What is Income Tax Return?

Tax on incomes, earnings and gains is levied by the Income Tax Act, 1961 (‘Act’) in India and the same is enforced and administered by the Income Tax Department. Income tax is either collected directly from the taxpayer in the form of advance tax and self-assessment, or they are collected indirectly through the persons paying income or charging expenses to the taxpayer, in the form of tax deducted at source (‘TDS’) or tax collected at source (‘TCS’) respectively.

Income Tax applies across the nation and is applicable to every person whether real or artificial, incorporated or otherwise. Accordingly, the taxpayer can be an individual, Hindu Undivided Family (HUFs), Body of Individuals (BOI), Association of Persons (AOP), firm, company, trust, society, political party or an artificial judicial person. Bearing a few exceptions, all these persons have to file the details of the annual incomes earned or gains accrued with the Department after the end of each financial year through the forms called Income Tax Returns (‘ITR’). These forms are in fact a self-declaration of the taxable incomes and gains followed by calculation of income tax and the details of those taxes paid.

Who all are required to mandatorily file the ITR?

Following categories of persons have to file the ITR every year without any exception:-

1. Individuals or HUF’s having gross total income more than the basic exemption limit;
2. Companies and firms including limited liability partnerships;
3. Any person wanting to carry forward or set off their losses;
4. Any person liable to get their books of accounts audited under the Act;
5. Any person having any assets located outside India or financial interest in an entity outside India or signing authority in a foreign bank account;
6. Persons deriving income from property held under a trust for charitable or religious purposes; or a political party, a research association, news agency, educational or medical institution, trade union, a not for profit university or educational institution, a hospital, infrastructure debt fund, any authority, body or trust;
7. Any person who has entered into a transaction which is a reportable specified financial transaction, details of which are compiled under the Annual Information Report.

What are the benefits of filing the Income Tax Returns?

1. Ease in availing loans and credit facilities

Filing of ITR is a prerequisite in availing personal or business loans or credit lines, including overdraft facilities, cash credits, bill discounting facilities and credit cards. In most cases, ITR’s of previous three financial years are a pre-requirement.

2. Enabling processing of visas for foreign visits, travel and stay

Overseas travel requires visas from the host countries. However, most of the visa processes these days call for a proof of earning. ITR’s are the most conclusive evidence as a proof of earning.

3. Claiming relief of taxes paid on income from foreign countries in India

To get the benefit of tax paid in other countries under Double Taxation Avoidance Agreements (‘DTAA’) taxpayers have to file income tax return. DTAA is an agreement between countries which ensures that taxpayers do not end up paying taxes twice on the same income. Such relief from double taxation is available under Sections 90, 90A and 91 of the Act. One can only claim such relief when the return of income has been filed.

4. Envisages issuances of Tax Clearance Certificate

To obtain tax clearance certificate under Section 281 of the Act, it is necessary to file income tax returns. This certificate is usually needed at the time of entering into high value transactions or foreign transactions especially related to sale or transfer of assets.

5. Opens up eligibility to filing of Government Tenders

If a person intends to apply any government projects through filing of tenders, income tax returns of preceding 3 years are a predefined norm for the eligibility.

6. Serves as a proof of accumulated earnings over the years

Income tax returns provide details with respect to the incomes earned and the sources of those earnings. These details serves as an evidence for high value transactions related to investments, properties and assets that a person may execute at later stage in life.

7. Helpful in case of no will or inheritance deed left by deceased taxpayer

Income tax returns also serve as a perfect way to keep the financial affairs of a person organised, updated, truthful and orderly. It may also provide details of all assets held and liabilities pending to be discharged in additions to sources of income. This in turns helps in distribution of assets and income of deceased taxpayer to the legal heirs in an amicable and documented manner.

Additional Benefit of filing of Income Tax return on or before Due date:-

1. Claiming Income Tax Refund

If a taxpayer has paid excess taxes by way of TDS or TCS, refund shall become due and the same can only be processed when income tax returns are filed and verified by the taxpayer within the stipulated time under law.

2. Losses can be carried forward to subsequent years for setting it off against future incomes

Taxpayer cannot carry forward losses of the current financial year to the next financial years until the ITR is filed within the due date.

3. Avoid extra interest on tax liability

Income tax returns can be filed only after the applicable taxes have been paid. Hence any delay in filing of the ITR, beyond the due date, attracts an additional interest at the rate of 1% for every month, or part of a month during the period of delay under Section 234A of the Act, on the amount of tax remaining unpaid.

4. Timely filing of ITR avoids late fees under Section 234F of the Act

Filing of income tax returns after the due date may attracts late fees up to ₹ 10,000/-. This late fees is in addition to any other penalty which may be levied under the Act.

The new and enhanced environment of income tax return filing and processing:-

In order to increase the number of returns filed and simultaneously reduce the time taken for processing for ITR’s, the Cabinet of Ministers had granted their nod to establish an integrated e-filing and centralised processing centre (‘CPC 2.0’).

CPC 2.0 aims at integrating all the income tax related processes under a single window and bring in place a quick, transparent and robust income tax filing, processing and post processing system. Faceless assessments and appeals, taxpayers’ charter, online grievance handling mechanism and servicing the needs of taxpayer under the Act, all these aspects have either been rolled out already or would be rolled out very soon. The entire project of CPC 2.0 is expected to be rolled out by the end of this calendar year and all the income tax returns filed for the financial year ending March 2020 will be processed under the new system. Hence the Income Tax Department has till date not initiated any processing of returns filed for the FY 2019-20(AY 2020-21).

(This article represents the views of the authors only and does not intent to give any kind of legal opinion on any matter)

Author:

Gyanesh Shukla,

Director | Email: gyanesh.shukla@masd.co.in