Updated Return – A Nudge in the Right Direction

INTRODUCTION

With a view of promoting voluntary tax compliance and reducing litigation, the Finance Bill, 2022 has introduced a novel sub- section (8A) to Section 139 of the Income Tax Act, 1961 (hereinafter referred to as the Act) which provides for filing a Return of Income known as Updated Return of Income over and above the Original Return of income, revised return of income and belated return of income. According to the speech of the Finance Minister this provision is introduced in view of the income tax department’s robust framework whereby it has various information about taxpayers transactions, an additional opportunity is to be granted to the taxpayer who realize that they have committed omissions or mistakes in correctly estimating their income for tax payment to correct such errors subject to payment of additional tax. This updated return can be filed within two years from the end of the relevant assessment year. It is believed that the proposal for updated return over a period longer than that is provided in the existing provisions of Income-tax Act would on the one hand bring use of huge data with the IT Department to a logical conclusion resulting in additional revenue realization and on the other hand, it will facilitate ease of compliance to the taxpayer in a litigation free environment.

EXISTING PROVISIONS

Section 139 of the Act is related to the provisions for filing of Income Tax Return by taxpayers. The object of section 139 of the Act is to give reasonable time to the taxpayer to file a correct statement of his income within the duration specified under the Act. Sub- section (1) of section 139 of the Act casts responsibility on the taxpayer to furnish a return within a definite time period or up to a particular date, that is, the due date which as per this section means:

  1. for an assessee who is a company or a person (other than a company) whose accounts are required to be audited under this Act or under any other law for the time being in force, it is 31st day of October of the assessment year;

  2. for an assessee who is required to furnish a report under section 92E, it is 30th day of November of the assessment year; and

  3. for any other assessee, it is 31st day of July of the assessment year.

Alternatively, sub-section (4) of section 139 of the Act facilitates filing of a belated return after the expiry of due date, if such return is furnished before 3 months prior to the end of the relevant assessment year or before the completion of assessment, whichever is earlier. Similarly, sub-section (5) of section 139 of the Act provides the taxpayer an opportunity to revise the return filed under sub-section (1) or sub-section (4) in case of any omission or wrong statement, after due date, which is to be filed 3 months before the end of the assessment year or before the completion of assessment, whichever is earlier.

To sum up, existing Section 139 provides an additional time of approximately 5 months to an individual assessee, 2 months to a company/auditable case and 1 month to an assessee who enters into an international transaction or specified domestic transaction respectively, in a financial year to file belated or revised return. However, this additional timeline for filing a revised/belated return may not be adequate when we factor in utilization of huge information and data available. The proposed Amendment seeks to give additional time.

PROPOSED AMENDMENTS WITH REFERENCE TO

I. A new sub-section (8A) in section 139 is proposed to be introduced to provide for furnishing of updated return under the new provisions in section 139, ––

  • Time limit to file Updated Return of Income.

    Any person, whether or not he has furnished a return under sub-section (1), sub-section (4) or sub-section (5), for an assessment year (herein referred to as the relevant assessment year), may furnish an updated return of his income or the income of any other person in respect of which he is assessable under the Act, for the previous year relevant to such assessment year, within twenty four months from the end of the assessment year. Such return shall be furnished in the prescribed form and manner and shall contain prescribed particulars.

    Thus, an updated return of income can be filed by any person i.e. individual, corporate entity, partnership firm etc. Further, even if such person has filed a return previously for the relevant assessment year, such person can still file Updated Return of Income.

  • Eligibility.

    1. The proposed sub-section (8A) of section 139 shall not apply if the updated return :

      • is a return of a loss or

      • has the effect of decreasing the total tax liability determined on the basis of return furnished or

      • results in refund or increases the refund due on the basis of return furnished

      Thus, an updated Return of Income can be filed only when there is a tax outflow for the Assessee and cannot be filed if Assessee believes that he has wrongly offered any income for tax.

    2. A person shall not be eligible to furnish an updated return under the proposed sub-section (8A) of section 139, if: ––

      1. search has been initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of such person.

      2. a survey has been conducted under section 133A, other than subsection (2A) of that section, in the case such person.

      3. a notice has been issued to the effect that any money, bullion, jewellery or valuable article or thing, seized or requisitioned under section 132 or section 132A in the case of any other person belongs to such person.

      4. a notice has been issued to the effect that any books of account or documents, seized or requisitioned under section 132 or section 132A in the case of any other person, pertain or pertains to, or any other information contained therein, relate to, such person.

      The above ineligibility is for the assessment year relevant to the previous year in which such search is initiated or survey is conducted or requisition is made and two assessment years preceding such assessment year. Thus, if survey is conducted on 31/1/2022 then the person in whose case the survey is conducted will become ineligible to furnish the Updated Return of Income for A.Y. 2022-2023 and the preceding two Assessment Years 2020-2022 and 2020-2021.

