Analysis of new provision allowing filing of Updated Tax Return

Updated return can now be filed for AY 2020-21 and subsequent assessment years

The new provision has been made applicable w.e.f 01.04.2022. Accordingly, the Taxpayers who have missed to file ITRs for Financial Year 2019-20 (Assessment Year 2020-21) and Financial Year 2020-21 (Assessment Year 2021-22) can now file ITR for such years by paying additional tax. Also, taxpayers can file Updated Returns for these years if they have omitted to include any income or to declare any income by paying additional tax. However, the updated return can’t be filed for earlier assessment years as availability of this window is only for two years from the end of the relevant assessment year.

Requirement to pay ‘additional tax’

In order to file an updated return, payment of additional tax is also required. An amount equal to 25 per cent of the tax and interest due on the additional income reported is required to be paid where the updated return is being filed within 12 months from the expiry of the assessment year. In case the updated return is being filed after expiry of 12 months from expiry of the relevant assessment year but before 24 months from expiry of the assessment year, then an amount equal to 50 per cent on the tax and interest due on the additional income reported is required to be paid.

Thus, such taxpayers filing returns for FY 2020-21 (AY 2021-22) will need to pay the balance tax due after taking credit of taxes already paid by way of advance tax, tax deducted at source, Minimum Alternate Tax (MAT) credit and any relief under section 89 or under Double Taxation Avoidance Treaty (DTAA) together with interest there on till date and late fee along with an additional amount of 25 per cent of such balance tax and interest before filing updated return. For FY 2019-20 (AY 2020-21), the additional amount will be 50 per cent of the tax payable and interest. The additional tax also with balance tax and interest there on and late fee is to be deposited before filing the return. The entire tax liability along with additional tax is to be paid before filing the updated return.

Further per the Updated Return Form ITR-U, taxpayers filing the Updated Return need to specify any one of the following reasons for filing Updated Return:

Updated return can be filed whether or not a return has been filed earlier

The objective of introducing this new provision is to give opportunity not only to the taxpayers who have failed to file the return but also an opportunity to those taxpayers who having filed the return, later on notices understatement of income consequent to data being collected and uploaded by Income tax department on the portal by way of 26AS, AIS or TIS. A taxpayer having filed the return, in case later on notice any such information, then he can update his return. However, such updation is possible only once for that assessment year. Having updated the return for an assessment year, the same can’t be updated again.

Immunity from penal consequences

By filing this updated return along with payment of additional tax, the taxpayers will get immunity from prosecution under section 276CC for failure to furnish return of income.

Though the amendment doesn’t explicitly provide for immunity from levy of penalty under section 270A in respect of under reporting and misreporting of income in the original return filed, however, considering the provisions of sub section (2) of Section 270A, it can be inferred that no penalty shall be leviable under this Section 270A as well. This assumption gets corroborated from perusal of the Memorandum explaining the introduction of this provision whereby the amendment has been captured under the heading ‘promoting voluntary tax compliance and reducing compliance’ and itself states that the existing timeline provided in Section 139 for filing a revised/belated return is not adequate considering utilisation of huge information and data available coupled with the “nudge approach” that motivates the taxpayer towards the desired objective of voluntary tax compliance, starting with filing of correct tax returns.

As regards immunity from prosecution under section 276C for wilful evasion of taxes, again, there is no explicit provision providing for any such immunity. However, based on the intent of introduction of the provision (as noted above) and considering the fact that taxes, interest along with additional tax liability already stands paid, one may argue that there should be no consequences under section 276C of the Act as well.

It would be ideal if CBDT issues a clarification that there shall be no penal consequences under section 270A or section 276C in case the income is declared in updated return under section 139(8A) to allay any kind of apprehensions of taxpayer. This will help encourage more taxpayers to opt for such new scheme.

