Budget 2022: Updated ITR will reduce litigation for taxpayers

In Budget 2022, presented on February 1, 2022, Union Finance Minister Nirmala Sitharaman introduced the concept of 'updated return' as a step towards encouraging voluntary compliance, reducing litigation and deterring tax evasion. 
 
What is an updated return? 
 
Currently, a taxpayer has the option to revise its tax return three months prior to the end of the relevant assessment year (AY). In case the original return is not filed, a taxpayer can file a belated tax return three months prior to the end of the relevant AY and there is no provision to revise the return in such cases.

Also Read: Income-Tax: Taxpayers can update ITRs only once in an assessment year, says official
 
For example, the due date for filing the original return and/or the revised/belated return for AY 2022-23 will be as under: 

This gives an additional time of about five months to an individual taxpayer, two months to a corporate assessee liable to audit and one month to a taxpayer to whom transfer pricing provisions apply, to file a revised/belated return. It is a very short timeframe for a taxpayer to make any changes in the tax return in case of any errors, omissions, or mistakes.  
 
In order to facilitate ease of compliance along with a litigation free environment, the Finance Bill, 2022 now proposes to provide additional time to the taxpayer to review his/her tax return for any errors, omissions, or mistakes and file an 'updated return'. The updated return can be filed within two years from the end of the relevant AY, irrespective of whether an original tax return was filed.  
 
For example, the due date for filing an updated return for AY 2022-23 will be as under: 

Under which circumstances can an updated return be filed? 
 
There are certain conditions attached to and restrictions imposed on filing of the proposed 'updated return', which are listed below: 

• There should be additional income being offered to tax and additional tax outflow for the taxpayer; 
• Only one 'updated return' can be filed for a relevant AY; 
• The updated return must be accompanied with proof of payment of applicable tax and interest along with late return filing fees and "additional tax";  
• Additional tax shall be 25% and 50% of the aggregate tax and interest (as per the updated return) if the updated return is filed within 12 months and 24 months from the end of the AY, respectively.  

A simplistic calculation of the additional tax liability is illustrated below: 

 

• Interest under sections 234A, 234B and 234C shall apply (as applicable) on the tax payable as per the updated return.  

 Also Read: Budget 2022: Updated income tax returns can be filed within 2 yrs of deadline

An updated return cannot be filed if: 

• It is a return of loss or reduces the tax liability or increases the refund due vis-à-vis the original/belated/revised return filed; 
• In search & seizure cases; 
• Where assessment, reassessment, revision or re-computation is pending or completed; 
• In case information has been received under an agreement referred to in section 90 or 90A of the Income-tax Act, 1961 (the Act); 
• In case prosecution proceedings have been initiated; and  
• If the tax officer has information under certain laws such as prevention of money laundering, black money, etc. 

Revised/belated return vs. updated return   
 
The taxpayer should be mindful of certain key differences between the existing options available for correcting/filing their return of income and the proposed 'updated return': 

• A revised return can be filed to enhance or reduce the income or loss of the taxpayer, or to only correctly report disclosures required in the income tax return form. Therefore, there may be a situation where a taxpayer claims a higher refund in the revised return vis-à-vis the original return. A belated return can be filed even if the taxpayer does not have any tax liability. However, an 'updated return' can be filed only in cases where the taxpayer is enhancing its income and tax liability. 
• A taxpayer can file multiple revised returns for the same AY, as long as it is within the prescribed due date for filing the same. However, an 'updated return' can be filed only once for a particular AY. 

Benefits of filing an updated return 
 
The proposal to file an updated return offers the following to the taxpayers:  

• Additional recourse to correct errors/offer income missed to be reported in the earlier returns;  
• Opportunity to reduce litigation;  
• Avoid possible penal consequences had the mistake / under-reporting of income been picked up during the course of an assessment/reassessment proceedings; and 
• Relief from prosecution proceedings.  

Aspects to be clarified 
 
There are certain aspects of the updated return which may require clarifications from the government: 

• In a situation where after correcting errors, a taxpayer has losses under one head of income and enhanced profits/income under another head of income, resulting in an overall increase in income and tax. For instance, there is a long-term capital loss as well as enhanced business income - can the taxpayer file the 'updated return', reporting income under one head and carry forward of loss under the other head of income?  
• The proposed provisions provide that an 'updated return' cannot be filed where assessment, reassessment, revision or re-computation is pending or completed. In cases where a taxpayer receives an intimation under section 143(1) of the Act and certain arithmetical adjustments or adjustments on account of mismatch of amounts reported in the income tax return form and Form 16/tax audit report, etc. are made, would the taxpayers have an option of filing the 'updated return'? 

Concluding remarks 
 
The proposal to file an updated return is a welcome move to reduce litigation, especially for taxpayers who have missed the deadline to file a tax return and taxpayers who have any unpaid taxes due to an error or omission at the time of filing their return.  
 
A major dampener for the taxpayers is the requirement for the additional tax liability of filing the 'updated return'. Not all errors or omissions lead to an enhanced income or tax outflow for a taxpayer. 

Some errors/omissions may even reduce a taxpayer's income or maybe only for the purpose of correctly reporting information that is required to be disclosed in the income-tax return. 

However, such situations are not currently covered under the ambit of the proposed provisions for filing an 'updated return'. 

Therefore, the proposed provisions for filing an 'updated return' do not entirely address the concerns or issues with having a limited period of time to file a revised return of income/rectifying errors or omissions in the return of income filed.  
 
In the Budget speech, the FM stated that mistakes or omissions may have been made by the taxpayers while estimating their income for tax payment and in order to provide the taxpayers with an opportunity to correct such errors, it is proposed to introduce the 'updated return' provisions. 

Accordingly, if the intent behind introducing the concept of 'updated return' is to be followed in the true spirit, then even a return that benefits the taxpayer should be allowed to be filed as an 'updated return'. 
 
In light of the above, it will be interesting to see whether this tax reform actually benefits the taxpayers at large and whether the government achieves its motives for introducing the same. 
 
(Rajesh H. Gandhi is Partner, Deloitte India; Utkarsh Trivedi is Director with Deloitte Haskins & Sells LLP; Vinita Abhyankar is Manager with Deloitte Haskins & Sells LLP; and Dhrti Manek is Tax Senior with Deloitte Haskins & Sells LLP.)