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Procedural law and enforcement strategy

(A) Return of tax bases and assessment

19.1 The procedural law in respect of all taxes dealt with under the Code is proposed to be consolidated and the new provisions will apply to all taxes (referred to as tax bases) unless specifically excluded.

19.2 The salient features of the provisions relating to filing of return of tax bases are as follows :

(a) It will be obligatory for the following persons to file their return of tax base in respect of their income :

(i) An individual if his gross total income from ordinary sources exceeds the threshold limit ;

(ii) A company ;

(iii) A firm ;

(iv) A non-profit organization ;

(v) A political party ;

(vi) Any person who derives any income from special sources and is liable to pay income-tax thereon ;

(vii) Any person who intends to carry forward the loss or any part thereof in accordance with the provisions of the Code ; and

(viii) Any other person if his gross total income from ordinary sources exceeds the threshold limit.

(b) Similarly, returns of tax bases in respect of dividend distributed and net wealth will also be required to be filed if there is a liability to pay tax in respect of these tax bases.

(c) The due date for filing the return of tax bases under the Code will be 30th June of the year following the financial year for all non-business non-corporate taxpayers and 31st August of the year following the financial year for all other taxpayers.

(d) The time-limit for filing a revised return or a voluntary belated return will be limited to twenty-one months from the end of the relevant financial year.

19.3 Taxpayers who do not voluntarily file their returns will be categorized into two categories, namely, stop filer and non-filer. A non-filer is defined as a person who has not filed the return for the relevant financial year and also for two financial years immediately preceding the relevant financial year. A stop filer is a person who has not filed a return for the relevant financial year but has—

(a) filed a return for the financial year immediately preceding the relevant financial year ; or

(b) not filed a return in response to a notice calling for the return for the financial year immediately preceding the relevant financial year ; or

(c) been assessed for the financial year immediately preceding the relevant financial year.

19.4 The Code provides that a notice may be issued to the non-filers and stop filers calling for their return of tax bases. However, such notice shall not be issued after twenty-one months from the end of the relevant financial year.

19.5 A two-step procedure will be followed for assessment of return filed with the tax administration. In the first stage, the return received will be processed to determine the tax payable or refund due to the taxpayer on the basis of the returned income subject to arithmetical corrections and adjustment of internal inconsistencies. In this stage, the returned income will be accepted by the Assessing Officer but the tax payable (including interest) on the returned income will be recomputed and claim of tax payment will be verified. In the second stage, the Assessing Officer will select a certain number of cases for the purpose of scrutiny. This selection will be based on parameters/criteria laid down by the Board from time to time. While the Department has initiated the process of computer assisted selection for scrutiny (CASS), the Assessing Officer will continue to enjoy discretion to select a limited number of cases on the basis of the parameters. Upon selection of the case, the Assessing Officer will undertake verification of the returned income.

19.6 The exercise of processing of returns (excluding cases selected for scrutiny) will be done along the following lines :

(a) The Income-tax Department, or any other authority authorised by the Board, shall issue an electronic acknowledgement for receipt of the return. The electronic acknowledgment shall bear a unique return acknowledgment number.

(b) The Department shall process the return after making adjustment, if any, to the tax base in the return and determine the sum (tax and interest, if any) payable by or refundable to the taxpayer.

(c) The adjustment to the tax base shall relate to—

(i) any arithmetical error in the return ; and

(ii) any incorrect claim, if such incorrect claim is apparent from the existence of other information on the return.

(d) The incorrect claim apparent from the existence of other information on the return shall mean to be a claim on the basis of an entry on the return—

(i) of an item which is inconsistent with another entry of the same item or another item on such return ; or

(ii) in respect of which information required to be supplied to substantiate such entry has not been furnished ; or

(iii) in respect of a deduction which exceeds a statutory limit imposed, if such limit is expressed as a specified monetary amount, or as a percentage, ratio, or fraction.

(e) The Department shall, in all cases, recompute the tax payable on the tax base determined after adjustment, if any, verify the claim for tax payment and determine the sum payable or refundable.

(f) The Department shall, in all cases, send an intimation in the prescribed form to the taxpayer specifying the tax bases so computed, the tax liability thereon, the amount of credit for prepaid taxes, if any, and the sum payable by the assessee or refundable to him. If no intimation is sent by the Department, the return shall be deemed to have been accepted in toto.

(g) The Department shall process the return within one year from the end of the month in which the return is furnished. However, if the return is processed beyond the time-limit of one year, the taxpayer will not be liable to pay to the Central Government any sum payable on account of any adjustment to the tax base in the return. Therefore, in such cases the Department will not be entitled to issue any notice of demand in respect of such sum. This will not foreclose any claim for refund by the assessee or prejudice any demand, including interest thereon, arising on the basis of the tax base declared in the return.

