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R. Anand

To be successful, the methodology of scrutiny has to be transparent, says R. Anand

THE quality and quantity of income-tax assessments carried out in the country are matters of grave concern. In a regime where the law is moving towards moderate rates and simple rules and regulations, most of the returns naturally will have to be accepted at face value. The thrust in Budget 2003-04 is to move towards administrative reforms, facilitating outsourcing of non-core areas in the Income-Tax Department and ensuring that most of the department's time is spent on core functions such as quality assessments, survey, investigation and improving collections.

It is in this background that the entire approach towards scrutiny of cases has to be understood and debated. There was a time when every return was scrutinised and a hearing with the assessee ensured before finalising the assessment. Of late, only 3 per cent of the cases are taken up for scrutiny.

Limited scrutiny

Effective June 1, 2002, the Finance Act, 2002 introduced the concept of limited scrutiny and the provisions read thus:

"Section 143(2): Where a return has been furnished under Section 139, or in response to a notice under sub-section (1) of Section 142, the assessing officer shall i) where he has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissible, serve on the assessee a notice specifying particulars of such claim of loss, exemption, deduction, allowance or relief and require him, on a date to be specified therein to produce, or cause to be produced, any evidence or particulars specified therein or on which the assessee may rely, in support of such claim;

"ii) ... The laudable of the scheme is to expedite immediate cases where, prima facie, there is an excess claim of deduction, allowance so that the matter is dealt with quickly and effectively. This scheme was hardly put to test and had a limited time of operation. Strangely, effective June 1, 2003, Finance Bill, 2003 seeks to delete this provision. The memorandum explaining the provisions dealing with the subject reads thus:

"Under the existing provision of clause (i) of sub-section (2) of Section 143, if an assessing officer has reason to believe that an assessee has made a claim of any loss, exemption, deduction, allowance or relief which is inadmissible, he can issue a notice under the said clause, specifying the claim and calling upon the assessee to produce evidence and particulars in support thereof. After hearing such evidence and considering such particulars, the assessing officer shall make an assessment of total income or loss under clause (i) of sub-section (3) of Section 143. It is proposed to discontinue the scheme of scrutiny assessment on limited issues by inserting a proviso in clause (i) of sub-section (2) of the said section so as to provide that no notice under clause (i) of the said sub-section shall be served on the assessee on or after June 1, 2003."

One does not know whether the scheme was a failure, in which case, no statistical information is available explaining why it was not a successful proposition.

Random scrutiny

On the subject of detailed random scrutiny, para 151 of the Finance Minister's speech dealing with administrative reforms reads as follows: "... immediate abolition of present discretion-based system for selection of returns of scrutiny; this will be replaced by a computer-generated intelligent, random selection of only 2 per cent of the returns, annually."

While the trend is to systematise the manner of selection of cases for scrutiny, one is not sure how this will be implemented and whether any bias or subjectivity will creep into the mechanism of selection of scrutiny, notwithstanding the role of computers in the process. There are already areas of friction between assessees and the department in the matter of selection of cases for scrutiny.

Guidelines for scrutiny

Scrutiny of assessments, although proposed to be carried out with the help of computers, has to be made with utmost care and in an unbiased manner with the help of proven and transparent guidelines issued by the Central Government. It may be noted that similar guidelines were laid down in 1999. The following is a gist of the press release of June 8, 1999:

"The Central Board of Direct Taxes has issued instruction for picking up cases for assessment under Section 143(3) in respect of certain pending returns and those received during the current financial year. Under the new policy initiative introduced in the Finance Act, 1999, all returns will now be accepted under Section 143(1). However, a very limited number of returns will be selected for assessment under Section 143(3). The procedure adopted for this purpose has laid stress on transparency and accountability and is expected to enhance revenue yield.

"The salient features are: Cases are to be picked up in a joint meeting of assessing officer and his next superior authority on the basis of credible information after recording the reasons in writing. The selection process is to be completed all over the country by September 30, 1999, to be followed by individual letters to assessees, whose cases have been selected. This will be followed by press note respective Chief Commissioners/Directors-General specifying the fact of completion of selection process and regarding intimation to the concerned assessees. Certain exceptional cases can be picked up only at the level of Chief Commissioner of Income-tax for reasons to be recorded in writing even after September 30, 1999. However, all assessments relating to search and seizure, survey under Section 133A, reassessment under Section 147 (and set aside assessment) will continue to be made under Section 143(3).

The end result/findings of the assessment under Section 143(3) will have to justify the selection of a particular case against specified norms.

While the trend is naturally to expand the base of assessees and ensure that thrust is given on meaningful investigation, selection of cases for scrutiny even if it is 2 per cent of the returns will have to be done on a scientific basis and in a transparent manner. Only then, the main limb of administrative reforms, namely, conduct of assessments, will move smoothly.

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