Income Tax Assessment Procedure

Ascertaining total income is one major task of the procedure involved in levying tax on an assessee.  The task of assessing the income returned and determination of tax liability is called ‘assessment’.  The term ’assessment’ has been used in the Income-tax Act meaning differently contexts.  In certain situations, it refers to computation of income, sometimes to the determination of tax payable and in some cases to the whole procedure laid down in the Act of imposing tax liability on assessee.

Assessment of income relating to one Financial Year (FY) starts in the succeeding financial year, which is called Assesment Year (AY). Income tax assessment procedure begins when an assessee files his return of income to the income tax department.

Filing of return [Sec 139 (1)]

A person has to file return of income in the prescribed form within the specified time limit if his total income exceeds the maximum non-taxable limit. A person other than a company though income is less than the nontaxable limit, who satisfies any one of six economic criteria and residing in a specified area.

  1. Ownership of a motor vehicle other than a two wheeler
  2. Occupation of any category of immovable property as may be notified by the CBDT
  3. Incurred expenditure on foreign travel by himself or in respect of any other person. Travel to Bangladesh, Pakistan, Bhutan, Nepal, Maldives, Sri Lanka and Saudi Arabia for hajj or china on pilgrimage to Manasarover are excluded.
  4. Holder of a credit card other than an add on card
  5. Member of a club where entrance fees charged is Rs.25000 or more
  6. Expenditure of Rs.50000 or more during the PY towards consumption of electricity.

Time of filing of return

  1. In the case of a company, due date of submission is October 31
  2. In the case of person other than a company
  3. Where audit is compulsory, due date of filing return is October 31
  4. In any other case, the due date of filing of return is July 31

Return of loss [Sec 139 (3)]: Return can also be filed in the prescribed form in respect of loss suffered by the assessee. It is not compulsory to file a return of loss, but certain losses can be carried forward only on filing return of loss

Belated return [Sec 139(4)]: If the return is not furnished within the time, the person may furnish the return of any PY at any time before the end of one year form the end of the relevant AY or before making assessment whichever is earlier. An assessee who files belated return are liable for penal interest

Revised return [Sec 139(5)]: If after filing a return of income or in pursuance of a notice the assessee discovers any omission or wrong statement in return originally filed, he can file a revised return. It should be filed within one year from the AY or before the completion of assessment whichever is earlier.

Defective return [Sec 139(9)]: Where the AO finds that the return filed by an assessee is defective he should intimate the assessee about the defect and give him an opportunity to rectify the defects within 15 days from the date of intimation or within such further extended time as the AO may allow. If the defect is not rectified within the time allowed, the return will be treated as invalid and it will be deemed that no return has been filed by the assessee attracting penal interest

Types of Income Tax Assessment

  1. Self assessment [Sec 140A]: When a return is furnished the assessee will have to pay tax, if any payable on the basis of return. He has also to pay interest up to the date of filing the return along with self-assessment of tax. The return of income is to be accompanied by proof of payment of both tax and interest. Assessing officer may make an enquiry for getting full information in respect of assesse’s income. The assessee shall be given an opportunity of being heard in respect of any material gathered on the basis of any enquiry so made. The assessing authority may also direct the assessee to get his accounts audited by an accountant nominated by chief commissioner, even if the accounts of the assessee have been audited under nay other provision.
  2. Summery assessment [Sec 143(1)]: If on the basis of return filed, any tax or interest is due the A.O shall send intimation to the assessee specifying the sum so payable. If any refund is due on the basis of such return it shall be granted to the assessee. Such intimation shall be deemed to be a notice of demand. Such an intimation should be send before the expiry of 2 years from the end of the AY in which income was first assessable
  3. Assessment in response to an order [Sec 143(2)]: Assessment of income after receiving a notice from income tax authorities is called assessment in response to an order. A.O   can send notice if he considers it necessary to ensure that the assessee has not understated the income or has not underpaid tax. After hearing such evidence as the assessee may produce in response to the notice and after taking into account all relevant materials, which the A.O has gathered, he shall pass an assessment order in writing determining the total income of the assessee and the sum payable or refund due to the assessee on the basis of such assessment order.
  4. Best Judgment Assessment [Sec 144]: In the following situation the A.O can make a best judgment assessment after considering all relevant materials, which he has gathered. (1) if the assessee has not filed a return or a belated return or a revised return, (2) if he fails to comply with the terms of the notice or fails to comply with the direction to get his account audited, (3) if he fails to comply with the terms of the notice  requiring the presence or production of evidence and documents and (4) if the A.O is not satisfied with the correctness or completeness of the accounts of the assessee. The best judgment assessment can be made only after giving the assessee a reasonable opportunity of being heard. Assessee has a right to file an appeal or to make an application for revision to the commissioner.
  5. Income escaping assessment or reassessment [Sec 147]: If the AO has reason to believe that any income chargeable to tax has escaped assessment for any AY he may assess or re assess such income. If an assessee has not furnished a return of income although total income is above the taxable limit or where a return of income has been made but assessee is found to have understated his income where an assessment is made but income chargeable to tax has been under assessed, reassessment can be made.

