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Various types of Assessment under Income Tax Act, 1961

ROHIT YADAV 
Updated on 28 February 2021

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Budget 2021 Update: In order to reduce the compliance burden, the time-limit for re-opening of assessment is being reduced to 3 years from the current 6 years from the end of the relevant assessment year. Re-opening up to 10 years is proposed to be allowed only if there is evidence of undisclosed income of Rs. 50 lakh or more for a year.

Further, it is proposed to completely remove discretion in re-opening and henceforth re-opening shall be made only in cases flagged by system on the basis of data analytics, objection of C&AG and in search/survey cases.

Further, in order to bring certainty in income tax proceedings at the earliest, it is also proposed to reduce the time limits for general assessment or processing of income tax return by three months and also for filing of returns.

Update:

The Finance Act, 2018 had inserted Section 143(3A) to implement e-assessment scheme for the regular assessment carried out by the Assessing Officer under Section 143(3). Now, the Finance Act 2020 has expanded the scope of e-assessment to cover the best judgment assessment under Section 144. The Central Government will issue the necessary directions in this regard by 31-03-2022.     

Various types of Assessment under Income Tax Act, 1961 (Amended by Finance Act, 2016)

Every Person, who is earning, which is chargeable to tax, has to furnish his return of income to the Income Tax Department. After filling of return of income, the next step is the processing of income tax return by the Income Tax Department. The income tax department examines the return of income and specifies any correction, if any. The process of examination of the return of the Income Tax Department is called "Assessment". Assessment includes re-assessment and best judgment assessment under section 147 and 144 respectively. We will discuss each type of assessment in detail in this article.

Types of Assessment

Under Income Tax Act, 1961, there are four types of assessment as mentioned below:

  1. Self assessment –u/s 140A
  2. Summary assessment –u/s 143(1)
  3. Scrutiny assessment –u/s 143(3)
  4. Best Judgment Assessment –u/s 144
  5. Protective assessment
  6. Re-assessment or Income escaping assessment –u/s 147
  7. Assessment in case of search –u/s153A

Self assessment

Before submitting returns assessee is supposed to find whether he is liable for any tax or interest. For this purpose this section has been introduced in Income tax act.

Where any tax is payable on the basis of any return required to be furnished under section 139 or section 142 or section 148 or section 153A, after deducting:

  1. Advance tax Paid, if any
  2. TDS/TCS
  3. Relief
  4. MAT credit

Then assessee shall pay tax & interest before furnishing return and proof of such payment will be accompanied with return of income.

Summary assessment

Assessment under section 143(1) is like preliminary checking of the return of income. Under this section, Income tax department sent intimation u/s 143(1) in which comparative Income Tax computation [i.e. as provided by Tax payer in Return of Income and as computed u/s 143(1)] is sent by Income Tax Department. At this stage no detailed scrutiny of the Return of Income is carried out. At this stage, the total income or loss is computed after making the following adjustment (if any), namely-

  1. Any arithmetical error in the return,
  2. An incorrect claim, if such incorrect claim is apparent from any information in the return;
  3. Disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under section 139(1);
  4. Disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return;
  5. Disallowance of deduction claimed under section 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, or section 80-IE, if the return is furnished beyond the due date specified under section 139(1);
  6. Addition of income appearing in form 26AS or form 16A or Form 16 which has not been included in computing the total income in the return;

Time Limit

Assessment u/s 143(1) can be made within a period of one year from the end of financial year in which the return of income is filled.

Scrutiny Assessment

Scrutiny assessment refer to the examination of a return of income by giving opportunity to the assessee to substantiate the income declared and the expenses, deduction, losses, exemptions, etc. claimed in the return with the help of evidence. During the course of scrutiny, the assessing officer gets opportunity to conduct enquiry as he deemed fit from the assessee and from third parties. The exercised is aimed at ascertaining whether the income in the return is correctly shown by the assessee and whether the claims for deductions, exemptions etc. are factually and legally correct. If any omission, discrepancies, inaccuracies, etc. comes light to as a result of examination, the assessing officer makes his own assessment of the assessee’s taxable income after taking into consideration all the relevant facts. These assessments are made under section 143(3) of the income tax act.

The case selected for Scrutiny Assessment can be of by two types - i.e. (1) Manual scrutiny cases and (2) Compulsory Scrutiny cases.

(1) Manual scrutiny cases

Following can be reason for manual scrutiny case:

  • Not filing Income Tax Return
  • Declaring lesser income compared to earlier year or Declaring more loss compared to earlier year.
  • Mismatch in TDS credit between claim and 26AS.
  • Non declaration of exempt income.
  • Claiming large refunds in return of Income.
  • Taking double benefit due to change in Job.
  • High Value Transaction (as reflected in AIR).

(2) Compulsory Scrutiny cases

The following cases are compulsorily selected for scrutiny:

  • Cases involving addition in the earlier assessment year in excess of Rs. 10 lakhs on a substantial and recurring question of law or fact which is confirmed in appeal or is pending before an appellate authority may come under compulsory scrutiny.
  • Cases involving addition in an earlier year on the issue of transfer pricing in excess of Rs. 10 crore or more on a substantial and recurring question of law or fact which is confirmed in appeal or is pending before an appellate authority.
  • Computer Added Scrutiny Selection (CASS): cases are also being selected under CASS on the basis of broad based selection filters. List of such cases shall be separately intimated in due course by DGIT (system) to the jurisdictional concerned. The cases for this purpose are mostly selected through the process of computer assisted scrutiny selection (CASS) and there is no element of subjectivity in this process.
  • Cases in respect of which specific and verifiable information pointing out tax evasion is given by Government Department/ Authorities. The Assessing Officer shall record reasons and take prior approval from Pr. CCIT/CCIT/Pr. DGIT/DGIT concern before selecting such a case for scrutiny.
  • Cases where order denying the approval u/s 10 (23C) of the Act or withdrawing the approval already granted has been passed by the competent authority, yet the assessee found claiming tax exemption under the aforesaid provision of the Act.

