MODULE 3

INCOME TAX LAW

Exam-Ready Notes | Income Tax Act, 1961

Prepared by: Law Faculty | Subject: Indian Income Tax Law

TABLE OF CONTENTS
1. Assessment Procedure [Sec. 139–148B]
2. Types of Assessment [Sec. 143–153]
3. Income Tax Authorities – Functions, Duties & Powers [Sec. 116–138]
4. Appeals [Sec. 246A–269]
5. Offences, Fines & Penalties [Sec. 140A, 221–275B]
6. Settlement of Grievances & Prosecution [Sec. 245A–245M, 276–280]
7. Relevant Provisions – ITA 1961 & IT Rules [Various]
8. Advance Rulings [Sec. 245N–245V]
9. Faceless Assessment / E-Assessment [Sec. 144B]
TOPIC 1: ASSESSMENT PROCEDURE
Assessment is the process by which the Income Tax Department determines the
taxable income of an assessee and computes the tax payable thereon. It is the
foundation of the entire income tax collection mechanism.

1.1 Meaning of Assessment

Assessment under the Income Tax Act, 1961 means the determination of income, total tax
liability, and any refunds due to the assessee. It involves scrutiny of the return filed and/or
independent enquiry by tax authorities.

1.2 Key Definitions

• Assessee [Sec. 2(7)]: Any person by whom any tax, penalty or interest is payable
under the Act, or who is required to furnish a return.
• Previous Year [Sec. 3]: The financial year immediately preceding the assessment
year.
• Assessment Year [Sec. 2(9)]: The period of 12 months commencing on 1st April
every year (e.g., AY 2024-25 relates to PY 2023-24).
• Person [Sec. 2(31)]: Individual, HUF, company, firm, AOP/BOI, local authority, or
any artificial juridical person.

1.3 Filing of Return of Income

Sections 139 to 148B govern the filing of returns and assessment procedure.
• Sec. 139(1): Mandatory filing of return by every company, firm, and person whose
income exceeds the basic exemption limit.
• Sec. 139(3): Return of loss – can be filed to carry forward losses.
• Sec. 139(4): Belated return – filed after due date but before the end of relevant
assessment year.
• Sec. 139(5): Revised return – filed to correct any omission or wrong statement in
original return.
• Sec. 139(8A): Updated return (ITR-U) – can be filed within 2 years from end of
relevant AY on payment of additional tax.

1.4 Due Dates for Filing Return [Sec. 139(1)]

Category of Assessee Due Date
Company / Firm requiring audit (non-transfer pricing) 31st October of AY
Assessee having international transactions (transfer 30th November of AY
pricing)
Other assessees (individuals, HUF, etc.) 31st July of AY

1.5 Notice to File Return [Sec. 142(1)]

The Assessing Officer (AO) may issue notice under Sec. 142(1) requiring the assessee to:
• File a return of income if not already filed.
• Produce accounts, documents, or information as required.
• Furnish a statement of assets and liabilities.
 KEY NOTE: Failure to comply with Sec. 142(1) notice can lead to Best Judgment
Assessment under Sec. 144.

1.6 Enquiry Before Assessment [Sec. 142(2) & 142A]

• Sec. 142(2): AO may make further enquiries or call for more information before
completing assessment.
• Sec. 142A: AO may refer to Valuation Officer to estimate value of assets if required.

1.7 Reassessment / Reopening of Assessment

• Sec. 147: If AO has reason to believe that income has escaped assessment, he can
reopen the case.
• Sec. 148: Notice for reopening must be issued before commencing reassessment.
• Sec. 148A (w.e.f. Finance Act 2021): AO must conduct enquiry and provide an
opportunity of hearing before issuing notice under Sec. 148. AO must pass an order
as to whether it is a fit case for issuance of notice.
• Time Limits for Reopening:
○ Within 3 years from end of relevant AY – for general cases.
○ Up to 10 years – if escaped income is Rs. 50 lakhs or more.
CASE LAW – CIT v. Kelvinator of India Ltd. (2010) SC: SC held that reassessment
cannot be based on mere change of opinion. There must be tangible material to suggest
income has escaped assessment. The power under Sec. 147 is not a power to review.
CASE LAW – GKN Driveshafts (India) Ltd. v. ITO (2003) SC: SC held that upon receipt
of notice under Sec. 148, the assessee has a right to ask for reasons for reopening. AO
must furnish reasons within a reasonable time. Assessee can file objections which must be
disposed of by a speaking order.
TOPIC 2: TYPES OF ASSESSMENT
The Income Tax Act, 1961 provides for five types of assessments, each serving a distinct
purpose in the tax collection and verification process.

