Digital Footprint: Journey from e-return to Faceless Assessment Scheme – Interpretation & thought process of Income-tax Department

Introduction

Charles Darwin had said that

“It is not the strongest of the species that survives, not the most intelligent that survives, it is the one that is the most adaptable to changes”

In India, CBDT first time introduced the e-tds return by electronic filing of returns of Tax Deducted at Source Scheme, 2003 in the FY 2004-05. This was the time when Income-tax Department started to collect the assesses’ data in the digital form. For the FY 2004-05, CBDT notified e-TDS return for salary and other payments which got extended by quarterly e-TDS return from the next FY. In September 2004, e-Income-tax return was also introduced on voluntary basis which was made mandatory for all corporate assesses from July 2006 and later on for all individual assesses also.

This digital journey which started from e-returns in the Year 2004 got extended to e-assessments in September 2017 and further Faceless Assessment and Appeals in August 2020. A map of the digital transformation is depicted below:

Journey of digital transformation of Indian Tax System

Journey of digital transformation of Indian Tax System

N. Chandrasekaran, Chairman of the Tata Group has said that “Going digital is no longer an option, it is the default.” This article discuss about the main features of the Faceless Assessment Scheme (‘FAS’) and also what do we mean by digital footprint. It also throws light on the benefits of the FAS and what is the thought process of Income-tax Department (‘ITD’) in respect of different issues which has got emerged after notifying this scheme by analyzing the different webinars of ITD spokespersons through the Platform of FICCI and CII.

I. Main Features of the Faceless Assessment Scheme

Faceless Assessment Scheme (FAS), 2019 was introduced first time in Sep’2019 in the name of e-Assessment Scheme which got revamped by Notification No. 60/2020 in Aug’20 with new name. During the last one year over 58,300 cases were picked under the e-assessment, of which over ~8,700 have been disposed of. Now, CBDT has order by F.No. 187/3/2020 ITA-I, that on or after Aug 13, 2020, all assessment order can be passed only under FAS except some specific circumstances.

(A) ECO-SYSTEM of the tax authority under the FAS

1. National e-Assessment Center (NeAC) to act as a nodal agency and a single point of contact between taxpayer and the department.

2. Regional e-Assessment Centers (ReAC) will carry the assessment proceedings which is comprising of different units i.e. Assessment Unit (AU), Verification Unit (VU), Review Unit (RU) and Technical Unit (TU).

3. All units will do the specific functions assigned to them which are as follows:

S. No. Unit Functions
1 Assessment Unit Identify issues, seek information and analyze material to frame draft assessment order (DAO)
2 Verification Unit Conduct enquiry, examination of books of account, examination of witnesses and recording of statement all through electronic mode.
3 Review Unit Review of DAO – Whether material evidence brought on record, points of facts and law incorporated, app. of judicial decisions considered, arithmetic correctness etc.
4 Technical Unit Provide technical assistance/advise on legal, accounting, forensic valuation, audit, transfer pricing, data analytics or any other technical matter.

(B) Face Assessment Procedure

Pictorial flow of information

1. The NeAC shall serve a notice on the assessee u/s 143(2).

2. The Assessee may reply within 15 days from the date of receipt of notice to NeAC.

3. The NeAC shall assign the case to AU in any one ReAC by an automated allocation system (AAS).

4. AU may make a request to NeAC for additional information/documents/evidence from Assessee, conduct of certain verification or enquiry by Verification Unit (VU) or technical assistance by Technical Unit (TU). Selection of VU/TU is based on AAS.

5. Where the assessee fails to reply any notice as mentioned above, a show-cause notice (SCN) is served on him for best judgement assessment u/s 144.

6. The response received from the assessee, VU or TU is provided to AU or and in case no reply is received from the assessee the same is intimated to AU to pass the best judgement assessment.

7. AU to pass the DAO u/s 143(2) or u/s 144 (best judgement order) including penalty proceedings initiated therein and send a copy of it to the NeAC. The NeAC shall examine the DAO in accordance with the risk management strategy by way of an automated examination tool.

