Understanding income tax assessment u/s 143 with latest case laws:

 

 

An encounter with the Income Tax Department is usually fraught with stress to say the least. But hearing from the IT department need not always be a bad thing. Sometimes, you might be pleasantly surprised with news of some extra cash (with late fees) being refunded to you!

What to do when you receive an Income Tax notice?

A. First and foremost – keep calm and read the communication you received end to end. Work around the legalese and understand what exactly are they trying to tell you.

B. Check the basics

·         Is it really your name on the notice?

·         Is your PAN number mentioned correctly?

·         Which assessment year is it meant for?

·         Who is the issuing officer? What is their designation?

·         Is there a document identification number? What is it?

 

C. Figure out the discrepancy 

The new intimation format has 2 columns. Here’s what it looks like:

If a particular row shows different amounts in these two columns, that is the source of your discrepancy.

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When can you expect to hear from the IT department?

1. TDS Amount Error
The most common issue with returns filed is often a mismatch in the TDS amounts. Sometimes your employer or deductor may have delayed or made a mistake filing their TDS returns.

If that is the problem with your return too, request your employer to revise the TDS amount credited to you.

2. Discrepancy in Return Filed by you
If the discrepancy is with the amounts declared by you in the returns you filed, try to understand the difference. 

Differences may arise because:

·         You may have forgotten to declare some incomes, like Interest from FDs

·         You may have claimed a deduction under the wrong section

·         You may have provided incomplete information

Remember, these notices are generated automatically by the Income Tax Department’s software.

Sometimes you may have filed everything correctly to the best of your knowledge, but still may have received a notice. It’s always good to have an expert look at your notice.

3. Documentation
Sometimes the IT department would like to review certain documentation based on which your returns were filed. In case of such a request, furnish the said documents immediately.

4. Tax Returns Not Filed
In case the notice is to remind you that you have not filed your tax returns yet, do so without any delay. The IT department can remind you about unfiled returns for the previous 6 assessment years.

Delays in tax filing can sometimes lead to a penalty of up to Rs.5000 per year. If there are taxes unpaid in such cases of delayed filing, the assessee is charged 1% interest per month from the due date.

If you are not required by law to file a tax return, then reply to the IT department clarifying this fact.

 

5. Investments in the name of spouse
Many individuals resort to purchasing assets in the name of their spouse, children or other close family members in the hope of evading taxes. Assets in this case refer to any kind of investment like land, buildings, fixed deposits, mutual funds, shares, debentures etc.

Let’s say you bought mutual funds in your wife’s name. As per section 64 of the Income Tax Act, any income you generate out of these mutual funds is still considered your income and YOU will be taxed for it.

You need to ensure that you declare such income at the time of filing your return, else you will attract attention from the taxman and receive a notice for the same.

 

6. High Value Transactions
High value transactions need to be updated to the Income Tax department by the entity with which you carry out such a transaction. This is in order to ensure taxes are levied as required on each of these transactions in a timely manner. Failure to do so is an invitation for a tax notice.

What qualifies as a high value transaction?

·         Cash deposits in a bank worth Rs 10 lakh or more in a year

·         Credit card purchases of Rs 2 lakh or more

·         Mutual fund investments for Rs 2 lakh or more

·         Purchase of bonds and debentures worth Rs 5 lakh or more in a year

·         Sale or purchase of property worth Rs 30 lakh or more

7. Non-disclosure of assets for wealth tax
If you own assets whose net value is over Rs.30 Lakhs, you are liable to pay wealth tax at the rate of 1% of the amount that is above the Rs.30 Lakhs limit. If you do disclose such assets that you own or do not pay taxes on them, there is a good chance that you might receive an IT notice.

Assets can include anything from land, second homes, cars, yachts, gold jewellery, antiques, art etc. If you are unsure about the exact value of the assets you own, you can approach government approved valuers for this purpose.

8. Random Scrutiny
To enforce tax compliance, the IT department has started randomly scrutinizing returns under section 143 (3). If you receive such a scrutiny notice, don’t panic. Just follow these simple steps:

1.    Check the validity of the notice as well as the duration within which you have to respond to the Assessing Officer. Usually, a scrutiny notice is served to the assessee within a period of 6 months from the end of the financial year. Very rarely, notices related to older cases are also sent under section 148, if the Assessing Officer finds genuine reason to do so.

2.    Make multiple copies of the notice received

3.    Submit documents requested along with a cover letter listing all the documents to the Assessing Officer

4.    Request for an acknowledged copy of the cover letter from the Assessing Officer for your own records

5.    If the notice is regarding your old dues, they can be adjusted against any pending refund claims made by you for a current year.  

