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

1.Filing of return of income – New assessee – Declaration of sub­stantial income in the initial assessment year – Effect thereof in earlier years— 1. The Finance Act, 1985 has, with the objec­tive of securing better tax compliance, simplified the direct tax laws and rationalised the rates of personal income-tax. The department is also accepting all returns of income filed by non-corporate assessees up to Rs. 1 lakh. A public circular has been recently issued stating that simply because a taxpayer has filed a higher return of income for the payment of advance tax, his earlier assessments will not be reopened and no roving enquiries will be made. Apprehension has been expressed in some quarters that where a person who has not so far been filing returns of income for tax purposes, whether due to ignorance or otherwise, now wants to come forward and file a return showing his true income and pay tax he may lay himself open to various difficul­ties. There is said to be a fear that the Income-tax Officer may, in view of the declaration of substantial income for the first time, suspect that income chargeable to tax for earlier years has escaped assessment and start roving enquiries against the taxpay­er.

2. The principles for the reopening of assessment, as prescribed under section 147, have been clearly enunciated in a number of decisions of the various High Courts and the Supreme Court. These principles apply as much to new assessees as to existing asses­sees. According to these principles, the mere declaration of substantial income for a particular year, even if it is done for the first time, cannot by itself constitute a valid ground for the opening or reopening of any earlier assessment or for start­ing roving enquiries against the taxpayer. While it is true that the penal provisions of the law will be applied more strictly in the cases where a person having taxable income does not come forward and file a return showing that income and pay tax thereon and is brought into the tax net only as a result of the efforts of the department, the department’s approach will be very liberal and sympathetic in the cases of new assessees who come forward themselves to show their true incomes in good faith and co-oper­ate in any enquiry relating to the assessment of their incomes.

3. Though the penal provisions of the law do apply in such cases, such as failure to comply with statutory obligations relating to filing of estimates and payment of advance tax, filing of returns in time, etc., instructions are being issued to all officers of the department that they should adopt a liberal and sympathetic approach where the assessee has come forward suo motu and co-operates with the department. Assessees will do well to avail themselves of this opportunity and file returns of income without any fear. Even if it is for the first time, they should do so as early as possible.

Circular: No. 432 [F. No. 225/86/85-IT(A-II), dated 20-9-1985/15-11-1985.

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October 2021