Income tax is the amount of money paid to the government on the income earned by individuals, businesses, and institutions within a jurisdiction. This enables the government to carry out their public duty. In India, the Income Tax Act 1961 outlines the provisions that govern income tax assessments.

Income Tax Returns (ITR)

People who earn more than the basic exemption limits during a financial year are required to submit a document to the income tax department. This document, known as income tax returns, contains information about the person’s income and deductions.

Income Tax Assessment Types

Individuals who file income tax returns are subject to scrutiny and review by income tax authorities at the end of each financial year. This process is known as income tax assessment, and it is an essential part of India’s income tax provisions. The income tax act lays down a structural flow of tax assessment, which both individuals and the income tax department must follow. There are several types of assessments defined by the income tax act that taxpayers should be aware of to ensure they are in compliance with the law.

Self Assessment

Taxpayers are responsible for determining their own income tax obligations. The tax authority offers a range of forms for the filing of income tax returns. Taxpayers combine income from various sources and apply any losses, deductions, or exemptions available to them during the year. The total income of the taxpayer is then computed. The taxpayer further reduces the sum of TDS and Advance Tax from the computed amount to arrive at the final tax payable on such income. Any outstanding tax, if applicable, is considered self-assessment tax and must be paid before filing the return of income. This process is commonly referred to as Self Assessment.

Summary Assessment

Automated assessment is a type of review that doesn’t require human input. It involves checking the information provided by the taxpayer against the data available to the income tax department. During this process, the department verifies the accuracy and reasonableness of the taxpayer’s return. The assessment is conducted online and automatically adjusts for mathematical errors, incorrect claims, and disallowances. For example, if the taxpayer claims more TDS credit than what is available in their PAN records, an adjustment will be made to reflect this. If the adjustment results in the taxpayer owing taxes, they will receive a notice under Section 143(1), which they must respond to accordingly. 

Regular Assessment

The assessment of an assessee’s income tax is conducted by an authorized Assessing Officer or Income Tax authority, not below the rank of an income tax officer, to ensure that the assessee has neither understated their income nor overstated any expense or loss, or underpaid any tax. 

The Central Board of Direct Taxes (CBDT) has established specific parameters that determine when a taxpayer’s case will undergo scrutiny assessment. 

  • When an assessee is subject to scrutiny assessment, the Department will issue a notice well in advance. However, this notice cannot be delivered after the expiration of six months from the end of the financial year in which the return is filed. 
  • The assessee will be requested to produce their books of accounts and other supporting evidence to validate the income declared in their return. After a thorough review of all the available details, the assessing officer will either confirm the return of income filed or make additions, which could result in an income tax demand. The assessee must respond appropriately to the demand.

Scrutiny Assessment

After you file your income tax return, an Income Tax Officer may review it. If so, you will receive an Income Tax Notice under Section 143(2). The officer may ask for more information, documents, or account books to examine. They will then calculate how much income tax you owe. If there is a difference between your income and the tax you paid, you will either receive a refund or need to pay the additional amount. 

If you disagree with the officer’s assessment, you can submit an application for reconsideration under Section 154, or a revision application under Section 263 or Section 264. If you still disagree with the Scrutiny Assessment order, you can appeal to higher authorities such as CIT (A), ITAT, High Court, and The Supreme Court, in that order.

Best Judgement Assessment

This assessment is required in the following situations:

  •  When the person being assessed doesn’t respond to a notice from the department asking for specific information or accounting books.
  • When the person doesn’t comply with a Special Audit ordered by the Income Tax authorities.
  • When the person doesn’t file their tax return by the due date or within the extended time allowed by the CBDT.
  • When the person doesn’t follow the instructions given in the notice issued under Summary Assessment.

After hearing the person’s argument, the assessing officer makes a decision based on all the relevant materials and evidence available to them. This is known as Best Judgement Assessment.

Income Escaping Assessment

The assessing officer has the power to evaluate or re-evaluate an assessee’s income if they have reason to believe that taxable income has gone unassessed. The time limit to send a notice for reassessment is four years after the end of the relevant assessment year

Below are some situations that may trigger reassessment:

  • The assessee has taxable income but has not yet filed a return.
  • After filing the income tax return, the assessee is found to have either understated their income or claimed excess allowances or deductions.
  • The assessee has failed to provide reports on international transactions, as required.

The length of the assessment period can vary for different taxpayers. For those who don’t feel comfortable dealing with income tax officers, it is recommended that they seek the assistance of a Chartered Accountant.

Penalty for non-filing of income tax returns

If you file your tax return after the due date, you may be subject to a penalty. The penalty amount depends on your total income. If your gross total income is Rs.2.5 lakh or less, the penalty will be zero. If your total income is between Rs.2.5 lakh and Rs.5 lakh, the penalty will be Rs.1,000. If your total income is greater than Rs.5 lakh, the penalty will be Rs.5,000.

As per the latest budget, you will not be penalized for filing your returns after December 31st. However, for the financial year 2020-21, the last date for filing has been extended.

If you miss the deadline for filing your tax return, you will not be able to carry forward losses except for house property losses incurred for that financial year.

If you have unpaid taxes, you will be charged 1% of the tax liability for every month or part of the month until the payment is made. However, for the financial year 2020-21, if your self-assessment tax liability exceeds Rs.1 lakh, you must pay the tax by July 31st, 2021 to avoid a 1% interest charge under section 234A.

Final thoughts

To guarantee accuracy and timeliness in income tax filing, it’s always wise to hire a financial advisor. By doing so, you can avoid the possibility of being assessed by the department later on.