Rechecking of ITRs: Govt to compare with past returns to catch discrepancies; see what does this mean for taxpayers

The Income Tax Department is scheduled to implement a new tax return processing change starting in April 2025. This update is designed to enhance accuracy and decrease discrepancies in filings. An adjustment to Section 143(1) of the Income Tax Act will empower tax authorities to compare a taxpayer’s most recent Income Tax Return (ITR) with those from previous years. Through this modification, any inconsistencies between the current and past returns will be identified, possibly resulting in automatic corrections.

While the intention behind this modification is to simplify assessments and lessen the issuance of tax notices, it may also have significant implications for taxpayers. Section 143(1) of the Income Tax Act governs the initial processing of income tax returns (ITR) by the tax department, permitting automatic adjustments to rectify errors like miscalculations or apparent discrepancies in claims made in the return.

How much tax do I have to pay? Calculate now

The new change announced by the government is set to take effect on April 1, 2025. This means that when you submit your ITR in July 2025, it will be scrutinized against the ITR submitted in July 2024.

After the submission of an Income Tax Return (ITR), it undergoes a review by the Income Tax Department as per the provisions of this section. In case of any errors, discrepancies, or necessary refund/interest adjustments, the taxpayer will receive an intimation outlining the required corrections or adjustments.

In the Finance Bill 2025, Finance Minister Nirmala Sitharaman proposed an amendment to Section 143(1) of the Income Tax Act. This amendment would empower the Income Tax Department to compare the current year's tax return with those of previous years, with the objective of flagging any inconsistencies in reported income, deductions, or other financial details.

Section 143(1)

According to the Central Board of Direct Taxes (CBDT), Section 143(1) has been revised to enable the identification of discrepancies in the tax return by comparing it with information from previous years. 

"The government has made amendments to the provisions concerning income tax search cases in order to provide relief to income taxpayers. According to a supplementary frequently asked question (FAQ) released by the Income Tax Department, Section 158BA (Assessment of undisclosed income as a result of search) has been updated to replace the term ‘total income’ with ‘total undisclosed income’. Additionally, changes have been made to Chapter XIV-B, which outlines the special procedure for income tax search cases. The revised chapter now indicates that the primary objective of the government is to conduct an income tax search or requisition operation to identify undisclosed income, rather than focusing on regular disclosed income," said CA (Dr.) Suresh Surana.

Impact on taxpayers

The proposed change to Section 143(1) has the potential to significantly impact taxpayers by expanding the range of adjustments that can be made during the processing of tax returns. 

The Income Tax Department will now be closely examining disparities between current and past ITRs, with a focus on areas such as reported income, declared assets, and carry-forward losses. 

While taxpayers will still be given the opportunity to address any proposed adjustments, this modification may lead to an uptick in tax disputes. Despite the intention to streamline assessments and minimize unnecessary notifications, the widened scope of scrutiny could result in an increase in cases being flagged for inconsistencies.

"The Department processes Income Tax Returns (ITRs) to rectify arithmetical and apparent errors, tax computations, and payments, without verifying sources and modes of earning income. The Finance Bill amended Section 143 by introducing a sub-clause permitting adjustments during ITR processing if inconsistencies are detected across multiple years. Such inconsistencies may involve discrepancies in income, deductions, exemptions or disclosures. Going forward the CBDT shall prescribe the cases / scenarios where 143(1) of the tax year would address any inconsistency of information in the return of preceding previous year. While CBDT has yet to define specific inconsistencies, an example provided in the FAQ is when a taxpayer claims a credit in a prior return, but the corresponding figures differ in the current return," Surana added.