Author: gellavenugopal

Partner Venu and Vinay , Chartered Accountants. www.vnv.ca

Defective Return

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What is Defective Return?

Sometimes when Income Tax Return is filed, we may miss to furnish certain information or they could be an error. Nonetheless, in such circumstances, a Defective Return Notice is issued by the Income Tax Department as per sec 139(9) to rectify them.

When can a notice for Defective Return be issued?

  • When return is not submitted in the prescribed form with all annexure and statement duly filled.
  • When the details of taxes paid are provided in the return but the income details are not provided.
  • The name mentioned on the Income-tax Return does not match with the name on the PAN card.
  • When you are required to maintain Balance Sheet and Profit & Loss statement, but have not filed the same.
  • When you have not paid your taxes in full and filed the return.
  • Some other reason as considered by the Income-tax department.

What is the maximum time limit to rectify?

Return should be revised within the stipulated time period addressing the defects within 15 days from the receipt of intimation order under section 139(9). Assessee can seek extension in the time period by writing to the concerned Assessing Officer. 

How to revise income tax return in response to notice of Defective return U/s. 139(9)

Step 1: Login to e-filing portal

Step 2: Now click on “e-File” and choose “e-File in response to Notice u/s 139(9)” from the dropdown options.

Step 3: On successful validation, if there is any defective notice raised by either CPC/AO, the below screen will be displayed, click on “Submit” to reply to notice.

Step 4: On submit you will be redirected to below screen,

If you agree with the defect then select “Yes” and upload the revised/rectified xml.

If you disagree with the defect then select “No” and you need to provide the reason for disagree. And click on “Submit” to complete the process.

Risk Management Process – confirmation for claim of refund

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What is it?

It is just a confirmation from the taxpayer that the refund claimed by them is correct to the best of their knowledge. And the response should be made within 30 days of receipt of this e-mail.

How to submit the response?

An assessee is required to submit their response in the e-Filing Portal post login by selecting either of the following options:

  • The claim of refund is correct to the best of my knowledge and belief
  • Return of Income is being revised wherein, correct claim of refund shall be made.

To submit the above mentioned response, please login to e-Filing portal, Go to Worklist->For Your Action-> Response for Refund Confirmation.

REVISED RETURN

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  • Revised return allows an assessee to rectify the error or omission of facts made at the time of filing the original ITR. When filing a revised return we need to mention details of the original return i.e., acknowledgment no and date of filing original return.
  • Time limit to file revised return is anytime-
  1. before the end of the relevant assessment year; or
  2. before the completion of the assessment,

whichever is earlier.

  • The process of filing a revised ITR is the same as filing an original one. However, while filing a revised ITR, an assessee is required to file it under section 139(5) of the Income-tax Act.
 AY 2019-20AY 2020-21
Due date for filing revised return.June 30th 2020March 31st 2021

BELATED RETURN

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Any person who has not furnished a return within the time allowed to them under section 139(1), or within the time allowed under notice issued under section 142(1), may furnish the return for any previous year at anytime —

  1. before the end of the relevant assessment year; or
  2. before the completion of the assessment,

whichever is earlier.

 AY 2019-20AY 2020-21
Due date for filing belated return.June 30th 2020March 31st 2021