8. NeAC may (i) pass an assessment order and send it to assessee or;

(ii) send a SCN for providing an opportunity, in case modification is proposed or;

(iii) send it to RU to review the order through AAS.

9. In case, the RU concurs with the DAO, the NeAC follow the procedure laid in 8(i) and 8(ii).

10. In case, the RU proposes any modification, it assigns the DAO to new AU by AAS.

11. The new AU after considering the modifications by RU send the final DAO to the NeAC.

12. The NeAC after receiving the final DAO from new AU follow the procedure laid in 8(i) and 8(ii).

13. In case of no reply from assessee, the NeAC can follow the procedure laid in 8(i)

14. In case of any reply from assessee, the NeAC send the reply to the respective AU to pass a revised DAO.

15. After receiving the revised DAO, in case

(i) no modification prejudicial to the interest of the assessee is proposed, the NeAC follow the procedure as laid in 8(i)

(ii) modification prejudicial to the interest of the assessee is proposed, the NeAC follow the procedure as laid in 8(ii) and further follow the procedure as laid in Point no. 13 & 14.

16. The NeAC will transfer all the e-records to the Jurisdiction Assessing Officer (JAO) after completion of the assessment to take such action as may be required under the Act.

(C) Exception to the FAS

  • CIT/Pr. DG in charge of the NeAC, at any stage, if consider necessary transfer the case to the JAO with the prior approval of the CBDT.
  • FAS covers only those cases where notice u/s 143(2) has been issued.
  • Cases assigned to the Central charges (Serious frauds, Major Tax Evasion, Sensitive and Search matters, Black Money and Benami cases)
  • International Tax charges cases (non-resident assesses).

(D) Exchange of communication exclusively by Electronic Mode

  • All communication between the NeAC and the assessee/authorized representative and all the internal communication within the department will be exclusive by the electronic mode.
  • All electronic record should be authenticated by the digital signature (NeAC or where assessee is required furnish his return with digital signature) or electronic verification mode.
  • The Pr. CCIT/Pr. DGIT under which the concerned unit is set up may approve the request for personal hearing if covered by the circumstances as per the instructions of CBDT.
  • Such hearing shall be conducted exclusively through video conferencing including use of any telecommunication application software which supports video telephony, as per the procedure laid down by CBDT.

II. Analysis and clarification by ITD officials on FAS

The ITD has shown proactive approach in the implementation of the FAS where it has not only come forward and taken part in the webinar organized by the Industry associations and tax advisors but also provided their clear view and thought process behind the implementation of the FAS and way forward. I have attended some of the webinars which has been organized by the FICCI, CII, Dhruva advisors, KPMG etc where eminent and senior ITD officials (e.g. Mr. Patanjali, Pr. CIT, Mumbai, Ms. Ratna Das Gupta, PCIT, ReAC, Mumbai, Ms. Smita Jhingran, CCIT, ReAC, Delhi, Mr. Rajesh Bhoot, JS (TPL-II), Mrs. Lekha Kumar, CCIT, ReAC, Mumbai) have shared their view and tried to clarify the queries raised by the taxpayers. It shows the clear intention of the Government in implementing the “seamless, painless and faceless” environment which is the motto behind this overall exercise.

In this article, I have tried to analyze and summarize the concern related to implementation and interpretation of the FAS and ITD view on them which is as follows:

(A) Framework and Scope of the FAS

Going forward, the ITD is going to be fragmented into two parts i.e. one which will take care of the all proceedings which will come under the FAS and another will be residual hierarchy for all other functions.

(a) Except the inclusion/exception as mentioned in the main feature of the FAS, the following clarification have been provided by the ITD officials in respect of the scope of the FAS i.e.

(i) Transfer Pricing proceedings will be covered under the FAS. TUs Technical Units includes supporting the AUs on TP. However, the DRP proceedings will be out of the scope of FAS.

(ii) Penalty proceedings related to non-compliance of procedure of FAS will be covered e.g. penalty u/s 271(1)(b). Other penalty proceedings e.g. penalty u/s 271(c), penalties covered u/s 269SS, 269T etc. will continue to be under the JAO, however, the initiation of the penalties in the Assessment Order will be the part of the FAS.

