Assessment of Income & Jeopardy Assessment: Rules, Cases & Tax Calculation

Key Concepts & Definitions

1. Income Year vs. Assessment Year

flowchart TD
    A["Income Year (FY)"] -->|"Income earned in this period"| B["Assessment Year (AY)"]
    B -->|"Tax computed & paid"| C["Due Date: 31st Magh"]
    A -->|"Example: FY 2079/80"| D["AY 2080/81"]
    D -->|"Tax paid by"| E["31st Magh 2081"]

• Income Year (Fiscal Year): April 1 – March 31 (e.g., FY 2079/80).
• Assessment Year (AY): The year after the income year when tax is computed (e.g., FY 2079/80 → AY 2080/81).
• Why the delay? Tax authorities need time to verify books, adjust for omitted income/expenses, and apply Profit and Loss Carry Forward (PCC).

2. Jeopardy Assessment: When Tax Authorities Step In

Jeopardy assessment occurs when:

• The taxpayer fails to file returns on time.
• The tax due is high (e.g., >Rs 500,000).
• Fraud or underreporting is suspected.

Process of Jeopardy Assessment

flowchart TD
    A["Taxpayer fails to file return"] --> B["Tax Officer issues Notice (Form 10A)"]
    B --> C["Taxpayer submits books/records (within 30 days)"]
    C --> D["Officer estimates taxable income (Form 10B)"]
    D --> E["Tax computed & provisional payment (Form 10C)"]
    E --> F["Final assessment (Form 10D) within 6 months"]

Key Rules:

• Tax is estimated based on available records.
• No strict audit (unlike normal assessment).
• Interest + penalty may apply if underpayment is confirmed later.

Real-World Example:

Case of a Kathmandu Retail Shop (Mr. Bikram)

• Scenario: Mr. Bikram (a small retailer) did not file his FY 2079/80 return by 31st Magh 2080.
• Action: The Inland Revenue Department (IRD) issued a jeopardy assessment notice.
• Estimation:
  • Gross sales (books): Rs 8,00,000
  • Estimated profit margin: 20% (industry average)
  • Taxable income: Rs 1,60,000
  • Tax @ 25%: Rs 40,000
• Outcome: Mr. Bikram paid Rs 40,000 immediately + 10% interest (later adjusted to Rs 35,000 after audit).

3. Adjustments in Taxable Income

Taxable income is not always the same as accounting profit. The Income Tax Act 2058 allows/disallows certain adjustments:

| Donation to Public School (Rs 200,000) |
|----------------------------------------|
| **Dr. Profit & Loss A/c** | **Cr. Donation A/c** |
| (200,000)                        | (200,000)               |
| **But**: Only **10% of taxable income** is allowed. |
| **Taxable Income**: Rs 1,000,000 → **Max deduction**: Rs 100,000 |
| **Final Adjustment**: Rs 100,000 deducted from taxable income. |

4. Common Exam Scenarios & Worked Examples

Scenario 1: Omitted Deductions (Past Exam Question)

Given:

• Year 1: Interest Rs 20,000 not deducted.
• Year 2: PCC Rs 25,000 omitted.
• Year 3: Dividend Rs 50,000 included in P/L (but tax-free under Section 10).

Solution:

Final Taxable Income Adjustment: (+20,000) + (-25,000) + 0 = -Rs 5,000 → Taxable income reduces by Rs 5,000.

Scenario 2: Jeopardy Assessment for a Daraz Seller

Given:

• Mr. Sagar (Daraz seller) did not file FY 2079/80 return.
• Estimated sales: Rs 12,00,000 (from Daraz dashboard).
• COGS (Cost of Goods Sold): 60% of sales.
• Other expenses: Rs 1,50,000 (electricity, rent, etc.).

Jeopardy Assessment Calculation:

1. Gross Profit = Sales - COGS = Rs 12,00,000 - (60% × 12,00,000) = Rs 4,80,000
2. Add back unrecorded expenses (e.g., Rs 50,000 cash expenses) = Rs 5,30,000
3. Less other expenses = Rs 5,30,000 - Rs 1,50,000 = Rs 3,80,000
4. Tax @ 25% = Rs 3,80,000 × 25% = Rs 95,000

Outcome:

• Immediate tax payment: Rs 95,000
• Later audit: If actual profit was Rs 3,50,000 → Refund of Rs 7,500 (after penalty).

5. Withholding Tax (WHT) vs. Normal Assessment

Real-World Example:

Khalti & eSewa Transactions

• When you pay rent via Khalti, the landlord receives 95% of the amount.
• Khalti deducts 5% WHT and remits it to the IRD.
• Your tax liability reduces by this amount (if you’re a taxpayer).

6. Depreciation & Block System (Preview for Unit 7)

While Unit 7 covers Block D in detail, Unit 3 introduces how depreciation affects taxable income:

Example (Nepal Electricity Authority - NEA):

• Asset: Generator costing Rs 50,00,000
• Depreciation Rate: 15% (Block D)
• Annual Depreciation: Rs 50,00,000 × 15% = Rs 7,50,000
• Taxable Income Reduction: Rs 7,50,000 (saves Rs 1,87,500 in tax @ 25%).

In the Real World

1. eSewa & Khalti (Digital Payments)

   • Concept: Withholding Tax (WHT)
   • How? When you pay rent or salary via eSewa, the platform automatically deducts 5% WHT and sends it to the IRD.
   • Impact: Simplifies tax compliance for small businesses (e.g., landlords, freelancers).

2. NTC & Ncell (Telecom Companies)

   • Concept: Jeopardy Assessment
   • How? If a small mobile shop owner fails to file returns, NTC/Ncell may report unpaid taxes to the IRD, triggering a jeopardy assessment.
   • Example: A Pathao driver earning Rs 5,00,000/year but not filing taxes may face estimated tax + penalty if caught.

3. Daraz & Sastodeal (E-Commerce)

   • Concept: Omitted Income & PCC
   • How? If a Daraz seller underreports sales, the IRD may compare bank deposits vs. declared income and adjust taxable income.
   • Example: A seller claims Rs 8,00,000 sales but bank shows Rs 10,00,000 deposits → IRD adds Rs 2,00,000 to taxable income.

Exam Tip

✅ What Examiners Look For:

1. Clear distinction between Income Year (FY) and Assessment Year (AY).
2. Step-by-step adjustments (e.g., omitted deductions, PCC, donations).
3. Jeopardy assessment calculations (always show estimated profit and tax rate).
4. Real-world tie-ins (e.g., Khalti WHT, Daraz sales scrutiny).
5. Penalty & interest rules (e.g., 10% interest on late payments).

❌ Common Mistakes to Avoid:

• Forgetting PCC (can reduce taxable income by up to 5 years of losses).
• Miscounting donation limits (only 10% of taxable income is deductible).
• Ignoring WHT in withholding tax questions (always check payer vs. payee rates).

Pro Tip:

"If a question mentions ‘omitted’ or ‘unrecorded’, always adjust taxable income UPWARD (add back). If it’s a deduction, adjust DOWNWARD (subtract)."

Final Note: This unit is highly practical—70% of exam questions involve calculations (adjustments, jeopardy assessments, WHT). Practice past papers focusing on:

• Omitted income/expenses
• Donation limits
• Jeopardy assessment scenarios
• PCC carry-forward

Good luck! 🚀