Income Tax Assessment Types Under 2025 Act — Scrutiny, Best Judgment & Reassessment | Virtual Auditor

How Cases Are Selected

• CASS (Computer Aided Scrutiny Selection): Algorithm-based selection using risk parameters
• Risk parameters include: large refund claims, high-value transactions, deviation from industry norms, AIS mismatch, frequent return revisions, significant year-on-year income variation
• Random selection: A small percentage of returns are randomly selected to maintain compliance discipline

Scrutiny Procedure

1. Notice under Section 143(2) issued — taxpayer informed of selection for scrutiny
2. Notice under Section 142(1) — specific queries and document requirements
3. Taxpayer submits response through e-portal with supporting documents
4. Virtual hearing (video conference) if required by either party
5. Draft assessment order prepared by Assessment Unit
6. Review by Review Unit (independent verification)
7. Final assessment order passed and communicated electronically
8. Demand notice issued if additional tax is determined

Time limit for issuing Section 143(2) notice: Within 3 months from end of FY in which return is filed (for timely filed returns) or within 6 months from end of FY of filing (for returns filed beyond due date).

Best Judgment Assessment

A best judgment assessment is made when the taxpayer:

• Fails to file a return despite notice under Section 142(1)
• Fails to comply with the terms of a notice — does not respond to queries or produce documents
• Fails to comply with directions issued during assessment proceedings

In a best judgment assessment, the AO is not bound by the taxpayer’s declarations. The AO uses all available material — bank statements, information from third parties, AIS data, industry benchmarks — to determine income. However, the assessment must be made honestly and with due diligence; it cannot be arbitrary or capricious.

Important: Before making a best judgment assessment, the AO must give the taxpayer a reasonable opportunity of being heard through a show cause notice.

Income Escaping Assessment (Reassessment)

The reassessment provisions under the Income Tax Act 2025 have been significantly streamlined compared to the old Sections 147/148/148A framework. Key features:

Reopening Time Limits

Procedural Requirements

1. Information: The AO must have specific information (from AIS, investigation wing, audit objection, DTAA exchange) suggesting income has escaped assessment
2. Prior approval: Mandatory approval from specified authority based on time limit and amount
3. Notice to taxpayer: Show cause notice with details of information and reasons to believe income has escaped
4. Taxpayer’s response: Opportunity to explain within the stipulated time (minimum 7 days, extendable to 30 days)
5. Order on objections: AO must consider the response and pass a speaking order if proceeding with reassessment
6. Fresh notice and assessment: If satisfied, notice for reassessment is issued and full assessment proceeds

Assessment in Search Cases

When a search under Section 132 or requisition under Section 132A is conducted, the AO can assess or reassess total income for:

• 6 assessment years preceding the year in which the search is conducted
• The assessment year relevant to the financial year in which the search is conducted
• Income of any other person if documents or assets pertaining to them are found during the search (corresponding assessment)

Time limit: Assessment in search cases must be completed within 12 months from end of the financial year in which the last authorization for search was executed.

Search assessments are not faceless — they are handled by the jurisdictional AO due to the sensitive nature and volume of evidence involved.

Protective Assessment

A protective assessment is made when there is genuine doubt about which person is liable to be assessed on a particular income. The AO makes a substantive assessment on the person believed to be the rightful assessee and a protective assessment on the alternative person. Once the substantive assessment is finalized (including through appeal), the protective assessment is either confirmed or discharged.

Reference to TPO — Transfer Pricing

Where the taxpayer has entered into international transactions or specified domestic transactions exceeding ₹20 crore, the AO may refer the case to the Transfer Pricing Officer (TPO) for determination of the arm’s length price. The TPO’s order is binding on the AO. The taxpayer can challenge the TPO’s order before the Dispute Resolution Panel (DRP). For dispute resolution, see our Appeals Guide.

Rectification of Mistakes

Any mistake apparent from the record in an assessment order, intimation, or any other order can be rectified under the rectification provisions (Section 154 equivalent). This covers:

• Arithmetic or clerical errors
• Obvious errors of law settled by Supreme Court or High Court
• Errors in applying TDS credit

Time limit: Rectification can be made within 4 years from the end of the financial year in which the order was passed. The taxpayer must be given an opportunity of being heard before any rectification that is prejudicial to them.

Time Limits for Completing Assessments

Assessment Procedure — From Notice to Order

Key Changes from the Income Tax Act 1961

• Faceless by default: All scrutiny assessments are conducted faceless unless specifically excluded (search cases, international tax)
• Streamlined reopening: The old three-tier system (Sections 147/148/148A/149/151) has been rationalized into a cleaner framework with two clear time limits — 3 years and 10 years
• Stricter approval: Reopening beyond 3 years requires approval from the highest authority (Principal Chief Commissioner level)
• Mandatory e-portal: All communications between AO and taxpayer must be through the income tax e-portal
• Reduced time limits: Tighter deadlines for completing assessments ensure timely disposal
• Consolidated provisions: The 2025 Act consolidates multiple scattered provisions into a logical structure

For a detailed comparison, see our Income Tax Act 2025 vs 1961 Transition Guide.

Related Articles: Income Tax Act 2025 Complete Guide | Faceless Assessment & Appeals | Income Tax Appeals Procedure | Penalties & Interest | TDS Rate Chart 2026-27