Under the new provision of search assessment under section 147 of the Income Tax Act, it has been provided in Explanation 2 of section 148 that in case of search/survey it shall be deemed that the Assessing Officer (AO) has information indicating escapement of income. Accordingly, the AO is authorised to issue notice under section 148 without following procedures prescribed in section 148A which is mandatory for non-search cases. The AO does not even have to record detailed reason for re-opening for the three preceding years. Only mention of search automatically re-opens the assessment. Only for re-opening assessments beyond three years (up to 10 years) he needs to refer to specific material/information indicating that the income escaping assessment is or likely to be more than 50 lakhs.
This special treatment for search cases under section 147 has given rise to some interpretation that in search cases the AO can recompute the income of completed assessment even if there is no fresh material arising from search or any other source.
Though it appears prima facie erroneous, this article seeks to examine the legality of such interpretation- because coming from the AO a reply that it is prima facie erroneous is likely to result in a bigger addition.
Legislative intent:
Before examining the legislative intent of the new section 147, it would be appropriate first look into the evolution of search assessment in the Income Tax Act (Act)
Legislative History:
Phase 1: Standard reassessment (pre-1995)
Before 1995, assessments in all cases, including those resulting from search and seizure operations, were handled under the standard reassessment provisions of the Income Tax Act. under section 147.
- Assessments could be reopened under Section 147 if the Assessing Officer (AO) had “reason to believe” that income had escaped assessment.
- Assessments were re-opened after search on the basis of material found in search or other material available with the AO.
- If no material was available, assessments were not re-opened for that year. Addition was made only on the basis of material indicating escapement of Income. The AO had no power to review a completed assessment without any fresh material.
Phase 2: Block assessment scheme (1995–2003)
The ineffectiveness of the standard reassessment provisions for search cases led to the first special assessment procedure.
- Introduction: The Finance Act of 1995 introduced Chapter XIV-B, establishing the block assessment scheme for searches conducted on or after July 1, 1995.
- Procedure: A single consolidated assessment was made for a “block period,” originally covering 10 years and later reduced to 6 years in 2001. This assessment was separate from the taxpayer’s regular annual assessments.
- Here also the courts held that the undisclosed income of the Block-period was to be determined on the basis of material found in the course search or any other material which was found out in course of investigation.
- The AOs were not allowed to review completed assessments.
Phase 3: Year-wise search assessment (2003–2021)
- Introduction: The Finance Act of 2003 replaced the block assessment scheme with new year-wise provisions under Sections 153A, 153B, and 153C, applicable to searches conducted from June 1, 2003, onward.
- Procedure: This new scheme required the AO to assess or reassess income for six assessment years preceding the search. If the evidence found during the search related to an undisclosed asset of significant value, the assessment could be extended for up to 10 years.
- Abatement: Any pending regular assessments for those six years would “abate” and be replaced by the assessment under this special scheme.
- Here also the SC in Abhisar Buildwell held that no addition can be made in completed assessments u/s 153A without incrimination material found in the course of search.
Phase 4: Integration with reassessment (2021–2024)
As technology improved and more third-party information became available, the government again shifted its approach.
- Introduction: The Finance Act of 2021 ended the separate scheme for search assessments and integrated them into the new, faceless reassessment provisions (Sections 147–151A), effective April 1, 2021.
- Procedure: Search and seizure were now considered “information” that could trigger a standard reassessment notice under Section 148, bypassing the preliminary inquiry procedure of Section 148A. The standard time limits for reassessment applied—three years from the end of the assessment year, extendable to 10 years for cases involving undisclosed assets over a specified monetary threshold.
Phase 4 mentioned above was introduced by the Finance Act, 2021. The long-standing scheme of sections 153A to 153C – under which the Assessing Officer (AO) was required to frame “search assessments” was replaced by a unified reassessment framework contained in sections 147 to 151 of the Income-tax Act, 1961.Under this new regime, where a search is initiated under section 132 or assets are requisitioned under section 132A, Explanation 1 to section 148 deems that the AO has “information which suggests that income chargeable to tax has escaped assessment.” Consequently, the AO may issue a notice under section 148 to reassess the income of the relevant years. The procedural safeguards of 148A are not applicable in search/survey cases.
The moot point that arises for consideration is whether, after 1 April 2021, additions in such search-triggered reassessments can be made without any incriminating material found in the search-particularly in respect of assessment years that stood concluded prior to the search.
Legislative Intent:
Before examining the legislative intent behind the present scheme of search assessment it is pertinent to note that at no point of time in the past the legislature wanted to make addition in a search case without any fresh material. This fundamental principle continues under the present scheme also is clear from the Notes on Clauses of the Finance Bill 2021 by which these provisions were enacted. The relevant portion is reproduced below.
