Scope, Limitations & Process of Issuance of Section 148 Notice under Income‑tax Act, 1961

Executive Summary: This article examines the law and practice governing issuance of notices under Section 148 of the Income‑tax Act, 1961 (“Section 148”) and accompanying provisions (notably Sections 147, 148A, 149 and 151). It discusses the statutory framework, the pre‑conditions for valid issuance, important safeguards available to the assessee, and the procedural steps the Assessing Officer (AO) must follow. The analysis relies on leading decisions of the Supreme Court and High Courts (including ITO v. Lakhmani Mewal Das, GKN Driveshafts (India) Ltd., Commissioner of Income‑tax v. Kelvinator of India Ltd., Union of India v. Ashish Agarwal and Union of India v. Rajeev Bansal) and the post‑2021 amendments that substantially re‑shaped reassessment procedure. Practical protections for taxpayers, tactical responses, and a corporate case study with numerical illustrations are included. The aim is to equip tax professionals and in‑house counsel with a rigorous, practitioner‑friendly guide to contesting or responding to a Section 148 notice.

1. Background and legislative context

Sections 147 to 151 of the Income‑tax Act deal with reassessment where income chargeable to tax has “escaped assessment”. Section 147 confers power to assess or reassess; Section 148 prescribes issuance of notice before reassessment. Prior to the Finance Act, 2021, the statutory language used the phrase “reason to believe”. The Finance Act, 2021 substituted sections 147–151 and introduced Section 148A (an inquiry / show‑cause machinery) and Section 149 (time limits). The new regime emphasizes procedural safeguards — recording of information, an opportunity of being heard, and specified internal approvals for issuance of notices beyond the primary time limit.

Because of pandemic related relaxations (TOLA 2020) and a cluster of litigations, the Supreme Court has subsequently clarified interaction between the old and new regimes, the effect of extension notifications and the conditions under which notices issued in the transition period would survive. These clarifications are crucial for analysing timeliness and validity of notices issued between April–June 2021 and beyond.

2. Text and immediate meaning of Section 148 (short note)

Section 148 provides (in substance) that before making an assessment, reassessment or recomputation under Section 147, the AO shall serve a notice on the person requiring him to furnish a return of income for the relevant assessment year, if information suggests that income chargeable to tax has escaped assessment. Section 148A (inserted by Finance Act, 2021) prescribes the preliminary steps — enquiry (with prior approval in defined cases), issuance of a show‑cause notice (with supply of relevant material), consideration of the assessee’s reply and a recorded order under Section 148A(d) deciding whether it is a fit case to issue a Section 148 notice. Section 149 prescribes time limits for issuance of notice and Section 151 prescribes sanctioning authority (where required).

3. Scope — when a notice may be issued

The AO may initiate reassessment where he has “information which suggests that income chargeable to tax has escaped assessment” and, after following the Section 148A procedure (where applicable), forms a decision under Section 148A(d) that it is a fit case to issue notice under Section 148. The modern formulation emphasises that the AO must have relevant material that forms a real and rational link (a “live link”) with the formation of belief that income has escaped. The courts have repeatedly rejected invocation of reassessment based on mere suspicion or a simple change of opinion on issues already adjudicated in the original assessment.

Key points on scope:

• The information must be intelligible, relevant and have a rational nexus to the escapement allegation. It cannot be speculative, vague or remote. The “live link” requirement preserves the protective balance between Revenue powers and taxpayer rights.
• Reopening may be justified by new facts discovered after the original assessment (for instance, undisclosed receipts, accommodation entries, material from third‑party documents, search records, or evidence of unaccounted assets or expenditures).
• The test is not whether the taxpayer ultimately proves the assessee liable; it is whether the AO had sufficient material to reach a prima facie belief justifying the inquiry and notice (the merits are normally tested later in appeal/tribunal).
• Reopening based solely on reassessment “policy” or mere re‑interpretation of the same records previously considered is impermissible (change‑of‑opinion doctrine).