High rate of additional tax of 25%/50% for filing updated return may not encourage taxpayers to file updated return where income inadvertently not declared is in the nature of under-reporting and not mis-reporting

It may be relevant to point out that in case the updation of return is in respect of an income which falls within the meaning of ‘under-reporting’ but do not fall within the meaning of ‘mis-reporting’ of income, the total liability on account of tax and interest and additional tax in case of updation of return may be higher than the tax which otherwise may be payable in consequence of assessment/reassessment where such addition or disallowance is made. In this regard, it may be relevant to point out that under section 270AA of the Act, where there is under-reporting of income, a taxpayer is given complete immunity from penalty and prosecution in case the taxpayer pays the demand as per the notice of demand issued in consequence of the assessment order and files declaration in prescribed formation that it shall not challenge the assessment order in appeal. It may be further relevant to highlight that such immunity is granted without the taxpayer having to pay any additional tax or fee. The taxpayer is only required to pay tax and interest in such cases and is entitled to immunity from penal consequences. As against this, in case an updation of return is sought, then in addition to the normal tax and interest, there is a requirement to pay additional tax of 25% or 50% as the case may be.

To explain the above by way of an example, take a case of a company which has opted for 115BAA and had declared income of Rs. 50 lakh in the return filed under section 139(1) of the Act. Say subsequently, the company notices that inadvertently, the amount of disallowance under section 14A to the tune of Rs. 20 lakh was not made in the return filed earlier. In such a case, the total liability arising in consequence of disallowance being made in reassessment proceedings, total liability arising in case updated return is filed within 12 months from expiry of relevant assessment year and tax liability arising in case updated return is filed after 12 but before 24 months from expiry of relevant assessment year shall be as under:

On going through the above table, it may be noted that total liability (ignoring penalty) arising pursuant to reassessment shall be Rs. 8.65 lakhs. As against the same, the total liability (including additional taxes) arising upon filing the updated return under section 139(8A) shall be Rs. 8.12 lakhs in case the updated return is filed within 12 months from expiry of the relevant assessment year and Rs. 10.65 lakhs in case updated return is filed after 12 months but within 24 months from expiry of the relevant assessment year. Keeping in view the same, it appears that where a taxpayer furnishes the updated return within 12 months, the taxpayer may have a lower tax liability vis-à-vis the liability arising in case tax is required to be paid in consequence of disallowance being made in the reassessment proceedings. As against this, in case the taxpayer is not able to file the updated return within 12 months from the expiry of the relevant assessment year, then the taxpayer is worse off under the updated return option and in fact has to pay lesser amount in consequence of reassessment proceedings.

Thus, in such cases where nature of additional income left to be declared in the original return falls within the meaning of under-reporting for which immunity from penalty under section 270AA can be sought and 12 months have already elapsed (AY 2020-21 as on date), then the taxpayer may not be encouraged to file the updated return. However, in case it is not possible to claim immunity on account of say multiple additions having been made in reassessment which warrants the order to be challenged further in appeal, then the tax liability under the updated return shall be lower as the total liability (including penalty) arising in consequence of reassessment shall then be Rs. 11.17 lakhs (as against Rs. 8.12 lakhs payable in case the updated return is filed within 12 months from expiry of the relevant assessment year and Rs. 10.65 lakhs payable in case updated return is filed after 12 months but within 24 months from expiry of the relevant assessment year). Similarly, in case the nature of income not declared is in the nature of mis-reporting, then the total liability being substantially higher i.e. Rs. 18.72 lakhs, the filing of updated return shall be beneficial.

In view of the above, in some situations, a taxpayer may be better off paying taxes after assessment proceedings than by disclosing the same by way of filing Updated Return whereas in some situations, the taxpayer may be better off by filing the updated return. The impact will depend upon the facts of each case.

However, it may be noted that filing updated return may also be beneficial in cases where multiple issues are involved and the taxpayer wishes to accept liability on some issues while choosing to litigate on the rest.

It may be also be relevant to highlight that the above said immunity is available only in case of under-reporting of income and not in cases of mis-reporting of income. As per provisions of section 270A of the Act, any difference between income determined under intimation under section 143(1) and income assessed is treated as under reporting. Such under-reporting is said to constitute ‘mis-reporting’ in the following cases:

In the above stated cases, the benefit of immunity under section 270AA is not available. However, it may be noted that in the following cases, penalty even for under reporting of income is not leviable in terms of section 270A(6):

Thus, if the penalty is not leviable on any of above grounds, then too, a taxpayer may find filing updated return voluntarily costlier as compared to total additional liability arising on addition made consequent to assessment or reassessment.