19.7 The decision to select a case for scrutiny will be based on various parameters/criteria laid down by the Board from time to time. Under the Code, the selection of cases for scrutiny will be made at a centralized level in accordance with the risk management strategy framed by the Board. This will eliminate all discretionary powers of selection presently vested in the Assessing Officer. Further, in order to prevent an assessee from circumventing the selection process, notwithstanding anything contained in any other Act for the time being in force, no information relating to the risk management strategy framed by the Board shall be revealed to any assessee or any member of the public or any organization. Upon selection of a case, a taxpayer will be communicated in writing about such selection. The communication shall be served within four months from the end of the financial year in which the return was filed.

19.8 When a return is selected for scrutiny, the Assessing Officer will issue a notice requiring the assessee to produce evidence in support of the return. After examining the evidence, if any, produced by the assessee and any other material in the possession of the Assessing Officer, the Assessing Officer will complete the assessment within twenty one months from the end of the financial year in which the return was filed.

19.9 The Code includes provisions regarding assessment proceedings, best judgment assessment, ordering special audits and reference to the Valuation Officer. The valuation made by the Valuation Officer will be binding upon the Assessing Officer.

19.10 Commissioners, Additional Commissioners and Joint Commissioners are the supervisory officers in the Department. A supervisory officer will be empowered to issue directions at the request of the Assessing Officer or on his own motion. The scope of such supervisory powers has been streamlined in the following manner :

(a) The Additional/Joint Commissioner may issue directions in a case at the request of the Assessing Officer and such directions shall be binding upon the Assessing Officer.

(b) The Additional/Joint Commissioner may, for the purposes of issuing a direction to the Assessing Officer, seek the directions of the Commissioner. The directions given by the Commissioner shall be binding upon the Assessing Officer.

(c) Where an Additional/Joint Commissioner himself is the Assessing Officer, the Commissioner may, at the request of the Assessing Officer, issue directions and such directions shall be binding on the Additional/Joint Commissioner.

19.11 The Code provides for a mechanism for assessment or reassessment of income which has escaped assessment. The salient features of the scheme of assessment of escaped tax base, inter alia, will be as under :—

(a) A case may be reopened if the Assessing Officer has reason to believe that any tax base has escaped assessment and for reasons to be recorded by him.

(b) The tax base shall be deemed to have escaped assessment if there exists any of the following reasons :

(i) the computation or assessment has not been made in accordance with any decision, prejudicial to the assessee, rendered by the Appellate Tribunal or the National Tax Tribunal or the High Court or the Supreme Court in the case of the assessee or any other person under this Code or under the Income-tax Act, 1961 ; or by a court under any other law ;

(ii) the computation or assessment has not been made in accordance with any order, direction, instruction or circular issued by the Board or in accordance with any directions issued by a supervising officer before the making of the assessment ;

(iii) any objection has been raised, or observation made, by the Comptroller and Auditor-General of India to the effect that the assessment has not been made in accordance with the provisions of the Code or the Income-tax Act, 1961.

(c) A case shall not be reopened after seven years from the end of the relevant financial year. However, no such time-limit shall be applicable if—

(i) the reassessment is required to be made in consequence of or to give effect to any finding or direction contained in an order passed—

(A) in the case of the assessee for any other financial year by any authority in any proceeding under the Code by way of appeal, reference or revision or by a court in any proceeding under the Code or under any other law ; or

(B) in the case of any other assessee for any financial year, by a court in any proceeding under the Code or under any other law ; and

(ii) the period of seven years for issue of such notice had not expired at the time the order, which was the subject-matter of appeal, reference or revision was made.

(d) The notice for reopening the case shall not be issued by the Assessing Officer unless the Chief Commissioner or Commissioner is satisfied that it is a fit case for the issue of such notice and grants his approval for issue of such notice.

(e) A time of atleast thirty days shall be given to the assessee for filing the return in response to the notice issued by the Assessing Officer.

(f) The notice to be issued by the Assessing Officer shall be accompanied by a notice in writing containing the reasons for reopening the case.

(g) In the case of a person (including a stop-filer or non-filer) where a search has been made or a seizure has been effected or any material has been obtained from any other authority,—

(i) it shall be mandatory to issue notice for reopening the assessments of the preceding seven financial years including the relevant financial year in which the search was conducted or the seizure was effected or the material was obtained ;

(ii) the notice shall be issued after obtaining the prior approval of the Chief Commissioner or Commissioner ; and

(iii) the assessment proceedings in respect of any of the seven years pending on the date of the search or the seizure or the requisition or on the date of obtaining the material requisitioned from any other authority shall abate and merge with the new proceedings.

