The process of assessment is the most significant part of the Income Tax Act. The Act requires an assessee to comply with certain requirements for computing income in accordance with the various provisions, and pay tax on his income so computed. An assessment is the process whereby the department verifies whether the person has complied with the provisions of law and paid the tax due on his income.
Over the past few years on account of the fact that returns have been accepted without scrutiny, many professionals, especially the younger ones, have lost touch with the various provisions governing assessment. In fact, the junior staff in offices of professionals has to be retrained for inter-action with the department so as to ensure that the assessment process does not result in creating any fresh burden on the client or even if there is a difference between the income as assessed and returned, adequate remedial measures can be taken.
The Central Board of Direct Taxes issues instructions from time to time to regarding scrutiny of returns. The recent instruction to verify returns with information received in the Annual Information returns (AIR) has created its own set of problems.
Prior to invoking the powers of assessment an assessing officer may “process” the return. In this processing an assessing officer has certain limited powers. This processing culminates in an intimation.
If after a return has been processed or an assessment has been completed, the assessing officer has reason to believe that any income chargeable to tax , has escaped assessment, the assessing officer may reassess such income.
The objective of this presentation is to discuss the various provisions regarding assessments under section 143 and reassessments under section 147.
SECTION 143 – ASSESSMENT
I. SECTION 143(1)
When return is filed U/s 139 or in response to notice u/s 142(1) it would result in
a) An Intimation U/s 143(1)
b) An assessment under 143(3)
c) If neither of the above, an acknowledgement is deemed to be an intimation
Before an intimation is sent, the return will be processed and the total income / loss will be computed after making the following adjustments
(i) Any arithmetical error in the return
(ii) An incorrect claim , if such incorrect claim is apparent from any information in the return
On the basis of the income / loss so computed the tax / refund due to the assessee shall be determined.
An intimation is a must if-
(i) Tax is payable by an assessee or refund is due to him or
(ii) Loss as returned is adjusted
If neither of these conditions exist the acknowledgment is deemed to be an intimation.
No intimation is to be “sent” after one year from the end of the financial year in which the return is made.
The word used is “sent” and not “served”. This is distinct from the term “served” which is specifically mentioned in the proviso to the section 143 (2).
II. SECTION 143(2)
Notice U/s 143(2) (i) – Provides that where an assessing officer has reason to believe that any claim of loss, exemption, deduction, allowance or relief is inadmissible he may issue a notice specifying the particulars of such claim and call upon the assess to produce any evidence, or particulars specified therein on which the assessee may really in support of the claim. This was what was called limited scrutiny. No notice under this section can be served after 1st June 2003.
Notice U/s 143(2)(ii) – If the assessing officer considers it necessary to ensure that assessee has not understated his income he may issue a notice calling upon the assessee to produce evidence in support of the return.
Proviso specifies that “service before expiry of six months from the end of the financial year in which return is furnished.” (w.e.f 1st April 2008).
III. Section 143(3)(ii)
On the day specified in the notice issued under clause (ii) of sub-section (2) or as soon afterwards as may be the assessing officer shall determine sum payable or refund due to him.
In case of assessee claiming exemption u/s 10 the assessing officer shall grant exemption u/s 10 or in case of a contravention of the requisite provisions of that section intimate the central Government of such contravention.
IV. SECTION 144 – BEST JUDGMENT ASSESSMENT
Where any person
- Fails to make a return u/s 139
- Fails to comply with the terms of a notice u/s 142(1) or direction issued u/s 142(2A)
- Fails to comply with terms of notice U/s 143(2)
The assessing officer shall
- After taking into account all relevant material gathered
- After giving the assessee an opportunity of being heard
Frame an assessment to the best of his judgement.
Opportunity is to be given to assessee to show cause why assessment should not be completed to the best of A. O’s judgement (first proviso to section 144).
No opportunity is required to be given where notice u/s 142(1) has been issued. (Second proviso to section 144).
It will be apparent from the above categories that a best judgement assessment is the consequence of a failure on the part of the assessee. Such a failure may be deliberate, may have arisen out of ignorance or circumstances beyond the control of an assessee. In any of these eventualities, the Assessing Officer is entitled, on the basis of all relevant material which he has gathered and after giving an opportunity to the assessee of being heard, make an estimate of the total income or loss of an assessee and determine the sum payable by him.
Courts, including the Apex Court, in a number of judgements have laid down the principles, which an Assessing Officer must follow in framing a best judgement assessment. Experience, however, shows that these are rarely followed and we have totally arbitrary and ad-hoc assessments
V .SECTION 144A – Power of Jt. Commissioner to Issue directions
The Joint Commissioner may either of his motion or by way of a reference from an Assessing Officer or on application of an assessee, call for and examine records of assessment and issue such directions as he may deem fit which shall bind the assessing officer. No direction prejudicial to the assessee shall be issued without assessee being heard.
During the course of assessment proceedings, there are a few common areas where certain issues arise.
a) Purchases / Expenses: – Very often, Assessing Officers require purchase / expenditure by way of direct confirmation from creditors or by way of proof of delivery etc. Such confirmations are not forthcoming or proofs are not available at the time of the assessment. In such a case, the assessee would be well advised to put forth the following.
i) Proof of consumption or resale of stock or receipt of service pertaining to the expenditure
ii) Comparative analysis of yield for earlier years
iii) Proof of payment made by Account Payee cheque etc.