2.1 Self-Assessment [Section 140A]

• Definition: Assessment made by the assessee himself before filing the return.
• Process: Assessee computes his own income, calculates tax, deducts TDS/advance
tax, and pays the balance (Self-Assessment Tax) before filing the return.
• Interest: Interest under Sec. 234A (delay in filing), 234B (default in advance tax),
and 234C (deferment) is also added.
KEY NOTE: Self-assessment tax must be paid before filing the return. Failure to pay
attracts penalty under Sec. 221.

2.2 Summary Assessment [Section 143(1)]

• Nature: Preliminary, automated processing of return without detailed scrutiny.
• Process: The return is processed through the Centralized Processing Centre (CPC),
Bengaluru.
• Scope of Adjustments:
○ Arithmetical errors in the return.
○ Incorrect claim (apparent from return itself).
○ Disallowance of loss claimed beyond permissible limit.
○ Disallowance of expenditure indicated in audit report.
• Time Limit: Intimation must be sent within 9 months from end of financial year in
which return was filed.
• No Personal Hearing: The assessee is given a 30-day notice before making
adjustment, but there is no personal appearance.

2.3 Scrutiny Assessment [Section 143(3)]

• Nature: Detailed assessment after notice and hearing. The most comprehensive
form of assessment.
• Trigger: Issued when AO considers it necessary to verify the return more thoroughly.
• Notice: AO issues notice under Sec. 143(2) within 3 months from end of FY in which
return was filed.
• Process: The assessee is asked to produce accounts, documents, and evidence;
personal/written submissions allowed.
• Time Limit to Complete: Within 12 months from end of AY in which return was filed
(as per Finance Act 2021 amendments).
CASE LAW – CIT v. Sahara India (2008) Allahabad HC: Court held that the AO must give
sufficient opportunity to the assessee before making additions in a scrutiny assessment.
Denial of reasonable opportunity vitiates the assessment order.

2.4 Best Judgment Assessment [Section 144]

• Nature: Assessment made by AO using his best judgment when the assessee fails
to cooperate.
• Circumstances when invoked:
○ Failure to file return under Sec. 139, 142(1), or 148.
○ Failure to comply with notice under Sec. 142(1) or 143(2).
 ○ Failure to get accounts audited or produce audit report under Sec. 142(2A).
• Procedure: AO must give a show-cause notice before making Best Judgment
Assessment (except in cases under Sec. 144 proviso).
KEY NOTE: Best Judgment Assessment does not mean arbitrary assessment. The AO
must act judicially and not capriciously.
CASE LAW – Kachwala Gems v. JCIT (2007) SC: SC emphasized that Best Judgment
Assessment must be based on some evidence and rational basis. The AO cannot make a
wild guess and must apply honest judgment on available material.

2.5 Income Escaping Assessment / Reassessment [Section 147]

• Basis: When AO has reason to believe income chargeable to tax has escaped
assessment.
• Pre-condition: After Finance Act 2021 – AO must follow Sec. 148A procedure
(enquiry + hearing) before issuing notice under Sec. 148.
• Time Limits: 3 years for general cases; 10 years if escaped income ≥ Rs. 50 lakhs.
• Limitation: No reassessment based on mere change of opinion (see Kelvinator case
above).

2.6 Protective Assessment

Though not specifically defined in the Act, protective assessment is made when it is uncertain
in whose hands income is to be assessed. It is made as a protective measure pending
resolution of the dispute.
• Purpose: To safeguard revenue interest when there is a dispute about the person in
whose hands the income should be taxed.
• Nature: Conditional assessment – if primary assessment stands, protective
assessment is withdrawn.

2.7 Comparison Table – Types of Assessment

Type Section Nature Key Feature
Self-Assessment 140A By assessee Tax paid before filing return
Summary/Intimation 143(1) Automated (CPC) Only arithmetical/apparent errors
corrected
Scrutiny 143(3) Detailed by AO Notice under 143(2); personal hearing
Best Judgment 144 By AO on default Assessee fails to cooperate
Reassessment 147/148/148A Reopening Income escaped earlier assessment
TOPIC 3: INCOME TAX AUTHORITIES – FUNCTIONS,
DUTIES & POWERS
The Income Tax Act, 1961 establishes a hierarchy of income tax authorities under Chapter
XIII (Sections 116 to 138) to administer the Act effectively.

