Income Tax Assessment

Income Tax Assessment

For paying Income tax to the Government, every tax payer must furnish the details of his income on which he has paid the tax. Such details of his income are given by him in the Income tax Return (ITR). Once the ITR is filed by the taxpayer, it is examined for accuracy of its details. This process of examination of the ITR is called as ‘Assessment’. This assessment also includes ‘re-assessment’ and ‘best-judgement assessment’.

The Income Tax Act prescribes FOUR major kinds of assessments which are applied in cases of large number of taxpayers. These are:

Sr. No. Type of assessment What it consists of: Section of Income tax Act
01 Summary Assessment Processing of ITR done by CPC. This is done to check arithmetical errors and small inconsistencies in the ITR. This processing precedes an intimation letter to the taxpayer specifying refund or demand or none. 143(1)
02 Scrutiny Assessment This is a detailed scrutiny of the return of income. It is done to confirm the correctness and genuineness of various claims, deductions, etc., made by the taxpayer in the return of income. It results into an assessment order computing assessed taxable income of the taxpayer. 143(3)
03 Re-Assessment This is resorted to by Assessing Officer who has reason to believe that there exists some income which you have not reported or underreported for any particular year. It results into assessment order and often into raising demand against the taxpayer 147
04 Best-Judgement Assessment In cases where the taxpayer does not file ITR in response to the notice issued by the Assessing Officer, nor does he respond to any notice of compliance issued by him, the AO completes the assessment based on his best judgement. This is called ‘best judgement assessment’. 144

Summary Assessment or processing

When you file an Income tax return electronically, it is received in the database of Income tax Department at Centralized Processing Centre (CPC), Bengaluru. Such a receipt of ITR is acknowledged by Income tax Department through issue of ITR-V (acknowledgement). The ITR filed electronically must be confirmed by the taxpayer that he has filed it himself, or that it is filed on his behalf. Such verification is done in two ways:

  • Physically by sending signed ITR-V acknowledgement to CPC within 120 days of submitting ITR electronically
  • Electronic verification through Aadhar OTP or Internet banking.

Once the ITR is verified, it is checked for defects and discrepancies. It is subjected to business rules framed for defective returns. If no defect is found, then it is pushed further for processing and if any defect(s) are found then a defective return notice u/s 139(9) of the Income tax Act is generated and issued to you. You are required to correct those defects within 30 days. This is also done entirely online.

The ITRs in which no defects are found or whose defects are corrected, are pushed for processing.

In processing, the ITR is checked for following things:

  • Tax Payment
  • Whether the TDS credit claimed by you in ITR matches with that deposited by your deductor
  • The income claimed by you in your ITR matches with other details in ITR
  • The deductions claimed by you are arithmetically correct
  • The loss claimed by you in ITR is in order

The processing of ITR is also called as ‘summary assessment’.

Then the ITR is processed and the intimation letter is generated. This processing means that the Income tax Department has accepted your ITR formally. The intimation letter is of three kinds depending upon the adjustments done in processing.

Sr. No. Type of intimation Type of ITR Description What you should do?
1 No demand and no refund In case of ITR where no refund is claimed. In this case, the CPC doesn’t find any fault with your computation of income and tax and since you have not claimed refund, no refund will be shown in intimation letter Nothing needs to be done. Keep safe for future reference.
2 Refund In case of ITR where refund is claimed. The CPC computes your refund as claimed by you. Sometimes, it may compute refund more than your claim. This happens generally when it pays you interest on the amount of refund as per section 244A of the I T Act. Check if you have received refund in your bank account. If NO, then write email to CPC
3 Demand In both cases of ITR In these cases, the CPC doesn’t agree with your computation of income or tax or your tax payment or TDS credit doesn’t match. In these cases, the demand intimation letter is generated. Such amount of demand is either shown as payable in the intimation or in case you have claimed refund in your ITR, such demand is adjusted against your refund claim and refund claim is reduced or fully adjusted. If you agree with the computation of CPC, then accept the less refund or pay the demand asked.If you don’t agree, then you must submit online rectification application to CPC.

Centralized processing Centre (CPC)

Earlier, the Income tax returns were processed manually in every income tax office by each of the Assessing Officer. After the advent of compulsory electronic filing of returns, it was logical that the e-returns should be processed at one place electronically. Accordingly, the Central Government issued a scheme called ‘Centralized Processing of Returns Scheme (CPRS)-2011’ vide Notification dated 04.01.2012. This scheme specified everything related to the processing at CPC. Through this scheme the Centralized Processing Centre was born and developed at Bengaluru.

