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Do Not Ignore Tax Demands: A demand notice carries interest at 1% per month on the unpaid amount once the 30-day payment period ends (Section 220(2) of the 1961 Act; Section 411 of the Income-tax Act 2025). Recovery action — attachment of bank accounts, salary, property — can begin 30 days after the demand date if unpaid and unchallenged. Act promptly.
Types of Tax Demands Under Income-tax Act 2025
| Demand Type | New Act Section | Trigger |
|---|---|---|
| Intimation with demand (processing under 143(1)) | Section 270 (old 143); notice of demand under Section 289 (old 156) | Mismatch in ITR: wrong deduction, income mismatch with AIS, arithmetic error |
| Assessment demand after scrutiny (143(3)) | Section 270 | Selected for scrutiny; AO disagrees with ITR; income addition |
| Best judgment assessment (144) | Section 271 | ITR not filed; non-compliance with notices |
| Reopening demand (147) | Sections 279 to 281 (old 147, 148, 148A) | Income escaped assessment; reopening within 3/10 years |
| Search assessment demand | Sections 292 to 301 (block assessment) | Post-search; undisclosed income found; six-year block period |
| TDS demand on deductor | Section 398 (old 201) | TDS not deducted, short-deducted or not deposited |
The Section 143(1) Intimation: Most Common Demand
Most taxpayers receive a Section 143(1) intimation (for Tax Year 2026-27 onward, Section 270 of the new Act covers old Section 143) — a computer-generated notice from CPC Bengaluru stating a demand or refund after processing the ITR. Common reasons for a demand at this stage:
| Common Reason | What Happened | Resolution |
|---|---|---|
| AIS income mismatch | Income reported in ITR is lower than AIS (Annual Information Statement) entries | Reconcile AIS; if AIS is wrong, file feedback on income-tax portal to correct AIS; if ITR wrong, file revised return |
| TDS credit mismatch | TDS deducted but deductor hasn't filed TDS return or quoted wrong PAN | Contact deductor to correct TDS return (Form 26AS update); file rectification request after correction |
| Wrong deduction claimed | 80C/80D deduction in old regime but new regime was applied; or deduction exceeded limit | Rectification under Section 154 (Section 287 of the new Act); or revised return if within deadline |
| Arithmetic error | Tax computation mistake in ITR | File rectification request |
| Rebate disallowed | Rebate (old 87A, Section 156) claimed but total income (with special rate income) exceeds ₹12L | Review and accept demand if correct, or file rectification with legal argument |
Responding to a Section 143(1) Demand
Timeline: You have 30 days from the date of intimation to respond. Options:
| Option | When to Choose | Process |
|---|---|---|
| Accept demand and pay | Demand is correct; you made an error | Pay via Challan 280 (self-assessment tax); submit response as "Agreed" on portal |
| Disagree and respond | Demand is wrong; you have evidence | File online response with supporting documents on e-filing portal → Pending Actions → Response to Outstanding Demand |
| File rectification (Section 154; Section 287 of the new Act) | Processing error by CPC; correct fact clearly on record | File rectification request on portal → e-file → Rectification → CPC → select error type |
| File revised ITR | Your own error in original ITR; within due date for revised return | Revised return under Section 139(5) (Section 263 of the new Act); deadline 31 March 2027 for AY 2026-27 returns, 31 March 2028 for Tax Year 2026-27 |
Scrutiny Assessment: Section 143(3) / Section 270 Process
If your ITR is selected for scrutiny, you will receive a scrutiny notice under Section 143(2) (Section 270 of the new Act), which must be served within the statutory limit — under the 1961 Act, within 3 months from the end of the year in which the return was filed. A notice under Section 148 (Section 280 of the new Act) is for reassessment, a different process. The scrutiny process:
| Stage | Timeline | What Happens |
|---|---|---|
| Notice for scrutiny | Within 3 months from the end of the year in which the return was filed (1961 Act limit) | Issued via e-proceedings; login to portal → Pending Actions → e-Proceedings |
| Questionnaire / information request | Varies | AO may ask for bank statements, invoices, investment proofs, capital gain computation |
| Draft assessment order | Before final order | For additions/disallowances above threshold, draft order must be shared for objections |
| Final assessment order + demand | Within the time limit in Section 286 (old Section 153) | Binding unless appealed |
| Appeal to CIT(A) | Within 30 days of demand | File Form 35 (Form 99 under the new Act) online with grounds of appeal; pay any tax you admit is due. A 20% deposit is only the usual condition for a stay — see below |
The 20% Deposit Is for a Stay, Not for Filing an Appeal: You can file an appeal to the CIT(A) without depositing 20% of the demand — only the tax you admit is due must be paid. To ask the Assessing Officer to stay recovery of the balance while the appeal is pending, CBDT's Office Memorandum of 31 July 2017 ordinarily requires 20% of the disputed demand to be paid; the officer can accept a lower or ask for a higher amount depending on the facts (Section 220(6) of the 1961 Act; Section 411(12) of the new Act). It is a guideline, not an automatic stay and not a condition of appealing.
