When a taxpayer fails to file a tax return or disclose his correct taxable income, he is issued with a tax demand. This is because tax authorities have information that indicates that the taxpayer has more income than he has offered to tax. This is possible even if the tax return was earlier assessed, and the assessment was closed. Such proceedings are called reopening of assessment or reassessment proceedings.
In Budget 2021, the time limit for reopening of assessment was halved from six years from the end of the assessment year, to three years. This was barring those cases where the income that had escaped tax and represented by an asset exceeded Rs 50 Lakh, in which case, the time limit would be 10 years. The reopening was required to be based on information available with the tax officer as against ‘a reason to believe’ provision earlier.
In Budget 2022, it has now been clarified that information obtained under the Tax Information Exchange Agreement with other countries, consequential impact of a Tribunal/ court order etc., would also constitute ‘information available with the Assessing Officer’.
Further, besides the income represented in the form of an asset, the income, which is represented by way of expenditure in respect of transaction/event/occasion, or by way of entry in the books of account, and which amounts to more than Rs 50 lakh, and which cannot be explained, and which suggests that the income chargeable to tax has escaped assessment, such income can also attract a notice anytime within the 10-year period.
For example, expenses on weddings, events or assets, where the investment made is above the prescribed level, would fall within the purview of this provision. Further, where this threshold is below the prescribed limit of Rs 50 lakh in a year, but exceeds the threshold when considered collectively across the years, then the assessment for each such year can also be reopened, despite it being lower than the given limit in each year.
Accordingly, a return filed and accepted under Section 143(1) or even in a regular assessment u/s 143(3) may not attain finality, and the tax authorities, based on the information available with them, can reopen the assessment within that time.
It is, therefore, important that all sources of income are considered, and the source of funds for all assets acquired and expenses incurred during the year are taken into account while filing one’s income tax return.
Earlier, the taxpayer could file a revised income tax return by 31 December of the assessment year that is, within nine months of the end of the financial year, to rectify any error or omission. He could file a belated return by 31 December following the end of the financial year. If this deadline was missed, there was no further recourse to rectify the return and avoid the penalties ranging between 50 per cent and 200 per cent of the tax amount for under reporting and misreporting of income.
Budget 2022 introduced the concept of filing an updated tax return, which permits a taxpayer to update his tax return, or, if he did not file a tax return, to file the return up to within three years from the end of the relevant financial year. To file an updated tax return, one has to pay an additional tax over and above the regular tax of 25 per cent of the tax (including surcharge and cess) and interest, if the return is filed within two years from the end of the financial year, and 50 per cent, if the updated return is filed between 24-36 months from the end of the financial year. Taxpayers could explore this option for FY 2019-20 and onwards. The Income Tax Department has recently notified a new form, Form ITR-U, to be used for filing an updated tax return.
An updated return cannot be filed to set off losses incurred against the income, in an updated return or to claim additional refunds. The option of updated return can be availed only if the return has not been selected for scrutiny. In case of search or survey proceedings, an updated tax return cannot be filed for the relevant financial year and the preceding financial year.
While it is best that the tax return filed is complete in all respects, if any omission in the return surfaces after the window to revise the return is closed, the taxpayer can use the updated tax return route to declare additional income and pay additional taxes, so as to avoid the rigors of reopening the assessment and the ensuing penalties and litigation.