New Income Tax Draft Rules Insert Rule 166 to Define Conditions for Treating Return as Defective

The Draft Income Tax Rules, 2026 have introduced provision by inserting Rule 166, which for the first time expressly lays down the conditions under which a return of income may be treated as a defective return under section 263(7) of the Income Tax Act, 2026.

The earlier Income Tax Rules, 1962, where no dedicated rule defined such defect conditions. The proposed rule seeks to standardise the parameters for determining defects in filed returns and reduce ambiguities for both taxpayers and the department.

Under Rule 166(1), a return of income will be regarded as defective if prescribed reporting and disclosure requirements are not properly complied with.

The first condition covers incomplete filing where all applicable fields, parts, schedules, statements, and columns in the return form have not been duly filled. This specifically includes disclosures relating to computation of income under various heads, gross total income, and total income.

The second defect condition applies to auditable cases. Where an audit report is required under section 63, failure to furnish such an audit report before filing the return of income will result in the return being treated as defective.

The third condition is for the cases where the return is filed under section 263(6). In such cases, if the details of tax payment as required under section 267 are not duly filled in the return, the filing will be treated as defective.

The fourth condition relates to credit claims of MAT or AMT. If the brought forward credit of Minimum Alternate Tax or Alternate Minimum Tax claimed in the return is not in accordance with the carry-forward credit reflected and allowed in the latest return of the assessee, the return will be considered defective.

And the Rule 166(2) empowers the Board to notify specific classes of persons for whom these defect conditions may either not apply or may apply with modifications.

Verbatim of Rule 166

“Conditions for treating a return as defective return under section 263(7) of the Act.

(1) A return of income shall be regarded as defective, if any of the following conditions is satisfied, namely:-

(a) all fields, parts, schedules, statements, and columns in the return of income, as applicable to the case of the assessee, have not been duly filled in, including those relating to computation of income chargeable under applicable heads of income, computation of gross total income and total income;

(b) the report of the audit, in auditable cases, referred to in section 63, has not been furnished prior to the filing of the return of income;

(c ) if the return of income is furnished under section 263(6), the details of payment of tax as per section 267 are not duly filled in the return;

(d) the brought forward credit of minimumalternate tax (MAT) or alternate minimum tax (AMT) claimed in the return is not in accordance with the carry forward of MAT or AMT in the latest return, as the case may be, allowed to the assessee;

(2) The Board may notify the class or classes of persons, to which any of the conditions specified in clauses (a) to (d) of sub-rule (1), shall not apply or shall apply with such modifications, as may be specified in such notification.”

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