All these would go to substantiate the fact that even though the purchases / expenditure have not been established by confirmation, other corroborative evidence is available.
b) Cash Credits: – This is the most common area of disputes in assessment proceedings. It is absolutely essential for the assessee to discharge the primary burden of proof. It is, therefore, advisable in such case to obtain the confirmation the receipt of such borrowing. At that point of time, the assessee normally has good relations with the lender or the intermediary and it is possible to obtain the confirmation along with PAN. If that is not possible, the following proofs should be given.
i) If there has been a partial repayment of loan, proof of such repayment and if the interest is paid, proof of payment of interest.
ii) Any other circumstantial proof that the assessee can adduce.
If no confirmation is forthcoming from the lender, a specific communication should be placed on record to the Assessing Officer requesting him to issue a summons. This will greatly facilitate the appellate proceedings, should the disallowance be made.
c) Variation in Inventory: – It often happens that with a view to obtain / enhance finance from a Bank, the assessee inflate the value of stock. In such an event, the assessee should produce the records for inventory maintenance under Excise Regulations, which are normally accepted. If quantitative figures of stock in the excise records tally with that of the quantity given to the Bank, the task would be easier because in that event, it is only the difference in valuation that needs to be explained.
d) Agreed Additions: – If the additions are being agreed to, in that event, the exact nature of agreement, nature of expenditure and the quantum thereof should be set out in writing. This reduced the ambiguity as to whether there has been an agreement between the assessee and the Assessing Officer.
e) Alternative Claim: – If during the course of assessment, the assessee comes to a conclusion that a particular claim preferred by him is not being allowed, an alternate claim should be preferred. E.g. if the Assessing Officer is of the opinion that the expenditure is capital in nature, alternative claim for depreciation should be put forth immediately.
f) Efforts made by the assessee to procure evidence to be placed on record:-
When the Assessing Officer asks for proof to substantiate a particular claim, the assessee may not have the same readily available. This is on account of the fact that the assessee may not have envisaged all the proofs that are required. Often, in the course of assessment proceedings, which are to be completed within a particular time frame, the assessee may not be able to procure the requisite evidence resulting in disallowance or addition. In such a situation, the assessee should place on record all the documentary evidence of the efforts that he has made to obtain the evidence. This will help in enabling the evidence to be placed on record in the appellate pro, should the same be procured in future.
VI. SECTION 147 – REASSESSMENT
If the Assessing Officer has reasons to believe that income chargeable to tax has escaped assessment for any year. The Assessing Officer may subject to the provisions of Sections 148 to 153 assess or recovered such income or re-compute the loss.
If the assessment of S. 143(3) has been made, no reassessment to be made after expiry of the four years from the relevant Assessment Year unless there is a failure by an assessee to disclose fully and truly all material facts for an Assessment Year. In other cases the time limit for issue of Notice is:-
a) Six years from the end of the relevant Assessment Year, if income chargeable that has escaped assessment is Rs. 1 Lac or more.
b) Four years from the end of the relevant Assessment Year if income is less than Rs. 1 Lac.
NOTICE U/S 148 – Issue of Notice where income has escaped assessment.
Before making a re-assessment u/s 147, notice has to be issued u/s 148 requiring an assessee to file the return of income.
Consequently the primary issues in regard to a reassessment are
a) Formation of reason to believe by the assessing officer
b) Recording of those reasons by the assessing officer
c) Issue of notice under section 148 by the assessing officer
d) Completion of assessment under section 147 read with section 143 (3)
As far as the formation of belief by the assessing officer the issue of whether the reopening is valid or not will depend on a plethora facts. These are predominantly legal issues and will have to be dealt with differently in different situations.
An assessee should invariably do the following:-
a) File a return in response to the notice under section 148.This is for the reason that though even a letter to the effect that the original return be treated as having been filed in compliance with the notice under section 148, the filing of return will give an assessee an option to substantiate the return with additional supporting proof and data.
b) Immediately on filing of the return the assessee should demand a copy of the reasons recorded by the assessing officer. If necessary the satisfaction note by the joint commissioner should be requested though it may not be advisable to do so in assessment proceeding.
c) Thereafter if feasible the reopening should be challenged. The manner of challenge would really depend on facts and therefore no hard and fast principles can be laid down. However by and large the following should be borne in mind.
i) If consistently over a period of time a particular factual position has been accepted by the department in orders under section 143 (3), it cannot be departed from unless new facts come to light.
ii) A mere suspicion is not sufficient to reopen an assessment.
iii) The opinion of any other person cannot be a substitute for a reason to believe. For e.g objection of audit party.
iv) No reopening can be made on the basis of mere change of opinion.
v) Even if reassessment is made the reopening should be challenged in appeal proceedings particularly if the original order is an order under section 143(3).
As some useful tips to participants, I am enlisting certain precautions that one should take to ensure that the clients’ interest is well protected.
(1) All returns, reports and documents should be thoroughly scanned before they are submitted to ensure that there is no contradiction between them.
(2) Notices and communications from the department should be promptly replied to even if some of the submissions are repetitive, it is necessary to reproduce the submission made on an earlier occasion if the prior submission is not before the person reading the second communication.
(3) If an Assessing Officer or other assessing authority is not present or available on the appointed day, record should be maintained in the file of the Chartered Accountant noting this fact.
(4) If it is felt that the assessing authority is of an adversarial attitude all oral submissions should be reproduced in writing. All submissions relating to facts, undertakings and declarations should be signed only by an assessee unless otherwise specifically required to be signed by the representative. Alternative pleas and claims to be made promptly.
(5) If a particular addition is agreed to buy peace that fact should be explicitly brought out in the submission.
(6) Even if all the requirements of the department’s notice cannot be complied with, the assessee must try to comply with a majority of them.
(7) If there is any delay or infringement then the default should be explained, both on merits and on technical grounds.
Written By : CA Jayant P. Gokhale, Mumbai