3.1 Hierarchy of Income Tax Authorities [Section 116]

Rank Authority Key Function
1 (Apex) Central Board of Direct Taxes (CBDT) Policy, rules, and general administration
2 Principal Director General / Director Supervision & control over region
General of IT
3 Principal Chief Commissioner / Chief Overall supervision of charges
Commissioner of IT
4 Principal Commissioner / Commissioner Administrative & appellate functions
of IT
5 Additional / Joint Commissioner of IT Supervisory & specific powers
6 Deputy / Assistant Commissioner of IT Assessment & demand functions
7 Income Tax Officer (ITO) Assessment of small cases
8 Tax Recovery Officer (TRO) Recovery of arrear taxes
9 Inspector of IT Field-level assistance

3.2 Central Board of Direct Taxes (CBDT)

• Constituted under: Central Boards of Revenue Act, 1963.
• Powers & Functions:
○ Framing of Income Tax Rules under Sec. 295 of ITA.
○ Issue of instructions and circulars for administration of the Act.
○ Appointment and control of IT authorities (except members of IRS).
○ Supervision and control over assessment, collection, and recovery.
○ Powers to grant exemption, relaxation, or extension of time limits.
KEY NOTE: CBDT circulars are binding on the Income Tax Department but NOT on the
assessee or courts (though they provide guidance).

3.3 Commissioners of Income Tax (CIT)

• Appointment: Sec. 117 – Appointed by Central Government.
• Key Powers [Sec. 120]: CIT has supervisory jurisdiction over AOs within their
region.
• Appellate Function [Sec. 246A/251]: CIT(Appeals) hears first appeals against
orders of AO.
• Revision Powers:
○ Sec. 263: CIT can revise any order passed by AO that is 'erroneous and
prejudicial to revenue' within 2 years.
○ Sec. 264: CIT can revise any order in favour of assessee (revisionary power in
assessee's favour) within 1 year.
CASE LAW – Malabar Industrial Co. Ltd. v. CIT (2000) SC: SC held that for invoking
Sec. 263, two conditions must be satisfied cumulatively: (1) the order must be erroneous,
AND (2) it must be prejudicial to the interests of revenue. Both conditions must exist
simultaneously.

3.4 Assessing Officer (AO)

• Definition [Sec. 2(7A)]: AO means the AO and includes JCIT, DCIT, ACIT, ITO
having jurisdiction over the assessee.
• Key Powers of AO:
○ Issuance of notices under Sec. 142(1), 143(2), 148.
○ Conducting scrutiny assessment under Sec. 143(3).
○ Making Best Judgment Assessment under Sec. 144.
○ Search & Seizure powers under Sec. 132.
○ Power to call for information under Sec. 133.
○ Survey under Sec. 133A – power to enter any place of business.
○ Power to conduct TDS inspections (Sec. 194 series).
○ Rectification of mistakes under Sec. 154.

3.5 Special Powers – Search & Seizure [Section 132]

Section 132 is one of the most potent investigative tools under the ITA.
• Trigger: Director General / Director / Principal CIT / CIT must have 'reason to
believe' that undisclosed income or assets exist.
• Powers during search:
○ Enter and search any building, place, vessel, vehicle, or aircraft.
○ Break open locks.
○ Seize books of accounts, documents, money, bullion, jewellery, etc.
○ Examine any person on oath.
• Retention: Books can be retained for 30 days (extendable with PCIT/CIT approval)
[Sec. 132(8)].
• Block Assessment: Assessment for undisclosed income found during search under
Sec. 153A to 153C.

3.6 Survey [Section 133A]

• IT authority may enter any place of business during business hours.
• Can inspect books, verify cash, stock, valuables.
• Cannot seize books/documents during survey (unlike search).
• Statements can be recorded but are not on oath (unlike search).

3.7 Power to Requisition Information [Sections 133, 133B, 133C]

• Sec. 133: AO can call for information from banks, institutions, authorities regarding
any transaction.
• Sec. 133B: Power to collect certain information (for assessing tax liability).
• Sec. 133C: Power to call for information by prescribed authority for verification
purposes.
TOPIC 4: APPEALS
The Income Tax Act provides a multi-tiered appellate mechanism to redress grievances of
assessees. It ensures checks and balances on the powers of the tax authorities.

