Risk Management Strategy (RMS) Under Section 148 of the Income-tax Act, 1961

The concept of a Risk Management Strategy (“RMS”) appears in Section 148 of the Income-tax Act, 1961 and plays a crucial role in the functioning of faceless assessments and reassessment proceedings. While the statute itself mentions RMS only briefly, its operational architecture is reflected across CBDT’s scheme notifications and departmental guidance materials.

Use of RMS in Faceless Assessment Framework

A brochure issued by the Income-tax Department in March 2023 highlights that technology-driven case selection—using data analytics, artificial intelligence, and risk-assessment tools—is a core feature of the faceless regime. RMS constitutes the backbone of this selection and review mechanism.

In response to the FAQ, “What happens after I file my reply to the notice u/s 143(2)?”, the brochure elaborates the internal workflow where RMS is applied at different stages:

1. Acceptance of Reply by AU:
   If the Assessment Unit (AU) finds the assessee’s reply satisfactory, it prepares an Income and Loss Determination Proposal (ILDP). This ILDP is mandatorily subjected to the computer-run RMS tool. RMS identifies cases that warrant review by the Review Unit (RU). If no review is triggered, or if the RU concurs without modification, a final assessment order is issued.

2. Requirement of Further Information:
   Where the AU considers the reply inadequate, it issues a notice under Section 142(1) along with a questionnaire through the e-filing portal. The assessee is expected to furnish additional information electronically, with the option to seek adjournment through the portal.

3. Issue of Show Cause Notice:
   If the AU remains unsatisfied, it issues a Show Cause Notice (SCN) outlining proposed variations prejudicial to the assessee. Replies and supporting documents must be filed online, and the assessee may seek a video-conference hearing before the AU.

4. Post-SCN RMS Screening:
   After considering the SCN reply, another ILDP is prepared and again routed through the RMS tool. Only after RMS-based scrutiny (and review, where applicable) is the final assessment order passed.

This workflow demonstrates that RMS is not merely a case-selection tool but a mandatory decision-validation mechanism operating at both pre-SCN and post-SCN stages.

Statutory Definition of RMS

The CBDT’s e-Verification Scheme, 2021 (Notification dated 13 December 2021) provides a formal definition. Section 2(p) states:

“Risk management strategy” means an algorithm for standardised examination of information, by using suitable technological tools, including artificial intelligence and machine learning, with a view to reduce the scope of risk, as decided by the Board from time to time.”

This definition clarifies that RMS is not static. It is a dynamic algorithmic framework updated by the CBDT periodically based on evolving data patterns, enforcement priorities, and risk behaviours.

Section 4 of the same notification—Electronic collection and verification—further situates RMS within a broader information-processing ecosystem used to validate data, flag irregularities, and guide subsequent verification or assessment actions.

Purpose and Functional Role of RMS

The RMS is designed to systematically identify, categorise, and manage risks associated with assessments and reassessments. It ensures:

• Targeted scrutiny through intelligent selection of high-risk cases.
• Standardised decision-making by reducing subjective discretion at the AU level.
• Efficient resource allocation by minimising human intervention and focusing departmental efforts where risk is genuinely present.
• Consistency and transparency in faceless assessment outcomes.

Its relevance has increased significantly with the amendments brought by the Finance (No. 2) Act, 2024, which have expanded the department’s data-processing mandate and strengthened the link between information-based risk flags and initiation of reassessment proceedings under Section 148.

Conclusion

RMS has emerged as a central pillar in India’s faceless tax-administration framework. Although the statutory text offers limited detail, the operational guidelines, scheme notifications, and departmental materials collectively reflect a structured, technology-driven mechanism that influences assessment and reassessment outcomes at multiple stages. As the faceless regime evolves, RMS is likely to gain even greater significance in ensuring accuracy, fairness, and uniformity in tax administration.