Types of Income-Tax Assessment: Self, Scrutiny & Best Judgment

The process of determining a taxpayer's actual income and the tax liability thereon is known as assessment. In India, under the Income Tax Act, 1961, there are several types of assessment, each with its own characteristics and legal implications. Understanding these is crucial for every taxpayer to ensure compliance and avoid future complications. The primary assessment types include Self-Assessment, Summary Assessment (Processing of Return), Scrutiny Assessment, and Best Judgment Assessment, in addition to Reassessment.

1. Self-Assessment (Section 140A)

Self-assessment is the initial and most common form of assessment, where the taxpayer himself computes his total income and tax payable. This is the foundation of India's direct tax system, operating on the principle of voluntary compliance.

Key Aspects:

• Concept: Before filing the income tax return, every taxpayer is required to calculate their total income, deduct admissible allowances and deductions, and determine the tax payable.
• When to Pay: Any tax due as per self-assessment, after adjusting for TDS, TCS, advance tax, and relief, must be paid before filing the income tax return. This payment is called self-assessment tax.
• Consequence of Non-Payment: Failure to pay self-assessment tax, or paying less than due, before filing the return can lead to interest under Section 234B and 234C, and potentially penalties.

2. Summary Assessment / Processing of Return (Section 143(1))

After a taxpayer files their return of income, the Income Tax Department processes it electronically. This is a preliminary assessment aimed at rectifying apparent errors and confirming the tax liability or refund claim. It's often referred to as "summary assessment" or "intimation under Section 143(1)".

Key Aspects:

• Automated Process: This assessment is largely automated, carried out by the Centralized Processing Centre (CPC).
• Limited Adjustments: The processing under Section 143(1) is limited to certain adjustments based on errors apparent from the return itself. These include:
  • Arithmetical errors in the return.
  • Incorrect claim, if such incorrect claim is apparent from any information in the return.
  • Disallowance of loss declared or expense claimed, if the return is filed beyond the due date.
  • Disallowance of deductions claimed under Section 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID, or 80-IE, if the return is filed beyond the due date.
  • Addition of income appearing in Form 26AS, Form 16A, Form 16, or Form 34F which has not been included in computing the total income in the return.
• Issuance of Intimation: An intimation under Section 143(1) is issued to the taxpayer, indicating any tax payable or refund due after these adjustments. If no adjustments are made and no tax/refund is due, the acknowledgment of the return itself acts as the intimation.
• Time Limit: An intimation under Section 143(1) can be sent anytime within one year from the end of the financial year in which the return is filed.

3. Scrutiny Assessment (Section 143(3))

A scrutiny assessment is a detailed examination of the income tax return filed by the taxpayer, along with supporting documents and evidence, to confirm the correctness and completeness of the return. The Assessing Officer (AO) conducts this assessment to ensure that the taxpayer has not understated income, computed excessive loss, or underpaid tax in any manner.

Key Aspects:

• Objective: To verify the claims made by the taxpayer in the return and to check for any discrepancies or non-compliance.
• Selection Criteria: Returns are selected for scrutiny assessment through various methods, primarily:
  • Computer Assisted Scrutiny Selection (CASS): Based on specific parameters flagged by the system (e.g., high-value transactions, significant deviation from industry norms, mismatches with third-party data).
  • Manual Scrutiny: In cases of specific information about tax evasion or large tax effect cases.
• Procedure:
  • Notice under Section 143(2): The process begins with the issuance of a notice under Section 143(2) by the AO, within a prescribed time limit (e.g., three months from the end of the financial year in which the return is filed). This notice calls upon the taxpayer to appear before the AO or furnish information/documents.
  • Furnishing Information: The taxpayer is required to provide all information, explanations, and documents demanded by the AO. This may involve multiple rounds of submissions and hearings.
  • Assessment Order: After considering all the evidence and information, the AO passes a scrutiny assessment order under Section 143(3), determining the final income and tax liability. This order results in either no change, an additional demand, or a refund.

4. Best Judgment Assessment (Section 144)

A Best Judgment Assessment is carried out by the Assessing Officer in circumstances where the taxpayer fails to comply with certain statutory requirements or if the AO is not satisfied with the information provided. In such cases, the AO makes the assessment to the best of their judgment, based on all relevant material available.

Circumstances for Invocation:

The AO can proceed with a Best Judgment Assessment if the taxpayer:

• Fails to file a return of income (original or belated) within the specified timeframe.
• Fails to comply with any notice issued under Section 142(1) (requiring production of accounts or information).
• Fails to comply with a notice issued under Section 143(2) (for scrutiny assessment).
• Fails to comply with the directions issued under Section 142(2A) (for special audit).
• Files a defective return under Section 139(9) and fails to rectify it within the given time.

Consequences and Principles:

• Estimated Assessment: The AO will estimate the income and tax liability based on available material, past records, and general knowledge, applying their best judgment. This assessment is often higher than what the taxpayer might have declared.
• Ex-Parte: It can be an ex-parte assessment, meaning it can be done without the taxpayer's direct input if they fail to cooperate after proper notices.
• Fairness: While it is called "best judgment," the AO is expected to make an assessment fairly and honestly, not vindictively or capriciously. It must be based on some material and not mere conjecture.
• Notice of Demand: Upon completion, a notice of demand is issued for the tax payable.

5. Reassessment / Income Escaping Assessment (Section 147 & 148A)

Reassessment, also known as income escaping assessment, allows the Income Tax Department to assess or reassess income that has escaped assessment in an earlier assessment year. This power is invoked when the AO has reason to believe that income chargeable to tax has escaped assessment.

Procedure under the new Section 148A:

• Inquiry and Opportunity to Respond: Before issuing a notice under Section 148, the AO must conduct an inquiry, if required, and provide an opportunity to the taxpayer to show cause why a notice under Section 148 should not be issued. This is done through a notice under Section 148A.
• Consideration of Reply: The AO considers the taxpayer's reply to the show-cause notice.
• Decision: Based on the inquiry and the taxpayer's response, the AO decides whether it is a fit case for issuing a notice under Section 148.
• Notice under Section 148: If the AO decides to proceed, a notice under Section 148 is issued, requiring the taxpayer to file a return of income.
• Reassessment Order: Subsequent to the filing of the return or non-compliance, the AO proceeds to pass a reassessment order.