(iii) Where the notice has already been issued by the ITD u/s 143(2) in respect of the re-assessment proceedings, it will be the part of the FAS, however, any new notice u/s 147 will be issued by the JAO only, however, further assessment proceedings will be eventually taken by the NeAC.

(iv) Revision proceedings u/s 263 will be outside the scope of the FAS. However, the ITD is expecting a significant downfall in revision cases being the improvement in the quality of the orders and also the digital footprint of the proceedings.

(v) De-novo remand of cases will come under the FAS, however where the remand notice has been issued for appeal effect purpose, it will continue to be under the scope of JAO.

(vi) TDS proceedings will continue to be under the JAO.

(b) Except the exclusions as mentioned in the point no. (a) which will come under the JAO, the scope of the residual hierarchy will be as follows:

(i) Demand Management & Collection and Recovery of taxes.

(ii) Taxpayer outreach education, facilitation and grievance handling

(iii) Rectification, prosecution and compounding proceedings and related court matters.

(iv) Audit functions including handling matters pertaining to Revenue and Internal Audit and taking remedial actions.

(v) Judicial functions including giving effect to the appellate orders of CIT (A), ITAT, High Court, Supreme Court, Settlement commission

(vi) Preparing scrutiny reports and filing of appeal wherever considered necessary; defending writ petitions; recommendation of SLPs etc.

(vii) All the Statutory powers under the Income Tax Act, 1961 like section 264 / 273A etc not exercised by the NeAC/ReACs.

(viii) Administrative, HRD and cadre control matters including related court matters.

(ix) Custody and management of case records and control of infrastructure

All the above functions have to be done in Faceless Manner through ITBA Portal as far as possible.

Other important points:

  • In case, during the assessment any application is filed before the Income-tax Settlement Commission (ITSC) and the case is selected for the settlement, it will be moved to the JAO and going forward will not be part of the NeAC.
  • All the assessment proceedings under the LTU will be shifted to the FAS or JAO depending upon the above mentioned criteria.
  • Power of withholding of the refund u/s 241A will continue to be with the JAO.
  • Procedure related to filing of fresh claims with the AOs, adjustment etc will continue be in the same manner. The only difference will that now it will be AUs instead of the JAO.
  • 2/3rd of the manpower is utilized for faceless and balance for other functions.

It has been clarified by the department that this scheme is a procedural change and it is not going to change any legal framework of the Act except where it has been specifically mentioned in the Scheme.

(B) Digital Footprint

The ITD is going to map the digital behaviour of taxpayers to create their profiles under FAS assessment in electronic mode. All interactions of a taxpayer with the tax authority will be logged. It will be a complete shift from the earlier practice where taxpayers could sit with the assessing officer and resolve issues at one go, following a single notice of demand, and even seek adjournment for hearings over telephone calls.

Ms. Smita Jhingran, CCIT while signifying Digital Footprint mentioned that  “If I give you a requisition for five things, you (taxpayer) respond to one, and take adjournment to respond to the other, that’s assessee behavior that is being mapped, which in the manual days was not being mapped,” It will be win-win situation for assessee as well as the officers.

(C) Risk management system (RMS) and Quality Control

RMS has a two-fold purpose i.e. to ensure the risk criteria under which cases selected are investigated to prevent high pitched addition and whether required additions are made or not. All cases flagged by will be sent for Review to the RUs.

To ensure the quality control, the ITD has come forward with the following planning:

(i) AUs, VUs and TUs are required to submit their feedback response in the System before sending their response/reports/DAO to NeAC

(ii) In Case of Difference Between AU and RU, PCIT (AU New) to examine the report and take necessary action

(iii) Responsibility and ownership will be given to all officers who contributed in any manner in making of any order or report, whether the DAO or the verification or review reports or modification to the DAO. Outstanding performance of the officers will be rewarded.

(D) Standard Operating Procedures (SOPs) for different function by the CBDT

During the interaction with ITD officials, it has been clarified that the following SOPs (Form, Mode, Process and Procedure (FMPP)) will be laid down by the Pr. CCIT or Pr. DGIT of the NeAC after the approval of the CBDT in a short span of time. It is also further specified that these will be in the public domain for the knowledge of the assesses.