Relief Measures Proposed by Central Government in the wake of COVID-19

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  • The due date for filing original and revised income tax returns for FY 2018-19 (relevant to AY 2019-20), is extended from 31 March to 30 June 2020.
  • The due date for individuals to link their Aadhaar number with their PAN is extended from 31 March to 30 June 2020.
  • The taxpayers can make investments or payments in LIC, Public Provident Fund, National Savings Certificates, and any other fund under Section 80C, Medical-claim under Section 80D and Donations under 80G till June 30, for claiming deductions for FY 2019-20.
  • Donation made up to June 30 towards PM CARES Fund shall be eligible for 100% deduction under section 80G of the IT Act from the income of FY 2019-20
  • It also provides that any time limits expiring between 20 March and 29 June for making investments, deposits, payments, acquisitions, purchases, and construction of buildings and property, or other similar actions to claim a deduction, exemption, or allowance under sections 54 to 54GB or Chapter VI-A, of the Income-tax Act, 1961 for the FY 2019-20, are also extended to 30 June 2020.
  • The deadline for any compliance obligations under any one of the specified acts, that otherwise would fall during the period 20 March to 29 June, is extended to 30 June 2020. These obligations include:
    • The completion of any proceedings, the passing of any order, the issuance of any notice, intimation, notification, sanction or approval, or other similar actions by any authority, commission or tribunal; and
    • Filing an appeal, reply, application, report, document, return, statement, or other similar records.
  • Where a tax or levy under any one of the specified acts is payable between 20 March and 29 June but is not paid until 30 June 2020, interest will be charged at a maximum of 0.75% per month or part month of delay. No late payment penalties or other sanctions will be imposed.

Taxability of Dividend Stripping

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What is Dividend Stripping?

Dividend stripping is a practice of buying shares or mutual fund units before the declaration of dividend, post the dividend declaration they sell the share or unit when its price falls below the purchase price. This practice is termed as dividend stripping.
The advantage for Tax Payer by doing dividend stripping is that he can avail dual Tax benefits:

  1. Dividend Income is exempt as per section 10(34/35) of Income Tax Act, 1961
  2. Loss incurred under sale of Shares can be claimed as short term capital loss.

For Example:

Mr.A buys 1000 shares of ABC Ltd. For Rs.500 per share on 25th January, dividend is declared by ABC Ltd on 19th February at Rs.100 per share. Mr. A sold those 1000 shares on 28th March for Rs.350 per Share.
In this instance, Mr. A can claim capital loss of Rs.1,50,000 and dividend earned of Rs.1,00,000 is exempt in his hands.
Due to the practice of dividend stripping the government incurs a huge loss in terms of tax revenue. Thus, to prevent the practice of dividend stripping, a new section 94(7) was introduced.

Section 94(7) of Income Tax Act, 1961

  1. Any person buys or acquires any securities or unit within a period of three months prior to the record date;
  2. Such person sells or transfers—
    • Such securities within a period of three months after such date; or
    • Such unit within a period of nine months after such date;
  3. The dividend or income on such securities or unit received or receivable by such person is exempt,

then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.

Interpretation:

The section interprets that if an individual buys a share within 3 months prior to record date i.e. the date on which the dividend will be paid, and sell it within 3 months after the record date, then the capital loss incurred due to the sale of shares will not be allowed for set off to the extent of dividend earned.

Similarly, in case of Mutual Funds – if an individual buys unit within 3 months before the dividend is to be paid and it within 9 months, then the capital loss incurred due to the sale of mutual funds will not be allowed for set off to the extent of dividend earned.

Now, in reference to the above example given, Dividend Income of Rs.100,000 is exempt in the hands of Mr. A and Capital loss will be allowed to set off only to the extent of Rs.50,000 (1,50,000 – 1,00,000).

Tax Implications of Dividend Stripping in case of Capital Gains

In case there is a capital gain on account of sale of shares after the receipt of dividend, then the dividend amount shall be exempt and only the actual gain on sale of share shall be taxable under head “Income from Capital Gains”.

Are single premium life insurance policies eligible for tax benefits?

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A life insurance policy will now be eligible for tax benefits under sections 80C and 10(10D) of the Income Tax Act only if the premium paid is less than 10% of the sum assured on death. This criterion is applicable to both regular as well as single premium insurance policies. These amendments are applicable to those policies issued on or after the 1st April 2013.

The earlier provision allowed an exemption, if the annual premium did not exceed 20% of the actual sum assured. Please note, deduction for life insurance premium with respect to insurance policies issued up to 31st March 2012 shall not exceed 20% of the sum assured.

Hence,

  • Any money received from a life insurance policy are entitled for a tax benefit under Section 10 (10D) only if the minimum sum assured throughout the policy term remains 10 times the single premium paid.
  • The tax benefit under Section 80 C is available only if the annual premium is less than 10% of the sum assured.