4.1 Overview of Appellate Structure

Level Forum Section Against Orders of
1st Appeal CIT(Appeals) / JCIT(Appeals) 246A / 246 Assessing Officer
2nd Appeal Income Tax Appellate Tribunal 253 CIT(Appeals)
(ITAT)
Reference High Court 260A ITAT (on substantial question of
law)
Final Appeal Supreme Court 261 / Art. High Court
136

4.2 First Appeal – Commissioner of Income Tax (Appeals) [Sec. 246A]

Orders Appealable under Sec. 246A
• Assessment under Sec. 143(3) – scrutiny assessment.
• Best Judgment Assessment under Sec. 144.
• Reassessment under Sec. 147.
• Order under Sec. 154 – rectification of mistake.
• Penalty orders under Sec. 221, 271, 271A, 272A, etc.

Procedure for Filing First Appeal

• Form: Form No. 35 filed electronically.
• Time Limit: Within 30 days of service of notice of demand or order.
• Fees:
○ Assessed income ≤ Rs. 1 lakh: Rs. 250.
○ Assessed income > Rs. 1 lakh ≤ Rs. 2 lakh: Rs. 500.
○ Assessed income > Rs. 2 lakh: Rs. 1,000.
○ Penalty/other orders: Rs. 250.
• Pre-deposit: Assessee must pay tax arrears or deposit as required before filing
appeal.

Powers of CIT(Appeals) [Sec. 251]

• Can confirm, reduce, enhance, or annul the assessment.
• Can set aside the assessment and direct fresh assessment.
• CAN enhance the assessment (enhance beyond what AO assessed).
KEY NOTE: CIT(A) can enhance an assessment but must give the assessee a reasonable
opportunity of being heard before doing so.

4.3 Second Appeal – Income Tax Appellate Tribunal (ITAT) [Sec. 253]
• Establishment: ITAT is established under Sec. 252 as an independent quasi-judicial
body.
• Composition: Judicial Members (from judiciary) and Accountant Members (CA/tax
background).
 • Jurisdiction: Hears appeals against orders of CIT(Appeals) and also certain orders
of CIT/PCIT directly.
• Time Limit: Within 60 days of communication of order of CIT(Appeals).
• Stay: ITAT can grant stay of demand for up to 365 days during pendency of appeal.
• Finality: ITAT is the final fact-finding authority. High Court only entertains questions
of law.
CASE LAW – Dy. CIT v. Ranka Jewellers (ITAT Mumbai): ITAT held that it has power to
admit additional evidence not produced before lower authorities in certain exceptional
circumstances, and must exercise this power judiciously.

4.4 Reference to High Court [Section 260A]

• Nature: An appeal on 'substantial question of law' arising from ITAT order.
• Time Limit: Within 120 days from receipt of ITAT order.
• Who can file: Assessee or Commissioner of Income Tax.
• Substantial Question of Law: A question that is debatable, not covered by settled
precedent, and material to the dispute.

4.5 Appeal to Supreme Court [Section 261]

• An appeal lies to the SC against any judgment of HC on a question of law.
• Under Art. 136 of the Constitution, Special Leave Petition (SLP) can also be filed.

4.6 Revision – Alternative to Appeal

• Sec. 263 – CIT's revision of AO's order: Order must be erroneous AND prejudicial
to revenue. Time limit: 2 years from date of order.
• Sec. 264 – CIT's revision in assessee's favour: CIT can revise any order to rectify
errors or grant relief. Time limit: 1 year from date of order.
TOPIC 5: OFFENCES, FINES & PENALTIES
The Income Tax Act, 1961 imposes penalties for various defaults and prescribes prosecution
for serious offences. The distinction between 'penalty' (civil liability) and 'prosecution' (criminal
liability) is critical.

5.1 Distinction: Penalty vs. Prosecution

Aspect Penalty Prosecution
Nature Civil / administrative liability Criminal liability
Authority Income Tax Authority Court of law
Standard Balance of probabilities Beyond reasonable doubt
Outcome Fine / monetary penalty Imprisonment / fine or both
Sections Sec. 140A, 221, 270A-275B Sec. 276-280

5.2 Major Penalty Provisions

Failure to Pay Self-Assessment Tax [Section 221]
• Penalty: Amount of tax in arrears (discretionary; up to tax amount).
• AO must give a reasonable opportunity before levying penalty.