    3. No updated return shall be furnished by any person for the relevant assessment year, where,

      1. an updated return has been furnished by him under the proposed subsection (8A) of section 139 of the Act for the relevant assessment year.

      2. any proceeding for assessment or reassessment or recomputation or revision of income under the Act is pending or has been completed for the relevant assessment year in his case.

      3. the Assessing Officer has information in respect of such person for the relevant assessment year in his possession under the Prevention of Money Laundering Act, 2002 or the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 or the Prohibition of Benami Property Transactions Act, 1988 or The Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 and the same has been communicated to him, prior to the date of his filing of return under the proposed sub-section (8A) of section 139 of the Act.

      4. information for the relevant assessment has been received under an agreement referred to in sections 90 or 90A of the Act in respect of such person and the same has been communicated to him, prior to the date of his filing of return under the proposed sub-section (8A) of section 139 of the Act.

      5. any prosecution proceedings under Chapter XXII have been initiated for the relevant assessment year in respect of such person, prior to the date of his filing of return under the proposed sub-section(8A) of section 139 of the Act.

      6. he is a person or belongs to a class of persons, as maybe notified by the Board in this regard.

    Thus, an updated return for an assessment Year can be filed only once.

II. It has also been proposed to amend sub-section (9) of section 139 to provide that a return filed under the proposed sub-section (8A) of the said section 139 shall be defective unless such return is accompanied by the proof of payment of tax as required under the proposed section 140B.

III. A new section 140B has been proposed to provide for the tax required to be paid for opting to file a return under the proposed provisions i.e. sub-section (8A) of section 139 of the Act as under :

  1. Where no return furnished earlier:

    Where no return of income under sub- section (1) or sub-section (4) of section 139 has been furnished by an assessee, he shall before furnishing the return under sub-section (8A) of section 139, be liable to pay :

    – the tax due together with interest and fee payable under any provision of the Act for any delay in furnishing the return or any default or delay in payment of advance tax, alongwith the payment of additional tax.

    The tax payable shall be computed after taking into account the following:-

    1. the amount of tax, if any, already paid as advance tax;

    2. any tax deducted or collected at source;

    3. any relief of tax claimed under section 89;

    4. any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax paid in a country outside India;

    5. any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section; and (vi) any tax credit claimed to be set off in accordance with the provisions of section 115JAA or section 115JD.

  2. Where Return is furnished.

    In the case of an assessee, where, return of income under sub-section (1) or sub- section (4) or sub-section (5) of section 139 (referred to as earlier return) has been furnished by an assessee, he shall before furnishing the return under sub-section (8A) of section 139, be liable to pay – the tax due together with interest and fee payable under any provision of this Act for any delay in furnishing the return or any default or delay in payment of advance tax, along with the payment of additional tax, as reduced by the amount of interest paid under the provisions of the Act in the earlier return,.

    The tax payable shall be computed after taking into account the following:-

    1. the amount of relief or tax, referred to in sub-section (1) of section 140A, the credit for which has been taken in the earlier return;

    2. tax deducted or collected at source, in accordance with the provisions of Chapter XVII-B, on any income which is subject to such deduction or collection and which is taken into account in computing total income and which has not been claimed in the earlier return;

    3. any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax paid in a country outside India on such income which has not been claimed in the earlier return;

    4. any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section on such income which has not been claimed in the earlier return;

    5. any tax credit claimed, to be set off in accordance with the provisions of section 115JAA or section 115JD, which has not been claimed in the earlier return.

    The aforesaid tax shall be increased by the amount of refund, if any, issued in respect of such earlier return.

  3. Additional Tax.

    The Additional tax, payable at the time of furnishing the return under sub-section (8A) of section 139, shall be – equal to twenty-five per cent of aggregate of tax and interest payable if such return is furnished after expiry of the time available under sub-section (4) or sub- section (5) of section 139 and before completion of period of twelve months from the end of the relevant assessment year. However, if such return is furnished after the expiry of twelve months from the end of the relevant assessment year but before completion of the period of twenty-four months from the end of the relevant assessment year, the additional tax payable – shall be equal to fifty per cent of aggregate of tax and interest payable if such return is furnished after the expiry of twelve months from the end of the relevant assessment year but before completion of the period of twenty- four months.

    For the purposes of computation of “additional income-tax”, tax shall include surcharge and cess, by whatever name called, on such tax.

  4. Interest u/s 234B, 234A & 234C.

    It is further provided that notwithstanding anything contained in the Explanation 1 to section 234B, in the cases where an earlier return has been furnished, interest payable under section 234B shall be computed on an amount equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid falls short of the assessed tax, where, “assessed tax” means the tax on the total income as declared in the return to be furnished under sub- section (8A) of section 139, after taking into account the following:

    1. the amount of relief or tax, referred to in sub-section (1) of section 140A, the credit for which has been taken in the earlier return;

    2. tax deducted or collected at source, in accordance with the provisions of Chapter XVII-B, on any income which is subject to such deduction or collection and which is taken into account in computing such total income and which has not been claimed in the earlier return;

    3. any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax paid in a country outside India on such income which has not been claimed in the earlier return;

    4. any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section on such income which has not been claimed in the earlier return;

    5. any tax credit claimed, to be set off in accordance with the provisions of section 115JAA or section 115JD, which has not been claimed in the earlier return. The aforesaid tax shall be increased by the amount of refund, if any, issued in respect of such earlier return.