Benefit of filing updated return is available to all category of taxpayers

It may be noted this facility of updation is open for all taxpayers whether an individual, HUF, AOP, Firm, Company or A Cooperative Society.

Restriction on filing updated return in certain circumstances

In certain circumstances, there is a bar that a taxpayer shall not be entitled to file an updated return. These are as under:

i. Restriction on filing updated return in case of search/survey

As per the second proviso to section 139(8A) of the Act, updated return cannot be filed:

In the above cases, the taxpayer is not eligible to file updated return for the search year/year of requisition as well as for any earlier assessment years. On-going through this restriction, it will be important to note that a person who gets searched or surveyed immediately becomes ineligible to file updated return. As against this, if any money, bullion or valuable article or thing or books of accounts or documents are found belonging to another person in such search or survey, then ineligibility of such other person is only after a ‘notice’ has been issued to such other person. Accordingly, such other person post search or survey on the first mentioned person can file an updated return of current assessment year and last two assessment years so as to declare or include income likely to be taxed in his income consequent to money, bullion, valuable article, books of accounts or documents belonging to him being found in the search or survey of the first mentioned person.

ii. Updated return can only be filed once for relevant assessment year

Another restriction is that updated return cannot be filed for the relevant assessment year by any person if an updated has been filed earlier for such assessment year. Thus, once an updated return is filed for any assessment year, the taxpayer is barred from filing another updated return for the same year even if time for filing the updated return is still available for that assessment year.

iii. Updated return cannot be filed where information available with the AO under certain Acts and the same has been communicated to the taxpayer

Updated return cannot also be filed for the relevant assessment year by any person if;-

On going through the above restriction, it may again be relevant to point out that the restriction gets triggered only when such information has been communicated to the taxpayer, prior to the date of furnishing this updated return. Thus, the person can file updated return in respect of income likely to be taxed in current assessment year and preceding two assessment years consequent to information under SAFEMA, 1976, PMLA, 2002, Black Money Act, 2015, Prohibition of Benami Property Transactions Act, 1988 or under section 90/90A of Income Tax Act before the same is communicated by the AO to such person.

It may be further noted that the restriction triggers as and when the information is ‘communicated’ to the taxpayer. Normally, under the new reassessment regime, communication may take place when a notice under section 148A(b) is issued on the basis of such information to conduct enquiry for reassessment proceedings. However, there may be other instances of ‘communication’ as well such as where notice under section 133(6) is issued in pursuance to receipt of information. Before communication of the information for the relevant assessment year, the taxpayer is eligible to file updated return.

iv. Assessment/reassessment/re-computation/revision is pending or completed

Another restriction is that an updated return cannot be filed for the relevant assessment year by any person if any proceeding for assessment or reassessment or re-computation or revision is pending or completed for that assessment year. Thus, where return has been filed earlier, the taxpayer will not be eligible to file updated return once the notice under section 143(2) has been issued. As against this, a taxpayer who has not filed the return, its eligibility to file updated return shall continue to be available till notice under section 148 is issued for assessment.

Another issue may arise as to whether issuance of notice under section 148A(b) under the new reassessment regime may said to constitute ‘pendency’ of assessment/reassessment proceedings thereby triggering the restriction to file updated return. The said issue may be debatable. Legally the reassessment proceedings get initiated only upon issuance of notice under section 148 and thus, a person on receipt of notice under section 148A(b) may be eligible to file updated return provided the assessment year for which such notice has been issued is falling within 24 months from the end of that assessment year and the information provided in such notice is not relating to restricted matters such as search, survey, Black Money, Benami etc. As noted earlier, in prescribed cases where the restriction triggers upon communication of information such as in matters pertaining to Black Money, Benami, etc, issuance of notice under section 148A(b) may itself trigger the restriction as the communication may said to have taken place.

v. Updated return cannot be filed where prosecution has been initiated

Another restriction is that updated return cannot be filed for the relevant assessment year by any person if any prosecution proceedings, under Chapter XXII of the Income Tax Act, have been initiated for the relevant assessment year in respect of such person prior to filing of updated return. It is to be noted that the taxpayer shall not be eligible to file an updated return for a relevant assessment year in a case where prosecution has been initiated under Chapter XXII of the Income Tax Act in respect of such year even if the grounds on which prosecution has been initiated has no relation with income/evasion of taxes (such as prosecution for technical breach, delay in payment of taxes deducted at source, etc).

