Effect of higher estimates of income for purposes of advance tax in financial year 1985-86 on assessment in relation to earlier years-Clarification regarding - Income Tax - 423/1985

Effect of higher estimates of income for purposes of advance tax in financial year 1985-86 on assessment in relation to earlier years-Clarification regarding Circular No.423 Dated 26/6/1985 The Finance Act, 1985, has, with the objective of securing better tax compliance, rationalised the rates of personal income-tax. Fears have, however, been expressed that where a taxpayer declares, for purposes of payment of advance tax during the current financial year, a substantially higher income than that assessed for any earlier year, the Income-tax Officer may suspect that income chargeable to tax for that year has been underassessed and, accordingly, re-open the assessment for that year. Fears have also been expressed that where the income declared for purposes of payment of advance tax during the current financial year is higher than the income declared in the return of income for an earlier year, the Income-tax Officer may start roving inquiries against the taxpayer in the pending assessment proceedings for that year. 2. The circumstances in which an assessment can be re-opened under clause (a) or clause (b) of sub-section (1) of section 147 of the Income-tax Act have been clearly enunciated in a number of decisions of various High Courts and the Supreme Court. Income-tax Officers have, therefore, to follow these principles in re-opening the assessments for past years. In terms of the principles enunciated in these decision, the mere declaration, for purposes of payment of advance tax, of a much higher income than that assessed for any earlier year, will not constitute a valid ground for re-opening the assessment for any earlier year, or for starting roving inquiries against the taxpayer in any pending assessment proceeding. 3. Clarification has also been sought on the question whether a taxpayer, who is found to have concealed his income for any earlier year, can claim that such income should not be assessed in that year on the ground that he had included such income in the estimate of advance tax furnished by him for the financial year 1985-86. Such a claim is clearly untenable. Income which relates to a particular assessment year can be assessed only in that year. Hence a taxpayer will not be able to claim that any part of the higher income declared by him for purposes of payment of advance tax should be set off against the income found to have been concealed by him for any earlier year. In such cases, the advisable course for the taxpayer will be to, voluntarily and in good faith, make a full and true disclosure of his concealed income, prior to its detection by the Income-tax Officer, and then make an application to the Commissioner of Income-tax for the reduction or waiver of penalty and interest under section 273A of the Income-tax Act. (Sd.) O.P. Srivastava, Director, Central Board of Direct Taxes.