Under-Reporting and Misreporting of Income [Section 270A – Inserted by FA

2016]
• Under-reporting [Sec. 270A(1)]: Penalty = 50% of tax payable on under-reported
income.
• Misreporting [Sec. 270A(9)]: Penalty = 200% of tax payable on misreported
income.
• Misreporting includes: Misrepresentation of facts, falsification of records,
suppression of income, claim of false expense.
KEY NOTE: Section 271(1)(c) was the earlier provision for concealment penalty; it is now
replaced by Sec. 270A for AY 2017-18 onwards.

Other Penalty Provisions

Section Default Penalty
271A Failure to maintain books/accounts (Sec. Rs. 25,000
44AA)
271B Failure to get accounts audited (Sec. 44AB) 0.5% of turnover; max Rs. 1,50,000
271C Failure to deduct TDS Amount equal to TDS not deducted
271D Taking loan/deposit in cash > Rs. 20,000 Amount of loan/deposit
(Sec. 269SS)
271E Repayment of loan/deposit in cash > Rs. Amount repaid
20,000 (Sec. 269T)
271F Failure to file return within due date (now —
removed; replaced by Sec. 234F fee)
271H Failure to furnish TDS/TCS statement in time Rs. 10,000 to Rs. 1,00,000
 Section Default Penalty
272A Failure to answer questions, sign statements, Rs. 10,000 per failure
furnish info

5.3 Fee for Default in Filing Return [Section 234F]

• If total income exceeds basic exemption limit:
○ Return filed after due date but on/before 31st December: Fee of Rs. 5,000.
○ Return filed after 31st December: Fee of Rs. 10,000.
○ If total income ≤ Rs. 5 lakhs: Fee limited to Rs. 1,000.

5.4 Immunity from Penalty [Section 270AA]

• Assessee can apply to AO for immunity from penalty under Sec. 270A and
prosecution under Sec. 276C if:
○ Tax and interest payable as per assessment order under Sec. 143(3)/147 has
been paid.
○ No appeal has been filed against the order.
• AO must grant immunity if conditions are satisfied.
TOPIC 6: SETTLEMENT OF GRIEVANCES &
PROSECUTION
6.1 Settlement Commission [Sections 245A to 245M]
Note: The Income Tax Settlement Commission was abolished w.e.f. 01.02.2021
(Budget 2021). Pending cases were transferred to the newly constituted Interim Board
for Settlement.
• Interim Board for Settlement: Established to deal with applications pending before
ITSC as on 01.02.2021.

Key Features of Settlement Mechanism

• Who can apply [Sec. 245C]: Any assessee who has filed a return of income and
has a case pending before an Assessing Officer.
• Minimum Additional Tax: The additional income to be disclosed must be at least
Rs. 10 lakhs (for cases filed before abolition).
• Bar on subsequent proceedings: Once settlement order is passed, it is conclusive
(Sec. 245I) and cannot be reopened.
• Immunity: Settlement Commission (now Interim Board) could grant immunity from
prosecution and penalty at its discretion.

6.2 Dispute Resolution Panel (DRP) [Section 144C]

• Applicability: Applicable to foreign companies and transfer pricing cases.
• Composition: Panel of 3 senior IT officers (PCIT/CIT level).
• Trigger: When AO proposes to make a variation in income (draft assessment order),
the eligible assessee can file objections before DRP within 30 days.
• DRP's Powers: Can confirm, reduce, or enhance proposed variation. Must pass
directions within 9 months.
• Appeal: Assessee can appeal DRP-directed assessment order directly to ITAT
(cannot appeal to CIT(A)).

6.3 Prosecution under Income Tax Act

Major Offences & Prosecution Provisions
Section Offence Punishment
276B Failure to pay TDS to government Rigorous imprisonment 3 months to 7
years + fine
276C(1) Wilful attempt to evade tax Rigorous imprisonment 6 months to 7
years + fine
276C(2) Wilful attempt to evade tax ≤ Rs. 25 lakhs Imprisonment 3 months to 2 years +
fine
276CC Wilful failure to furnish return of income Imprisonment 3 months to 2 years (or 7
years if tax > Rs. 25 lakhs) + fine
277 False statement in verification Imprisonment 6 months to 7 years +
fine
277A Abetment of false return by CA or other Imprisonment 6 months to 7 years +
person fine
 Section Offence Punishment
278 Abetment of false return by others Imprisonment 3 months to 2 years +
fine
278B Offences by companies Company + officer in default both liable
for prosecution

Compounding of Offences [Sec. 279(2)]

• The PCIT/CIT may compound (settle) any offence under Chapter XXII with the
permission of CBDT.
• Compounding is at the discretion of the authority; it is not a matter of right for the
assessee.
• CBDT has issued guidelines for compounding of offences prescribing fees.
KEY NOTE: Prosecution and penalty can run simultaneously. The institution of criminal
proceedings does not bar levy of penalty and vice versa.