Updated return cannot be a return of loss

It is important to point out that this updated return cannot be filed if it is a return of loss. Accordingly, if a person has earlier filed a return declaring loss, such person cannot file an updated return reducing such loss, in case it has missed to include certain income or loss has been computed in excess. A loss return can be updated only if it gets converted to a return of positive income meaning thereby entire loss should get wiped out and thereafter there should be some positive income.

Updated return to be filed for subsequent years where there is reduction in losses/unabsorbed depreciation/MAT credit

If by virtue of filing an updated return under the new provision, losses/unabsorbed depreciation/MAT Credit carried forward is to be reduced for any subsequent previous year, then it is mandatory that an updated return shall be furnished for each such subsequent previous year. Consequently, there is a requirement to pay additional tax in respect of each such subsequent year also.

In a case where return for subsequent year has been filed whereby enhanced losses have been claimed (which are required to be reduced as a result of filing updated return for any preceding year) and time limit to file revised return under section 139(5) is available, then there may be an issue as to whether filing of updated return for such subsequent year shall still be mandatory or not; or whether the same can be corrected by way of filing revised return. However, in case time period for filing original return for subsequent year is yet to expire, return for such subsequent year has not been filed and consequently, enhanced losses have not yet been claimed in such return for subsequent year, then it may not be necessary to file an updated return and the taxpayer may claim reduced losses in the original return for such subsequent year itself.

Updated return cannot result in decrease in tax liability or increase in refund

It may be important to point out that an updated return cannot be filed to decrease the tax liability as per the return already filed for the relevant assessment year. So one cannot reduce income while filing updated return. Similarly, updated return cannot be filed for claiming refund and also for claiming increased refund as compared to the refund as per the return already filed.

Accordingly, in case a taxpayer has paid excessive tax by way of advance tax or TDS and his liability of tax on the income actually earned is less than the tax paid by way of advance tax and/or TDS, he will not be eligible to file this updated return for the relevant assessment year unless the income is increased to such a level where there is an additional tax liability over and above the taxes paid by way of advance tax and TDS.

From the above prohibition imposed on filing Updated Return, it is interesting to note that a taxpayer is allowed to file updated return of past years only in case there is an additional Tax liability and not in case where there is a claim for refund. A taxpayer having deposited tax much more than its liability is ineligible to file updated return, whereas a taxpayer who is in arrear of paying taxes on income earned by him, is eligible to file updated return and get immunity under the Act.

A taxpayer can update the return if he has omitted to declare or under declared any income but he can’t revise and file an update the Return, if he has overstated its income or by mistake included any income which either was not to be included or was exempt or where a taxpayer has omitted to claim any deduction permissible under the law. This apparently is not fair and equitable to the taxpayers.

Set off of losses permissible against additional income declared in updated return

Another issue may arise as to whether setting off losses against additional income is permitted or not. In this regard, it may be relevant to mention that the same is not specifically barred. Thus, the taxpayers may be able claim set off losses while declaring additional income in the updated return, subject to the rider that the set off should not result in decrease in tax liability or increase in refund.

Filing of updated return should be allowed even where there is decrease in tax liability

The apparent objective of this new provision is additional revenue, then only one is eligible otherwise the person is not eligible. Though one may appreciate this objective, however, law should be fair and equitable to both tax administration as well as taxpayers. The law today give authority to tax administration to rectify, revise and reassess any under assessment and that too with limitation going up to as much as 10 years from the end of the relevant assessment years. As against this, the law gives option to a taxpayer to rectify or revise its return within a period ranging from merely 5 months to just 1 month.

