FM Sitharaman proposes to amend Section 143(1) of I-T Act in Finance Bill 2025; what does this mean to taxpayers

Union Finance Minister Nirmala Sitharaman has proposed a revision to Section 143(1) of the Income Tax Act, 1961, with the Income Tax Department also releasing FAQs regarding this change. The Finance Bill 2025 proposes changes to Section 143(1), focusing on inconsistencies between previous and current income tax returns to reduce taxpayer notices, while expanding prima facie adjustments to ITRs.

According to the FAQs, the amendment to Section 143(1) aims to address any discrepancies in the tax return compared to information in the return of a previous year, as per regulations. The FAQ clarified that specific guidelines for identifying and addressing these inconsistencies are yet to be determined. However, one possible scenario could involve a taxpayer claiming a credit in a previous return, but failing to report the same figures accurately in the current return.

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The FAQs stated: “Section 143(1) has been amended to provide for checking any inconsistency in the return with respect to the information in the return of any preceding previous year, as may be prescribed.” 

What is Section 143(1)?

The Finance Bill 2025 has introduced an amendment to Section 143(1) of the Income Tax Act, which deals with the processing of income tax returns (ITR) after submission and verification by taxpayers. This section historically allowed the tax department to make prima facie adjustments for arithmetical errors or apparent incorrect claims. Now, the amendment aims to address inconsistencies between the previous year's and the current year's ITR at the time of processing, thereby reducing the issuance of income tax notices.

The specific amendment reads: '(iia) any such inconsistency in the return, with respect to the information in the return of any preceding previous year, as may be prescribed.' This broad clause empowers the Central Board of Direct Taxes (CBDT) to prescribe various scenarios for adjustment. 

According to tax experts, Section 143(1) serves as a summary assessment provision that allows the tax office to finalise orders without an exhaustive scrutiny process. Historically, this section has been utilised for prima facie adjustments, which have been extended over time to include specific disallowances, such as disallowance of claimed losses or expenditures, or additions based on income appearing in 26AS. 

The newly proposed amendment continues this trend, expanding the scope to include inconsistencies with previous years' returns. While adjustments under Section 143(1)(a) aim to determine the total income or loss, the recent changes could potentially lead to litigation if adjustments are disputed by taxpayers. 

The impact of this amendment could be significant for taxpayers who face a widened scope for possible prima facie adjustments. Under the new rules, inconsistencies between current and previous ITRs, such as discrepancies in reported income, disclosed assets, or carry-forward losses, will be scrutinised more thoroughly at the processing stage. 

Although taxpayers will have an opportunity to respond to proposed adjustment notices, the widened scope for adjustments might increase the likelihood of disputes. The emphasis on consistency is designed to streamline the assessment process and minimise the administrative burden of issuing notices, but it also raises concerns about the potential for increased litigation.

The Income Tax Department is expected to provide clarity on what specific inconsistencies will be checked through this amendment. This includes any data furnished in previous and current ITRs, such as income disclosures, asset details, and audit report particulars. By avoiding the detailed scrutiny process, the department intends to make swift adjustments while ensuring taxpayer compliance. However, the broad language of the amendment, particularly the phrase 'as may be prescribed', grants significant latitude to the CBDT in determining applicable scenarios, leading to concerns about discretion in enforcement.