What is Income Tax?

Income tax is the taxable amount paid to the government for the income earned by individuals, businesses, and institutions within a jurisdiction, that enables the government to actively fulfill the public duty.

In India, The Income Tax Act 1961 encompasses the provisions that govern the income tax assessment.

Income Tax Returns (ITR)

An individual whose income for the financial year exceeds basic exemption limits files a statement to the income tax department containing information related to income and deductions, called income tax returns.

Income Tax Assessment

The income tax returns filed by individuals are scrutinized and reviewed by the income tax authorities at the end of every financial year, this is called income tax assessment.

In India, the income tax provisions have a structural flow of tax assessment, which must be adhered to by the individuals and the income tax department. The flow of assessments laid down by the income tax act are,

  • Self-assessment, section 140A
  • Summary-assessment, section 143(1)
  • Scrutiny-assessment, section 143(3)
  • Best judgment-assessment, section 144
  • Income escaping assessment, section 147

Understanding income tax assessment

  • Self-assessment:

    In self-assessment, the assessee must compute income tax returns on his own, calculating the income earned against loss incurred and other deductions. If the amount computed exceeds the tax deducted at source (TDS) or the advance tax, he must pay the outstanding amount before filing the income tax returns which is known as self-assessment tax.

    In simple words, self-assessment tax is the remaining amount the assessee must pay to the income tax department when the tax arrived at is exceeding the tax deducted at source TDS and advance tax.

    The excess amount can occur when the taxpayer acquires capital gains or any other income on which TDS is deducted at a lower rate but the taxpayer is coming under higher slabs. If the assessee files income tax returns without self-assessment tax, such filing will be considered void and subject to interest on account of nonadherence to provisions of the law.

  • Summary assessment:

    Summary assessment is the first stage of tax assessment where overview scrutiny will be conducted, no detailed scrutiny will be there to check plausible clerical errors such as,

    1. Mathematical miscalculations or arithmetical errors in the return.
    2. Incorrect claim
    3. Incorrect disallowance
    4. Errors occurring from form16, 16A, or 26AS.
    5. Disallowance of expenses u/s 10AA, 80 IA to 80 IE if the return is furnished beyond the due date specified u/s 139(1).

    No such adjustment shall be made unless an intimation is given to the assessee of such adjustment in writing or electronic mode.

  • Scrutiny assessment:

    An officer will be assigned to review the filings carefully and ensure that the computed tax liability is not under or overstated by the assessee. The objective of this assessment is to confirm that the taxpayer has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner. Detailed scrutiny will be conducted.

    In case, a mismatch is found in the submitted statement, the assessee could agree with the claim or if he has some dissatisfaction, he could appeal to the commissioner of income tax appeals (CITA) further to the income tax appellate tribunal (ITAT), high court or supreme court respectively.

  • Best judgment-assessment:

    In the best judgment assessment the assessing officer base the assessment on his best judgment i.e. he must not act dishonestly or capriciously. Best judgment assessment refers to a situation where the officer computes the tax payable as the assessee does not comply to provide or maintain necessary source documents or book of accounts to support the claim when requested to submit.

    In this scenario, the officer computes the tax liability based on his best judgment. The income tax act specifies certain situations under which the income tax officer can compute tax liability based on best judgment,

    1. When the assessee does not file an income tax return
    2. When the assessee does respond to the notice requesting submission of documents
    3. The response of the assessee has crossed the limit permitted by the central board of direct taxes (CBDT)
    4. When the officer is not satisfied with the documents provided.
  • Income escaping-assessment:

    When the assessing officer has reasons to believe that any income chargeable to tax has escaped assessment for a financial year, an income escaping-assessment will be conducted. In such case, the income tax department holds full authority to revisit and review 6 years’ tax filing, if the alleged amount is Rs. 1,00,000 or more.

    As per budget 2021, the time limit of opening the case has been reduced from 6 years to 3 years. However, for cases where concealment of income exceeds Rs.50L (Serious Tax evasion cases), cases can be opened for 10 years.

    Circumstances under which income is deemed to have escaped assessment are,

    1. When the assessee is found to have taxable income but has not filed income tax returns for the financial year.
    2. The submitted income tax return is under or overstated
    3. Failure to furnish information relating to international income
    4. Unaccounted overseas assets
    5. When the income of the assessee exceeds the tax exemption limit but has not filed income tax returns.

Penalty for non-filing of income tax returns

  • If the return is filed after the due date, then 3 scenarios will be there-
    1. If Gross Total Income is Rs.2.5 lakh or less then the penalty will be Nil.
    2. If total income is more than Rs.2.5 lakhs and up to Rs. 5 lakh then the penalty will be 1000.
    3. If the total income is more than 5 lakh then the penalty will be Rs.5,000.
  • As per the last budget, after 31st Dec, returns will not be filed, the penalty cannot be levied. However, for FY20-21, the last date of filing has been extended
  • When the date of filing u/s 139)(1) has been exceeded, the assessee will not be able to carry forward losses except for House Property Losses incurred for the financial year.
  • Pending for unpaid taxes would be chargeable 1% of tax liability for every month or part of the month until the payment of the amount. However, for FY20-21 the due date of filing ITR is 30th September but if self-assessment tax liability exceeds one lakh then tax needs to be paid before 31st July 2021 to avoid 1% interest u/s 234A.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.