1. Income Tax Basics
Every taxation system requires
assessment. So does the Income
T ax Laws of India. Assessment
simply means determination of
T ax. This tax is determined as
per Taxation laws existing in
that particular Assessment Y ear.
Income
What constitutes income is a
very dynamic concept – as that
is determined through mix of
legislation, court judgement,
custom, business practice etc.
Many times, there are retrospective amendments in
law that leads to change in
amount of income for particular assessment year (AY ), and
consequently change in tax liability.
Here we may remember that the process of Assessment comes when
income has already been earned or accrued. Consequently first the
income year comes and the year next to income year is the assessment
year. For example the Assessment Y ear 2009-10 would relate to
income year 2008-09. Here in common parlance, the income year
might be called „financial year‟. However, the Income T ax Act of India
prefers to call it „Previous Y ear‟.
Person – One who earns Income
T he „Person‟ who is under assessment is called the Assessee. T he
Person / Assessee can be an Individual / HUF / Firm / LLP /
Cooperative / Company / AOP / BOI / Artificial Juridical Person.
Ty pes of Income
T ax is assessed (ie. determined) under the following heads of income:
1) Salary
2) House Property
3) Business / Profession
4) Capital Gain
5) Other Sources
Now it is understood that these heads of income would be applicable
depending on type of assessee. For example a Company or Firm etc
cannot earn salary. – only an individual can earn it.

2. Ty pes of Assessment
Here we focus on the various procedures of assessment. Under
Income T ax Act 1961, there are the following types of assessment:
1) Sec 140 A – Self Assessment
2) Sec 143 (3) – Regular / Scrutiny Assessment
3) Sec 144 – Best Judgment Assessment
4) Sec 147 – Assessment / Reassessment of Income Escaping
Assessment
Normal Procedure of Taxat ion
T he usual process of T axation is:
1) T he assessee earns income
2) He deposits tax – based on self calculation – or as determined by
his T ax Consultant
3) T he assessee fils Income T ax Return (IT R)
Income Tax Ret urn (ITR)
Here it may be noted, that just paying tax is not enough. T he ultimate
thing is the IT R. T his IT R can be called a self declaration of
information containing various sources of income earned and tax
paid. T he Government requires IT R because, in absence of that, it
would not be able to understand as to what amounts and from what
sources the assessee has earned in the year, and what taxes has to been
paid by the assessee.
Here without going into details, it might be added, that the IT R under
normal course should be filed u/s 139(1). T his section describes the
normal time limit of filing the IT R – which is for non-audit cases is
July 31 of the Assessment year, and for audit cases September 30 of
the Assessment year.
Generally, a person who has income above the minimum exemption
limit (without giving effect of any sections of IT Act) is obligated
under law to file IT R. However assessee eg a Company has to file IT R
compulsorily whether it earns profit or not.
Also, a person, who has income below the minimum exemption limit,
though not required by law, is not barred from filing IT R. Often
people having income below the minimum exemption limit also file
IT R – and the motivation for filing it varies – it can be that someone
wants a Credit Card or a loan from some Bank or NBFC, or has to
produce the IT R for getting some contract. Many of those who return
such income are genuine cases.
However, there are others who would try to manipulate law for their
ends. For example, some people who are in receipt of black money file IT R in name
of their wives or other relatives – showing that these

