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4 Major Income Tax Return Assessment Under Income Tax Act 1961

Recently, Prime Minister Sh. Narendra Modi said that “Indian Taxpayers are Honest”. I completely agree with him. My conviction is based on the queries posted by the readers of this blog. The intent of most of the income taxpayers is not to hide any information or underpay tax. Any discrepancy observed during the Income Tax Return Assessment is mostly because of mistake or oversight from the taxpayer. In some cases, taxpayer realizes the mistake after filing ITR. To avoid any adverse observation in Income Tax Return Assessment, he/she is willing to correct the same through revised ITR. Large no of queries on this blog is related to the filing of revised ITR.

Recently, my father checked with me how to file the revised income tax return. He is a 67 year old pensioner. The reason for filing revised ITR is that he forgot to add one of the fixed deposit’s interest income while filing ITR. The amount was not so huge i.e. Rs 3700. He told me that he has paid all the taxes honestly from last 43 years and don’t want AO to point this anomaly during Income Tax Return Assessment. Thus Prime Minister’s observation is correct.

What is Income Tax Return Assessment?

In layman terms, the filing of Income Tax Return is like writing an annual exam. In the exam, you write what you learned during the year. Whereas in Income Tax Return, you file/mention all the details of your income, gains, losses, deductions, exemptions etc during the financial year.

The test papers were evaluated by your teacher similarly Income Tax Return Assessment is like an evaluation of information filled in your income tax return by AO. The AO or Assessing Officer is your teacher. He checks/examines the correctness of the information shared by the taxpayer. This entire process is called Income Tax Return Assessment.

4 Major Income Tax Return Assessment Under Income Tax Act 1961

In school, we used to get report card i.e. how we did in the exams. Similarly, income tax department issues the report card that is called intimation. This intimation on Income Tax Return Assessment is under following 4 sections. As i mentioned in my previous post, that the intimation should not be considered as an income tax notice. The 4 major Income Tax Return Assessment are as follows.

(a) Assessment under section 143(1)

This is also called preliminary or summary assessment. The assessee is not called or required for this assessment. It is like reconciliation of information shared by the taxpayer and information available with the AO. In this assessment, it is assumed that information/facts shared by the taxpayer are correct. There is no detailed scrutiny of the income tax return.

Following details are checked:

  • Calculations or Arithmetic errors: For example, if tax payable is Rs 2,00,000 and taxpayer paid Rs 2,01,000. The refund of Rs 1,000 will be issued.
  • Inconsistency between various entries: For example, HRA is claimed along with home loan tax deduction for self-occupied property.
  • Excess deductions/exemptions claimed: For example, max tax benefit on preventive health check-up is Rs 5,000 but taxpayer claimed Rs 10,000.
  • Inadequate information: For example, i claimed capital gain exemption but forgot to share information on investment in capital gains bond.

The AO will correct error if any and intimation u/s 143(1) will be sent to the taxpayer with the details of tax refund/tax payable or all is well :)

Normally you will receive either Income Tax Return Assessment intimation u/s 143(1) or a notice u/s 143(2) i.e. scrutiny assessment notice.

You can expect intimation u/s 143(1) within a period of 1 year from the end of the FY in which the return is filed. For example, you filed ITR for FY 2015-16 in FY 2016-17. Therefore, you can receive intimation on or before 31st Mar 2018.

(b) Assessment under section 143(3)

This is also called detailed or scrutiny assessment. In other words, AO carries out detailed scrutiny of the return. He will check the genuineness, correctness and authenticate the income, claims, deductions, exemptions etc in the income tax return.

As i mentioned earlier, sometimes the taxpayer fail to understand the definition of income. The most common example is claiming exemption on fixed deposit interest under Rs 10,000 exemption available for interest from savings bank account. In other words, the tax is underpaid.

If any discrepancy is observed under detailed scrutiny then the taxpayer may be called to attend the office of AO and produce the evidence to support his claim.