Appeal Hierarchy and Timelines
| Forum | File Within | Form | Grounds |
|---|---|---|---|
| CIT(Appeals) — Commissioner of Income Tax (Appeals) | 30 days of receiving demand/assessment order | Form 35 (Form 99 under the new Act), online | Dispute AO's addition/disallowance; factual and legal grounds |
| ITAT — Income Tax Appellate Tribunal | 60 days of CIT(A) order | Form 36 (Form 115 under the new Act) | Further appeal; binding decisions; revenue's appeal if taxpayer wins at CIT(A) |
| High Court | 120 days of ITAT order | Petition | Question of law only; not facts |
| Supreme Court | Varies | SLP | Constitutional question or important question of law |
| Dispute Resolution Panel (DRP) | 30 days of draft order | Form 35A (old number; confirm the current form) | Transfer pricing disputes; international cases; alternative to CIT(A) |
Case Study: Rohan Sharma — ₹8.5 Lakh 143(1) Demand on AIS Mismatch
The Situation
- Rohan filed ITR for FY 2025-26 (AY 2026-27, under the 1961 Act) with salary ₹12L and FD interest ₹40K
- AIS shows property sale consideration of ₹35L (sale proceeds, not gain)
- Rohan had sold ancestral property; capital gain was nil after Section 54 reinvestment
- 143(1) demand: ₹8,50,000 (tax on entire ₹35L as if it's income)
What Rohan Should Do
- Do NOT pay the demand immediately
- Login to e-filing portal → Response to Outstanding Demand → Select "Disagree"
- Provide: property sale deed, new house purchase deed, Section 54 reinvestment evidence
- Submit capital gain computation schedule (included in original ITR)
- File feedback on AIS portal clarifying nature of transaction
If Demand Upheld at 143(1)
- File rectification under Section 154 with computation
- If rejected: appeal to CIT(A) within 30 days
- To seek a stay, offer the usual 20% of the demand (₹1,70,000)
- File Form 35 online with detailed grounds of appeal
Prevention
Rohan should have filed the capital gains schedule correctly in original ITR showing reinvestment under Section 54. AIS mismatches for property sale are extremely common — always include the full CGT computation in ITR even if gain is zero.
Vivad Se Vishwas (VSV) Scheme: Legacy Disputes
For pending disputes under the old Income Tax Act 1961 (for years prior to Tax Year 2026-27), the Vivad Se Vishwas Scheme 2.0 allows settlement by paying a percentage of disputed tax demand. Check income-tax portal for current VSV scheme status and eligibility.
Demand Management Checklist
When You Receive a Tax Demand Notice
- Note the date of intimation — 30-day response window starts
- Login to incometaxindia.gov.in → e-filing → Pending Actions → Outstanding Demand
- Download the intimation/order and identify the specific addition/disallowance
- Cross-check against your ITR filing and supporting documents
- Check AIS (Annual Information Statement) for the discrepancy root cause
- Determine: is the demand correct (pay and close) or incorrect (contest)?
- If incorrect: file online response with evidence within 30 days
- If proceeding to CIT(A) appeal: file Form 35 (Form 99 under the new Act), pay any admitted tax, and apply for a stay with the usual 20% deposit
- Keep all response acknowledgement receipts safely
✅ Key Takeaways
- Most demands are 143(1) intimations — computer-generated on AIS mismatches or TDS errors
- 30 days to respond to any demand notice; do not let it lapse
- Interest at 1% per month on unpaid demand after the 30-day payment period (Section 220(2); Section 411 of the new Act)
- The usual 20% deposit is a condition for a stay of the balance demand during appeal (CBDT guideline), not for filing the appeal
- Rectification request (Section 154; Section 287 of the new Act) for processing errors — simpler than appeal
- Scrutiny assessment must be completed within the limit in Section 286 (old Section 153)
- Property sale proceeds in AIS are always "consideration" not gain — include CGT schedule in ITR
Frequently Asked Questions
Can the department attach my bank account without prior notice?+
Under Income-tax Act 2025, recovery action can begin 30 days after the demand date if the demand is neither paid nor stayed. Before attaching a bank account, the TRO (Tax Recovery Officer) typically issues a notice of attachment. However, in exceptional cases involving flight risk or fraudulent intent, provisional attachment can happen quickly. Always respond to demands promptly to avoid reaching this stage.
Do I have to deposit 20% of the demand to file an appeal?+
No. Filing the appeal needs only payment of the tax you admit is due. The 20% deposit is the usual condition, under CBDT's guidelines, for a stay of the balance demand while the appeal is pending. If you cannot pay 20%, you can ask the Assessing Officer or PCIT for a lower amount, giving reasons of genuine hardship. This is discretionary relief and not guaranteed. The alternative is to challenge the demand in a writ petition before the High Court, but this is time-consuming and expensive.
How long does a CIT(A) appeal take?+
CIT(A) timelines vary widely — from 6 months to 3–4 years depending on the complexity and case backlog. The government has been working on reducing backlogs through the faceless appeals scheme. For fast resolution, the Dispute Resolution Scheme (DRS) or VSV may offer quicker finality for legacy disputes.
Is interest on tax demand deductible?+
Interest paid under Sections 234A, 234B, 234C (advance tax / filing delay) is not deductible from taxable income. Interest paid under Section 220(2) on outstanding demands is also not deductible. Penalty amounts paid are similarly not deductible. Only interest paid in the ordinary course of business (e.g., business loan interest) is potentially deductible.