6.4 Taxpayer's Charter & Grievance Redressal

• Taxpayer's Charter [Sec. 119A, inserted by Finance Act 2020]: CBDT is required
to adopt and declare a taxpayer's charter setting out rights of taxpayers and
obligations of the Department.
• Ombudsman: Income Tax Ombudsman (under IT Ombudsman Guidelines 2006)
handles grievances against IT officials' conduct.
• CPGRAMS: Centralised Public Grievance Redress and Monitoring System for online
complaints.
TOPIC 7: RELEVANT PROVISIONS OF THE INCOME TAX
ACT, 1961 & IT RULES
7.1 Key Structural Provisions
Section Subject Matter
Sec. 1 Short title, extent & commencement
Sec. 2 Definitions (e.g., AY, PY, assessee, person, income, etc.)
Sec. 3 Previous year defined
Sec. 4 Charge of income tax – the charging section
Sec. 5 Scope of total income (residence-based)
Sec. 6 Residential status determination
Sec. 9 Income deemed to accrue or arise in India
Sec. 10 Incomes not included in total income (exemptions)
Sec. 14 Heads of income
Sec. 80C–80U Deductions from gross total income
Sec. 139–158 Procedure for assessment
Sec. 159–189 Liability in special cases (minors, firms, liquidators, etc.)
Sec. 190–206CA Deduction and collection at source (TDS/TCS)
Sec. 207–219 Advance Tax
Sec. 220–232 Collection and Recovery
Sec. 246–269 Appeals and Revision
Sec. 270A–275B Penalties
Sec. 276–280 Offences and Prosecution
Sec. 281–298 Miscellaneous (including CBDT powers, rules, etc.)

7.2 Important Income Tax Rules, 1962

• Rule 12: Form and manner of furnishing return of income; specifies ITR forms.
• Rule 30: Time and mode of payment of TDS to government.
• Rule 31: Certificate for TDS (Form 16 / Form 16A).
• Rule 31A: Quarterly TDS statement (Form 24Q / 26Q / 27Q).
• Rule 37BA: Credit for TDS.
• Rule 40G: Application for settlement before Settlement Commission.
• Rule 44E: Advance Ruling – application procedure.
• Rule 46A: Additional evidence before CIT(Appeals).
• Rule 68B: Sale of attached immovable property.

7.3 Significant Financial Thresholds

Provision Section Threshold / Amount
Basic exemption limit (Individual < Sec. 115BAC Rs. 3,00,000 (new regime)
60 yrs)
Provision Section Threshold / Amount
Tax audit turnover limit – business Sec. 44AB Rs. 1 crore (Rs. 10 crore if cash < 5%)
Tax audit limit – profession Sec. 44AB Rs. 50 lakhs
Cash loan/deposit limit Sec. 269SS Rs. 20,000
Cash repayment limit Sec. 269T Rs. 20,000
Presumptive tax – business (Sec. Sec. 44AD Turnover ≤ Rs. 2 crore
44AD)
Domestic transfer pricing threshold Sec. 92BA Aggregate transactions > Rs. 20 crore
TOPIC 8: ADVANCE RULINGS
Advance Rulings provide certainty to taxpayers (especially foreign investors) about their tax
liability in India before entering into a transaction. They reduce litigation and foster investor
confidence.

8.1 Meaning and Objective

• Definition [Sec. 245N(a)]: 'Advance Ruling' means a determination by the
Board/Authority of the question of law or fact stated in the application regarding
liability of the applicant for payment of tax.
• It enables a non-resident (and now resident) applicant to know their tax liability in
advance.
• It avoids disputes and lengthy litigation.

8.2 Board for Advance Rulings (BAR) [w.e.f. September 2021]

The Authority for Advance Rulings (AAR) was reconstituted as the Board for
Advance Rulings (BAR) w.e.f. 01.09.2021 to reduce pendency and improve efficiency.
• Composition: Two members of the rank of PCIT/CIT, appointed by Central
Government.
• Earlier AAR: Was headed by a retired Supreme Court judge; pending AAR
applications were transferred to BAR.