For assessment under section 143(3), the notice is served u/s 143(2). I have explained notice u/s 143(2) in my post, 7 Types of Income Tax Notice. After the hearing and going through the details & evidence furnished by the taxpayer. The AO will issue an order in writing on Income Tax Return Assessment. This order will mention the tax refund/tax payable or NIL Tax/Refund based on the assessment.

The assessment u/s 143(3) shall be made within 2 years from the end of the relevant assessment year. For example, a taxpayer can receive intimation u/s 143(3) for AY 2016-17 /FY 2015-16 till 31st Mar 2019.

(c) Assessment under section 144

This assessment is for naughty students of the class i.e. non-complying or non-cooperating taxpayers. This is also called Best Judgment Assessment. The following cases are covered under this section

  • If the taxpayer fails to
    • File ITR within Due Date u/s 139(1)
    • Belated Return u/s 139(4)
    • Revised Return u/s 139(5)
  • If the taxpayer fails to comply with all the terms and conditions of a notice issued u/s 142(1)*
  • If the taxpayer fails to comply with the directions issued u/s 142(2A). This section deals with the special audit.
  • If the taxpayer fails to comply with the terms of notice issued u/s 143(2)*
  • If AO is not satisfied with the correctness or completeness of the accounts or if there is no consistent method of accounting followed by the taxpayer

In all the above-mentioned cases, the assessment is carried out on the basis of the relevant details, materials, evidence etc by AO. Therefore, it is called best judgment assessment. In other words, if the ITR is not filed or the taxpayer is not cooperating with the AO i.e. not sharing information, incomplete or inconsistent book of accounts etc. In all such cases, AO carries out the best judgment assessment.

If any of the conditions listed in this section is applicable then the show cause notice is issued to the taxpayer i.e. why not AO should complete the assessment to the best of his judgment? This notice is not issued to taxpayers who already received notice u/s 142(1). A taxpayer may respond to the notice and avail opportunity given to him. He can put across his point of view and reasons. If the AO is not satisfied with arguments then he proceeds with the best judgment assessment. The AO will issue an order in writing on Income Tax Return Assessment. This order will mention the tax refund/tax payable or NIL Tax/Refund based on the assessment to the best of his knowledge.

Alternatively, he will consider the taxpayer’s appeal if he is satisfied with taxpayer’s argument and changes the type of assessment or take relevant steps.

As per section 153, The assessment u/s 144 shall be made within 2 years from the end of the relevant assessment year.

(d) Assessment under section 147

If the AO believe that any income of the taxpayer that is chargeable to the tax escaped assessment for any assessment year, he can initiate assessment u/s 147.

The following cases are covered under this section

  • Income escaped assessment in original assessment i.e. types of assessment discussed in this post. One of the most common examples is people with income not chargeable to tax i.e. within basic exemption limit of Rs 2.5L. I calculated my income as 2.4L and did not file ITR. The AO found that Rs 15,000 escaped assessment thus total income should have been Rs 2.65L. A taxpayer has to file ITR in this case.
  • Income is understated
  • Claim excess loss, deduction, exemptions, allowance, etc.
  • Fail to furnish a report w.r.t international transaction u/s 92E
  • Under assessment of income due to low rate, human error, excessive relief, excessive loss or depreciation allowed
  • Any asset outside India

In all such cases, notice is issued u/s 148. Like previous assessments discussed, a taxpayer is heard. Based on the information available AO may assess or reassess the income by including income escaped assessment. After re-computing, AO will issue an order on  tax refund/tax payable or NIL Tax/Refund. Subject matters of appeal, reference or revisions are not covered under this section.

As per section 153, assessment u/s 147 shall be made within 1 year from the end of the financial year in which the notice under section 148* is served on the taxpayer.

* Discussed in detail in my post, 7 Types of Income Tax Notice

I made an attempt to explain the Income Tax Return Assessment in simple and easy to understand language. Normally, the taxpayer finds it difficult to understand. To conclude, As a taxpayer, you should be more than happy to receive Income Tax Return Assessment u/s 143(1) :)

Copyright © Nitin Bhatia. All Rights Reserved.

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