6 min read.Updated: 03 Dec 2020, 06:48 PM ISTVikas Vasal
Once filed, an ITR undergoes a series of internal checks and validation processes by the tax authorities before the final tax liability is determined and communicated to the taxpayer
Income tax is one of the main sources of revenue for the government and filing of an income-tax return (ITR) is an important compliance responsibility of a taxpayer under the tax legislation. An ITR is a declaration of taxable income, consequential tax liability and taxes paid by a taxpayer. Certain other disclosures are also required to be furnished in the ITR viz. specified assets, financial interests and transactions etc. Once an ITR is filed by the taxpayer, it is evaluated and processed by the Indian income tax authorities. Once filed, an ITR undergoes a series of internal checks and validation processes by the tax authorities before the final tax liability is determined and communicated to the taxpayer.
It is important for the taxpayers to understand the process followed by the tax authorities, which is broadly as below:
Check for completeness and initial processing: As a first step, the ITR is checked for its completeness in all respects. In case any defect is identified, a notice or intimation is sent to the taxpayer requesting him to rectify the same. In case no response is received from the taxpayer within specified timelines, the ITR is considered as invalid or not filed. On the other hand, if the defect is rectified, the ITR moves on to the next step.
Afterwards, the ITR is processed by the income tax department’s Centralised Processing Centre (CPC). This processing is carried out in a computerized manner without any human intervention.
The CPC verifies the information provided by the taxpayer in the ITR, including audit reports, certificates etc. with any other information available with the tax authorities. Any adjustments for arithmetic errors, incorrect claims etc. are automatically done and an intimation is issued to the taxpayer. At this stage, if there is an apparent error in the processing, a taxpayer can file a rectification request.
Detailed assessment: The next step involves detailed review of the ITR. Different types of assessments that could be carried out at this stage, depending on the facts of each case are:
1. Regular assessment: This is also referred to as ‘scrutiny assessment’ or ‘revenue audit’. The selection is done through a computer-aided selection methodology based on certain pre-defined criteria. Manual selection is also carried out in certain specific cases. The purpose of this assessment is to ensure that a taxpayer has neither underreported income nor overstated loss. The scrutiny undertaken could be detailed or limited to few specific points.
If a return is picked up for a regular assessment, the tax authorities issue a questionnaire seeking details required for assessment. Once the details are submitted by the taxpayer i.e. representations made, the tax authorities independently review the claims. If they arrive at a conclusion that the claims are not in accordance with the law or its legal interpretation, they carry out suitable adjustments to the income. These adjustments are communicated to the taxpayer through a detailed reasoned order.
2. Reassessment: This is resorted to when the tax authorities have ‘reasons to believe’ that some taxable income pertaining to any earlier year has escaped the tax net. This type of assessment can be initiated if no ITR has been filed or where an ITR was filed but some income or part of income had escaped tax. The tax authorities can generally go back up to four to six years, to reopen the assessment depending on the quantum of income involved. This period may be extended to 16 years where such income relates to any asset (including financial interest in an entity) located outside India. The notice for reassessment requires the taxpayer to furnish its ITR for the year for which the notice is issued.
3. Assessment in case of search and seizure: This is also referred to as ‘block assessment’. At times, the tax authorities, in order to carry out investigations and unearth undisclosed income, conduct search and seizure proceedings on certain taxpayers. There are separate provisions in the law dealing with such cases. Assessment could be initiated for a period of six years preceding the year in which the search is conducted. In this situation, the notice issued by the tax authorities may require the taxpayer to furnish ITR for such years.
It is worth noting that once an ITR has been filed by a taxpayer in response to a notice for re-assessment or a notice for block assessment, the proceedings are akin to a regular assessment.
4. Best judgement assessment: There could be a situation where either the ITR has not been filed or the taxpayer does not provide the information sought by the tax authorities during the course of the assessment proceedings. In such cases the tax authorities have the power to assess the income as per their “best judgement" i.e. based on the available information and documents.
Recovery and collection proceedings: Once the assessment is complete, the next step is to collect the outstanding taxes. There are specific proceedings for the recovery and collection of outstanding tax emanating from adjustments made to the returned income either when the returns are electronically processed by the CPC or in the order passed in pursuance of assessment proceedings.
Penalty proceedings: In case the tax authorities find any default in complying with provisions of the Act, there is also a concept of penalty proceedings. Penalty proceedings are independent proceedings initiated post the completion of assessment. There are specific provisions in the law dealing with different situations where the penalty could be levied and the quantum involved. However, penalty can be reduced or waived upon fulfilling the prescribed conditions, subject to the satisfaction of the tax authorities.
Grievance redressal and appeals: In case of apparent mistakes/errors in orders passed by the tax authorities, a taxpayer can file a rectification request. Further, any taxpayer aggrieved by an order of the tax authorities has recourse to an appeal mechanism prescribed under the Income-tax laws. The Commissioner of Income-tax (Appeals) (‘CIT(A)’) is the first appellate authority, before whom an appeal can be filed. If the CIT(A) does not grant relief, the taxpayer can approach the Income-tax Appellate Tribunal (ITAT), the jurisdictional high court and finally the Supreme Court of India. This avenue is also available to the tax authorities, in case they are aggrieved by the order passed by the CIT(A) or any higher appellate authority.
Evolution of assessment proceedings: Till recently, the assessment proceedings used to take place manually, wherein notices were served physically, and all responses were submitted in hard copies by personal visits to the tax department. However, with the advent and expansion of the digital era, the government introduced e-proceedings for assessments wherein all notices and responses are issued/submitted through electronic means on the e-filing portal of the tax department. Further, all notices and documents served on a taxpayer bear a unique Document Identification Number (DIN).
Faceless assessments–a step ahead: Recently, the government has unveiled the scheme of faceless assessment. In case of faceless assessment, the taxpayers are not required to appear personally before the assessing officers and the identity of the tax officials evaluating the ITR and other documents filed by the taxpayer is not revealed.
Similarly, there is also a new scheme for faceless appeals for the first appellate level, akin to faceless assessments wherein the CIT(A) would be randomly assigned, submissions would be electronically filed and hearings held virtually.
There has been a lot simplification and digitisation of ITR filing and the assessment procedures in the recent past. It is likely that the detailed assessments would be restricted to high-value and high-risk cases identified by use of data analytics and artificial intelligence. The intent is to minimize the trouble for honest taxpayers and focus on cases which have escaped the tax net through information obtained from different sources.
Adityavikram Rathore contributed to this article.
Vikas Vasal is national leader-tax at Grant Thornton Bharat LLP
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