"Understanding the Update Income Tax Return: Key Opportunities for Assessees"

Update Income Tax Return: A New Opportunity for Assessees

On April 29, 2022, the Central Board of Direct Taxes (CBDT) introduced the concept of the "Update Return" by notifying Rule 12AC of the Income Tax Rules, 1962. This new provision offers an important opportunity for assessees who may have encountered specific scenarios related to their income tax returns.

Eligibility for Update Return

Assessees may find themselves in the following situations where an update return may be applicable:

• Failure to File: The assessee did not file their income tax return (ITR) before the due date and the time for belated return has expired.
• Underreported Income: The return was filed on time, but it later came to light that the income was underreported or certain heads of income were omitted from the previously filed return for that assessment year.

Importantly, the opportunity to file an update return remains available, even after the deadlines for filing revised returns.

Consequences of Underreporting

Underreporting income or misreporting may lead to serious consequences, including:

• Penalties ranging from 50% to 200% of the tax amount owed.
• Potential imprisonment for up to seven years as a result of prosecution.

Filing an Update Return

• Eligible entities for filing an update return include:

  • Individuals
  • Hindu Undivided Families (HUF)
  • Limited Liability Partnerships (LLP)
  • Associations of Persons (AOP)
  • Bodies of Individuals (BOI)
  • Local Authorities
  • Artificial Juridical Persons
  • Companies
  • Political Parties

• Update returns can be filed within 24 months from the end of the relevant assessment year.

Additional Tax Liability

Assessees are required to pay additional income tax based on the timing of their update return submission:

• 25% of additional tax plus interest if filed within 12 months from the end of the relevant assessment year.
• 50% of additional tax plus interest if filed after 12 months but within 24 months from the end of the relevant assessment year.

This facility for update returns became effective from April 1, 2022. Assessees can now file update returns for assessment years 2020-21 and 2021-22. Specifically, the update return for the assessment year 2020-21 can be submitted until March 31, 2023. It is crucial to note that update returns cannot be revised once filed.

Restrictions on Filing Update Returns

The update return can only be filed for additional income. No provisions are in place for filing an update return that would:

• Result in a loss.
• Reduce tax liability.
• Lead to an increase in refund.

Furthermore, the option to file an update return is not permitted under the following conditions:

• If search proceedings under Section 132 have been initiated.
• If books of account or assets have been requisitioned.
• If a survey has been conducted against the assessee.
• If documents or assets have been seized or requisitioned from any other person that belong to the assessee.
• If an assessment, reassessment, recomputation, or revision is pending or has been completed for that assessment year.

Benefits of Filing an Update Return

By filing an updated return that discloses additional income, taxpayers can potentially mitigate or eliminate the penalties associated with non-reporting or underreporting. Importantly, no prosecution under Section 276CC will be initiated if an updated return is furnished by the assessee, thereby providing a safeguard against severe penalties.