3. relatives have earned it through some activity like coaching or
teaching or sewing center! T his way they make some of it white –
without paying any tax!
It is even possible that such an assessee is not in receipt of the amount
that is being shown in IT R – it is just to get benefit of Credit Card or a
personal loan that they file IT R.
Also, sometimes, IT R is filed for the purpose of getting refund of T DS.
Had there been no T DS, the person might not have required filing
IT R.
Legally one should return only that much income which s/he earns.
However our Income T ax laws are so complicated – that people would
take advantage of it in different ways and sometimes in a wrong way.
Need for Checking by IT Dept
Often people may think that IT Dept would not be concerned if any
person files IT R showing income of Rs. 85,000 – when the exemption
limit is Rs. 150,000. But I have seen that even Assesses returning such
low level of income as Rs. 83,000 come under net of scrutiny
assessment!
T hen there are also mal-practice in case of many assesses who earn
high income. T he usual tendency is to show less income so as to pay
less tax. T his is quite prevalent among Company assesses and T rusts.
Often, such malpractice of returning less income is deliberate. But
sometimes, it can even be due to ignorance of law or mis-application
of law.
Given this situation – where the culture of honesty is not there in
society – whether deliberate or by design or by ignorance of law – the
IT Department has come out with its own ways and procedures of
assessement. Every year it comes out with a list of assesses – which is
a certain percentage of assesses – of which it does detailed scrutiny.
T he list is generated by computer (Computer Assisted Scrutiny
System (CASS)) based on certain pre-defined criteria, as determined
by the IT Dept from time to time.
Examples of such criteria:
1) All returns where deduction claimed under Chapter VIA of the
Income tax Act is Rs. 25 lakhs or above in stations other than the
cities on computer network.
2) All cases where total value of International T ransactions (as
defined u/s 92 B of the Income tax Act) exceed Rs.15 crores) etc.
Usually every year, the IT Dept comes out with number of such
criteria – which it considers fit cases for detailed scrutiny.
Here it may also be added that u/s 2(7) Assessee means a person by

4. whom income tax or any other sum of money is payable under this
Act, and includes
(a) every person in respect of whom any proceeding under this Act has
been taken for the assessment of his income or of the income of any
other person in respect of which he is assessable, or of the loss
sustained by him or by such other person, or of the amount of refund
due to him or to such other person ;
(b) every person who is deemed to be an assessee under any provision
of this Act ;
(c) every person who is deemed to be an assessee in default under any
provision of this Act ;
Consequently the department can issue assessment notice to any
person – including non-asessees and non residents – if in opinion of
department such person is liable to tax.
T he other thing is that the above-mentioned types of assessments are
assessment under different conditions or (legal) situations or stages. It
would be even more appropriate to call them different procedures of
assessment. Because ultimately – and simply stated – assessment is
determination of tax. One cannot determine different tax for same
income at different times (till one is following the same law for the
particular AY ). It is basically the kind of information that the IT Dept
has with itself that it undertakes to assess the tax liability under the
different provisions.
Self Assessment
1) Self Assessment u/s 140 A: T his simply means that the person
is calculating his own tax liability and thereafter filing IT R after
payment of self-calculated tax. Since assessee himself calculates the
tax and income returned – it is called self-assessment. However, the
system of self-assessment is only to make the work of IT Dept easier –
it is not the end of assessment. It is simply paying tax and filing of
Return by the assessee. T he IT Dept only gives an acknowledgement /
intimation u/s 143(1). T he assessee can file IT R as Self assessment
under the different sections of 139 (Return within due date / Belated
Return / Return of Loss etc.) or in response to notice u/s 142(1) or
148 or 153A
T he Self Assessment also covers case where one has filed IT Return –
and some Refund is due. T hen when the IT Dept processes the Return
and sends the Refund Cheque (Income T ax Refund Order) – it is sent under cover of

