Introduction to Section 142(1)
“Section 142 is the gateway to truth in tax assessments, empowering authorities to unravel the financial narrative and ensure compliance”
Overview of Section 142(1)
Section 142(1) of the Income Tax Act, 1961 is a crucial provision that empowers the Assessing Officer (AO) to make inquiries and gather information before assessing an individual’s or entity’s income tax liability. This section serves as a tool for the tax authorities to ensure compliance and verify the accuracy of the income declared by taxpayers. By issuing a notice under Section 142(1), the AO can require the taxpayer to furnish specific information, produce books of accounts, or appear in person to clarify doubts. The objective is to facilitate a thorough assessment and prevent tax evasion, ultimately ensuring that the correct amount of tax is levied.
Overview of Section 142(1)
Section 142(1) in The Income Tax Act, 1961 –
(1) For the purpose of making an assessment under this Act, the Assessing Officer may serve on any person who has made a return under section 115WD or section 139 or in whose case the time allowed under sub-section (1) of section 139 for furnishing the return has expired a notice requiring him, on a date to be therein specified,—
Clause (i): Furnishing a Return of Income
(i) where such person has not made a return within the time allowed under sub-section (1) of section 139 or before the end of the relevant assessment year, to furnish a return of his income or the income of any other person in respect of which he is assessable under this Act, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed, or :
Provided that where any notice has been served under this sub-section for the purposes of this clause after the end of the relevant assessment year commencing on or after the 1st day of April, 1990 to a person who has not made a return within the time allowed under sub-section (1) of section 139 or before the end of the relevant assessment year, any such notice issued to him shall be deemed to have been served in accordance with the provisions of this sub-section:
[Provided further that a notice under this sub-section for the purposes of this clause may also be served by the prescribed income-tax authority,†]
Clause (ii): Production of Accounts or Documents
(ii) to produce, or cause to be produced, such accounts or documents as the Assessing Officer may require, or
Clause (iii): Furnishing Information
(iii) to furnish in writing and verified in the prescribed manner information in such form and on such points or matters (including a statement of all assets and liabilities of the assessee, whether included in the accounts or not) as the Assessing Officer may require :
Provided that—
- (a) the previous approval of the Joint Commissioner shall be obtained before requiring the assessee to furnish a statement of all assets and liabilities not included in the accounts;
- (b) the Assessing Officer shall not require the production of any accounts relating to a period more than three years prior to the previous year.
Analysis
Section 142(1) empowers the Assessing Officer (AO) to serve a notice on a taxpayer for the purpose of making an assessment. Let’s break down each clause:
Furnishing a Return of Income
- The AO can require a taxpayer to furnish a return of income if they haven’t filed one within the time allowed under Section 139(1) or before the end of the relevant assessment year.
- This clause applies to taxpayers who are assessable under the Act, including individuals, companies, and other entities.
- The return must be in the prescribed form and verified in the prescribed manner.
Production of Accounts or Documents
- The AO can require the taxpayer to produce specific accounts or documents.
- The documents must be relevant to the assessment and not excessively burdensome to produce.
- The AO can’t require production of accounts older than 3 years prior to the previous year (proviso (b)).
Furnishing Information
The AO can require the taxpayer to furnish specific information, including:
- Statement of assets and liabilities (with Joint Commissioner’s approval for assets not included in accounts)
- Other information in the prescribed form
- The information must be relevant to the assessment and not violate confidentiality or other laws.
Provisional Interpretations
| Proviso | Interpretation |
|---|---|
| Proviso (a) | Joint Commissioner’s approval is required for requiring a statement of assets and liabilities not included in accounts. |
| Proviso (b) | The AO can’t require production of accounts older than 3 years prior to the previous year. |
| Second Proviso | Notices issued after the end of the relevant assessment year are deemed valid if served on a person who failed to file a return. |
Illustration: Simple Example
Lets suppose, Let’s take an example to illustrate Section 142(1). Suppose, X , a freelance consultant, filed his income tax return for AY 2023-24, declaring an income of ₹50 lakhs. The Assessing Officer (AO) issues a notice under Section 142(1) requiring X to:
- Furnish a detailed statement of his business expenses
- Produce books of accounts and bank statements
- Provide information on his assets and liabilities, including investments and loans
The notice is issued on 1st August 2024, and X is asked to comply by 15th August 2024. Here, the AO is exercising powers under Section 142(1)(ii) and (iii) to gather information and verify X’s income. X must comply with the notice, providing the required information and documents.