The CPC is headed by the Commissioner of Income tax and is responsible for following activities.

  • Receipt of electronic returns
  • Scanning of documents received like ITR-V acknowledgments
  • Data entry related activities related to receipt of ITRs and processing of them
  • Processing of ITRs
  • Prioritizing the kind of returns which need to be processed on priority
  • Issue of refunds through refund banker scheme
  • Validation of return filing software
  • Storage and retrieval of records
  • Receipt of rectification applications and carrying out rectifications
  • Issue of defective return notices and carrying out relevant corrections
  • Adjustments of refunds in cases of demands
  • Making rules and scheme for all the above tasks

The address of the CPC for communication is as follows:

1st Floor, Prestige Alpha No 48/1 48/2, Beratenaagrahara, Begur Hobli, Hosur Road, Bengaluru, Karnataka 560100.

Or

Post Bag No.1,
Electronic City Post Office,
Bengaluru, Karnataka 560100

What is Intimation Letter u/s 143(1)?

When the processing is done by CPC, Bengaluru, the outcome of such a processing is the Intimation Letter. This is generated electronically after processing. The intimation letter is of three kinds depending upon the adjustments done in processing. The actions that you need to take on such intimations is shown below.

Sr. No. Type of intimation Type of ITR Description What you should do?
1 No demand and no refund In case of ITR where no refund is claimed. In this case, the CPC doesn’t find any fault with your computation of income and tax and since you have not claimed refund, no refund will be shown in intimation letter Nothing needs to be done. Keep safe for future reference.
2 Refund In case of ITR where refund is claimed. The CPC computes your refund as claimed by you. Sometimes, it may compute refund more than your claim. This happens generally when it pays you interest on the amount of refund as per section 244A of the I T Act. Check if you have received refund in your bank account. If NO, then write email to CPC
3 Demand In both cases of ITR In these cases, the CPC doesn’t agree with your computation of income or tax or your tax payment or TDS credit doesn’t match. In these cases, the demand intimation letter is generated. Such amount of demand is either shown as payable in the intimation or in case you have claimed refund in your ITR, such demand is adjusted against your refund claim and refund claim is reduced or fully adjusted. If you agree with the computation of CPC, then accept the less refund or pay the demand asked. If you don’t agree, then you must submit online rectification application to CPC.

The format of intimation letter is different for different kinds of intimation letters. The format of intimation letter for ITR-1 is represented as below:

Scrutiny Assessment

  • This is one of the most important procedures in Income tax and the one which causes anxiety amongst taxpayers who don’t have a dedicated team of lawyers or Chartered Accountants to deal with such matters.
  • All kinds of inquiries and investigations carried out by the Income tax Department, result into the scrutiny assessment. This includes search and seizure actions also.
  • The Officer who conducts scrutiny assessment is called as Assessing Officer. He may be of the rank of Income Tax Officer, Assistant Commissioner of Income Tax or Deputy Commissioner of Income Tax depending upon the quantum of reported income of the taxpayer in her ITR.
  • The scrutiny assessment culminates into the passing of assessment order by the Assessing Officer
  • While carrying out the scrutiny assessment, the Assessing officer, conducts enquiries into all the aspects of the returns of income and the sources of income of the taxpayer and arrives at determination of the assessed taxable income.

The procedure of scrutiny assessment is as follows:

  • The case of the taxpayer or the ITR of the taxpayer is selected for scrutiny assessment through computerized system of selection which is called as ‘Computer Assisted Selection for Scrutiny (CASS), though in some instances, the case may be selected for scrutiny assessment manually by the Assessing Officer according to certain criteria prescribed by Central Board of Direct Taxes.
  • The list of cases selected through CASS is available to the Assessing Officer generally in the month of July in every year this is known as ‘Scrutiny Register’ or ‘Scrutiny List.’
  • First, the Assessing Officer issues and serves a 143(2) notice or a scrutiny notice on the taxpayer
  • Then the AO may serve a notice under section 142(1) along with the questionnaire on the taxpayer. This questionnaire contains the issues and questions which are relevant for conducting enquiries into the ITR of the taxpayer.
  • The taxpayer or his representative (as the case may be) will appear before the Assessing Officer and will place his arguments, supporting evidences, etc., on various matters/issues as required by the Assessing Officer. This is called as ‘hearing’ before the Assessing Officer.
  • This procedure of issuing questionnaire and hearing may happen at any number of times till the Assessing Officer is satisfied with replies and submission of the taxpayer.
  • After hearing and verifying such submission and considering such particulars as the taxpayer may produce and such other documents and evidences as the Assessing Officer may require on specified points and after taking into account all relevant materials which he has gathered, the Assessing Officer determines or assesses the taxable income of the taxpayer and issues the Assessment Order with notice of demand and computation of tax liability.
  • The Assessment Order may be accompanied with a demand notice if a demand is raised against taxpayer.