4. Statutory limitations, thresholds and time‑bars (Section 149 and related rules)

The substituted Section 149 (Finance Act, 2021) prescribes the time limits for issuing a notice under Section 148. The new law reduced the default limitation to three years from the end of the relevant assessment year. However, for more serious cases where the AO possesses tangible material showing that income chargeable to tax has escaped assessment to the tune of Rs. 50 lakhs or more (represented by assets, expenditures, entries in books of account or other documents), the notice may be issued within ten years from the end of the relevant assessment year. The Finance Act, 2021 also requires specified authority approvals (Section 151) for issuance beyond the ordinary period. These safeguards are intended to balance effective tax collection with finality for taxpayers.

Recent judicial pronouncements (including the Supreme Court’s decisions in Ashish Agarwal and Union of India v. Rajeev Bansal) clarified that pandemic‑era extensions (TOLA) and transitional notifications must be read with caution; notices issued under the old regime in the transition period were deemed to be show‑cause notices under Section 148A(b) of the new regime by the Supreme Court in Ashish Agarwal, but time limits and sanction requirements under the substituted provisions remain critical. Rajeev Bansal reiterated that notices must be issued within surviving time limits and that failure to comply with Section 151/Section 149 affects the AO’s jurisdiction. (See authorities cited below.)

5. Procedure (Section 148A and pre‑conditions) — step‑by‑step

The modern procedure may be summarized in practical steps (the precise steps and timelines must be checked against the latest statutory text and CBDT instructions):

Step 0: Receipt / discovery of information by the AO

• Information may flow from investigation, search, survey, audit objections, third party data, intelligence, regulatory filings, RBI alerts, or internal enquiries. The AO must record the information that suggests escapement.

Step 1: Internal approval (where required)

• In certain classes of cases (notably where the matter falls beyond three years) prior approval of specified authority (Section 151) is legally required before undertaking inquiry or issuing show‑cause (Section 148A) / notice (Section 148).

Step 2: Section 148A(a) enquiry (if applicable)

• The AO may conduct an enquiry to verify the information, again subject to internal approvals. This may include seeking documents, asking questions, or conducting limited enquiries – but not a full‑scale reopening without following Section 148A and sanction requirements.

Step 3: Issue of show‑cause (Section 148A(b))

• Where the AO proposes to reopen, he must issue a show‑cause notice (with the specified minimum time for reply not less than seven days and not exceeding thirty days) and supply the relevant information/material relied upon by Revenue. The supply of material is a mandatory step — failure to supply materially relevant information can vitiate the process and attract judicial scrutiny.

Step 4: Consideration and passing of order (Section 148A(c) and (d))

• The AO considers the assessee’s reply and, on the basis of available material and the reply, passes a recorded order under Section 148A(d) deciding whether it is a fit case to issue a notice under Section 148. That recorded order must deal with the assessee’s objections and record reasons. GKN Driveshafts laid down a principled procedure for dealing with objections and the duty of the AO to pass a “speaking order” disposing the objections before proceeding.

Step 5: Issuance of Section 148 notice

• Only after steps above are complied with, and within statutory time limits (Section 149 read with TOLA if applicable), the AO may serve Section 148 notice requiring the assessee to furnish return for the relevant year.

Step 6: Filing of return and further proceedings

• The assessee must file a return within the time mentioned (usually 30 days or such period as in the notice). Thereafter the AO proceeds with reassessment (subject to adducing reasons, recording, and the assessee’s legal remedies).

6. Leading judicial authorities and legal principles

This section summarizes key court rulings that shape the modern law.

(a) ITO v. Lakhmani Mewal Das, (1976) 103 ITR 437 : 3 SCC 757

• Principle: Reopening requires “reason to believe”, which is stronger than mere suspicion. The reasons must have a rational connection with formation of belief. Reopening cannot be founded on stale suspicion or remote inferences. Courts emphasized bona fides and existence of material that rationally links to escapement.