(i) Circumstances in which request for personal hearing through video conferencing will be approved.

(ii) Situation where mandatory communication through electronic mode will not apply.

(iii) Eventualities where the cases to be transferred from FAS to the proceedings under the JAO.

(iv) Procedure for accessing, verification and authentication of information and response including documents submitted during the assessment proceedings

(v) It is also understood that with set-up of separate technical unit within ReACs, the Government shall build industry specific expertise. The Government set-up a portal viz National Judicial Reference System. (‘NJRS’) for benefit of the Tax Authorities to seek knowledge which can be used for the purpose of making a knowledgeable assessment

(vi) All the penalty proceedings will be transferred to the Centralized National Penalty Centre. It is also under discussion to bring all the penalty proceedings under the faceless scheme in the near future.

(E) Expectation of the ITD from the Assesses

The success of the scheme will depend upon the IT infrastructure and behaviour of the assessee that how diligently they take up the process. ITD has a lot of expectations from the assessee which they have reiterated in every interaction with the taxpayers. It can be summarized as follows:

(a) Prepare robust, clear and comprehensive written submission which is easy to understand.

(b) Attach proper supporting documentation which can include flow-charts, pictorial depiction etc

(c) Pro-active in reconciling all the data points related to the case in different statues e.g. IT Act, GST, SEZ filings, RBI filings, AIR etc.

(d) In complex issues, the assessee can discuss the issues proactively by filing the comprehensive reply with the jurisdictional precedence.

(e) File all submission in timely manner without taking any unnecessary adjournments.

III. Benefits of the New Scheme vs. earlier e-schemes

By introducing the FAS, the CBDT has tried to make extensive use of technology, digital analytics and even Artificial Intelligence to ease compliance burden, minimize the physical interface between the taxpayers and the tax officials to achieve the objective of providing a seamless, painless and faceless tax administration. A gist of the benefit of the new scheme with a comparative analysis with earlier e-models can be provided as below:

(1) No final assessment order without a show-cause notice to the assessee in case there is any modification by the AU in the returned income. (opportunity of being heard will an essential part of the FAS).

(2) No human interface

The above pictorial view of the FAS procedure clearly indicate that all the communication will be only through electronic mode. NeAC will be the only single point of contract for the assessee.

(3) Functional Specialization

Technical Unit will consist of learned officers of the department related to different area who can provide their inputs in respect of different functions e.g. TP, audit, international tax etc.

(4) Dynamic Jurisdiction

All the cases will be allotted to any AU (New AU), RU, VU or TU on the basis of AAS which allows a dynamic jurisdiction to every case. A case of any assessee can be assessed anywhere in India which will bring fairness and unbiased disposal of the cases.

(5) Team based working

Different teams specialized in different areas will be involved in the assessment. Hence, it will not be possible for a single person or a single team to impact the flow of the case.

(6) Improvement in quality of assessment

New faceless scheme will give a major thrust to ‘quality’ assessments given the number of units involved in framing an assessment and thus will go a long way in curtailing litigation in the country especially for unwarranted issues.

(7) Transparency, efficiency and accountability.

(8) Pre-audit of the DAO will be done by the RUs based on the risk base strategy and incase of any modification suggested by the RU, there will be a fresh assessment by the New AU.

(9) Justification/reasoning will be provided to the Assessee for selection of his case under scrutiny proceedings which was never there in any earlier model.

(10) Ease of compliance for taxpayers and expeditious disposal of cases.

IV. Challenges in implementation of Scheme & way forward

  • Migration of the open assessments

How the migration of all the open assessment will happen to the new system? Whether the new notices will be issued by the Department to the assesses and the de-novo proceedings will start or all the information/justification which has been filed with the department already will be transferred to the NeAC electronically.

  • Jurisdictional Precedence amid dynamic jurisdiction

In the Faceless Assessment Scheme, we are discussing about the dynamic jurisdictions, where an assessee of one city can be assessed anywhere in India. In such circumstances, how the Jurisdictional Precedence rules will follow. Whether the CBDT is planning to issue any guidelines in respect of the disputed matters where different jurisdiction have different interpretations on the same issue.

