Compliance Issues with Form 26AS and AIS: The New Foundation of Tax Scrutiny

Introduction

The nature of tax compliance in India has changed drastically with the introduction and subsequent adoption of data-driven platforms by the Income Tax Department. The shift of manual reporting to digital footprints has allowed tax authorities to track and question the financial conduct better. The developments towards a new shift can be supported by two main instruments, Form 26AS and the newly adopted Annual Information Statement (AIS). They are both important instruments to obtain financial information associated with a PAN of a taxpayer, and they constitute the cornerstones of modern tax investigations. Although their intentions are grounded in transparency and the expansion of the tax base, these types of forms have also created numerous compliance problems, legal uncertainties, and practical issues, particularly for individual taxpayers and small businesses.

This article involves the development of Form 26AS and AIS, legal and functional concerns that arise from their use, and also how the said forms are slowly defining the future of taxman in courts.

Understanding Form 26AS and AIS: The Twin Pillars of Compliance

Form 26AS: The Legacy Record Keeper

Form 26AS has been the most common tax credit statement that includes the information on TDS, TCS, advance tax, and refund credits. Controlled under section 203AA with 31AB of the Income Tax rules, the form is a yearly record of tax transactions about taxpayers with a PAN. It also encompassed high-value transactions that were reported based on the Annual Information Return (AIR) until FY 2019-20.

Over the years, the Form 26AS was used as a tool of reconciliation and an evidentiary document in the tax assessment. It also remains to be accepted in appeals courts as a final piece of evidence of payment of tax, provided it cannot be refuted.

AIS: The Expanded Surveillance Mechanism

Introduced in 2021, the Annual Information Statement (AIS) greatly expands the taxpayer profiling. Under Section 285BA and Rule 114E, AIS amalgamates data of various reporting units such as banks, mutual funds, stock exchange, and GSTN, and property registrars. AIS contains a very broad range of financial activity, which includes:

•  Income on interests and dividends
•  Mutual fund trades and securities
•  Remittance
•  Purchases through credit cards
•  Sale and acquisition of property
•  GST turnover and incoming supplies

The AIS is also accompanied by a Taxpayer Information Summary (TIS), which gives the financial data in simplified algorithm based form with an indication of the tax treatment of the different heads of income.

Although AIS is a technology to achieve the objectives of pre-filling returns and minimising evasion, there have always been serious concerns about its exactness, legal sanctity and even fairness on a procedural ground.

Compliance Challenges Emerging from AIS and Form 26AS

1. Data Mismatches and Automated Notices

One of the most prevalent issues arising from AIS and Form 26AS is the mismatch between reported income in the ITR and the data auto-populated in AIS/26AS. These mismatches may stem from:

• Duplicate or inflated entries by reporting entities (e.g., reporting gross and net interest simultaneously)
• Timing differences in income recognition (especially for interest accruals or capital gains)
• Errors in PAN tagging for joint investments, co-owned properties, or family accounts

Such discrepancies often lead to intimations under Section 143(1)(a)or e-proceedings under Section 148A, thus increasing the compliance burden and litigation exposure for honest taxpayers.

2. Inaccurate or Unverified Third-Party Reporting

AIS heavily relies on data furnished by third parties such as banks, brokers, and registrars. However, these institutions often report data erroneously or without necessary context. For instance:

• Maturity proceeds of FDs are reported without separating interest and principal
• Purchase and redemption of mutual funds are reported without netting off STT and exit load
• GST turnover may reflect gross invoices without accounting for adjustments or credit notes

Taxpayers are then left to manually rectify or explain these inconsistencies, often without any guidance from the reporting institutions.

3. Legal Ambiguity Regarding Evidentiary Value

Unlike Form 26AS, which is backed by statutory rules and case law, the AIS lacks clear legislative authority. Although the CBDT describes it as an ‘informational tool’, in practice, AIS is increasingly being relied upon for scrutiny and reassessment triggers. This creates a quasi-legal burden on taxpayers, without an adequate legal framework or grievance redressal mechanism.