(b) GKN Driveshafts (India) Ltd. v. ITO, (2003) 259 ITR 19 (SC) : (2003) 1 SCC 72

• Principle: Supreme Court prescribed a mandatory procedure when section 148 notices are issued: (i) the assessee may file objections to reopening; (ii) the AO must supply reasons within reasonable time and dispose of objections by a speaking order before proceeding; (iii) if the AO does not supply the reasons, the remedy is judicial; but non‑supply alone may not always quash the assessment — the court will look to substance and compliance with principles of natural justice.

(c) Commissioner of Income‑tax v. Kelvinator of India Ltd., (2010) 320 ITR 561 (SC)

• Principle: Reopening cannot be based merely on “change of opinion”. The material relied upon must be fresh or previously not considered; the AO cannot reopen because he now takes a different view of facts that were earlier considered and decided in the original assessment.

(d) Union of India v. Ashish Agarwal, (Supreme Court, 2022)

• Principle: The Supreme Court directed that reassessment notices issued under the old regime during the transition period (1 April–30 June 2021) be deemed to be show‑cause notices under Section 148A(b) of the new regime; the AO must provide material and follow 148A procedure insofar as practicable with some relaxations for the transitional problem. This decision saved a large number of notices that would otherwise have been struck down as premature.

(e) Union of India v. Rajeev Bansal, (Supreme Court, October 3, 2024)

• Principle: Key clarifications on TOLA and survival of time limits; clarified that notices must be issued within the surviving statutory time limits, and that non‑compliance with Section 151 and Section 149 affects AO jurisdiction. Rajeev Bansal summarised the correct application of the substituted provisions, time limits, and the consequences of TOLA and Ashish Agarwal orders for notices issued in the transitional window.

(Each of the above authorities is discussed in more detail in the annexure ‘Case Law Digest’.)

7. Protections available to the assessee — practical and legal remedies

Taxpayers can rely on procedural and substantive protections; early, well‑documented reactions are essential. Principal protections include:

A. Procedural protections

1. Right to reasons and supply of material: If a notice is issued, the assessee may request reasons recorded by the AO. Under GKN and Section 148A, the AO must disclose relevant information relied upon to enable the assessee to make a meaningful reply. Non‑supply or vagueness is frequently a basis for judicial intervention.

2. Opportunity of hearing: Section 148A(b) requires a show‑cause period not less than 7 days; natural justice mandates adequate time and disposal of objections by a speaking order before reassessment.

3. Jurisdictional and sanction defects: If the AO failed to obtain necessary sanction under Section 151, or issued notice after the time bar under Section 149, the notice may be challenged as jurisdictionally defective.

4. Faceless / Scheme compliance: Under faceless assessment scheme and Section 151A/151, notices may need to be issued by prescribed authorities (FAO) or processes to be followed. Non‑compliance with CBDT scheme has produced successful High Court defenses in some cases (queried in recent 2024–2025 rulings).

B. Substantive protections

1. Change of opinion: Courts routinely strike down reopening that merely reflects a change of opinion on matters previously considered (Kelvinator). If the AO relies on nothing beyond what was before him at the original assessment, the notice can be quashed.

2. Absence of “live link”: If the material relied upon is tenuous, remote or does not establish a rational nexus with alleged escapement (Lakhmani), courts will quash notices.

3. Time‑bar (limitation): If Section 149‑prescribed time limits are exceeded, the notice is time‑barred. Post‑Ashish Agarwal and Rajeev Bansal jurisprudence, careful computation of surviving limitation and TOLA consequences is necessary.

4. Burden of proof at reopening stage: Although the AO must have material to form prima facie belief, the ultimate burden on the department to prove taxability remains at assessment/appeal stages. At jurisdictional challenges the focus is on legal compliance with procedure and reasonableness of AO’s recorded reasons.