It may be relevant to point out that the time limit for filing a revised return (whereby a claim for deduction omitted to be made in the original return may be claimed) used to be two year from the end of relevant assessment year and was reduced to one year from the end of relevant assessment year. This period of one year was initially reduced by Finance Act, 2017 from expiry of 1 year from end of relevant assessment year to end of assessment year itself. Subsequently, this time limit was further reduced by Finance Act, 2021 from expiry of assessment year to 3 months before the expiry of relevant assessment year. Thus, a taxpayer who is required to file the return by 31st October can furnish the revised return only by 31st December i.e. within 2 months. Not only that, a taxpayer to whom Transfer Pricing provisions are applicable, is required to file return by 30th November, get only 1 month to file revised return, if any.

Thus, the period to file revised return within 5 months to 1 month is too low. In fact, in the Memorandum Explaining the introduction of new provision, it has been acknowledged that this period of 5 months to 1 months may not be adequate and hence the new provision for filing updated return is being introduced. Relevant extract reads as under:

“3. This provision 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. This additional timeline for filing a revised/belated return may not be adequate when we factor in utilization of huge information and data available coupled with the “nudge approach” that motivates the taxpayer towards the desired objective of voluntary tax compliance, starting with filing of correct tax returns.

4. Hence, it is proposed to introduce a new provision in section 139 of the Act for filing an updated return of income by any person, whether he has filed a return previously for the relevant assessment year, or not. 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.”

Once the legalisation itself acknowledges that the time period for filing revised return may not be adequate, there is no reason as to why only additional taxes should be a criteria for eligibility to file the updated (revised) return and why one should not be eligible to file updated (revised) return to claim deduction inadvertently not claimed earlier. After all, the mandate of Article 265 of Constitution of India is to bring to tax correct income.

Nobody can dispute the fact that tax laws are quite complex and there is bound to be some mistakes and omissions here or there both by tax administration as well as taxpayers. More so when every day judgements are being delivered by various courts interpreting this complex income tax law. The administration has the authority under the law to use these interpretations to its advantage, to revise and/or reassess the income but the taxpayer has no right to seek advantage of such interpretation as time period for filing revised return is too short. Even during assessment proceedings, a taxpayer is denied the right to make a legitimate claim of deduction or exemption before the assessing officer on the ground that the same can’t be entertained without return being revised and time period of revision stands expired by that time.

Considering the above, it would have been ideal if this option of updating return had been provided for the benefit of taxpayers as well. To protect the interest of the Revenue, a similar condition may have been imposed that in case a deduction is being claimed in the updated return for the first time, then 25% of tax benefit will have to be forgone in case the tax return is being filed within 12 months and 50% of the tax benefit will have to be forgone in case the updated return is being filed after 12 months.

Need to allow filing of updated return beyond two assessment years

The objective of introducing this new provision is to encourage voluntary compliance, to promote ease of doing business in India and to reduce litigation. Hence the restriction of updating return within two years from the end of the assessment years should also be relaxed. It would be ideal that time period for filing updated return be further increased with a requirement to pay higher amount of additional tax. This will help encourage more voluntary compliance and also ensure increased collection of taxes which otherwise is a challenge even for the tax administration with best of enforcement machinery. To ensure that taxpayers don’t take undue advantage of such relaxation, the additional tax to be paid may be increased in proportion for each year, may be 75% in case updated return it is filed beyond 2 years but within 3 years from the end of relevant assessment year and 100% in case it is filed beyond 3 years and before 4 years from the end of relevant assessment year and so on. The eligibility criteria for filing updated return of assessment not being pending and/or assessment not being made at the time when updated return is filed with heavy additional taxes (more than the penalty otherwise leviable) will ensure that only bonafide cases of omissions and errors will be able to file the updated returns and hence, there shouldn’t be any apprehension that it may lead to misuse by the taxpayer.

Condonation of delay under section 119 in cases involving genuine hardships

Under section 119 of the Income Tax Act, CBDT has the power to condone the delay in filing return to avoid genuine hardships. Prior to insertion of section 139(8A), in cases involving genuine hardships, the taxpayers used to approach CBDT to seek condonation of delay in filing return beyond the due date prescribed under section 139(1) of the Act. Even after insertion of section 139(8A), in cases involving genuine hardships, one may consider approaching CBDT under Section 119 for condonation of delay in filing the ITR rather than filing updated return.