft assessment order, then after DRP Directions, AO passes Final Assessment Order.
Final Order consists of 3 things:
• assessment order u/s 143(3)
• computation sheet
• demand notice u/s 156
Stage 7: Now Appellate Stage Starts
If taxpayer disagrees with order of AO, then appeal can be filed.
Where DRP route followed, then following flow of Appeal:-
Final Order
↓
Appeal to ITAT
↓
Appeal to High Court (substantial question of law)
↓
Appeal to Supreme Court
Where DRP route NOT followed:
Final Order
↓
Appeal to CIT(A) u/s 246A
(time limit: 30 days)
↓
Appeal to ITAT
↓
Appeal to High Court
↓
Appeal to Supreme Court
Important points:
Point 1. Question of Law vs Question of Fact
Appeal to HC and then SC, can be made only if: Substantial Qestion of Law exists.
Courts does NOT re-examine facts. It examines whether:
• law was applied correctly
• legal interpretation is correct
• principles of natural justice followed
• jurisdiction exercised properly
Substantial question of law means:
✔ interpretation of law is involved
✔ conflicting court decisions exist
✔ legal principle needs clarification
✔ issue affects large number of taxpayers
✔ tribunal interpretation appears legally incorrect
Other this is Question of Fact.
A Question of Fact is an issue relating to truth, correctness, or evidence of a particular transaction or event. It involves verification of facts, not interpretation of law.
ITAT is final fact finding authority.
High Court normally does not re-check evidence.
Examples of question of fact:
Genuineness of Expense
Unexplained Cash Credit u/s 68
Business vs Personal Expense
Bogus Purchases
Transfer Pricing comparables selection
Point 2. Basics of Appeal preparation and filing
In income-tax litigation, appeal is primarily prepared using:
1. Statement of Facts (SoF)
2. Grounds of Appeal (GoA)
These are the core documents of any appeal filed before CIT(A), ITAT, HC or SC.
Statement of Facts is a chronological narration of relevant facts of the case.
It explains:
• background of the assessee
• return filing details
• assessment proceedings
• notices issued by AO
• submissions made by assessee
• findings of AO
• why AO's conclusions are incorrect
Grounds of Appeal specify exact errors committed by Assessing Officer.
GoA are legal objections.
Each ground identifies:
• mistake in law
• mistake in facts
• violation of principles of natural justice
• incorrect interpretation
• excessive addition
Conclusion
While most returns are processed routinely, complex transactions often move through scrutiny and litigation channels.
Understanding this flow helps in:
• better compliance planning
• drafting effective submissions
• avoiding unnecessary disputes
• handling litigation strategically
We are always open for doubts, please reach us on WhatsApp to ask any doubts or clarifications on above matter.
Thanks
Tags
Income Tax