C. Remedies and tactical steps

1. File a prompt, reasoned objection to the AO (preferably in writing), request recorded reasons and supply of material, and demand disposal by a speaking order as mandated by law.

2. Preserve record, formally request the reasons under Section 148A / judicial precedents, and contemporaneously prepare documentary evidence to rebut alleged escapement.

3. If the AO fails to supply reasons or acts in breach of procedure, consider filing a writ petition (High Court) challenging jurisdiction — but courts often require exhaustion of remedy before the AO issues final order (per GKN); timeliness of writ application is a strategic decision and must be assessed case by case.

4. Raise jurisdictional grounds (time‑bar, want of sanction) at the earliest opportunity and record them in replies; keep a copy of all communications.

5. Use settlement alternatives where appropriate (e.g., disclosures, VDIS‑type schemes are rare today) or administrative remedies like application for rectification of mistake only where legitimate.

8. Corporate case study and numerical illustration

Facts (hypothetical, but realistic):

Alpha Manufacturing Ltd (AML) is a Jaipur‑based company. For AY 2020‑21 AML showed a taxable profit of ₹22,50,000 after claimed sale of an old factory land was shown as fully exempt under a claimed reinvestment provision. The AO receives third‑party information from a municipal property registry and bank records indicating (i) AML sold a portion of the land for ₹1,10,00,000 in March 2020, (ii) the sale proceeds were routed through a related shell company, and (iii) AML received only ₹20,00,000 in bank credits as receipts. The AO records information and issues a Section 148A(b) show‑cause and later a Section 148 notice dated September 2, 2022.

Key legal/applicative points:

• Quantum of alleged escaped income: If the AO alleges that AML’s undisclosed income relating to sale is ₹90,00,000 (for example by imputing market value less declared receipts) and this is represented by an asset/transaction entry, it crosses the ₹50 lakh threshold; under Section 149 this permits reassessment up to 10 years from the end of AY 2020‑21, subject to sanction and time‑bar calculations.
• Time‑bar computation: For AY 2020‑21 (relevant FY 2019‑20), the three‑year window would normally close on 31 March 2024. If the AO invokes the ₹50 lakh threshold and has tangible documents, he may issue notice within the extended period (statutory computations must follow Rajeev Bansal / TOLA guidance where transitional issues arise)
• Practical defensive steps for AML:

1. On receipt of show‑cause: prepare a detailed reply pointing to documentary evidence (sale deed, bank entries, transfer pricing, inter‑company invoices), request supply of the specific material relied upon by Revenue and seek a personal hearing under Section 148A(b).

2. If reasons supplied are vague or contain extraneous material, file specific objections under GKN and demand recorded disposal before any reassessment order — preserve all correspondence and copies of municipal registry proofs.

3. Engage forensic accounting (to reconstruct value flow) and prepare a reconciled working paper showing that sale proceeds were fully credited, or if not, trace receipts to related parties and produce explanations (for example, part consideration was receivable due to escrow).

4. Consider filing writs only after AO fails to supply reasons or fails to dispose objections by recorded order; remember that courts may require the AO’s speaking order before entertaining challenge to the eventual assessment on merits in many circumstances.

Numerical illustration — tax impact if reassessment succeeds:

Assume escaped income found = ₹90,00,000.

Corporate tax (hypothetical blended rate) = 25% (for illustration) = ₹22,50,000

Penalties and interest (section 234A/234B/234C + penalty u/s 271(1)(c) or 270A) could materially multiply tax liability. Exact computation depends on years, rate slabs, and whether undisclosed income is treated as income from other sources, capital gains or business income.

Preparing a pre‑emptive computation is essential to advise board and arrange funds for contingent liability.