    Where no earlier return has been furnished, the interest payable under section 234A shall be computed on the amount of the tax on the total income as declared in the return under sub-section (8A) of section 139. Further, interest payable under section 234C, where an earlier return has not been furnished, shall be computed after taking into account the income furnished in the return under sub-section (8A) of section 139 as the returned income. At the same time, for the computation of additional tax above, the interest payable shall be interest chargeable under any provision of the Income-tax Act, on the income as per return furnished under sub-section (8A) of section 139, as reduced by interest paid in the earlier return, if any. However, the interest paid in the earlier return shall be considered to be nil if no earlier return has been furnished.

IV. It is proposed to amend Section 276CC

which provides for prosecution for failure to furnish Return of Income u/s 139(1) or in response to Notice u/s 142(1), 148, 153A. Accordingly if an Assessee furnishes a valid Updated Return u/s 139(8A) then such person will not be prosecuted.

EFFECTIVE DATE

These amendments will take effect from 1st April, 2022.

FURTHER ANALYSIS

The proposed amendment has received mixed reactions from the taxpayers. The levy of additional tax has received some criticism particularly on the ground that paying additional tax is like paying penalty even for genuine and bonafide omissions. Also, it is felt that reduction of litigation is a two-way street. Thus, by disqualifying persons from filing updated returns in case of Search/Survey which tends to result in litigations which last for years is a failure on the part of Government of it’s commitment to reduce litigation. Though some of the concerns are legitimate, but these concerns are also misplaced and perhaps based on wrong understanding of the main objective of the proposed amendment. Perusal of Section 139(8A) shows that it is silent about any specific circumstances for filing an Updated Return unlike Section 139(5) which provides that a Revised Return of Income can be filed if assessee discovers any omission or any wrong statement in the original Return of Income. However, the Finance Minister in her speech has stated as under

“121. India is growing at an accelerated pace and people are undertaking multiple financial transactions. The Income Tax Department has established a robust framework of reporting of taxpayers’ transactions. In this context, some taxpayers may realize that they have committed omissions or mistakes in correctly estimating their income for tax payment. To provide an opportunity to correct such errors, I am proposing a new provision permitting taxpayers to file an Updated Return on payment of additional tax. This updated return can be filed within two years from the end of the relevant assessment year.”

From the above, one can infer that this provision is mainly for an Assessee who has not correctly estimated his income or committed some mistake in estimating income or a calculated omission i.e. an Assessee who has applied his mind to his income and have initially come to a conclusion that particular income is not taxable. However, subsequently such Assessee believes that the income is taxable or may be taxable and wants to avoid litigation and penal consequences. Then such an Assessee would have an opportunity to pay additional tax and avoid litigation. Of-course this is not to say that genuine omissions or non-filing of Return of Income can’t be regularized by an updated return but the Government expects such genuine omissions or genuine wrong statements to be corrected by filing revised returns.

Further, on a holistic reading of Section 139(8A) the underlying scheme of said Section appears to be based on the concept of “Detection”. In-other words if the Income Tax department detects any income not offered to tax before the same is voluntarily disclosed by an Assessee then the Government doesn’t desire to extend this scheme. Thus, in light of this concept of prior detection of income of assessee not offered to tax, the various disqualifications appear to be on parity and also justified.

However, there are certain issues which the Government may consider positively to strengthen the updated return scheme such as :

  • An Assessee in whose case Assessment proceedings commence becomes ineligible to file an updated return. A notice u/s 143(2) to commence Assessment proceedings is required to be issued within three months from the end of the financial year in which return is furnished. Thus, in case of Assessee who are scrutinised almost every year, there will be a very small windoe to file updated return and this provision would hardly be of any utility.

  • To treat every person in whose case there has been a Search or survey as ineligible to file updated Return seems unreasonable. In case of such a person if no incriminating material is found during the course of Search or Survey then such person should become eligible to file updated return.

  • Reopening of Assessment should be permitted to be done only after expiry of time period for filing updated return. This is because if a Reopening is initiated within two years then Assessee becomes ineligible to file updated return. In the alternative, Assessee should be permitted to file updated return in regard to items not covered by the reopening notice.

CONCLUSION

The proposed amendment by the Government is part of the “nudge approach”. In a Nudge the public policy–makers arrange decision–making contexts in ways to promote behaviour change in the interest of individual citizens as well as that of society. In the present context the Government wants to motivate the taxpayer towards the desired objective of voluntary tax compliance, starting with filing of correct tax returns. However, only time will tell whether levying of hefty additional tax will promote the expected behaviour change.

Comments are closed.