To clarify income tax assessment in India, the law that can be used is the Income Tax Act 1961. Fund assessment deals with the evaluation done on returns that the Income Tax Department applies to individuals and firms.
Today, there are different types of income tax assessments, and each of them has its own specific function.
These types are essential for taxpayers and other tax practitioners to avoid any legal or financial conflicts. In this post, we will explore all the top 7 types of assessment in income tax in India under Indian laws.
What is the Income Tax Assessment?
Types of assessment in income tax are organized checks conducted by the Income Tax Department to verify taxpayers’ income declarations, allowable deductions, and the amount of tax payable. every types of assessment in income tax ensures accurate evaluation and accountability in the tax system.
The goal of these types of assessment in income tax is not only the collection of revenue but also the promotion of a fair taxation system in society.
Understanding these assessments can help taxpayers discharge their responsibilities effectively and manage any notices they may receive in an appropriate manner.
What is the Overview of the Top 7 Types of Assessment in Income Tax?
Under Indian income tax law, Top 7 Types of Assessment in Income Tax are classified based on their purpose and level of scrutiny:
- Self-Assessment
- Summary Assessment
- Investigative Assessment
- Best Judgement Assessment
- Income Escaping Assessment
- Assessment in Case of Search
- Protective Assessment
They are of different types, and each has its own requirements and steps, which we will discuss below.
Self Assessment (Section 1540A)
Definition and Purpose
Self-assessment is the basis of the tax filing process, it is the process in which the taxpayer, without the help of professional tax preparers, estimates his tax liability before filing his income tax return. It depends on the honesty and accuracy of assessing the balance of income, deductions, exemptions, and tax payable.
Key Features
- Objective: Enables taxpayers to assess and pay taxes.
- Procedure: Taxpayers are expected to work out and calculate taxes, ensure the validity of deductions on their income, and get the taxes calculated. The existing unpaid tax has to be paid before filing the return for the previous year.
- Timelessness: Non-payment on time attracts interest under sections 234A, 234B, or 234C of the Income Tax Act.
Example Scenario
Let us take the example of a person who holds a salaried job and is eligible for tax on the income earned after deductions. This is a method in which the person calculates the amount of tax he needs to pay and pays it before filing his ITR.
Self Assessment (Section 1540A) is the 1st assessment among the Top 7 types of assessment in income tax and also a very important one.
Summary Assessment (Section 143(1))
Definition and Purpose
Summary assessments are one of the types of assessment in income tax conducted without human intervention, programmed by the Central Processing Centre (CPC). This type of assessment is informal and checks the reliability of the information reported. The CPC matches the details entered in the ITR with those in their records, identifying discrepancies in calculations, tax compliance, and other related data. Among the various types of assessment in income tax, summary assessments help ensure quick verification of tax returns.
Key Features
- Objective: Helps to verify the mistakes made in the returns filed to reduce cases of tax fraud.
- Process: It flags any discrepancies; correct taxes are calculated, and discrepancies in the declared income or deductions are claimed and made.
- Response Time: The taxpayer is notified under a notice, and even, if any discrepancies are found, the taxpayer gets an opportunity to rectify or give clarifications.
Example Scenario
A taxpayer prepares an ITR in which he declares deductions in excess of the maximum amount allowed under a particular section. Some CPCs note this disparity and revise the total tax amount payable before sending another notice to the taxpayer with the changes.
Summary Assessment (Section 143(1)) is the 2nd assessment among the Top 7 types of assessment in income tax and also a very important one.
Scrutiny Assessment (Section 143(3))
Definition and Purpose
Scrutiny assessment is a comprehensive scrutiny of tax returns to ensure that the taxpayer has correctly disclosed his income and is entitled to the allowances he is entitled to. If doubts arise in the return, such as due to certain high-value transactions or discrepancies pointed out during summary assessment, the Income Tax Department initiates a scrutiny assessment.
Key Features
- Objective: To ensure accurate tax reporting through detailed scrutiny.
- Procedure: The taxpayer is issued a notice under section 143(2) and is required to submit evidence of the income, deductions, and other calculations being claimed.
- Selection Criteria: The scrutiny assessment is usually done on samples using risk profiling, suspicious transactions, or purely at random.
Example Scenario
If a person is released on bail and has declared huge investments, the source of his income comes under question. An inquiry assessment is initiated to confirm the source of funds used for such investments.
Importance for Taxpayers
So in the process of scrutiny assessment, taxpayers need to submit well-supported documents and records. All the receipts, bills and other supports for the deductions and expenses claimed also need to be retained.
Scrutiny Assessment (Section 143(3)) is the 3rd assessment among the Top 7 types of assessment in income tax and also a very important one.
Best Judgement Assessment (Section 144)
Definition and Purpose
Best judgment assessment is relevant when the taxpayer either does not respond to the assessment notice or when he provides insufficient information. Here the tax officer works with the gross income or estimates it through the information available during assessment.
Key Features
- Objective: It allows completion of assessment in a situation where the taxpayer is non-responsive or uncooperative.
- Procedure: The estimated taxable income is based on the officer’s reasonable assumptions, account records, and past and other documents.
- Applicability: It is a standard practice where, for example, the taxpayer fails to cooperate, or where the information submitted is deemed to be inadequate.