Note:
If the maturity is not exempted under section 10(10D) and the amount received from a policy is more than Rs 1,00,000, it will be taxable and TDS @ 1% shall be deducted by the insurer before making this payment. If the amount received is less than Rs 1,00,000, then no TDS shall be deducted but the amount received shall be fully taxable, it will be taxed at income tax slab rate

Notices Issued Under the Income Tax Act

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After an Assessee files his/her Income tax return, it is processed by the Income tax Department. If there is any mistake / error / discrepancy noticed in the return filed, then the same is intimated to the Assessee by the means of an income tax notice.

You are not sure about what it is and how to respond to it. Don’t panic when you receive a notice from income tax department.

First and foremost, it is important that you understand the difference between an intimation and a notice. Intimation is to highlight the outcome of the processing of your return or conclusion of assessment, and you may not be required to act upon it (although there are a few exceptions to it). However, when you receive a notice, it requires you to give your response to the IT department.

Recently, the CBDT has notified a new scheme known as Centralized Communication Scheme (CCS) whereby, gradually all communications will happen in an electronic mode.
There are various types of Income tax notices, issued by the Income Tax Department, which you can read in the question below.

What are the types of Income tax notices?

The Income tax department issues notices for various purposes under Income Tax Act, 1961. These are listed below:

  1. Income Tax Intimation/ Notice under section 143
  2. Notice under section 139(9)
  3. Notice under section 148
  4. Notice under section 245
  5. Notice under section 142

Let us know the above types of notice in detail:

  1. Income Tax Intimation/ Notice under section 143:
    • Income Tax Intimation under section 143(1):  
      It is an intimation sent by the Income tax department after the return is filed by the taxpayer and processed by CPC.  
      The income is computed after making the necessary following adjustments to the total income in the return:
      1. any arithmetical error in the return;
      2. an incorrect claim (provided the incorrect claim is apparent from the information filed);
      3. disallowance of incorrectly claimed loss or expenditure;
      4. any income which has not been included in the return
      5. disallowance of deduction u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if return is filed beyond due date u/s 139(1).
        However, before making any such adjustments, in the interest of natural justice, intimation has to be given to the assessee requiring him to respond to such adjustments. Such intimation may be in writing or through electronic mode. The response received, if any, has to be duly considered before effecting any adjustment. However, if no response is received within 30 days of issue of such intimation, the processing shall be carried out incorporating the adjustments.
    • Income Tax Notice under section 143(2)/(3):
      Notice u/s 143(2) is issued to assessee by the Income Tax Department when Income Tax Return of assessee is selected for scrutiny assessment or detailed assessment u/s 143(3). In simple words, Scrutiny assessment or detailed assessment u/s 143(3) means a scrutiny carried out to confirm the correctness and genuineness of various claims, deductions, etc. made by assessee in Income Tax Return. The basic purpose of this scrutiny assessment is to ensure that assessee has filed the return with the correct income and paid the tax accordingly.

      The objective of this scrutiny is to check that:
      • Assessee has not understated his income
      • Assessee has not computed excessive loss
      • Assessee has not under-paid the tax in any manner
        So, to carry out scrutiny u/s 143(3) of the Income Tax Act, notice u/s 143(2) is issued by the Income Tax Department.

