Income Tax Assessment

After filing an income tax return, your ITR goes through several stages before the refund is credited to your bank account. One of them is Income tax assessment, wherein the Income Tax Department examines the income tax returns (ITR) filed by individuals and businesses. It involves verifying the income reported, deductions claimed, and tax liability calculated in the ITR. Let us read in detail below.

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What is Income Tax Assessment?

Once you file your income tax return, it undergoes a thorough review process by the Income Tax Department (ITD). This review involves assessing and verifying the details you submitted. If everything is accurate and compliant, you’ll receive your income tax refund. Essentially, Income Tax Assessment is the examination of the information provided in your return to ensure it meets all regulatory requirements.

In simpler terms, Income Tax Assessment is the process where the ITD reviews the details from your tax return to confirm their accuracy and compliance.

Types of Income Tax Assessment

Self Assessment

The taxpayer consolidates their total income from different sources and self-assesses their tax liability. The assessee adjusts their income against any losses incurred and applies deductions or exemptions, if applicable. After determining the total income, the assessee reduces any advance tax paid or TDS (if deducted) to calculate the remaining tax payable. If there are still taxes due (Self-Assessment Tax), the assessee must pay the Self-Assessment Tax before filing the tax return. This whole process is known as self-assessment.

Summary Assessment

Summary assessment is the first stage of tax assessment, where overview scrutiny will be conducted; no detailed scrutiny will be there to check plausible clerical errors such as,

  1. Mathematical miscalculations or arithmetical errors in the return.
  2. Incorrect claim
  3. Incorrect disallowance
  4. Errors occurring from form16, 16A, or 26AS.
  5. Disallowance of expenses u/s 10AA, 80 IA to 80 IE if the return is furnished beyond the due date specified u/s 139(1).

No such adjustment shall be made unless an intimation is given to the assessee of such adjustment in writing or electronic mode.

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Scrutiny Assessment

An officer will be assigned to review the filings carefully and ensure that the computed tax liability is not under or overstated by the assessee. The objective of this assessment is to confirm that the taxpayer has not understated the income, has not computed excessive loss, or has not underpaid the tax in any manner. Detailed scrutiny will be conducted.

In case a mismatch is found in the submitted statement, the assessee could agree with the claim, or if he has some dissatisfaction, he could appeal to the commissioner of income tax appeals (CITA) further to the income tax appellate tribunal (ITAT), high court or supreme court respectively.

Regular Assessment

The Income Tax Department authorizes the assessing officers, generally the income tax officers or above ranks, to conduct an assessment. This assessment is to be conducted to ensure that the taxpayers haven’t understated and overstated their income and filed their ITR within the tax compliances.

The Central Board of Direct Taxes (CBDT) has set some perimeters for identifying cases for scrutiny assessments. When a taxpayer’s case is flagged for scrutiny, they receive advance notice. However, this notice must be sent to the taxpayer within six months from the end of the financial year in which the return was filed.

During the assessment process, taxpayers are required to provide their books of accounts and supporting documentation to verify their income claims. The Assessing Officer then evaluates the book of accounts and documents to come to a conclusion that the declared income is accurate or requires adjustment. If differences are found, additional tax liabilities may be imposed.

Best Judgment Assessment

In the best judgment assessment, the assessing officer bases the assessment on his best judgment, i.e., he must not act dishonestly or capriciously. Best judgment assessment refers to a situation where the officer computes the tax payable as the assessee does not comply with providing or maintaining necessary source documents or book of accounts to support the claim when requested to submit.

In this scenario, the officer computes the tax liability based on his best judgment. The Income Tax Act specifies certain situations under which the income tax officer can compute tax liability based on best judgment,

  1. When the assessee does not file an income tax return
  2. When the assessee does respond to the notice requesting the submission of documents
  3. The response of the assessee has crossed the limit permitted by the Central Board of Direct Taxes (CBDT)
  4. When the officer is not satisfied with the documents provided.

Income Escaping Assessment

When the assessing officer has reasons to believe that any income chargeable to tax has escaped assessment for a financial year, an income escaping-assessment will be conducted. In such cases, the income tax department holds full authority to revisit and review 6 years’ tax filings, if the alleged amount is Rs. 1,00,000 or more.

As per budget 2021, the time limit for opening the case has been reduced from 6 years to 3 years. However, for cases where concealment of income exceeds Rs. 50L (Serious Tax evasion cases), cases can be opened for 10 years.

Scenarios that may Trigger Reassessment

  1. When the assessee is found to have taxable income but has not filed income tax returns for the particular financial year.
  2. The assessee understated their income or claimed incorrect deductions or exemptions in their filed ITR.
  3. Failure to furnish information relating to international income and unaccounted overseas assets

Penalty for non-filing of income tax returns

If the return is filed after the due date, then 3 scenarios will be there-

  1. If the Gross Total Income is Rs.2.5 lakh or less, then the penalty will be Nil.
  2. If total income is more than Rs.2.5 lakhs and up to Rs. 5 lakh then the penalty will be 1000.
  3. If the total income is more than 5 lakh, then the penalty will be Rs.5,000.

As per the last budget, after 31st Dec, returns will not be filed, and the penalty cannot be levied. However, for FY20-21, the last date of filing has been extended

When the date of filing u/s 139)(1) has been exceeded, the assessee will not be able to carry forward losses except for House Property Losses incurred for the financial year.

Pending for unpaid taxes would be chargeable 1% of tax liability for every month or part of the month until the payment of the amount. However, for FY20-21, the due date for filing ITR is 30th September, but if self-assessment tax liability exceeds one lakh, then tax needs to be paid before 31st July 2021 to avoid 1% interest u/s 234A.