Important Keyword: Raise a tax demand, Process a tax refund, Arithmetical Errors, Incorrect Claims.
Table of Contents
Introduction
Taxpayers often encounter situations where the amount of tax they report in their income tax returns does not match the assessment done by the income tax department. This difference is referred to as deficiency. While the term “deficiency” is not explicitly defined in the Income Tax Act, it is commonly used to describe such discrepancies in day-to-day life. When this occurs, the income tax department notifies the taxpayer about the deficiency through an intimation order under Section 143(1) of the Income Tax Act, 1961.
This article will walk you through the concept of deficiency, how it is calculated, what adjustments are made by the department, and the steps you need to take to address such deficiencies.
What is Deficiency?
A deficiency arises when there is a difference between the tax reported by the taxpayer and the tax assessed by the income tax department after reviewing the filed returns. This discrepancy may be due to computational errors, incorrect claims, or disallowed deductions. When such a difference is identified, the department sends an intimation under Section 143(1), notifying the taxpayer of the tax demand or, in some cases, a tax refund.
In the context of a tax demand, this difference is often termed a deficiency in the tax filing, and the taxpayer must take steps to address it within a specific timeframe.
How is Deficiency Calculated?
The deficiency is calculated after the taxpayer files their income tax return (ITR). The Income Tax Department assesses the return based on information from various sources, including income disclosures, tax deductions, and other relevant data. This assessment process is fully automated, with no human intervention, ensuring accuracy and transparency.
If discrepancies or errors are found during the assessment, the department sends an Order under Section 143(1) to the taxpayer. This order might either:
- Raise a tax demand (if the tax assessed is higher than what was reported in the return).
- Process a tax refund (if the tax assessed is lower than what was reported).
In cases of tax demand, the deficiency is identified, and the taxpayer must act to resolve it.
Key Steps Involved in the Calculation
The assessment process considers the following aspects to calculate any deficiency or tax refund:
- Arithmetical Errors: If there is any basic calculation error in the return, such as incorrect addition or subtraction of income, the department will correct it and notify the taxpayer.
- Incorrect Claims: If the taxpayer claims deductions, exemptions, or expenses that are not supported by the details provided in the return, the department disallows such claims. This might lead to an increase in taxable income and, consequently, the tax payable.
- Disallowance of Losses: The department may disallow the set-off of losses, either for the current financial year or brought forward from previous years, if they do not meet the specified conditions.
These adjustments made by the department can lead to the identification of a deficiency in the taxpayer’s reported income and tax liability.
What to Do When You Receive a Deficiency Intimation
Upon receiving an intimation under Section 143(1), taxpayers need to review the details carefully. If the intimation highlights a deficiency (tax demand), it is important to act swiftly. Here’s what you should do:
- Verify the Information: Cross-check the intimation with your filed return to identify the source of the discrepancy. Look for any arithmetical errors or incorrect claims that might have caused the deficiency.
- Agree or Disagree: If you agree with the deficiency, you must pay the additional tax within 15 days of receiving the notice. If you disagree, you can file a rectification request or respond with supporting documents to prove that your original filing was accurate.
- Respond Promptly: Failure to respond within the stipulated time may lead to further action by the department, such as initiating a scrutiny assessment, which can be more detailed and time-consuming.
How to Pay the Deficiency Amount?
If you agree with the tax demand raised by the income tax department, you need to make the payment as soon as possible. The payment process involves the following steps:
- Use Challan 280: To pay the tax demand, you will need to use Challan 280, which is available on the Income Tax Department’s official website.
- Select the Right Payment Type: When filling out Challan 280, ensure that you select the payment type ‘Tax on Regular Assessment (400)’. This indicates that the payment is being made in response to a tax demand raised by the department.
- Complete the Payment: Once the challan is correctly filled, proceed with the payment through the available online or offline methods.
- Keep Proof of Payment: After making the payment, keep the payment receipt or challan as proof, in case you need to present it later during any further tax assessments or queries.
Adjustments Made by the Income Tax Department
The adjustments that lead to the calculation of a deficiency are mostly automated and involve the following:
- Correction of Arithmetic Errors: Any math errors in the ITR will be automatically corrected by the system during the assessment.
- Disallowance of Incorrect Claims: If a taxpayer claims deductions or exemptions that are not valid based on the data provided, these claims will be disallowed. For instance, if a taxpayer claims a deduction for a non-qualifying investment, this will be rejected, and the taxable income will increase.
- Set-off of Losses: The department may disallow the set-off of losses (current or past year) if they do not meet the conditions specified in the Income Tax Act. For example, capital losses can only be set off against capital gains, not against other types of income.
Conclusion
Understanding and handling tax deficiencies is an essential aspect of being a compliant taxpayer. If you receive an intimation about a deficiency under Section 143(1), ensure you carefully review the details and take immediate action. By responding on time, verifying your return, and paying any additional taxes, you can avoid further complications like scrutiny or penalties.
Download Pdf: https://taxinformation.cbic.gov.in/view-pdf/1001006/ENG/Notifications