        Time limit for issuance of notice u/s 143(2):
        A notice u/s 143(2) for scrutiny assessment can only be issued upto a period of six months from the end of the financial year in which the return was furnished by assessee.
        For example, Ms Sharma filed her return on 25.07.2016 for the financial year 2015-16. In such a case, the notice u/s 143(2) can be issued to Ms Sharma only upto 30.09.2017 being end of six months’ period from the FY 2016-17 in which the said return was filed.
  2. Income Tax Notice under section 139(9):
    This Income Tax Notice is issued if the Income tax return filed is defective. Common cases when the notice for defective return is sent:
    • When you have filled up details of taxes paid, but have not provided income details, the Income Tax Department deems it defective.
    • A notice for defective return is sent when tax deducted has been claimed as a refund, but no income details are provided in the return.
    • The Department sends you a notice for defective return under Section 139(9) when you haven’t paid your taxes in full.
    • When you are required to maintain a balance sheet and profit and loss statement but haven’t given the details of the same with your income tax return, the tax return is declared defective.
    • When audit report u/s 44AB is applicable but the same has not been furnished online along with the return of income.
      An Assessee must revise his/her return addressing the defects to the Income Tax Department within 15 days from the receipt of intimation order under section 139(9).
      To know how to response please click here
  3. Notice under Section 148:
    If the assessing officer has reasons to believe that assessee has not disclosed his income correctly and therefore, assessee has paid lower taxes or where assessee has not filed his tax return at all in a case where he should have ideally filed it as per law, this is termed as income escaping assessment. Under these circumstances the assessing officer is entitled to assess or reassess the income, as the case maybe.

    Prior to making such assessment or reassessment, the assessing officer should serve a notice to the assessee asking him to furnish his return of income. The notice issued for this purpose is issued under the provisions of section 148. The various timelines to be adhered to for issuance of notice under section 148 is as follows:
    • Upto four years from the end of the relevant AY:
      Notice cannot be issued by any officer below the rank of Assistant Commissioner or Deputy Commissioner. An assessing officer can only issue a notice under section 148 on the direction of the Joint Commissioner after recording the reasons to do so.
      For AY 2018 -19 notice under section 148 can be issued till 31st March 2023.a.     
    • Beyond four years but upto six years from the end of the relevant AY:
      Notice can only be issued by the Chief Commissioner or Commissioner is satisfied that income has escaped assessment. The amount of income which has escaped assessment should be more than Rs. 1,00,000.
      For AY 2018 -19 notices under section 148 can be issued till 31st March 2025.
    • Beyond four years but upto sixteen years from the end of the relevant AY:
      Notice under section 148 can be issued if income in relation to any asset (including financial interest in any entity) located outside India, is chargeable to tax in India but has escaped assessment.
      For AY ending 2018 -19 notices under section 148 can be issued till 31st March 2035.
  4. Notice under Section 245:
    If the assessing officer has reasons to believe, that there is tax demand which has not been paid for the previous years by the assessee and he wants to set off the current year refund against that demand, notice under section 245 is issued. However, the assessing officer can proceed with adjustment of demand and refund only after assessee has been provided with a proper notice and an opportunity for being heard.
    The timeline to respond to the notice is within 30 days from the day of receipt of the notice. If assessee does not respond within the aforesaid timeline, the assessing officer can consider the non-response as consent and proceed with the adjustment.
    For example: If Mr. A has an outstanding tax demand of Rs.25,000/- pertaining to A.Y.2015-16 and in A.Y.2017-18 he has a tax refund of Rs.31,000/- , So assessing officer can adjust the tax refund of Rs.31,000 against the demand of Rs.25,000 after the timeline allowed under Sec.245 has expired and Mr. A will be paid a net refund of Rs.6,000/- only.

  5. Notice Under 142(1) – Inquiry before assessment:
    Notice under Section 142(1) is usually served to call upon documents and details from the assessee, and to take a particular case under assessment.
    The basic purpose is to inquire the details of the assessee before making assessment under the Act. It can be related to ‘Preliminary Investigation’ before starting the assessment.
    By serving a notice u/s 142(1) the assessing officer, may call upon the assessee:-
    • To furnish a return of income in respect of which he is assessable, where he has not filed his return of income within the normal time allowed.
    • It may include return in respect of his own income or income of another person for which he is liable to be assessed. Example- In case of legal guardian/ deceased person.
    • To produce accounts or documents which the AO may require for the purpose of making an assessment.
    • To furnish in writing any information on matters including statement of the assessee. For Example- statement of assets and liabilities of the assessee on a particular date.
      The AO may or may not start assessment after compliance with this notice, dependent upon the facts of assessee. If AO is satisfied with the produced documents or return, he may not start with the assessment process.
      Compliance with this notice u/s 142(1) is mandatory even if the tax payer is of the opinion that the accounts/documents requested are irrelevant.
      If assessee does not comply with the provisions of this section:
      • It may result in Best Judgement Assessment u/s 144, or
      • Penalised under Sec 271(1)(b) i.e. Rs 10,000 for each failure, or
      • Prosecution under Sec 276D which may extend upto 1 year and with fine.