Scrutiny Notice or Notice under section 143 (2) of the Income tax Act

  • When your case is selected for scrutiny assessment, you will be issued a scrutiny notice which is issued under section 143(2) of the Income tax Act
  • Or when you receive a notice under section 143(2) of the Income tax Act, then it is certain that your case of ITR is selected for scrutiny assessment
  • If you have not filed ITR for a particular year, you can not receive a scrutiny notice. In that case you may receive a notice under section 142(1) asking you to file Income tax Return or notice under section 147/148 asking you to file income tax return regarding your income about which the Assessing Officer has information
  • This notice must be issued and served on you within 06 months from the end of the financial year in which you have filed your ITR
    • If you have filed your ITR for assessment year 2018-19 on 31st August 2018, then the financial year ends on 31/03/2019 and the scrutiny notice must be served on you on or before 30th September 2019 (that is before six months from the end of the financial year)
  • The notice is issued and served through email as well as on your address mentioned in the last ITR filed by you.
  • The notice served through email is a valid service of notice.

The format and contents of scrutiny notice

  • The format of notice is specified and prescribed in Income tax rules and notifications.
  • It contains following details:
    • Your name, address and PAN
    • The acknowledgement number and date of ITR filed by you for a specific assessment year
    • The type of scrutiny assessment for which the case is selected-either Complete or Limited.
    • In case of ‘Limited scrutiny’ cases, this notice specifies the reasons or issues on which the case is selected

The format of scrutiny notice prescribed is as under

e-Assessment

  • The process of scrutiny assessment involves issuing of notices and questionnaire by the Assessing Officer, enquiries by the Assessing Officer and submission of replies, documents and hearing of taxpayer before the Assessing Officer. This procedure involves a substantial physical presence and interaction of taxpayer with Assessing Officer.
  • In order to reduce this interaction and bring transparency and audit trail to the scrutiny proceedings, the CBDT has brought in the process of e-Assessment.
  • In 2015, this was introduced on a pilot basis in five metros and later extended to seven metros in 2016. This initial phase was voluntary and optional for the taxpayers. The e-assessment was to be done only with the consent of the taxpayer.
  • This was an ‘email-based assessment’, wherein the notices or scanned copies of notices were sent through email to the taxpayer and the taxpayer was expected to submit submissions through email to the designation based official email ID of the Assessing Officer.
  • In 2017, Income-tax Department developed an Integrated platform i.e. Income Tax Business Application (ITBA) for electronic conduct of various functions/proceedings including assessments. This is integrated with the ‘E-filing’ portal (www.incometaxindiaefiling.gov.in) which is used by the assessee to electronically communicate with the Income tax Department.
  • During scrutiny assessment, Assessing Officer sends notices and letters through the ‘Assessment Module’ of ITBA which is delivered in the ‘E-filing’ account of concerned taxpayer.
  • Upon receipt of such letters and notices, taxpayer is able to submit the response along with attachments by uploading the same through his ‘E-filing’ account on the ‘E-filing’ portal (www.incometaxindiaefiling.gov.in).
  • The response or submission submitted by the taxpayer is viewed by the Assessing Officer electronically in ITBA. This communication of data and documents between the Income-tax Department and taxpayer through electronic mode is called as ‘E-Proceeding’.
  • In subsequent improvements in the procedure, the CBDT issued an Instruction No. 03/2018 dated 20/08/2018. Through this instruction, the CBDT has made e-assessment compulsory and not voluntary.
  • The procedure of e-assessment is as follows:
    • The first scrutiny notice is served on the taxpayer through physical mode as well as in email and is also delivered to his e-filing account
    • Then the taxpayer is expected to submit his submit his submissions on e-filing account
    • The Assessing Officer will verify such submissions and raise queries if any on such submissions only through the ‘e-proceeding’
    • The Assessing Officer is also expected to maintain the records of such proceedings on the E-Proceeding
    • Once the submissions are verified, the Assessing Officer will prepare the Assessment Order and cause such order delivered with digital signature through the E-Proceeding only.