8.3 Who Can Apply? [Section 245N(b)]

• Non-resident applicant: Any non-resident seeking determination about a
transaction.
• Resident applicant (limited category):
○ Resident falling under a notified class (e.g., those with substantial investment in
India).
○ A resident applying in relation to tax treaty (DTAA) applicability.
• Public Sector Undertaking: Any public sector company.

8.4 Questions Admissible for Advance Ruling [Sec. 245N(b)]

• Question of law or fact relating to the tax liability of the applicant.
• Regarding a transaction which has been undertaken or is proposed to be undertaken
by the applicant.

8.5 Questions NOT Admissible [Section 245R(2)]

• The question is already pending before any IT Authority, Appellate Tribunal, or Court.
• The question involves determination of fair market value of property.
• The question relates to a transaction or issue designed primarily to evade or avoid
tax.
• Application is not made in prescribed form or the applicant has not given undertaking
to pay prescribed fees.

8.6 Procedure for Advance Ruling

• Form: Application in Form 34C (non-resident) or Form 34D/34DA (resident);
submitted with prescribed fee.
 • Time Limit for Decision: BAR must pronounce ruling within 6 months of receipt of
application.
• Hearing: The applicant and the Commissioner have right to be heard.
• Binding Nature [Sec. 245S]: The ruling is binding on: (a) the applicant and (b) the
CIT/AO having jurisdiction. It is not binding on other persons or in other cases.
• Limitation [Sec. 245T]: The ruling becomes void if obtained by fraud or
misrepresentation of facts.
• Appeal: An appeal against BAR ruling lies to the High Court within 60 days [Sec.
245W].
KEY NOTE: Advance Ruling is binding only on the particular applicant and the tax
authorities in respect of that particular transaction. It has no binding effect as a precedent in
other cases.
CASE LAW – Columbia Sportswear Co. v. DIT (2012) SC: SC held that an advance
ruling binds the applicant and the Revenue in respect of the specific transaction. The
applicant cannot resile from the ruling obtained by it.
TOPIC 9: FACELESS ASSESSMENT / E-ASSESSMENT
9.1 Background & Introduction
Faceless Assessment was introduced as a transformative reform to:
• Eliminate physical interface between taxpayer and tax officer.
• Reduce corruption, harassment, and subjective decision-making.
• Promote transparency, efficiency, and accountability.
• Leverage technology for tax administration.
Section 144B was inserted by the Taxation and Other Laws (Relaxation and
Amendment of Certain Provisions) Act, 2020, to provide the legislative framework for
Faceless Assessment.

9.2 Evolution of E-Assessment

Year Development
2018 E-assessment Scheme, 2018 notified by CBDT under Sec. 143(3A) – pilot project.
2019 Sec. 143(3A), 143(3B), 143(3C) inserted; E-Assessment Scheme 2019 notified.
2020 Faceless Assessment Scheme launched (7th August 2020, 'Transparent Taxation'
platform). Sec. 144B inserted.
2021 Faceless Appeals Scheme, 2021 and Faceless Penalty Scheme, 2021 also launched.

9.3 Faceless Assessment – Section 144B

Key Structural Units
• National e-Assessment Centre (NeAC): Nodal authority for faceless assessment;
issues notices and coordinates assessment units.
• Regional e-Assessment Centre (ReAC): Hosts assessment, verification, technical
review, and review units.
• Assessment Unit (AU): Identifies issues, examines return, and passes draft
assessment order.
• Verification Unit (VU): Conducts enquiry, examination, and recording of statements.
• Technical Unit (TU): Provides technical assistance on valuation, legal issues,
accounting standards.
• Review Unit (RU): Reviews draft assessment order before it is sent to assessee.

Process of Faceless Assessment [Sec. 144B]

• NeAC issues notice under Sec. 143(2) – allocated randomly by system.
• Case assigned to AU by automated allocation system.
• AU identifies relevant issues, examines return & supporting material.
• Information/documents requested through system – no physical meeting.
• AU prepares draft assessment order.
• RU reviews the draft order; if variation proposed, assessee served show-cause
notice.
• Assessee submits response within specified time (electronically).
• Final assessment order passed by NeAC; communicated electronically.