There can be two types of scrutiny assessment i.e. (1) Limited scrutiny assessment and (2) Complete Scrutiny Assessment. When case is selected for Limited scrutiny assessment, assessing officer can ask only the details regarding the reason behind the selection of any specific matter. However, in case of Complete Scrutiny Assessment, Assessing officer can ask complete details of transaction reflecting in the return of the income.

Best Judgment Assessment

Section 144 of Income tax act, 1961 speaks about Best Judgment Assessment. In the best judgment assessment, an assessing officer makes an assessment based on his best reasoning. Assessee should neither be dishonest in his assessment nor have a vindictive attitude.

There are two types of Best Judgment Assessment

a. Compulsory best judgment assessment: It is done when assessing officer finds that there is an act amounting to non co-operation by the assessee or where assessee is found to be a defaulter in supplying information to the department.

b. Discretionary best judgment assessment: It is done in cases where assessing officer is dissatisfied with the authenticity of the accounts given by the assessee or where no regular method of accounting has been followed by the assessee.

The process of Best Judgment Assessment is applied in conformity with the Principle of Natural justice. As per the provision of Section 144 of the Income Tax Act, 1961, the Assessing officer is supposed to make an assessment of the income of an assessee to the best of his Judgment in the following cases:

  • If the person fails to make return u/s as required 139(1) and has not made a return or a revised return under sub-section (4) or (5) of that section; or
  • If any person fails to comply with all the terms of a notice under section 142(1) or fails to comply with the direction requiring him to get his account audited in terms of section 142(2A); or
  • If any person after having filed a return fails to comply with all the terms of a notice under section 143(2) requiring his presence or production of evidence and documents; or
  • If the Assessing officer is not satisfied about the correctness or the completeness of the accounts of assessee or if no method of accounting has been regularly employed by the assessee.

In the case of best judgment assessment, an assessee has a right to file an appeal u/s 246 or to make an application for revision u/s 264 to the commissioner.

One should also keep in view the following

The best judgment assessment can only be made after giving the assessee an opportunity of being heard. Such opportunity shall be given by issue of a notice to the assessee to show cause why the assessment should not be completed to the best of his Judgment and that opportunity for hearing will not be necessary where notice u/s 142(1) already been issued.

Protective assessment

Though there is no provision in the income tax act authorizing the levy of income tax on a person other than whom the income tax is payable, yet it is open to the authorities to make a protective or alternative assessment if it is not ascertainable who is really liable to pay the tax among a few possible persons.

In making a protective assessment, the authorities are merely making an assessment and leaving it as a paper assessment until the matter is decided (as to whom the asset owned by) one way or another. Further more, a protective order of assessment can be passed but not a protective order of penalty must, however be noted that while protective assessment is permissible, a protective order for recovery is not permissible.

Re-Assessment (or) Income escaping assessment

Re-assessment is carried out if the Assessing officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year.

Scope of assessment u/s 147

The objective of carrying out assessment u/s 147 is to bring under the tax net, any income which has escaped assessment in original assessment. Here, Original assessment means an assessment u/s 143(1) or 143(3) or 144 and 147 (as the case may be).

Procedure of assessment u/s 147

  • For making assessment u/s 147, the assessing officer has to issue notice u/s 148 to the taxpayer and has to give him an opportunity of being heard.
  • If the Assessing officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, then he may, subject to provisions of section 148 to 153, access to re-assess such income and also other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of proceeding under this section. He is also empowered to re-compute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned.
  • Items which are the subject matters of any appeal, reference or revision can not be covered by the Assessing officer under section 147.

Time limit for completion of assessment under section 147

As per section 153 (2), assessment u/s 147 shall be made within 9 month from the end of the financial year in which notice u/s 148 was served.

Time limit for issuance of notice under section 148

  • Notice u/s 148 can be issued within a period of 4 years from the end of the relevant assessment. If the escaped income is likely to amount Rs. 1,00,000 or more and certain other condition satisfied, then notice can be issued up to 6 years from the end of the relevant assessment year.
  • In case of escaped income relates to any assets (including financial interest in any entity) located outside India, notice can be issue up to 16 years from the end of the relevant assessment year.

Notice u/s 148 can be issued by AO only after getting prior approval from the prescribed authority mentioned in section 151.

Assessment in case of search or requisition

Notwithstanding anything contained in section 139, section 147, section 148, section 149, section 151 and section 153, in the case of a person where a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003,

The Assessing Officer shall -

(a) issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years referred to in clause (b) in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139;

(b) Assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made.  

Note: Sec. 153A contemplates issue of notice for 6 years preceding the search but not for the year of search or requisition and thus no return is required to be filed for the year of search u/s 153A. Only regular return u/s139 is to be filed.

Time limit for completion of assessment u/s 153A/153C: [153B]

In case of person searched: 153A

  1. 21 months from the end of the financial year in which last of the authorization for search u/s 132 or requisition u/s 132A was executed.
  2. Similar time limits shall apply in respect of the year of search also.

In case of any other person: 153C

As provided in above clause (a) or clause (b) or 9 months from the end of the Financial Year in which Books of accounts or documents or assets seized/requisitioned are handed over to the AO having jurisdiction over such person; whichever is later.

Reference:

  1. Taxmanns' Income Tax Act, as amended by Finance Act, 2016, 60th Edition.
  2. Vinod Gupta, Direct Tax Law, as amended by Finance Act, 2016, 30th Edition.

The author can also be reached at mannrohit224@gmail.com.


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