Amendment to Section 143(1): A Step Toward Easier Tax Compliance Or A New Challenge For Taxpayers?

Filing the income tax return (ITR) for a taxpayer is a careful act wherein they have to ensure compliance while avoiding scrutiny. The Income Tax Department (ITD) recently notified some amendments to the Finance Bill 2025. One of these is an amendment to Section 143(1) of the Income Tax Act, 1961 which intends to improve accuracy and reduce errors in ITR filings.

However, the change has also raised some questions regarding such as whether it would create more headaches than relief.

What Is This Amendment To Section 143(1)?

This section provides provision for processing of ITRs after making certain specified adjustments like an arithmetical error in the return or incorrect claim in the return apparent from any information in the return.

However, the Section has now been amended wherein tax officials will be able to check ‘inconsistencies’ between the current year’s income tax return (ITR) and the preceding year’s ITR at the time of processing.

If any inconsistencies are found, they could trigger an automated adjustment during the processing stage itself. This means that even before the tax department takes a closer look, the system may flag variations in income, deductions, or tax credits.

More Accuracy or More Complexity?

Will this change simplify ITR processing or make it more complex? Tax experts have mixed views on this. According to CA Aastha Gupta, Partner at S.K. Gulati and Associate, taxpayers need to be more vigilant than before while filing their returns. Since the income tax return of the current financial year will be compared with the previous financial year, the taxpayers need to have a justification for the differences in sources or value of income.

The goal of course is to reduce tax scrutiny notices by ensuring that discrepancies are caught early. However, Raghunathan Parthasarathy, Partner at BDO India, highlights the flip side of this change.

“While the legislative intent appears to promote return accuracy and reduce scrutiny, the practical implication may be an increased compliance burden, especially for taxpayers with tax credits, carry-forward losses, MAT/ AMT credits, claims/ deductions or genuine year-on-year changes due to business restructuring, income re-classification etc,” he states.

He further adds, “As clarified in the Supplementary FAQs (FAQ 9), even a mismatch in credit claimed in earlier years vis-à-vis the current year could trigger validation under the amended provision, indicating increased system-led vigilance.”

What Could Be Flagged?

The Finance Bill, 2025’s proposed amendment to Section 143(1)(a) would be established by inserting clause (ii), introducing a new dimension to the Centralised Processing of Returns. 

The clause empowers the Centralised Processing Centre (‘CPC’) to flag inconsistencies between the current year’s return and any preceding previous year, as may be prescribed.

However, the ITD has yet to clarify the exact nature of these ‘inconsistencies’. 

Says CA Aastha, “There can be numerous examples like capital gains on account of sale of immovable property, income on account of maturity of life insurance policy, opting for presumptive taxation, change in source of TDS/TCS credits, change in the nature of deductions claimed etc. However, these inconsistencies are yet to be defined by the CBDT as per the FAQs.”

The key concern is the broad wording of the amendment, since it applies to “any preceding year,” comparisons might not be limited to just the previous financial year but could extend even further back.

The lack of clarity raises important questions, such as:

- Will taxpayers get a notice before an adjustment is made?

- Will they have sufficient time to respond or correct discrepancies?

- Could this lead to an increase in tax disputes?

If this amendment is interpreted narrowly, focusing only on clear arithmetical or factual mismatches, it could reduce scrutiny notices and streamline compliance for taxpayers. But if applied broadly, even routine changes in income classification or tax claims could get flagged leading to unnecessary confusion and potential disputes. 

What Should Taxpayers Do?

Says Parthasarathy, “To mitigate the risk of adjustments at the processing stage, taxpayers are advised to proactively reconcile current year data with prior year filings.” This is particularly for:

- Carried-forward business losses or depreciation;

- Unabsorbed deductions under Chapter VI-A or other provisions;

- MAT/ AMT credits and similar carry-forward tax credits

“This reconciliation must go beyond the immediately preceding year, as the provision covers ‘any preceding previous year’ broadening the scope of comparison,” he states.

Could this amendment lead to an increase in tax disputes and litigation, given the broad wording of "as may be prescribed"? 

According to Parthasarathy, the current lack of clarity on the types of inconsistencies that may be prescribed under clause (iia) gives rise to ‘interpretational uncertainty’. 

This provision could be viewed through two potential lenses:

Restrictive Interpretation: If interpreted in line with the original intent of Section 143(1), which focuses on arithmetical or apparent factual errors, “inconsistencies” would be limited to mechanical/ arithmetical mismatches. In such a scenario, automated processing remains limited in scope, and the risk of litigation is significantly reduced.

Expansive Interpretation: Alternatively, if the term “inconsistency” is construed more broadly to include interpretational inconsistencies such as changes in income classification or treatment of deductions, routine variations in taxpayer positions may get flagged. This could increase compliance complexity and potential disputes, particularly during the initial phase of implementation.

Will this amendment lead to fewer scrutiny notices, or could it result in more automated adjustments? Says CA Aastha, “It totally depends upon the filters or threshold limits set up at the level of the CPC that processes all the returns and issues the intimation u/s 143(1) of the Income Tax Act, 1961.”

For now, this amendment needs more clarity. If implemented well, it could indeed reduce tax scrutiny and ensure smoother processing of returns. The key, however, will be how tax authorities define ‘inconsistencies’ and whether taxpayers are given a fair chance to clarify their filings before adjustments are made.