Personal Hearing under Faceless Assessment

 • Sec. 144B(7): No personal hearing is ordinarily granted.
• Exception: If assessee makes a specific request, PCIT/CIT may grant personal
hearing through video conferencing/video telephony.
KEY NOTE: Personal hearing in Faceless Assessment is by video conferencing only.
Physical presence of assessee before any IT authority is eliminated.

9.4 Faceless Appeals Scheme, 2021

• Appeals before CIT(Appeals) are now conducted faceless (electronically).
• National Faceless Appeal Centre (NFAC): Central authority for appeals.
• Allocation of appeals done randomly; no direct interface between appellant and
appeal unit.
• Video conferencing available on request.
• Appeal orders communicated electronically.

9.5 Faceless Penalty Scheme, 2021

• All penalty proceedings under the IT Act are conducted electronically.
• No physical interface between assessee and penalty authority.
• Notices, responses, and orders all through IT portal.

9.6 Benefits of Faceless Assessment

Benefit Impact
Elimination of physical interface Reduces corruption and harassment
Random allocation of cases Ensures no personal nexus between assessee and officer
Team-based assessment Multiple officials review; reduces individual subjectivity
Digital records Full audit trail; all communications documented
Reduced compliance cost No travel; documents submitted online
Increased transparency All proceedings through ITBA/e-filing portal

9.7 Constitutional Validity

CASE LAW – Mon Mohan Kohli v. ACIT (2021) Delhi HC: Delhi HC upheld constitutional
validity of Faceless Assessment Scheme but directed that opportunity of personal hearing
(via video conference) must be meaningfully provided when requested; denial of such
opportunity violates principles of natural justice.
CASE LAW – Bharat Parikh v. CBDT (2021) Gujarat HC: HC held that Faceless
Assessment does not violate Art. 14 or Art. 19 of Constitution. The scheme is a reasonable
classification for administrative efficiency. However, the principles of natural justice must be
adhered to even in faceless mode.

9.8 Limitations and Challenges

• Complex cases involving voluminous documents pose challenges in digital
submission.
• Technical glitches on IT portal can affect compliance.
• Absence of face-to-face interaction may lead to misunderstanding in complex fact
situations.
• Quality of assessment may vary depending on AU allocated.
QUICK REFERENCE SUMMARY: KEY SECTIONS
Section Subject Key Point
Sec. 2(7) Assessee Person liable to pay tax, penalty, etc.
Sec. 139(1) Return filing Mandatory for specified persons; due dates apply
Sec. Updated return (ITR-U) Filed within 2 years; additional tax payable
139(8A)
Sec. 140A Self-assessment Tax computed and paid by assessee before filing
return
Sec. 143(1) Summary assessment Automated; only apparent errors corrected
Sec. 143(2) Notice for scrutiny Must be served within 3 months of end of FY of filing
Sec. 143(3) Scrutiny assessment Detailed assessment by AO after notice
Sec. 144 Best judgment assessment Default by assessee triggers AO's best judgment
Sec. 144B Faceless assessment Entire process electronic; no physical interface
Sec. Reassessment Escaped income; 3-year / 10-year limit
147/148
Sec. 148A Pre-notice enquiry Mandatory before notice under Sec. 148
Sec. 154 Rectification Mistake apparent on record; AO can rectify within 4
years
Sec. 234F Fee for late filing Rs. 5,000 / Rs. 10,000 for belated return
Sec. 246A Appeal to CIT(A) Against AO's order; form 35; within 30 days
Sec. 253 Appeal to ITAT Within 60 days of CIT(A) order
Sec. 260A Appeal to HC Substantial question of law; within 120 days
Sec. 263 CIT revision (revenue) Erroneous + prejudicial to revenue; 2-year limit
Sec. 264 CIT revision (assessee) In assessee's favour; 1-year limit
Sec. 270A Penalty for under-reporting 50% or 200% of tax on under/misreported income
Sec. 276C Prosecution for evasion Wilful evasion; 6 months to 7 years RI
Sec. 279 Compounding of offences CIT/PCIT may compound with CBDT permission
Sec. 245N Advance ruling – definition Advance determination of tax liability
Sec. 245S Binding nature of ruling Binds applicant and jurisdictional authority
Sec. 132 Search and seizure Requires 'reason to believe'; AO can enter, search,
seize
Sec. 133A Survey Entry during business hours; cannot seize

End of Module 3 – Income Tax Law Notes

All sections refer to Income Tax Act, 1961. Prepared for examination purposes.