 

Now let us understand the section with the given below-mentioned latest case laws. 

 

·         Assessing Officer initiated reassessment proceedings and made addition to assessee's income based on a  sales tax assessment order which was restored back by the Sales Tax Appellate Tribunal. The Tribunal  found that no authenticated document providing information was collected from car manufacturer, nor  was same furnished to assessee nor assessee was given opportunity of cross examining the officer. The  High Court upheld the order of the Tribunal holding that where an assessee was not provided with opportunity to cross examine person providing information that lead into addition to income, and hence  fresh adjudication was required.   Refer, Panchvati Motors (P.) Ltd. .v. ACIT, 220 Taxman 39.

 

·         Fact that case is selected for scrutiny under CASS does  not mean s. 143(2) notice & assessment order are void for non-application of mind by AO. Refer, U.P. State Industrial Development Corp. (UPSIDC) v. DCIT, Lucknow ITAT.   

 

·         AO after recording reasons and approval of authority case was selected for scrutiny. The assessee filed writ petition, dismissing the petition the Court held that there was no violation of CBDT’S guidelines for selection of cases. Refer, Ajay s/o Shantilal Lalwani, 270 CTR 588.

 

·         Estoppel Assessment on amalgamating  company is a nullity- U/s 170(2) assessment has to be on successor-Mistake cannot be cured u/s 292BB, participation by amalgamating company is irrelevant as there  is no estoppel against a  statute.[S. 143(2),153A,153C,170, 176,292B,Companies Act, S.481]. Refer, CIT .v. Dimension Apparels Ltd, Delhi HC.

 

·         The Court held that there was failure to issue notice of hearing before making best judgment assessment  and concurrent finding that assessment ante-dated and time barred. Court held that conclusion reached by Tribunal based on appreciation of pure questions of fact.Appeal of revenue was dismissed. Refer, CIT .v. Amarchand Sharma and Udani, 364 ITR 203.

 

·         Notice u/s. 143(2) is necessary, where for any reason the AO repudiates the return field by the assessee in response to the notice u/s. 158BC(a) relating to the block assessment sec. 292BB is a rule of evidence, and not a rule which dispenses with the requirement of giving notice under the Act. In the absence of notice u/s. 143(2) assessment under s. 158BD/158BC was not sustainable. Refer, CIT v. Parikalpana Estate Development (P) Ltd, 79 DTR 246.

 

·         On a writ petition by the assessee, a public sector undertaking, for quashing of intimation u/s. 143(1)(a) of the Act, and also for quashing the consequential orders. It was held, that if the AO wanted to disallow any expenditure for want of proof, he should have issued notice and called for the evidence for deciding the question. The A.O. could not have made the addition for want of documents. The adjustments made were not covered by the scope of Sec. 143(1)(a). Refer, Indian Drugs and Pharmaceuticals Ltd v. UOI, 349 ITR 32 .

 

·         The assessee sold agricultural land for Rs. 1.20 crore and deposited the cash proceeds in his bank account. He filed a return in which the transaction was disclosed and claimed to be not chargeable to tax. However, as the sale deed showed the transaction at Rs. 22 lakh and because the purchasers claimed that the sale value was only Rs. 22 lakh, the AO treated the difference of Rs. 97.80 lakhs as income from undisclosed sources. The AO admitted that the evidence produced by the assessee to show that the land was in fact worth Rs. 1.20 crore and that he had in fact received the said sum from the purchasers prima facie supported the version of the assessee though he still made the addition. The CIT(A) upheld the stand of the AO though the Tribunal reversed it on the ground that the evidence on record showed that the assessee had offered the entire sale proceeds and that the purchasers had sought to undervalue the land. On appeal by the department to the High Court HELD dismissing the appeal: 

 

The assessee is an honest citizen who deposited the entire amount in the bank and voluntarily filed return. He also made a complaint to the registering authority that the sale deed has been registered at a value much below the amount actually received. The other evidence produced by the assessee was more than sufficient to discharge the burden which the AO had unreasonably placed on the assessee. The ITO did not act in a bonafide manner. He discarded the overwhelming evidence led by the assessee without giving any reasons at all. The assessment was framed only on the ipse dixit of the AO which gives us reason to believe that he had exceeded his authority with some ill will or with ulterior motive. The CBDT should cause an enquiry into the conduct and motives of the ITO in framing the assessment and raising demand of income tax against the assessee.   Refer. CIT v. Intezar Ali, ITA Appeal 162 of 2013 dt. 26.07.2013.