(h) The reassessment shall include any other part of the tax base liable to tax which has escaped assessment and which has come to the notice of the Assessing Officer in the course of reassessment proceedings.

(i) The order of assessment or reassessment of escaped tax base shall not be made after the expiry of twenty-one months from the end of the financial year in which the notice of escapement was served.

19.12 Under the Code, specified international transactions are required to be reported to the Transfer Pricing Officer (TPO).

19.12 Under the Code, specified international transactions are required to be reported to the Transfer Pricing Officer (TPO).

19.13 The underlying objective of creating the institution of TPO is to ensure that the arm’s length price of an international transaction should be determined only by an officer with requisite expertise on the subject. Accordingly, the Code proposes the following procedure for determining the arm’s length price in relation to an international transaction :—

(a) International transactions, as specified in the Code, shall be reported to the TPO by the due date of filing the return of tax bases.

(b) The TPO shall, on the basis of a risk management strategy framed by the Board in this behalf, select appropriate transactions for determination of the arm’s length price and serve upon the assessee the communication of such selection, within two months from the end of the financial year in which the report was filed or the information about the transaction was received.

(c) Upon selection of the international transaction, the TPO shall inform the Assessing Officer about such selection within seven days from the date on which the communication was sent to the assessee.

(d) Upon selection of the transaction, the TPO shall serve on the assessee a notice requiring him to produce evidence, if any, on which the assessee may rely in support of the computation made by him of the arm’s length price in relation to the international transaction or such other material as the TPO may require.

(e) The TPO shall serve his report, determining the arm’s length price, on the Assessing Officer and the assessee within forty-two months from the end of the financial year in which the international transaction was made. Such report shall be binding upon the Assessing Officer.

(f) Thereafter, the Assessing Officer shall compute the total income on the basis of the arm’s length price determined by the TPO. The assessment in such cases shall be completed within three months from the end of the month in which the report of the TPO was received by the Assessing Officer or thirty three months from the end of the relevant financial year, whichever is later.

(g) No separate appeal will lie against the report of the TPO. However, a taxpayer will be entitled to agitate the computation of the total income, so determined by the Assessing Officer, on the basis of the arm’s length price determined by the TPO.

19.14 Further, with a view to provide certainty to taxpayers in respect of their tax liability arising from any future international transaction, the Code empowers the Board to formulate a scheme to enable it to enter into, with the approval of the Central Government, advance pricing agreements with taxpayers in relation to such transactions.

19.15 Under the Code, taxes will be collected on "pay-as-you-earn" basis. Therefore, the Code envisages the collection of taxes through the following mechanism :—

(a) Deduction of tax at source (TDS) on payments made during the financial year, which, in general, have an income component ;

(b) Collection of tax at source (TCS) on payments received during the financial year ;

(c) Payment of advance tax during the financial year on the estimated income ; and

(d) Self-assessment tax.

19.16 There is no change in the provisions dealing with each of the above methods of collection and recovery of tax.

19.17 The rates of tax deduction at source on payments made to residents are indicated in the Third Schedule and on payments made to non-residents are indicated in the Fourth Schedule.

19.18 The provisions relating to recovery of tax have been streamlined. The Assessing Officer will have the power to recover the taxes that are due. At the end of one year from the end of the financial year in which the notice of demand was issued, the Assessing Officer will cease to have jurisdiction to recover arrears. Thereafter, the power will be exercised by the Tax Recovery Officer. The Code lays out the sequence of the steps that may be taken to recover arrears. At the final stage, arrears will be recovered by way of attachment and sale of movable and immovable property in accordance with the provisions of the Fifth Schedule to the Code.

19.19 The tax administration receives a large volume of information relating to an assessee furnished by him and by third party sources. These information, essentially, relate to his financial and commercial transactions. It is part of his right to privacy. However, the Right to Information Act enables a person to obtain commercially sensitive and private information relating to any other person which may have the effect of causing financial, commercial or personal injury to such other person. The disclosure of such information to third parties/competitors also inhibits full compliance with tax laws.

19.20 Internationally, countries prohibit the disclosure of information furnished to, or obtained by, the tax administration, regardless of the law relating to the right to information. However, the information is allowed to be shared with other enforcement agencies to the extent it is necessary in public interest.

19.21 Steps will, therefore, be taken to amend the Right to Information Act prohibiting disclosure of information relating to any assessee to any third party except in the circumstances provided under the Code.