“ In cases where search is initiated u/s 132 of the Act or books of account, other documents or any assets are requisitioned under section 132A of the Act, assessment is made in the case of the assessee, or any other person, in accordance with the special provisions of sections 153A, 153B, 153C and 153D, of the Act that deal specifically with such cases. These provisions were introduced by the Finance Act, 2003 to replace the block assessment under Chapter XIV-B of the Act. This was done due to failure of block assessment in its objective of early resolution of search assessments. Also, the procedural issues related to block assessment were proving to be highly litigation-prone. However, the experience with this procedure has been no different. Like the provisions for block assessment, these provisions have also resulted in a number of litigations. Due to advancement of technology, the department is now collecting all relevant information related to transactions of taxpayers from third parties under section 285BA of the Act (statement of financial transaction or reportable account). Similarly, information is also received from other law enforcement agencies. This information is also shared with the taxpayer through Annual Information Statement under section 47 285BB of the Act. Department uses this information to verify the information declared by a taxpayer in the return and to detect non-filers or those who have not disclosed the correct amount of total income. Therefore, assessment or reassessment or re-computation of income escaping assessment, to a large extent, is information-driven. In view of above, there is a need to completely reform the system of assessment or reassessment or re-computation of income escaping assessment and the assessment of search related cases. The Bill proposes a completely new procedure of assessment of such cases. It is expected that the new system would result in less litigation and would provide ease of doing business to taxpayers as there is a reduction in time limit by which a notice for assessment or reassessment or re-computation can be issued. The salient features of new procedure are as under:
[Clauses 35 to 40 and 42 to 43]
It is apparent from the above clauses that the avowed objective of the new assessment procedure under section 147 was to provide a less litigation prone system where assessment, reassessment and re-computation would be information driven. Thus, the proposition that reassessment and re-computation in search cases can be done without any fresh information is just the opposite of the legislative intent. The amendment did not alter the substantive standard of evidence. The law continues to require that any addition be founded on cogent, tangible, and relevant material that shows escapement of income.
Besides, if the AO is given the authority to frame search assessment afresh even where no fresh information is available either from search or otherwise, it will not only give the settled principle of “change of opinion’ a go-by but is also bound to increase litigation as the AO would feel free to make any addition as if they were doing a fresh complete scrutiny case under section 143(3). The provision for deemed information and consequential issue of notice u/s 148 in search cases is merely a procedural change intended to remove one stage of litigation before completion of assessment. However, to interpret the deeming provision to mean that the AO can also make addition in a completed assessment without any fresh material is completely contrary to the legislative intent.
This is further highlighted by the Karnataka High Court in the case of SMT. VASANTHI RAMDAS PAI v. THE INCOME TAX OFFICER in IN W.P.NO.8797/2022. The Court observed,
“ The CBDT has issued Instruction dated 10.12.2021 vide F.N0. 225/135/2021/ITA-II indicating as to what is information and how it would be collected. The relevant portion of the instructions is reproduced for ready reference:
“2. As per the amended provisions of the section 148 of the Income-tax Act,1961 (‘the Act’), the information which has escaped assessment has been defined to include the two categories of information, i.e.,(i) the information which is flagged in accordance with the risk management strategy formulated by the Board; and (ii) final audit objection raised by the C&AG.
3. For effective implementation of risk management strategy, the Central Board of Direct Taxes (Board), in exercise of its powers under section 119 of the Act, directs that the Assessing Officers shall identify the following categories of information pertaining to Assessment Year 2015-16 and Assessment Year 2018-19, which may require action under section 148 of the Act, for uploading on the Verification Report Upload (VRU) functionality on Insight portal:
(i) Information from any other Government Agency/Law Enforcement Agency.
(ii) Information arising out of Internal Audit objection, which requires action
u/s 148 of the Act.
(iii) Information received from any Income-tax Authority including the
assessing officer himself or herself.
(iv) Information arising out of search or survey action.
(v) Information arising out of FT&TR references.
(vi) Information arising out of any order of court, appellate order, order of NCLT and/or order u/s 263/264 of the Act, having impact on income in the assessee’s case or in the case of any other assessee.
(vii) Cases involving addition in any assessment year on a recurring issue of law or fact.
The Hon’ble Court referring to the above-mentioned Instruction concluded as under.
“ In the opinion of this court, the term ‘information’ appearing in Explanation 1 to Section 148 cannot include the return of income filed by the assessee as it does not fall within any of the above five categories specified therein. Even the CBDT instructions, though may not be binding on the issue of interpretation, also do not talk of the very Return which has been filed becoming information permitting the Assessing Officer to issue notice under section 148 stating that income has escaped assessment. In fact, based on the returns filed by the petitioners, it was open to the Assessing Officer to undertake a regular assessment under Section 143 if he had felt that there was a wrong claim to exemption or that income should have been taxed differently. To permit the Assessing Officer to state that income has escaped assessment and re-open the same based on the very Return filed by the assessee who has already disclosed the transaction, would enable him to by-pass the regular assessment procedures; that would virtually render Section 147 to be an enabling provision to make second assessment where the Assessing Officer has missed the bus under Section 143. Such a course of action cannot be permitted as that would go against the very spirit of these sections and the time limits specified in Section 153. That would militate against the statutory scheme brought about by the amendment of sections 147 & 148; further, that would render the provisions prescribing limitation period under section 153 for assessment/re-assessment, otiose. I am therefore of the opinion that the jurisdictional facts in terms of ‘information’ as defined under Explanation I to Section 148 which suggests that some income chargeable to tax has escaped assessment itself, were apparently lacking. This threshold having not been met, issuing a notice under Section 148A(b) and passing order under (d) of Section 148A are liable to be voided.”
It is clear from the above decision of the Karnataka High Court that even issue of notice u/s 148A(b) & consequential order u/s 148(a)(d) is without jurisdiction if it is issued only on the basis of information available in the return. Therefore, in a search case which requires a higher degree of evidentiary backing, making addition only on the basis of information available in the return would be a mockery of interpretation.
It is therefore, clear that the possession of fresh information indicating escapement of income is a sine-qua-non for valid 147 proceeding. That being so, obviously making addition without any fresh material only on the basis of return is totally against legislative intent and the scheme of new section 147.
Thus, if an assessment is completed u/s 143(3) or 143(1) and the time to issue 143(2) has expired, the assessment attains finality. Such returns can be re-opened u/s 147 on the basis of search or survey but addition can only be made on the basis of some fresh material arising from such search or survey or some other source. The AO can’t recompute the income only on the basis of information available in the return. It is high-time some clarification is issued on this to stop this erroneous interpretation gaining ground in the field.
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