The absence of statutory recognition also raises concerns under Article 14 and Article 265 of the Constitution, particularly when adverse tax consequences are initiated on the basis of unverifiable or disputed AIS entries.

Implications for Taxpayers: Compliance and Procedural Risks

The AIS is presented as a dynamic document, yet the process for filing feedback on inaccurate or mismatched entries is opaque and time-consuming. There are no specified time limits for the resolution of such feedback, nor is there an appellate remedy in case of non-acceptance of the taxpayer’s version.

More importantly, any failure to reconcile discrepancies in AIS can lead to significant downstream consequences, such as:

• Reassessment under Section 148 based on “information suggesting income has escaped assessment”
• Penalties under Section 270A for under-reporting or misreporting of income
• Prosecution under Section 277 in cases where misreporting is construed as deliberate

Such outcomes are particularly harsh in cases where the mismatch was caused not by intent, but by flawed third-party reporting.

Judicial Approach: Emphasis on Procedural Fairness

Indian courts have consistently held that reliance on third-party information must be subject to verification and opportunity of being heard. In KN Driveshafts (India) Ltd. Versus Income-Tax Officer And Others - 2002 (11) TMI 7 - Supreme Court, the Supreme Court ruled that reasons for reassessment must be furnished, and objections must be heard before further proceedings are initiated.

Similarly, in SR. Koshti Versus Commissioner of Income-Tax - 2004 (12) TMI 62 - GUJARAT High Court, the High Court held that the revenue authorities cannot ignore explanations furnished by the taxpayer without adequate reasoning. The case of Kisan Ratilal Chokshi v. CIT (2018) 89 taxmann.com 90 (SC) reaffirmed that information in Form 26AS or AIS should not be treated as conclusive without affording the taxpayer a chance to rebut the same.

These rulings underline the principle that data alone cannot be the basis of assessment without due process, cross-verification, and application of mind.

Role of Tax Professionals: A Paradigm Shift

The advent of AIS has significantly altered the role of tax professionals, especially those advising on return preparation, compliance, and litigation. Practitioners must now:

• Conduct a pre-filing reconciliation between AIS/TIS/Form 26AS and the taxpayer’s books
• Guide clients on how to submit feedback for incorrect AIS entries
• Review high-value transactions in advance to mitigate the risk of scrutiny
• Respond to Section 133(6), 148A(b), and 143(1)(a) notices with data-backed explanations

More importantly, professionals must be equipped to challenge the evidentiary value of AIS entries, especially where the data lacks accuracy or is not traceable to source documents.

Policy Recommendations and The Way Forward

Given the increasing reliance on AIS and Form 26AS, the following reforms are essential to ensure a fair and effective compliance framework:

1. Statutory Recognition of AIS: The AIS should be given legislative recognition through appropriate amendments, thereby clarifying its evidentiary weight and taxpayer obligations.
2. Time-Bound Redressal Mechanism: The feedback system for AIS must be upgraded with defined turnaround timelines, grievance escalation protocols, and status tracking.
3. Centralized AIS Grievance Cell: A dedicated redressal cell under the e-Assessment Centre or CPC should be introduced to handle complex AIS-related disputes.
4. Awareness and Training: The CBDT, ICAI, and Bar associations should collaborate to conduct awareness drives and technical training on AIS interpretation and compliance.
5. Data Accountability for Reporting Entities: Financial institutions and other reporting agencies must be held accountable for errors in reporting, with penalties for consistent non-compliance.

Conclusion

Form 26AS and the Annual Information Statement represent a watershed moment in the evolution of India’s tax compliance regime. While they bring the promise of transparency and efficiency, they also introduce new layers of complexity, risk, and procedural burden for taxpayers. The increasing reliance on third-party data must be accompanied by robust safeguards, legal clarity, and institutional support.

The foundation of modern tax scrutiny must rest not only on the availability of data but also on the principles of due process, equity, and accountability. Unless these compliance issues are addressed with urgency and foresight, the very tools meant to simplify taxation could become instruments of inadvertent hardship. For now, the burden lies on professionals and policymakers alike to ensure that this digital transformation upholds both tax efficiency and taxpayer dignity.