The only driving forces behind filing updated returns are honesty and saving in penalty, based on amount of additional tax
By Sudin Sabnis & Yogesh Kale
In order to facilitate quicker processing of returns and completion of tax assessments, the window for submission of belated or revised returns was substantially shrunk in the recent past. Thus, if a taxpayer notices an omission in the tax return after the due date for revised return is over, there is no other option but to disclose the omission during the assessment proceedings and face the likely penal consequences. Levy of penalty has also been a subject matter of repetitive litigation.
Against the backdrop of this difficulty and with an intent to promote voluntary compliance and reduce litigation, Budget 2022 proposes to introduce the provisions for filing “updated return” in the Income-tax Act, 1961 (the Act).
Filing updated returns
Taxpayers would be allowed to file an updated return within 24 months from the end of the relevant assessment year (AY) (i.e., even after the expiry of the time limit for revised / belated return), although there are a host of exceptions for this.
While a usual revised return can be filed for any upward or downward revision in taxable income reported in the original return, an updated return would be allowed to be filed only for an upward revision of income with corresponding increase in the tax liability reported in the original return. In other words, an updated return would not be allowed for revision of income leading to decrease in the original tax liability or increase in the original refund, or if it is a return of loss.
Only one updated return would be allowed for an AY, and taxpayers would not be allowed to file an updated return, if assessment, reassessment or revision proceedings or proceedings under certain laws like Prevention of Money Laundering Act, Black Money Law, etc., are pending for the relevant AY. Updated return would also not be allowed for an AY and the preceding two AYs under certain circumstances like search, survey, and seizure proceedings.
Pay additional tax
The story does not end here! A taxpayer would be required to pay “additional tax” besides the differential tax, before filing the updated return. The differential tax and the additional tax would be computed in accordance with Section 140B proposed to be inserted in the Act. The additional tax would be 25% of the differential tax, if the updated return is filed within 12 months from the end of the relevant AY and 50% of the differential tax, if the updated return is filed beyond 12 months from the end of the relevant AY.
The proposed provisions may give rise to quite a few interesting questions. For example, would an exemption or a deduction not claimed in the earlier return be allowed to be claimed in the updated return, if it, together with the additional income, leads to net increase in tax liability? Would a foreign company paying tax in India in respect of its permanent establishment be able to claim foreign tax credit in its home country in respect of the additional tax paid? If yes, the additional tax may not have as much of a cost impact as it would have for other taxpayers.
Risk of assessment
Does the overall scheme sound like an amnesty scheme to you? Wait, thereby hangs a tale! There is nothing in the proposed provisions that absolves the taxpayers of risk of assessment or reassessment after filing an updated return, considering the proposed revisions in timelines for initiating and completing regular assessment pursuant to an updated return.
The only immunity if at all that one may get is from levy of penalty for underreporting of income, though this also may stand diluted wholly or partially by the amount of additional tax paid before filing the updated return. Thus, the only driving forces behind filing updated returns are honesty and saving in penalty (depending on the amount of additional tax).
Sabnis is partner and Kale is director, Nangia Andersen LLP
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