Clarifications on issues relating to effect of filing higher estimates of income for advance tax purposes on assessments for earlier years/filing of returns of income by new assessees declaring substantial income in the initial assessment year/filing of higher returns of wealth for earlier years
Effect of higher estimates of income for advance tax purposes in financial year 1985-86 on assessments in relation to earlier years – 1. The Finance Act, 1985 has, with the objective of securing better tax compliance, rationalised the rates of personal income-tax. Fears have, however, been expressed that where a taxpayer declares, for purposes of payment of advance tax during the current financial year, a substantially higher income than that assessed for any earlier year, the Income-tax Officer may suspect that income chargeable to tax for that year has been underassessed and, accordingly, reopen the assessment for that year. Fears have also been expressed that where the income declared for purposes of payment of advance tax during the current financial year is higher than the income declared in the return of income for an earlier year, the Income-tax Officer may start roving enquiries against the taxpayer in the pending assessment proceedings for that year.
2. The circumstances in which an assessment can be reopened under clause (a) or clause (b) of sub-section (1) of section 147 have been clearly enunciated in a number or decisions of various High Courts and the Supreme Court. The Income-tax Officers have, therefore, to follow these principles in reopening the assessments for past years. In terms of the principles enunciated in those decisions, the mere declaration, for purposes of payment of advance tax, of a much higher income than that assessed for any earlier year, will not constitute a valid ground for reopening the assessment for any earlier year, or for starting roving inquiries against the taxpayer in any pending assessment proceeding.
3. Clarification has also been sought on the question whether a taxpayer, who is found to have concealed his income for any earlier year, can claim that such income should not be assessed in that year on the ground that he had included such income in the estimate of advance tax furnished by him for the financial year 1985-86. Such a claim is clearly untenable. Income which relates to a particular assessment year can be assessed only in that year. Hence a taxpayer will not be able to claim that any part of the higher income declared by him for purposes of payment of advance tax should be set off against the income found to have been concealed by him for any earlier year. In such cases, the advisable course for the taxpayer will be to, voluntarily and in good faith, make a full and true disclosure of his concealed income, prior to its detection by the ITO, and then make an application to the Commissioner for the reduction or waiver of penalty and interest under section 273A.
Circular : No. 423 [F. No. 225/86/85-IT(A-II)], dated 26-6-1985