After filing the return, a taxpayer has an option to file a revised return or if not filed altogether, an option of filing of belated return. The period to file such returns is 5 months in the case of the individual assessee, 2 months for audited businesses, and 1 month for assessees with transfer pricing transactions. Since this period is too limited, the income tax law is introducing a new option to file ‘Updated Return’. Taxpayers who may realize that they have committed omissions or mistakes while correctly estimating their income for tax payment will now have an opportunity to correct their errors by filing an updated return under section 139(8A). Updated returns can be filed within three years from the end of the financial year. This option has been introduced so that department does not have to go through a lengthy process of adjudication.

Although from the wording it seems a taxpayer can file ‘Updated return’ at his option when he feels so, on analysis of the provisions, it seems the other way around. Since the income tax department is extensively collecting information from other Government departments, it may now send notices to the taxpayers to file an ‘Updated return’ to declare income as per information available with the income tax department. Usually, the income tax department goes ahead with show-cause notice, then assessment notice, passing final order and then recovery of taxes – the process is lengthy for the tax department. Therefore, it will now ask the taxpayer to file an updated return, before they begin the assessment. Sounds nice? But there’s more to the story that wasn’t part of the budget speech, instead of embedded in the finance bill.

Under new section 140B, for filing an updated return, a taxpayer has to mandatorily disclose additional income that has to mandatorily result in additional taxes. You cannot file a loss return, or decrease your income, the income must mandatorily increase as a result of the return. Further, on such incremental income, 25% additional tax has to be paid apart from the tax as per normal provisions i.e. tax slabs or 25% – 30% as may be applicable. If a taxpayer has not filed any return, or any belated return, and is now filing an updated return, additional tax has to be paid at 50% of the total tax payable, on the income disclosed in the updated return. Thus, taxpayers would effectively pay around 50% – 80% of the income in taxes, additional taxes and interest on such taxes. Therefore, though Finance Minister may call it a “trust-based” approach, it is effectively a useful provision for the income tax officers to avoid litigations and collect taxes quickly. It is quite unlikely that people would voluntarily file such a return unless forced to file by way of a tax notice.

Updated returns cannot be filed in cases where a survey, search or seizure has been conducted or is in process. Further, such assessee is barred from filing the updated return for the previous two years apart from the year in which survey, search or seizure proceedings have been initiated. This is because such taxpayers may update returns to nullify the effects of such proceedings which result in higher outgo of taxes, penalties etc.