Illustration: Complex Example (Corporate)
Let’s take a more complex illustration to understand it better, Suppose, XYZ Pvt. Ltd., a real estate developer, filed its income tax return for AY 2023-24, declaring a total income of ₹10 crores. The Assessing Officer (AO) issues a notice under Section 142(1) requiring the company to:
- Furnish a detailed statement of income, including:
- Break-up of deductions claimed under Section 80-IA (infrastructure development)
- Computation of book profits under Section 115JB (Minimum Alternate Tax).
- Produce:
- Audited financial statements, including notes to accounts
- Agreements with customers and contractors
- Documents evidencing utilization of advances received from customers.
- Provide:
- Information on accounting policies and revenue recognition practices
- Details of pending litigation or claims against the company.
The AO suspects that the company might have overstated deductions or underreported income. Here, the AO is exercising powers under Section 142(1)(i), (ii), and (iii) to gather detailed information and verify the company’s income. XYZ Pvt. Ltd. must comply with the notice, providing the required information and documents.
Key Judicial Interpretation
Here are some brief summary of the judgments related to this provision;
- Madhuri Sameer Gokhale v. UOI (2025 LawText (BOM) (3) 72) The Bombay High Court quashed defective notices issued under Section 142(1), emphasizing the importance of specifying the purpose and ensuring proper service.
- XYZ Industries Ltd. v. ITO (2019, Bom HC) The court clarified that requests under Section 142(1) must be confined to the relevant assessment year.
- CIT v. Inderjit Singh (2012, Del HC) The Delhi High Court held that the AO cannot engage in fishing inquiries.
- Grindlays Bank Ltd. v. ITO (1980) 14 Taxman 176 (SC) The Supreme Court underscored that statutory notices must be exercised in good faith and within statutory boundaries.
- V.S. Finance Ltd. v. CIT (2025) 473 ITR 722 (All)(HC) The court set aside an ex parte reassessment order due to delayed notice, violating principles of natural justice.
Repercussion
If a taxpayer fails to comply with a notice under Section 142 of the Income Tax Act, several consequences can occur:
- Best Judgment Assessments – The AO may proceed with a best judgment assessment under Section 144, estimating the taxpayer’s income based on available information.
- Penalty – The AO may impose a penalty of ₹10,000 to ₹1 lakh under Section 271(1)(b) for non-compliance.
- Prosecution – In severe cases, prosecution under Section 276D may be initiated, which can lead to imprisonment or fine.
- Interest and Demand – The AO may raise a demand for tax, interest, and penalties, which the taxpayer must pay.
- Loss of Opportunity to Contest – Non-compliance may result in the taxpayer losing the opportunity to contest certain issues or provide explanations.
Illustrative Example
For example, Let’s ABC Enterprises received a notice under Section 142(1) from the Assessing Officer (AO) requiring them to Furnish a detailed statement of income and expenses for AY 2023-24 and Produce books of accounts and bank statements by 20th September 2024. ABC Enterprises ignores the notice and doesn’t respond by the deadline. Here’s what could happen:
- The AO proceeds with a best judgment assessment under Section 144, estimating ABC’s income at ₹1 crore (higher than the originally declared ₹50 lakhs). The AO determines a tax liability of ₹30 lakhs, including interest.
- The AO imposes a penalty of ₹50,000 under Section 271(1)(b) for non-compliance.
- ABC receives a demand notice to pay ₹30 lakhs (tax) + ₹5 lakhs (interest) + ₹50,000 (penalty) = ₹35.5 lakhs within 30 days.
- If the non-compliance is deemed wilful, the AO might initiate prosecution under Section 276D, which could lead to a fine or imprisonment.
If ABC Enterprises had complied, they might have explained discrepancies, reduced the tax liability, or avoided penalties. Non-compliance escalates the situation, making it costlier and riskier.
