Automated initial scrutiny process for deemed assessments laid down in Income Tax Ordinance

KARACHI: A specific process has been laid down for the deemed assessment under section 120 of the Income Tax Ordinance, 2001.

The Income Tax Ordinance, 2001 by way of section 120 prescribes Universal Self Assessment Scheme on the basis of disclosures made by the taxpayers in their returns. The return filed is deemed to be an assessment order for that year for all purposes under the Ordinance.

It appears that even after the proposed amendment all returns filed will constitute deemed assessments under section 120 unless they are amended in the manner prescribed for automated process of initial scrutiny within six months of filing.

The initial scrutiny process which shall always be automated without any human intervention will envisage identification and incorporation of the following adjustments:-

1. a) Arithmetical errors in the return, which includes any wrong or incorrect calculation of tax payable including any minimum or final taxes;
2. b) An incorrect claim as apparent from any information in the return;
3. c) Disallowance of any loss, deductible allowances or tax credit; or
4. d) Disallowance of carry forward of loss. The term ‘incorrect claim as apparent from any information in the return’ is defined as: (i) a claim on the basis of entry in the return of an item inconsistent with another entry of the same or some other item in the return, (ii) any tax payment which is not verified from the collection system, or (iii) in respect of a deduction where such deduction exceeds specified statutory limit.

This amendment appears to be a prescription for the remedy of errors, omissions and aggressive positions adopted by the taxpayer in relation to self assessment scheme. In certain other jurisdictions, the return includes a statement furnished by the taxpayer.

“The present amendment does not fulfil the objective which is supposed to be achieved from the statement of aggressive positions. Moreover, the definition of ‘incorrect claim’ needs to be re-examined for practical purposes,” A.F Ferguson’s Tax Memorandum notes.

For making the above adjustments, issuance of an automated notice and provision of opportunity to the taxpayer to explain his position is mandatory.

In case of failure to respond within 30 days of issuance of notice, adjustments shall be made. Where no such adjustments are made within six months of the filing of return, the amounts specified in the return will be deemed to have been accepted from the date of filing of return and the same shall be electronically intimated.

A taxpayer aggrieved by the adjustments made in the above manner has a right to contest the same by way of an appeal before the Commissioner – Appeals.