Type of scrutiny assessments

Your case for scrutiny assessment can be selected either for Limited Scrutiny or Complete Scrutiny. This depends upon the complexity of the transactions done by you in a financial year for which ITR was filed which has been taken up for scrutiny assessment. The type of scrutiny is mentioned on the scrutiny notice itself. If it’s a Limited Scrutiny, then the issues or reasons on which the case is picked up for scrutiny assessment is mentioned there. In case, it is a complete scrutiny, then the reasons and issues are not mentioned on the scrutiny notice.

  • Limited Scrutiny means that your case is selected for verification of a specific issue and the Assessing Officer is expected NOT to cause enquiries into the aspects and issues other than those for which such case is selected for scrutiny assessment. If he travels beyond the limits of limited issues, then he has to take a prior approval of the Pr. Commissioner of Income Tax who is a very senior authority in Income tax Department.
  • However, general details like bank statements, nature of business or nature of activities or sources of income are not linked with any specific issues and can be requisitioned by the Assessing Officer irrespective of the type of scrutiny assessment.
  • The Complete scrutiny assessment means there is no limit on the scope of enquiries to be carried out by the Assessing Officer and he can carry out any kinds of enquiries as he may deem necessary for the purpose of scrutiny assessment. This is a very detailed scrutiny assessment.

Re-assessment OR assessment under section 147 OR reopened assessment

This means the case of the taxpayer is reopened after a substantial lapse of time and subjected to assessment after such reopening. The scrutiny notice can be issued only within a period or six months form the end of the financial year in which return is filed by the taxpayer. Once this period is over and the scrutiny notice is not issued to the taxpayer then the case of the taxpayer can not be picked up for a regular scrutiny assessment.

Therefore, such case needs to be picked up for re-opening assessment. The case or the assessment can be re-opened even after the scrutiny assessment of such case was completed earlier.

The case can be reopened under following circumstances:

  • You have taxable income, but you have not filed income tax return disclosing such income
  • You have filed the income tax return, but you have not disclosed certain income in the return and this is in knowledge of the Assessing Officer
  • You have filed the Income tax return, but you have made certain claims or deductions in the return which are patently false and about which the information you have not provided
  • The Assessing Officer is in possession of the information in respect of you which could result in detection of taxable income in your hands.
  • Some of the common issues on which assessment is reopened in case of individual and HUF taxpayers who do not have large amount of business income are as follows:
    • Cash deposit of more than INR 10,00,000/- in the bank account
    • Purchase of shares or mutual funds of large amount
    • Purchase of immovable property and sources of such purchase are not commensurate with your returned income in ITR
    • Sale of immovable property but capital gains are not disclosed in the ITR
    • Sale of immovable property and deduction is claimed wrongly in the ITR
    • Non-disclosure in ITR of the interest income on FDs and other deposits

Procedure of re-assessment

  • After receipt of information that the taxpayer has not offered certain income for tax purpose, the Assessing Officer verifies the information along with relevant ITRs of taxpayers to see whether any taxable income has escaped assessment.
  • If the taxable income has escaped assessment, then the Assessing Officer is required to record that he has reason to believe that taxable income has escaped assessment.
  • However, he is not required to quantify the exact amount of taxable income at this stage. He is needed only to determine whether the taxable income escaping assessment is more than or less than Rs. 1 lakh.
  • After he records the reasons, Assessing Officer is required to obtain the approval of Income tax Authorities superior to him like Joint/Addl. Commissioner of Income tax Act or Pr. Commissioner/Commissioner of Income tax Act as the case may be.
  • Once approved, Assessing Officer issues notice under section 148 of the Income tax Act, (148 notice) to the taxpayer. Such a notice does not contain the reasons for which notice is issued but contains that the AO has reasons to believe that you have income which has escaped assessment in a particular year and to bring that income to tax, 148 notice is issued.
  • There are time limits in respect of re-opening of assessments
Category of escaped income Maximum time limit Example for A Y 2018-19
Income escaped > 1 lakh Upto 04 years from the relevant assessment year of which income has escaped assessment Can be re-opened t 31/03/20123
Income escaped < 1 lakh Upto 06 years from the relevant assessment year of which income has escaped assessment
Income from foreign asset Upto 16 years from the relevant assessment year of which income has escaped assessment