5. „Intimation u/s 143(1)‟
T here is no assessment order by the Dept. under Self Assessment
simply because, the assessment is not being done by the department.
In my opinion the self-assessment should only be considered an
exercise in filing of IT R – and just – the first step in the process of
assessment(s) that are undertaken by the department. If the Dept does
not take up the case for any further assessment – then there is nothing
else to do. Since the assessment is not being done by the IT
Department, for legal purpose the acknowledgment / intimation by IT
Department is not considered as „Assessment‟.
Scrut iny Assessment
2) Regular / Scrutiny Assessment u/s 143(3): For this notice is
issued u/s 143(2). T he salient features are:
T his notice can be issued only when the assessee has furnished Return
of Income u/s 139(1) or 142(1)
T he notice u/s 143(2) has to be served on the assessee within six
months of expiry of financial year in which the return was furnished.
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Only 3% to 5% cases are taken for scrutiny assessment
T he Assessing Officer (AO) is not required to possess any „reason to
believe‟. In this assessment AO is charged with the duty to ensure that
the assessee:
- has not understated income
- has not computed excessive loss
- has not under paid taxes
Also, the AO may require documents / proof from the assessee – on
which the AO would make his assessment and calculate the tax
liability. Sometimes, AO may also wish to physically verify the
Creditor etc!
Also while the scrutiny assessment is in process, the assessee can also
put forth claims that he had not done in the IT R – and these have to be
considered by the AO.
Consequently, in his assessment u/s 143(3) the AO can even reduce
income below the returned income or assess loss higher than the
returned loss.
T he assessment u/s 143(3) is completed with an assessment order in
writing – which should contain the tax computed under the signature
of AO.
Under this AO can also do protective assessment – ie. assess the same
income in hands of more than one person till it becomes clear in whose
hand the income should be assessed. Protective assessment is
undertaken so that there is no loss to Revenue.

6. If assessment u/s 143(3) is done on basis of invalid return – the
assessment order continues to operate – till it is invalidated by the
court.
On remand (ie. if the cases goes to IT AT on some points, and IT AT
sends it back to AO for reconsideration or correction on question of
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fact or law) only the specific point can be dealt by the AO. On remand,
the AO cannot bring in new sources of income or open new issues.
Assessment made under this section would be final and the
department cannot open the case again – unless there are valid
reasons („reasons to believe‟). T hese are dealt in reassessment
proceedings.
Best Judgment Assessment
3) Best Judgement Assessment u/s 144: Conditions:
- Assessee fails to furnish IT R u/s 139(1) and has not furnished it u/s
139(4)
- fails to comply with all terms of notice u/s 142(1)
- fails to comply with direction issued u/s 142 (2A)
- fails to comply with terms of notice u/s 143(2)
T hen the AO to the best of his judgment can determine the income and
tax payable by assessee based on records possessed by AO.
Prior to proceeding on assessment u/s 144, the AO should give a show
cause notice to the assessee. However if the AO has already issued
notice u/s 142(1)(i) and the assessee has not complied with its terms,
then AO can go ahead with assessment and no show cause notice is
required.
U/s 144 AO cannot assess income below returned income and cannot
assess loss higher than the returned loss. Even in case there is no
return for the year, the AO has to base his calculation on certain
logical/rational/scientific and reasonable ways viz. based on ratios,
growth rate of industry / sector. T he assessment order should
therefore be a speaking order.
Assessment u/s 144 can also be resorted to if AO is not satisfied with
the correctness / completeness of Books of Accounts.
Also the AO can reject Books of accounts u/s 145 if assessment
proceedings are in process u/s 143(3) / 144 / 147 / 153A – and in
such case, the AO shall assess the income and tax to the best of
judgement (ie. as per the requirements / procedure of sec 144) and
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complete assessment proceedings under the particular section under
which the proceedings are going on.

7. Reassessment
4) Assessment / Reassessment of Income Escaping
Assessment u/s 147:
T o undertake assessment u/s 147, notice has to be issued u/s 148.
Before issuing notice u/s 148 the AO shall „record his reasons‟ for
issuing the notice. T he notice has to be issued separately for each AY
for which proceedings are to be taken up u/s 147. T he assessee has to
file Return in response to notice u/s 148 – even if he has filed the
return previously within due date. Also, the AO is duty bound to
provide the assessee the reasons recorded by him – if the assessee
requests for it after filing Return of Income in response to the notice.
If on request the reasons are not supplied – then the AO cannot
proceed u/s 147.
If there has been no previous assessment u/s 143(3) or 144, then
proceedings u/s 147 is called assessment, else it is called reassessment.
Also assessment / re-assessment u/s 147 cannot be
undertaken for any AY , if assessment proceedings are already
underway under any other section of IT Act.
In this the most important thing is that the AO should have „reasons to
believe‟ that income chargeable to tax has escaped assessment. In
proceeding under this sections, the AO can also consider any other
income under any head of income that comes to his detection
subsequent to issue of notice u/s 148. However, u/s 147 can only
relate to issues of underassessment – and unlike assessment u/s
143(3), the AO cannot reduce income or increase losses..
T his assessment can be undertaken whether the Assessee has filed
return or not – or whether any assessment has been undertaken
previously or not. T his is because, the section 147 speaks both of
assessment and also reassessment.
Reasons to believe includes:
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1) T here has been retrospective change of law – either by legislation
or due to court order (usually Supreme Court)– and the AO finds that
the assessee needs to be re-assessed in light of the new law / rule that
is to be applied retrospectively.
2) Evidence that has come to notice of AO. T his evidence can be from
any source – including any other assessment proceedings or
information received from revenue intelligence etc.
3) Mistake apparent from records
T he interesting thing is that it is only necessary that there is prima
facie some material on basis of which the case can be reopened. T he