Rectification of mistakes [Sec 154]

The AO may amend any order passed by it or amend nay intimation sent by it if he finds that a mistake apparent from record is made. This is called rectification of mistake. Where a rectification has the effect of enhancing tax liability or educing the refund, the AO is required to issue a notice of its intention to do so the assessee and give the assessee a reasonable opportunity of being heard. Rectification of mistakes may be made either on it’s own motion or on the application of the assessee. Rectification can be made only within 4 years from the end of financial year in which the order sought to be rectified was passed.

Permanent Account Number (PAN)

This is number allotted by income tax department to a person who files return of income. Every person whose taxable income exceeds Rs.1,50,000 or Rs.1,85,00(for women assessee )or Rs.2,25 ,000(for senior citizen) during an accounting year is required to obtain PAN. Every person who has been allotted PAN should quote such number in all his returns or correspondence with income tax authorities, quote such number in all challans for payment of any sum, quote such number in all documents pertaining to such transactions as may be prescribed by the board. New series of Pan contains ten alphanumeric characters and is issued on a laminated card.

Persons who should have PAN compulsorily:

  1. Exporter or importer
  2. Assessee under the Central Excise Act
  3. Service tax assessee
  4. Persons registered under the CST Act or value added tax act
  5. Any employer who is required to file return of fringe benefits

Important point related with PAN

  1. PAN should be quoted in all correspondence to income tax department
    1. Any person who is receiving any sum of money or income on which TDS is to collected have to furnish the PAN to the person who is responsible for deducting TDS
    2. Persons who do not have a PAN should furnish Form60 while entering into any of the specific transactions
    3. If person fails to apply for PAN or to quote PAN in specified documents or transaction is liable to pay a  penalty of Rs.10,000/

Tax Planning

Tax planning refers to paying minimum amount of tax after legally utilizing the available deductions, exemptions, rebate and relief provided by the income tax department. Tax planning is in the hands of the tax payer. Tax planning is legal in nature and is entirely different from tax evasion and tax avoidance. Tax evasion is one where the assessee makes a false claim of his income to reduce or escape tax liability. Tax avoidance is one where the assessee tries to reduce his tax liability by taking advantage of some provisions or some of the loopholes in the tax law. A person who has avoided tax is not liable for any penalty.

Tax Holiday

If an assessee is permitted or given exemption for not to pay tax for certain number of year/ years then that particular year or years will be termed as Tax holiday. The following are the some of provisions mentioned by income tax department regarding tax holidays.

  1. 100% export oriented units       10 year tax holiday is allowed for 100% of the income.
  2. For newly established industrial undertaking in Free trade zones , electronic hardware technology park, software technology park or special economic zone- 10 year tax holiday is allowed for 100% of the profits(except for SEZ)

For SEZ the deduction is as follows

a)      For the first 5 years                       100% of export profit

b)     For the next 2 years                       50% of export profit

c)      For the next 3 years                       50% of export profit

E-Filing

Any return of income submitted through electronic media is E-filing . Under E-filing the following three concepts can be dealt

Filing of returns on computer readable medium

A person who is to furnish return of income can submit his return of income on or before the due date in the prescribed manner in any of the following methods

  • Floppy
  • Diskette
  • Magnetic cartridge
  • Tape
  • CD
  • Any other computer readable media

Electronic furnishing of return of income scheme, 2004

An assessee at his option can furnish his return of income to an e-return intermediary who in turn will digitalise the data and transmit the same electronically to e-return administrator on or before the due date.

Furnishing of return of income on internet scheme, 2004.

An assessee having PAN and who has income from salary but does not have income from business and profession and who is assessed in a specified city may furnish his return under this scheme at his option before the due dates of return

FRINGE BENEFIT TAX

The finance act 2005 has introduced fringe benefit tax from the AY 2006-07. it is taxed in the hands of the employer. Fringe benefit tax is charged @ 30% plus surcharge if any and an educational [email protected]%. It is taxed even if the employer does not have a any taxable income. Fringe benefit tax cannot be claimed as a deduction while computing total income.  Fringe benefit means privilege, service, facility or amenity directly or indirectly provided to employee. Fringe benefit also includes entertainment, festival celebration, gifts, scholarships, health clubs and other similar facilities. Telephone including mobile phones, use of hotel, tours and travels etc.

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