9. Practical checklist and annexure — sample reply and documentary schedule.

A practical checklist for Counsel/Tax team on receipt of Section 148/148A notice:

Immediate steps (within 7–10 days)

• Stamp and date the notice, record delivery method, and verify the issuer and authority.
• Identify the relevant AY, compute statutory limitation timing, check sanction/authority requirement under Section 151, and determine whether Section 148A procedure was followed.
• Circulate notice to CFO & legal team; instruct forensic accountant immediately.
• Prepare a chronology of all documentary events for the relevant AY.

Documents to collect (high priority)

• All bank statements (company and related parties), ledger entries, sale deeds, transfer documents, board resolutions, contracts, TDS certificates, payment receipts, invoices and reconciliation statements.
• Third‑party documents referenced by Revenue (obtain certified copies where possible).
• Any prior assessment orders and correspondence with Revenue.

Draft reply template (short form)

• Acknowledge receipt, reserve rights, request full set of reasons and material relied upon.
• Provide concise factual explanation with documentary annexures (numbered), indicate documents enclosed, and ask for a hearing under Section 148A(b).
• If material supplied by Revenue is inadequate, specifically state legal objections (time‑bar, lack of sanction, change of opinion, absence of live link, etc.) and demand disposal by speaking order under GKN.

Annexure — sample skeleton reply (summary):

1. Introductory para: identification and brief facts.

2. Paragraph denying escapement and referencing prior disclosures and filed return.

3. Documentary annexures list with pagination.

4. Legal objections: cite Lakhmani (1976), Kelvinator (2010), GKN Driveshafts (2003), and recent Supreme Court directions (Ashish Agarwal; Rajeev Bansal) as applicable.

5. Request: supply all material, grant hearing, and dispose objections with a speaking order as required by law.

10. Conclusions and recommendations

Section 148 remains a potent instrument for the Revenue but the post‑2021 legislative changes and the subsequent Supreme Court clarifications have introduced meaningful procedural safeguards for taxpayers. A firm, documented, and early response is the best protection. Particular points for in‑house counsel / tax advisors:

• Always check time‑bar and sanction prerequisites under Section 149 and Section 151 at the outset.
• Insist on production of the specific material relied upon; do not accept vague reasons.
• Keep contemporaneous records and establish a clear factual chronology showing full and true disclosure during the original assessment if that is the case.
• Use leading precedents (Lakhmani, Kelvinator, GKN, Ashish Agarwal, Rajeev Bansal) tactically; for example, the “change of opinion” and “no live link” doctrines are frequently decisive at preliminary stages.
• Consider specialist forensic accountants early where inter‑company transactions or accommodation entries are alleged.
• If jurisdictional defects exist (time‑bar, lack of approval), raise them immediately: they go to the AO’s competence to proceed.

11. Bibliography — selected authorities cited (non‑exhaustive)

• Income‑tax Act, 1961: Sections 147, 148, 148A, 149, 151. (statutory text)
• ITO v. Lakhmani Mewal Das, (1976) 103 ITR 437 : (1976) 3 SCC 757.
• GKN Driveshafts (India) Ltd. v. Income‑tax Officer, (2003) 259 ITR 19 (SC); (2003) 1 SCC 72.
• Commissioner of Income‑tax, Delhi v. Kelvinator of India Ltd., (2010) 320 ITR 561 (SC).
• Union of India v. Ashish Agarwal, Supreme Court (May 4, 2022) (directions on transitional notices and Section 148A).
• Union of India v. Rajeev Bansal, Supreme Court (Oct. 3, 2024) (TOLA and Section 149/151 clarifications).
• Select High Court and Tribunal pronouncements applying the above principles (Bombay HC, Delhi HC, Madras HC and various ITAT decisions).

Annexures in this document

A. Short case law digest (Lakhmani, GKN, Kelvinator, Ashish Agarwal, Rajeev Bansal) — page references and short extracts.

B. Practical checklist for corporate respondents (printable 1‑page).

C. Sample reply skeleton (editable).