  

·         Revenue authority has to afford an opportunity of hearing to assessee in accordance with law, before  proceeding to pass an assessment order. Where notice under s. 143(2) was dispatched to assessee only  after date fixed for hearing, there was denial of reasonable opportunity of hearing to assessee and, in such a case, impugned order passed by revenue authority was not sustainable as it violated principles of natural justice.  Refer, Green Power Realtors (P.) Ltd. v. DCIT, 216 Taxman 169.

 

·         Revenue authority has to afford an opportunity of hearing to assessee in accordance with law, before  proceeding to pass an assessment order. Where notice under s. 143(2) was dispatched to assessee only  after date fixed for hearing, there was denial of reasonable opportunity of hearing to assessee and, in such a case, impugned order passed by revenue authority was not sustainable as it violated principles of natural justice. Refer, Green Power Realtors (P.) Ltd. v. DCIT, 216 Taxman 169 (Mad)(HC).

 

·         Tribunal was of the opinion that though the purchases might have been made from bogus parties, the  purchases themselves were not bogus. Held not the entire amount, but the profit margin embedded in  purchases would be subjected to tax and not entire purchase price.  Refer, CIT v. Bholanath Poly Fab Pvt. Ltd, 355 ITR 290 (Guj.)(HC).

 

·         The assessee, after examining the assessment record, had confirmed that the Assessing Officer had signed the original assessment order. Further, the "notice of demand" served upon the assessee bore the signature of the Assessing Officer. Hence, the absence of his signature in the copy of the assessment order would not vitiate the assessment. Refer, Mampilly Antony (Dr) v. DDIT(IT), 25 ITR 91 (Cochin)(Trib.).

 

·         If records are available with the Department and the assessee points towards it, the authorities must verify that evidence and decide allowability. Refer, Russian Technology Centre P. Ltd. v. DCIT, 25 ITR 521 (Delhi) (Trib.).

 

·         Taxation principles are enshrined in the Legislature. Power to legislate lies with Parliament. Accounting standards or Guidance Note or Guidelines, by whatever name called, issued by any autonomous or even statutory bodies including the Institute of Chartered Accountants of India, or for that matter, the SEBI are meant only to prescribe the way in which the transactions should be recorded in books or reflected in the annual accounts. These guidelines do not have the force of an Act of Parliament. Refer, Biocon Ltd. v. DCIT (LTU), 25 ITR 602 (SB)(Bang.)(Trib.).

 

·         The High Court held that by virtue of the amalgamation sanctioned by the High Court, the transferor company no longer survives and hence the question of assessing such transferor company for the purpose of income tax would not survive. Refer, Khurana Engineering Ltd vs. DCIT, 217 Taxman 75 (Guj.) (HC).

 

·         There is nothing in law which prevents the A.O. in an appropriate case from taxing both the sundry  credits, the source and nature of which are not satisfactorily explained, and the business income  estimated by him after rejecting the books of account of the assessee as unreliable.  Matter remanded to the Tribunal with as direction to examine the identity, creditworthiness and  genuineness of the transactions of the sundry creditors. Refer, CIT v. G. S. Tiwari and Co, 357 ITR 651 (All)(HC).

 

·         Assessment framed under section 143(3) read with section 147 without issue of notice under section  143(2) is invalid.  Refer, ITO .v. D. D. Ahuja and Brothers, 28 ITR 551

 

·         Omission on the part of the Assessing Officer to issue notice within stipulated time in case of search  was fatal and not curable. Refer, DCIT .v. Shrikant Rathi, 28 ITR 576.

 

·         The assessee had filed revised return and since no notice u/s.143(2) on revised return had been issued  by the A.O., the assessee held the assessment order as null and void. The Tribunal held since  Assessing Officer framed assessment order on basis of original return of income filed and in which  notice u/s. 143(2) had been validly issued, there was no need to issue any further notice u/s. 143(2) on  revised return filed, which was also not taken into consideration and the assessment order passed was  therefore a valid one.  Refer, ACIT .v. Uday Bhagwan Industries, 145 ITD 401.

 

·         Last day of  service being postal holiday, the notice was served on next day-Notice was held to be valid.  [S.143(2)]. Refer, Gujarat State Plastic Manufacturers Association .v. DDIT, 359 ITR 516.

 

·         The expressions "serve" and "issue" are interchangeable, as has been noticed in section 27 of the  General Clauses Act, 1897, and also in a judgment of the Supreme Court in Banarsi Devi .v. ITO  [1964] 53 ITR 100 (SC).Held, that the notice which was served by affixture on the last day of  limitation was valid. Refer, V. R. A. Cotton Mills P. Ltd. .v. UOI, 359 ITR 495.

 

 

 

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