Section 144 Of the Income Tax Act

Section 144 of the Income Tax Act 1961 deals with the assessment of taxpayers carried out by an Assessing Officer (AO) as per their best judgement and all the available relevant information. These assessments are generally done in cases where taxpayers fail to comply with the requirements of other sections of the act.

Also Read: Intimation Under Section 143(1) of the Income Tax Act

Best judgment assessment under Section 144 of the Income Tax Act is not invoked in all cases. There are certain circumstances under which the AO invokes it. These include:

Failure to File Tax Returns on Time

There is a specific deadline for filing your tax returns. As many people tend to file taxes on the last day, the official server of the income tax portal may face technical glitches. Therefore, it is in your best interest not to wait for the last day to file your returns but to do so a few days before the deadline.

Not Disclosing the Correct Income

Your tax liability depends on your taxable income. You are taxed depending on whether you choose the new or the old tax regime and under the tax slab you fall under. If you do not disclose your actual income or happen to provide inaccurate information related to your income, the AO can resort to Section 144 to make the best judgment assessment.

Not Complying with Notices

If you do not comply with the notice issued by the tax department under various sections, such as sections 142(1) and 143(2), the AO has the right to invoke Section 144 Income Tax Act. If the AO feels that he needs more clarification regarding a particular thing after filing your tax return, he can issue you a notice under section 142(1).

Not Cooperating with the Tax Authorities

Cooperating with tax authorities during the assessment is in your best interest. Non-cooperation will only make matters worse and complicate things. If you fail to cooperate with the tax authorities during the assessment, the AO can use his right to invoke Section 144 of the Income Tax Act for best judgment assessment.

Also Read: Penalties on Late Filing of Income Tax Returns

Here is what happens when AO decides to invoke Section 144 of the Income Tax Act:

• Notice Issuance: The AO will issue you a notice asking you to provide a reason why they should not proceed with the Best Judgment Assessment. However, if you have received a notice under Section 142 (1), then they may skip this step.
• Your Response: After receiving the notice under Section 144 of the Income Tax Act, you will have a chance to respond and clarify. You need to explain and submit the missing documents.
• AO’s Decision: The next step is the AO’s decision on whether or not they find your explanation and clarification satisfactory. If not, they will proceed with the Best Assessment process.
• Complete Assessment: The AO will start by making a decision based on available information and financial records.
• Issuing Order: Next, the AO will issue an assessment order entailing their findings and tax liabilities determined.
• Demand Notice: If additional tax payable is found based on the AO assessment, a demand notice will be issued in your name.

Also Read: Complete Guide To Income Tax Declaration (ITD)

There are significant repercussions if you get a notice under Section 144 of the Income Tax Act. Some of the potential consequences are as follows:

Higher Tax Liability

This can be the first significant consequence. Your tax liability can increase significantly. The AO may not consider the deductions or exemptions you have claimed in your tax returns. Consequently, you may be paying a higher tax. This can not only burn a hole in your pocket but can also lead to stress.

Interest and Penalty

You might end up paying interest and a penalty for not complying with the relevant provisions. That is not all. The AO may also initiate prosecution proceedings against you. All of these can be a cause of significant stress.

Also Read: What is Tax Evasion? Common Methods and Penalties in India

Under Section 144 of the Income Tax Act, the AO has a time limit before starting the assessment. Section 153 outlines this time limit (see table).

Also Read: ITR Filing Last Date FY 2023-24(AY 2024-25)

The assessing officer uses certain information and methods to make their assessment. Here is the toolkit of an assessing officer.

• Past Returns: You must provide information about your previous tax returns. This can provide valuable insights into your income patterns.
• Bank Statements: AO uses your bank statements to discover undisclosed income sources and suspicious transactions.
• Industry Benchmarks: The AO uses the income details of other individuals in similar businesses to compare with your submitted reports.
• Third-Party Information: Data from employers, banks, and other financial institutions can be used for assessment.
• Lifestyle Indicators: Expensive splurging or buying high-end assets are also indicators that AOs highly consider.