  • Role of eminent consultants/lawyers in Functional specialization

Technical Units will provide technical assistance/advise on legal, accounting, forensic valuation, audit, transfer pricing, data analytics or any other technical matter. Whether only department learned and eminent officials will be the part of such TUs or it will be open to other professionals who can become part of such units.

  • Transition lag in the re-assigning of the Department work-force

Now the Department is re-organizing its overall man-power and as per our understanding 2/3 of the total man-power will be shifted to handle the work of Faceless Assessments. What is the expected transition time which will be taken in this shifting after which the department will start to work in normal mode?

  • Way forward for other proceedings under Income-tax Act

What is the thought process of CBDT in bringing the penalty proceedings and other residual proceedings e.g. rectification, appeal effects, revision u/s 263/264 in faceless manner?

  • Presence of IT infrastructure for e-governance

Submission of 100% data electronically for scrutiny proceedings to the CBDT is a humongous task specifically in India where digital footprint has just started taking its place at a huge level. Even in COVID-19 situation where many industries are working from home, we are facing a lot of problem related to internet and networking issues. How the CBDT is planning to provide basic facility related to IT infrastructure to general assesses so that they should not face any issue related to e-communicate with the Department e.g. e-Mitra etc.

  • Procedural issues related to e-communication

– Minimum/maximum time in respect of replies to be filed by the assesses.

– Type of attachments and minimum/maximum size of uploading

– Call Centre/ Chat-box facility to ease-off any technical glitch faced by the taxpayer

– E-mail protocols – alternative email ids to be used in case of no response before invoking best judgment assessment

– Guidelines to avoid seeking vague information and unreasonable details

– Guidelines related to change of cases from limited scrutiny to completed scrutiny.

V. Conclusion

John Sculley has said that

“Innovation never came through bureaucracy or hierarchy. It has always come from individuals”.

FAS is the biggest structural reform in the ITD post-independence. The paradigm shift by the ITD needs a lot of tough decision just like implementation of it from a fixed date which can be taken by top individuals sitting at the top of the heap of bureaucrats and they have to drive the complete process to make it successful.

Change and innovation has to happen, and no one can stop it. Klaus Schwab has said in2016 at Davos conference that “Ultimately, the ability of government system and public authorities to adapt will determine their survival”

Discretion word will be word of past now, FAS will be completely system and process driven. It can be compared with the ITAT where there are different benches to provide their input and work as a team to take any decision. BUREAUCRACY develops more perfectly, the more it is dehumanized. The anonymous nature of the process will discourage high-pitched assessment and lead to objective, fair and just assessment orders which can be finalized in a very short time. Even though the amendment in the Scheme has been made effective immediately, migration of ongoing assessment proceedings in between may cause inconvenience for taxpayers. Filing of bulky submission through electronic mode may pose challenge before the taxpayer as well as the tax authorities as verification of such electronic files may not be an easy task. The success of the scheme will depend mainly on IT infrastructure development. CBDT has to work a lot on taxpayer education to provide smooth functioning of the Scheme.

Even though, the due date of passing of assessment order has been extended upto March 31, 2021 but looking at the herculean job which is with the CBDT to establish the system to implement the new process, this time period looks to be very short. There may be teething problem in implementing the scheme, but the success depends upon the persistence implementation and good governance.

“Life is not always perfect… there is always a possibility for a problem. The Problem is not the end but it’s is the beginning of a different life.”

(The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual)

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2 Comments

  1. ASHOK KUMAR B says:

    About FA, time to reply to notice u/s 143(2) is very less. At least 3 months may be given to think, get over the bombshell & prepare contact CA particularly in case ITR is prepared by tax payer himself.
    Secondly If no reply received from tax payer and assessment is done on best of judgement basis a chance may be given to tax payer to accept it only with interest due but no penalty

    1. Navneet says:

      It is good suggestion, however, 3 month is a long time. As per my understanding, there will be specific queries, not like earlier long questionnaire. Then 15 days time can be justified.

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