8. sufficiency or even correctness of material is not to be considered at
the stage of opening / reopening of caseu/s 147. However reasons to
believe does not include – rumors, gossips, suspicion or change of
personal opinion of AO.
Now, the assessment u/s 147 and 143(3) (and also 144) is sort of
linked. After all, any assessment can be done only on scrutiny of
records. Now as previously mentioned – to take up assessment u/s
143(3) – notice u/s 143(2) has to be served on the assessee within six
months of expiry of financial year in which the return was furnished.
Example
Now take an example – the assesse “X” has filed Return for AY 2006-
07 based on income for the FY 2005-06 within due date of 31-July-
2006. For doing scrutiny assessment u/s 143(3), Notice u/s 143(2)
can be issued upto 30-Sept-2007.
Now suppose there is no action by the department and no assessment
proceedings are undertaken by the department. Now suppose, in the
May 2009, the AO concerned while doing assessment of some other
case comes to understand that for “X”, for the AY 2006-07, certain
amount of income has escaped assessment. Now in May 2009, the AO
cannot issue “X” notice u/s 143(2) for doing assessment u/s 143(3).
But now he can do the assessment u/s 147.
So, he would issue him notice u/s 148 on 30-May-2009 for opening assessment
proceedings u/s 147. Now in response to this notice – “X”
files return in 5-June-2009. Now this return is treated as return u/s
139. Now AO can issue him notice u/s 143(2) till 30-Sept-2010 to call
for various documents and records and undertake to scrutinize the
documents and compute/recomputed assessable income and tax. T he
assessment shall be considered to have been carried out u/s 147. If
the AO issues notice u/s 143(2) after 30-Sept-2010, then the
proceeding u/s 147 would be void.
Now consider, that in the above case – in response to notice u/s 147,
the assessee “X” does not file any return. T hen AO shall proceed u/s
147 to the Best of his Judgment to assess the income and tax. In doing
assessment as per Best Judgement, the AO shall be bound by the
procedures of Sec 144.
U/s 148 notice can be issued till the end of six years from the end of
relevant AY . T here are various criteria laid down as to whose sanction
is required and the monetary limits etc. But suffice here to say that
notice u/s 148 cannot be issued after expiry of 6 years from the end of
relevant AY – whatever may be the income escaping assessment.

9. Concluding Remarks
What has been described above is to explain how the assessment
procedure works in Income T ax Law. T here are also assessment
procedures relating to cases under search / seizure. But that has not
been dealt here – that would take up another article to write about.
As such, for any case that is undertaken for assessment by the
department– there are various issues relating to date of issue / receipt
of notice, assessee approaching CIT (Appeals) or filing writ petition in
High Court, changes happening in IT laws/ regulations through Court
proceedings in other similar cases, and various circumstantial „ifs and
buts‟. All these tend to complicate the assessment proceedings. And
that is apart from – at times – illegal gratification for „satisfaction‟ of
AO – which at times happen (In one of the seminars, a popular Income
T ax author commented that the „satisfaction‟ of AO was more
important than the correctness of accounts!). All these things tend to
influence a case under assessment.
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