You can do certain things so that you do not get a notice under Section 144 of Income Tax Act. Here are some of those:

File Your Taxes on Time

The simplest way to avoid Section 144 Income Tax Act is always to file your taxes on time. Whether you are filing regular, updated or revised taxes, adhere to the deadline at all costs. If you find it difficult to file it yourself, seek professional help from a tax consultant or a chartered accountant.

Provide Accurate Information

Thanks to technology, concealing income and underreporting are impossible today. The authorities can quickly find if you try to hide anything. Therefore, it is crucial to provide correct information related to your income from all sources. Doing so not only ensures compliance but also goes a long way in mitigating risks associated with invoking Section 144.

Make Sure to Comply with Tax Notices

If you have received a notice, review it carefully and discover why you were issued it. Prepare your reply and forward it to the tax department by the due date. If you need help understanding the Section 144 Income Tax Act notice and clarification about the reply to be sent, seek help from a professional.

Maintain Proper Documentation

Always keep all your financial records carefully and make sure to document major financial changes in detail. These documents are your proof to the AO in case you get any notice under Section 144 of the Income Tax Act.

Cooperate with Tax Authorities

Extend your full cooperation with tax authorities during the assessment. Do not hide anything, and admit if you have made a mistake. The more willingly you cooperate with tax authorities, the lesser the chances of the AO invoking Section 144 of the Income Tax Act.

Account Reconciliation

Another way to avoid triggering Section 144 is to reconcile your bank statements with your accounting records. Both financial documents must show similar figures, and reconciling them ensures that any discrepancies are avoided early on.

Keep Digital Records

In today’s time, having a digital record of every financial transaction is crucial. You must have digital records of your finances along with physical proof. These digital documents are quite useful in case physical documents get destroyed or lost.

Maintain Consistency

Be consistent in your financial records, as differences or inconsistencies in records can raise concerns. If found, you can be asked by the AO to submit clarification proof to back up your financial records.

Unusual Transactions

Another thing that can trigger Section 144 Income Tax Act is unusual transactions in a year. If you have made some large and unusual transactions, then be prepared to explain them to AO and make sure to bring the supporting documentation for proof.

Like various sections of the law, Section 144 of the Income Tax Act also allows for reforms that are required in changing times.

• Clear Guidelines: The guidelines for Section 144 Income Tax can be clearer and more specific to invoke the best assessment judgements. It will help reduce arbitrary decisions.
• Improve Taxpayer Communication: A streamlined communication channel should be introduced to provide taxpayers with information and explanations. This will lead to more accurate assessments.
• Take a Gradual Approach: Before resorting to the best judgment assessment, a system of graduated responses should be introduced. This will increase compliance without being too punishing.
• Leverage Data Analytics: AOs can use data analytics to complete their assessments. This will not only give accurate results but also reduce the chances of a dispute.
• Education for Taxpayers: Several times, taxpayers are unaware of their responsibilities and rights, which leads to mistakes. Steps should be taken to educate taxpayers about Section 144 of the Income Tax Act and Income Tax in general.

Also Read: What Are The Heads of Income Under Income Tax Act?

Just like filing taxes on time and providing accurate information can prevent invoking Section 144 of the Income Tax Act, a health insurance plan safeguards you from high medical bills that can pinch your pocket hard and dry up your savings in no time.

Medical insurance ensures funds are not a paucity in receiving the best possible treatment. Today, you can also get parents' health insurance for elderly members of your family. This way, you save not only your health but also your loved ones' lives and get the best treatment in case of medical emergencies.

With TATA AIG, you can buy health insurance online in just a few clicks. We offer you a range of medical insurance plans that you can choose from based on your needs. Our plans give you peace of mind and reduce out-of-pocket expenses during a medical emergency.