What is Intimation u/s 143(1)?

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Intimation under Section 143(1) of the Income Tax Act can be issued to begin a summary assessment without calling the taxpayer. In a summary assessment, the tax officer would not call for additional information or documents as requested in a scrutiny assessment.
An income tax notice under Section 143(1) will be issued in any of the following scenarios:

  • Additional tax is payable by the assessee, after making adjustments mentioned below and giving credit to the taxes and interest paid. In such a case, the taxpayer will be asked to pay the amount due within 30 days.
  • Tax is refundable to the assessee, after making adjustments mentioned below and giving credit to the taxes and interest paid.
  • There is an increase/decrease in the loss declared by the assessee and no tax or interest is payable by the assessee and no interest is refundable to the assessee.

The total tax payable, refund applicable or loss can be recomputed due to any of the following reasons:

  • Any arithmetical error in the return.
  • An incorrect claim, if such incorrect claim is apparent from any information in the return.
  • Disallowance of loss claimed, if a return of the previous year for which set-off of loss is claimed was furnished beyond the due date specified under section 139(1).
  • Disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return.
  • Disallowance of deduction claimed u/s 10AA, 80IA to 80-IE, if the return is furnished beyond the due date specified under section 139(1).
  • Addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return

Intimation under section 143(1) shall be sent before the expiry of one year from the end of the financial year in which the return is made. For example if the return is filed on 25.07.2018, then the intimation u/s 143(1) can be sent on or before 31st March 2020.

Intimation u/s 143(1) is sent in the following cases:

  1. When there is no mismatch:
    It’s likely that all of the fields are matching and there is refundable or no tax due – in such a case you can safely assume the intimation to be an acknowledgement of your tax return. No further action is required from your side.
  2. When there is a Demand and you agree with it:
    You need to make payment of this tax due to the income tax department. Once you make a payment of the tax due, no further action is required from your end.
    The Taxes can be paid by a taxpayer through any one of following modes:
    • Through Bank (physical)
    • Online payment
  3. Where there is a Demand and you do not agree with it:
    It can be corrected through two ways.
    • Rectification Request: A rectification request under section 154(1) is allowed by the Income Tax Department for correcting mistakes when there is an apparent mistake in your ITR
    • Revised Return: Revised Return under Section 139(5) of the Income Tax Act can be filed only if you have made any mistakes in your original income-tax return.

What does communication under section 143(1)(a) means?

Notice u/s 143(1)(a) is an intimation from the Central Processing Centre (CPC) seeking clarification of the mismatch between the Income and deduction when compared to Form 16, Form 16A or Form 26AS.

How to provide response to Communication u/s 143(1)(a)?

Step 1: Login to the Income tax portal https://www.incometaxindiaefiling.gov.in/home
Step 2: Go to e- Proceeding tab and select e-Assessment/Proceedings.

Step 3: After clicking on “e-Proceeding”, you will see a screen as given below. Click on Adjustment u/s 143(1)(a)’.

Step 4: After selecting the proceeding name for the respective Assessment year, the following screen will be displayed. Click on Reference ID to view the notice and to provide the response please select the submit option.

Step 5: Now you have to select whether you ‘Agree’ or ‘Disagree’ with the adjustments in the notice and accordingly you have to select the same.

Step 6: If you Select ‘Agree or Partial Agree’, you have to file a revise return after providing necessary adjustments. If you select Disagree the following screen will be displayed and then you will have to mention the reasons for your disagreement. The reasons are same as those mentioned above. 
Enter the necessary details and click on ‘submit’ and once you submit your response, you will see an acknowledgement screen.