Example Scenario
A business owner fails to submit the required bills for the expenses he wants to claim. The assessing officer then arrives at the income by applying assumptions derived from past returns or average industry revenues.
Best Judgement Assessment (Section 144) is the 4th assessment among the Top 7 types of assessment in income tax and also a very important one.
Income Escaping Assessment u/s 147
Definition and Purpose
Income Escaping Assessment administered under section 147 is done when the tax officer believes that some income was not declared or the income included at the time of assessment was minimal. The purpose of such a review is to identify additional sources of income that were not included in the previous tax return so as to get a complete figure of the taxable person’s liabilities.
Key Features
- Objective: An attempt is made to bring all undetected income under tax to reduce loopholes in tax calculation.
- Procedure: The tax officer sends a notice to the taxpayer so that the taxpayer can submit reasons or corrections in respect of other incomes that have not been reviewed for assessment. Reassessment is usually done for the last four years, but if there is some significant hidden income, the use of six years is allowed.
- Legal Protection: This is where the tax officer needs genuine reasons to initiate an income-evading assessment, this can come from new information, external complaints, or third parties informing the tax office that the person under assessment has under-declared income.
Example Scenario
For example, if a taxpayer has deposited a fairly large amount in his account, and this amount has not been taxed as income while the assessment was done, and then the officer finds out the above problem, they can proceed for reassessment. The taxpayer is then in a position to support the income sources or pay the due tax related to it.
Importance for Taxpayers
Taxpayers are required to provide documented reports of all monies received to preclude any possibility of a review under Section 147. This means that responding on time with documented explanations will reduce the time taken for an investigation.
Income Escaping Assessment u/s 147 is the 5th assessment among the Top 7 types of assessment in income tax and also a very important one.
Assessment in Case of Search u/s 153A
Definition and Purpose
Section 153A deals with the assessment of income in search cases where the Income Tax Department conducts search operations called ‘raids’. The main purpose of this assessment is to establish under-reported income, known as fictitious income in this case, undisclosed assets or investments. It is used when the search reveals a lot of hidden information about income.
Key Features
- Objective: To check unreported income and other assets discovered during the search.
- Procedure: When a search is conducted, the assessing officer gives notice to the taxpayer to file returns for the past six years including the current year. These returns are then assessed based on the information gathered in the search process.
- Scope: If an assessment was made earlier or has been done and closed, then reassessment is required for the revenue year for the past six years under section 153A. This means that the officer can check any income that has never been reported or has been reported incorrectly.
Example Scenario
For example, the Income Tax Department might want to search the premises of a businessman to nab him for holding undisclosed foreign income and/or assets. The assessment under Section 153A was to cover the current year and the previous six years and enabled the authorities to levy tax on any income or assets that were not disclosed during the search.
Importance for Taxpayers
In search cases, the assessment highlights concerns regarding the completeness and accuracy of disclosures about income and assets. Those who keep their accounts well updated and make clean declarations can avoid such assessments and the associated penalties.
Assessment in Case of Search u/s 153A is the 6th assessment among the Top 7 types of assessment in income tax and also a very important one.
Protective Assessment
Definition and Purpose
Protective assessments may be eligible for an area where the true recipient of certain income is unknown or suspected for one reason or another. Assessments are done on a protective basis so that companies do not lose any potential revenue, hence the need for legal methods to reclaim ownership.
Key Features
- Objective: Tax protects income when ownership of a particular matter is in question.
- Procedure: Tax is imposed with the assumption that other adjustments should be made when the ownership position is known from a legal point of view.
- Applicability: Used in a situation where there are more parties seeking compensation or where the law has not clearly defined the ownership of income.
Example Scenario
For example, suppose a company’s income is disputed by multiple entities. Protective valuation is used to protect against tax risk while the legal owner is being confirmed in court.
Protective Assessment is the 7th assessment among the Top 7 types of assessment in income tax and also a very important one.
If you want to see more about the types of assessment in income tax then you can click on the below video.
Also Read: Objectives of income tax
What are the Practical Implications for Taxpayers?
Understanding the types of assessments can provide the following benefits to taxpayers:
- Quick Response: Such information enables taxpayers to deal appropriately with notices and requests they receive from the tax department when they are aware of the types of assessments.
- Accurate Record-Keeping: In my experience, the fact that scrutiny assessments are conducted in this manner helps ensure that all possible parts of income and expenses that may be subject to scrutiny are documented.
- Risk Mitigation: Maintaining an active tax compliance status reduces additional tax or penalty payments that may arise from changes in assessment or best judgment.
In Conclusion
The types of assessment in income tax is designed to address specific situations. Summary assessment (Section 143(1)) performs quick checks on the mathematical accuracy of returns, while scrutiny assessment (Section 143(3)) and best judgement assessment (Section 144) involve detailed investigations to address anomalies or non-compliance. Reassessment (Section 147) focuses on income that has escaped previous assessments, ensuring all tax liabilities are covered.
It remains crucial for taxpayers to self-assess their liabilities, ensuring timely and accurate tax payments. This helps uphold the promises and principles of the tax system while also allowing for proper investigations under different types of assessment in income tax, such as reassessment when needed.
Understanding the value of these types of assessment in income tax helps taxpayers meet deadlines, avoid disputes and penalties, and reduces the risk of facing lengthy investigations.
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