Last reviewed: 13 November 2026. Company notices are rarely about a missed interest income. They are about how money came into the business, whether payments were properly taxed at source, and whether the tax audit report and the return tell the same story. A company's file is also examined in more depth, so a reply is only as strong as the documents behind it. These are the issues that come up most often.
Part of our income-tax notice series. For every notice type, the time limits and the appeal route, start with the complete guide to income-tax notices.
The issues that drive company notices
| Issue | What the officer asks | What answers it |
|---|---|---|
| Share capital and premium (s.68) | Identity, creditworthiness and genuineness of each investor | PAN, ITR, bank statement showing source, valuation report, board and ROC filings |
| Unsecured loans (s.68) | Same three tests for each lender | Confirmation, lender's ITR and bank statement, interest and TDS record |
| TDS not deducted or not paid (s.40(a)(ia)) | 30% of the expense disallowed | TDS returns, challans, or proof the payee offered the income (Form 26A route) |
| Payments to micro and small enterprises (s.43B(h)) | Disallowance of dues outstanding beyond the agreed or 45-day period at year-end | Udyam status of each supplier, agreements, payment dates |
| Cash payments and cash loans (s.40A(3), 269SS, 269T) | Disallowance and penalty | Exceptions under rule 6DD, business necessity, documentation |
| Carry-forward of losses (s.79) | Whether shareholding with 51% voting power continued | Shareholding pattern at both year-ends; startup exemption where applicable |
| Related-party payments (s.40A(2)(b)) and transfer pricing | Excessive or unreasonable payments; arm's length price | Benchmarking, Form 3CEB, agreements, evidence of services |
| Tax audit report differences | Disallowances in Form 3CD not reflected in the return | Reconciliation of Form 3CD with the computation |
TDS defaults on the company as deductor
Separately from assessment, the company may receive TDS default intimations for short deduction, late payment and late filing, with interest under section 201(1A) and fee under section 234E. Our guide to TDS default notices covers the reply. For the MSME rule, our 43B(h) review sets out how dues are tested at year-end.
How to build a company's reply
- Prepare a single reconciliation of the return, financial statements, Form 3CD, GST returns and AIS.
- For every party questioned, assemble a one-page summary with the documents behind it.
- Answer on law where the facts are settled: for example, section 68 for share capital in a closely held company requires the source of the investor's funds to be explained as well.
- Keep board minutes, valuation reports and ROC filings consistent with the explanation given to the officer.
- Where an issue is recurring year after year, consider an appeal on principle rather than conceding each year.
Director liability
Where tax of a private company cannot be recovered from it, section 179 of the 1961 Act allows recovery from every person who was a director during the year, unless the director proves that non-recovery is not due to gross neglect, misfeasance or breach of duty. That makes timely replies and appeals in company cases a matter of personal exposure for directors as well.
Illustrative example
A startup in Pune received a scrutiny notice for AY 2025-26 on ₹2.4 crore of share premium and ₹60 lakh of interest-free loans from directors. Section 56(2)(viib) (angel tax) was omitted from AY 2025-26, so the premium was examined under section 68 alone. The reply gave each investor's bank trail and ITR and the directors' loan sources from their own salary and capital gains. The officer accepted the premium. For one director's loan, sourced through a family member's account, a confirmation and that member's ITR were added, and no addition was made.
Frequently asked questions
Why do private companies get income-tax notices?
Commonly for the source of share capital, premium and unsecured loans under section 68, TDS defaults leading to disallowance under section 40(a)(ia), dues to micro and small enterprises under section 43B(h), cash transactions, carry-forward of losses after a change in shareholding, and differences between the tax audit report and the return.
Is angel tax still applicable to startups?
Section 56(2)(viib) was omitted with effect from assessment year 2025-26. Share capital and premium can still be examined under section 68 for identity, creditworthiness and genuineness of investors.
Can directors be held liable for a company's income-tax dues?
Under section 179, where a private company's tax cannot be recovered, every director during the relevant year can be held jointly and severally liable, unless the director proves the non-recovery is not due to gross neglect, misfeasance or breach of duty.
How is section 43B(h) examined in assessment?
The officer checks whether amounts due to micro and small enterprises remained unpaid beyond the agreed period (maximum 45 days) or 15 days without agreement, and disallows such amounts in the year, allowing them in the year of payment.
What documents should a company keep ready for scrutiny?
Audited financial statements, books and ledgers, bank statements, Form 3CD and the computation, TDS returns and challans, GST returns, ROC filings for allotments, investor and lender documents, related-party agreements and transfer pricing documentation where applicable.
We read the notice against your return, AIS and books, tell you what it is really asking, prepare the reply with supporting documents, file it on the portal and follow the matter through to the order and, where needed, appeal. The outcome rests with the tax authority; our work is to put a complete, documented response before it.
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This article is for general information and does not constitute advice on any specific case. Sources: the Income-tax Act, 1961 (which continues to govern assessment years up to 2026-27 under section 536 of the Income-tax Act, 2025), the Income-tax Act, 2025, the Finance Act, 2026 and the CBDT instructions and circulars cited in the text. Time limits run from the date of service of each notice or order; confirm the current position and the exact dates in your notice before acting. Firm details: Somesh Chandak & Associates, Chartered Accountants, Unit 119, 1st Floor, Centura Square IT Park, SG Barve Road, Wagle Estate, Thane West 400604. FRN 158694W.