Driving Voluntary Tax Compliance: the impact of Section 139(8A) on Updated Returns

The Finance Act 2022 introduced a new section1 enabling assessees to file updated returns. As per the budget speech and the memorandum attached to the Finance Bill, the purpose of the new provisions was to promote voluntary tax compliance and reduce litigation in situations where the assessee either missed filing his return of income within the statutory timeline or where, after filing his return he subsequently discovered any underreporting of income.

As per the provisions, any person may furnish an updated return for the previous year relevant to the assessment year within 24 months from the end of the assessment year. An updated return may be furnished even if the assessee has filed no return within the statutory timelines.

The Income-tax Act, 1961 (the Act) provides timelines within which a return of income is required to be furnished by various types of assessee. Furthermore, the timeline provided to file revised returns or belated returns has been reduced to 31 December following the end of the relevant previous year. The new updated return provision allows an assessee extended period of 2 years from the end of the assessment year to file an updated return.

For e.g., the timeline to file a revised return or a belated return for AY 2023-24 expired on 31 December 2023. For AY 2023-24, the updated return may be filed by 31 March 2026, thus giving an assessee additional time to disclose his correct total income without any litigation or penal consequences.

An updated return may be furnished in the following circumstances:

  • No return has been made within the statutory timelines
  • A return has been filed by the assessee. However, the assessee has now noticed an error in reporting his income or his income is underreported.

Due to the significant push for digitalization, the government has gathered a huge quantity of data, reflected in the Annual Information Statement (AIS), a comprehensive statement of various incomes and transactions of an assessee on the income-tax website. AIS was also introduced to facilitate voluntary compliance and eliminate the underreporting of income by assessees.

The government recognizes the issue that an assessee may have genuinely missed reporting certain incomes and, hence, also introduced the provisions of updated income to enable the assessee to comply with the disclosures. The government believes that this provision would, on the one hand, bring the 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.

Given the purpose, the provisions are made applicable subject to prescribed conditions. It is quite obvious that these provisions cannot be availed of for claiming any benefit by the assessee, for e.g., an updated return cannot be filed to claim additional deductions, incentives or additional loss/ MAT credit carry forward. An updated return can be filed only to disclose additional income over and above the income that has been disclosed in the original return. In short, the total income as per the updated return cannot be lower than the income in the original return.

Furthermore, the assessee is required to pay additional tax over and above his tax liability while filing an updated return, which should be accompanied by proof of payment of tax and additional tax. Additional tax payable is as follows:

  • If an updated return is furnished within 12 months from the end of the relevant assessment year – 25% of the income tax payable, including surcharge and cess, and interest.
  • If an updated return is furnished after 12 months but before 24 months from the end of the relevant assessment year – 50% of the income tax payable, including surcharge and cess, and interest.

While computing the income tax payable in an updated return, credit of all taxes paid, including TDS, foreign tax credit, rebates, marginal relief and credit of MAT, if any, is allowed.

Additionally, if, as a result of an updated return for a year, the carried forward loss or unabsorbed depreciation or MAT/AMT credit is reduced and has an impact on the taxable income for subsequent year or years, an updated return is required to be furnished for each such subsequent year revising the income. For e.g., if in year 1, the assessee had a loss that was carried forward and set off in year 2. The assessee now files an updated return for year 1, thus reducing the loss that has been carried forward and set off in year 2, he is required to file an updated return even for year 2 with the revised loss set off.

As per the provisions, an updated return cannot be filed in the following circumstances:

  • If it is a return of loss.
  • If it has the effect of reducing the tax liability as disclosed in the earlier return or results in a refund or increases the refund due on the earlier return under Section 139(1)/(4)/(5).
  • If a search under Section 132 is conducted or books of accounts, other documents or assets are requisitioned under Section 132A.
  • Survey is conducted under Section 133A(other than subsection 2A).
  • Any money, bullion, books or, documents, etc. seized under Section 132 or requisitioned under Section 132A in case of any other person belonging to or pertaining to such person.
  • If one updated return has already been furnished by the assessee for the year;
  • Any proceeding for assessment/ reassessment/revision of income is pending or has been completed for the relevant assessment year.
  • The assessing officer has information in his possession under the Prevention of Money Laundering Act,2002 or Blank Money (Undisclosed Foreign Income & Assets) & Imposition of Tax ,2015 or the Prohibition of Benami Property Transactions Act, 1988 or the Smugglers & Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 and the same has been communicated to him before filing the updated return.
  • Information has been received under an agreement referred under Section 90 or 90A of Double Taxation Avoidance Agreement (DTAA) and the same has been communicated to him before filing the updated return.
  • Any prosecution proceedings have been initiated under Chapter XXII.
  • He is a person or belongs to such classes of persons as may be notified by the Central Board of Direct Taxes (CBDT).

An updated return has to be submitted in Form ITR U, notified for this purpose vide Rule 12AC.

As observed above, this is a welcome step with a positive intention to reduce litigations, help better compliance and thus ensure more tax revenues are collected. It gives an assessee a breather to disclose correct income before the tax department without any litigation. This compliance, however, comes with some additional tax burden; hence, assessee’s should not consider updated returns as a substitute to the return filing requirements within statutory timelines.

1. Section 139(8A) of the Income-tax Act, 1961

Tax Street April 2024