Income Tax Assessment: Meaning And Types
Every financial year, it is mandatory for individuals who earn above the basic exemption limit to file Income Tax Returns (ITR). By filing ITR, taxpayers in India make the government aware of their income, deductions, and other earnings-related information. Once the Income Tax Department obtains this information, they process it and examine the accuracy of the details. This process of scrutinising one’s income details by the income tax authorities is called income tax assessment.
Read on to know how income tax assessment works and its types.
What is Income Tax Assessment?
In India, the basic exemption limit under the new tax regime is Rs. 2.5 lakh for individuals up to 60 years of age. Thus, if any individual or entity earns more than 2.5 lakh, they have to file income tax returns by self-calculating the amount they earned in the past financial year.
After taxpayers fill in their income details diligently, it goes for assessment. Hence, income tax assessment is a post-filing procedure that helps the authorities decide whether the details provided by taxpayers are legitimate or not.
Types of Income Tax Assessment
For the Assessment Year 2020-21, more than 8 crore Indians have paid income tax. Considering India’s population, it is vital to maintain a structural flow while assessing the income and deduction details of taxpayers. Hence, the Income Tax Act has categorised assessment into the following types:
- Section 140A: Self-Assessment
When taxpayers calculate their total taxable income by themselves, it is known as self-assessment. Under this mechanism, assessees have to calculate their income from various sources, adjust it against losses and deductions, and pay the tax applicable.
Furthermore, they have to reduce any advance tax or TDS amount paid by them before computing their taxable income. Thus, self-assessment tax is an amount over and above TDS and advance tax. The payment of this tax should take place within July 31 of every year by filling Challan No/ ITNS 280.
- Section 143(1): Summary Assessment
Under this mechanism, assessment is done without human intervention by cross-checking information provided by assesses with details stored by the Income Tax Department. Through summary assessment, one can spot clerical errors and inconsistencies in the ITR.
However, this is an initial stage of assessment that helps in summarising any arithmetical errors, incorrect claims or disallowances. Thus, this process is carried out before the Income Tax Department sends an intimation letter to taxpayers for refund, error, or adjustment.
- Section 143(3): Scrutiny Assessment
Now we move on to detailed scrutiny of Income Tax Returns filed by taxpayers. An Assessing Officer (AO) performs the role of conducting an inquiry and ensuring the correctness of income details provided by assessees.
Furthermore, for a thorough examination, an AO can demand the books of accounts or certain documents. The aim is to verify that there is no disparity between income earned and tax paid. Thus, an AO analyses whether taxpayers have understated their income or overstated the losses.
If there is a mismatch, an assessee can pay the extra amount or accept refunds. However, if taxpayers are dissatisfied with the assessment, they can appeal to higher authorities or apply for recitation under Section 154.
- Section 144: Best Judgement Assessment
This type of assessment takes place only under circumstances in which a taxpayer fails to cooperate with the IT department. In these cases, an AO has to compute the tax liability of an assessee with the best judgement in mind, without dishonesty.
Best judgement assessment takes place when:
- Assesses fail to respond to multiple notices issued by the Income Tax Department instructing them to provide certain documents or books of accounts.
- Taxpayers do not file income tax returns for the financial year within the due date specified by Central Board of Direct Taxes (CBDT).
- Taxpayers fail to comply with special audits or written requests ordered by the Income Tax Department.
- Assessees do not maintain proper books of accounts.
- AO is unsatisfied with the documents or information provided by an assessee.
After hearing an assessee’s argument, an AO passes an order based on relevant documents and information known as best judgement assessment.
- Section 147: Income Escaping Assessment
When an Assessing Officer believes that a taxpayer’s income has escaped assessment, he/she has the authority to order a reassessment. With sufficient reasons, an AO can reopen a case dating back to 3 years if the amount is more than Rs. 1 lakh. That said, if an assessee conceals income of more than Rs. 50 lakh (serious tax evasion), an AO can reopen a case as old as 10 years.
The circumstances under which reassessment takes place are as follows:
- An assessee’s income is taxable, but ITR is not filed
- The assessee filed ITR but understates income or overstates losses or deductions
- When taxpayers do not furnish reports on international transactions
The duration of reassessment varies according to how gravely an income has escaped the initial assessment.
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Final Word
Income tax assessment is vital for the smooth and effective functioning of the Indian taxation system. To avoid a delay in receiving income tax returns, one should avoid any type of assessment in front of an AO. Furthermore, taxpayers should pay close attention to the various types of assessments and file ITR accurately.
FAQs on Income Tax Assessment
If taxpayers fail to file their ITR within the due date (usually July 31), they will have to pay a late filing fee of Rs. 5,000. For those with an annual income between Rs. 2.5 lakh and Rs. 5 lakh, the fee is Rs. 1,000. That said, if an assessee misses the last date as well, a penalty fee of Rs. 10,000 applies to them.
An Assessing Officer is an income tax officer who has the authority to conduct assessments of income details submitted by taxpayers. This officer is appointed by the Central Board of Direct Taxes to assess or reassess taxable income, which does not follow the determined guidelines.
Individuals or entities who earn not less than Rs. 2.5 lakh and not more than Rs. 5 lakhare subject to an income tax rate of 5%. However, under Section 87A, they can avail tax rebate that makes their income tax-free. Nonetheless, these individuals do have to file ITR.
An income tax notice is a written communication that notifies an assessee when an assessing officer picks their ITR for scrutiny. If taxpayers receive this notice, they should respond to it quickly and submit the documents requested.
Scrutiny assessment is when an AO decides to conduct a detailed analysis of one’s ITR. The time limit for sending a notice to the assessee under Section 143(2) is six months from the end of the relevant financial year.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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