Critical Analysis of New Reassessment Provisions: Section 148, 148A and 149

Critical analysis of new reassessment provisions: Section 148, Section 148A and Section 149

In this article, we provide a critical analysis of the new reassessment provisions introduced by the Finance Act, 2021. These provisions, specifically Section 148, Section 148A, and Section 149 of the Income Tax Act, have completely transformed the law related to reassessment, assessment, and recomputation under the Act. We explore the reasons behind the increased usage of reassessment proceedings, the changes in time limits, the impact on different types of cases, and the validity of notices issued under these provisions.

In the recent times, the machinery of reassessment proceedings under the Income Tax Act, 1961 (‘the Act’) have been invoked by the Income Tax Department now, more than ever before. This is largely due to advancement of technology and information about Specified Financial Transactions (SFT’s) collected by the Department through Form No. 61A filed u/s. 285BA of the Act. The information collected through SFT is compared with ITR filed by the taxpayer and is also used to detect non-filers of returns. Reassessment proceedings are initiated accordingly.

Validity of reassessment proceedings u/s. 147 of the Act has been a subject matter of huge litigation on various grounds and thousands of judicial pronouncements are available on this issue. Similarly, validity of assessment proceedings u/s. 153A and 153C has also been highly litigation-prone. Thus, the Finance Act, 2021, has now completely transformed the law related to reassessment u/s. 147, assessment u/s. 153A and section 153C of the Act and has introduced completely new procedure for the purpose of making assessment / reassessment / recomputation u/s. 147 of the Act. Memorandum to Finance Bill, 2021 stated that ‘It is expected that the new system would result in less litigation and would provide ease of doing business to taxpayers’

The erstwhile provisions of Section 147, 148, 149 and 151 existing prior to Finance Act, 2021 have been substituted and new Section 148A and 148B have been introduced.

Section 147 vs. Section 153A / Section 153C:

Prior to amendment made vide Finance Act, 2021, assessment in cases of search u/s. 132 or requisition u/s. 132A of the Act was to be done in accordance with the provisions of Section 153A in the case of searched person and u/s. 153C in the case of person other than the searched person. In other cases, where the Assessing Officer (‘AO’) had reasons to believe that income chargeable to tax has escaped assessment, Notice u/s. 148 of the Act was issued and reassessment proceedings were completed u/s. 147 of the Act. Thus, there were different provisions to deal with search / requisition cases and non-search cases. Now, under the new provisions, a sunset clause has been inserted in Section 153A and 153C. Thus, assessment relating to search initiated / requisition done on or after 1^st April, 2021 will be done in accordance with the new provisions of Section 147.

Changes in time limit:

Old provisions – Notice u/s. 148 could be issued for 4 years from the end of AY. Further, Notice u/s. 148 could have been issued upto 6 years from the end of AY in cases where income escaping assessment is Rs. 1 Lakh or more.

New Provisions – Time limit for issuing Notice u/s. 148 has been reduced to 3 years from the end of AY. However, in certain cases, Notice u/s. 148 can be issued beyond 3 years but upto 10 years from the end of AY if the AO has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment is Rs. 50 Lakhs or more per assessment year. Income escaping assessment will be calculated separately for each assessment year and Notice can be issued only for that particular assessment year in which income escaping assessment (represented only in the form of asset) is Rs. 50 Lakhs or more. However, w.e.f. 1^st April, 2022, the provisions of Section 149 have been amended vide Finance Act, 2022 income escaping assessment can be either in form of an asset or expenditure in respect of transaction / event / occasion or in the form of an entry or entries in the books of account. If investment in such asset or expenditure in relation to such event or occasion has been made or incurred, in more than one previous years relevant to the assessment years falling within period of these 10 years then a notice under section 148 shall be issued for every such assessment year for assessment, reassessment or recomputation.

Notice U/s. 148 requiring him to furnish return of income within a period of three months from the end of the month in which such notice is issued, or such further period as may be allowed by the Assessing Officer on the basis of an application made in this regard by the assessee (the phrase in italics substituted w.e.f. 1-4-23 in place of, “such period, as may be specified in such notice”), and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139.

w.e.f. 1-4-2023 third proviso inserted U/s. 148 stating, “Provided also that any return of income, required to be furnished by an assessee under this section and furnished beyond the period allowed shall not be deemed to be a return under section 139”.

Can Notice u/s. 148 be issued for period beyond 3 years ? (i.e. for AY prior to AY 2018-19)

In various cases, Department has issued Notice u/s. 148A and 148 in the month of March-2022 for the AY 2015-16 (i.e., even for AY’s prior to AY 2018-19).

The said Notices have been issued by considering the time limit of 10 years provided in clause (b) of the amended Section 149(1). However, it is worthwhile to note than even before the Finance Act, 2021, was introduced, the time limit of 10 years was in existence for making assessment in search / requisition cases u/s. 153A or 153C where the AO had in his possession books of account or other documents or evidence which reveal that the income, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to 50 Lakhs or more.

Now, the separate provisions of Section 153A/153C and Section 147 of the Act have been merged under the new reassessment provisions. Separate provisions for making assessment in search / requisition cases u/s. 153A / 153C have been done away with. Thus, the above-mentioned time limit of 10 years has been continued under the new reassessment provisions. The phrase /wordings used under new Section 149 is similar to what was mentioned in the erstwhile section 153A (4^th Proviso).

The Budget Speech of Honourable Finance Minister while presenting the Finance Bill, 2021 is also relevant and guiding in this regard. The extract of the same is as under:

“Reduction in Time for Income Tax Proceedings

 153. Honourable Speaker, presently, an assessment can be re-opened up to 6 years and in serious tax fraud cases for up to 10 years. As a result, taxpayers have to remain under uncertainty for a long time.

154. I therefore propose to reduce this time-limit for re-opening of assessment to 3 years from the present 6 years. In serious tax evasion cases too, only where there is evidence of concealment of income of `50 lakh or more in a year, can the assessment be re-opened up to 10 years. Even this reopening can be done only after the approval of the Principal Chief Commissioner, the highest level of the Income Tax Department.”This understanding is also supported by the Memorandum to Finance Bill 2021 which states that ‘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 intention of legislature is to reduce the time limit for issuing Notice u/s. 148 of the Act and not to increase the time limit. If the amended provisions are interpreted that Notice u/s. 148 can be issued for upto 10 AY’s in all cases where income escaping assessment is 50 Lakhs or more, then the same will be against the intention of legislature.

Thus, it is my humble opinion that Notice for period beyond 3 years can only be issued in search / requisition (earlier covered u/s. 153A/153C) / survey cases i.e. cases where the AO has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, has escaped assessment (w.e.f. 1^st April, 2022 – also in the form of expenditure / entries in books of account). The words – ‘AO has in his possession’, ‘evidence’, ‘which reveal’ used in Section 149(1)(b) are of great significance.

Merely any AIS/TIS/AIR / SFT information with AO cannot be treated that AO has in his possession evidence which reveals that income chargeable to tax has escaped assessment, because the word, “information” has nowhere been used in Section 149(1)(b) and ‘information in possession’ is very different than the term ‘AO has in his possession books of accounts or other documents or evidence’ as used in Section 149(1)(b).

Thus, initiation of reassessment proceedings beyond 3 years merely on the basis of AIS/TIS/AIR / SFT information such as cash deposit, sale of immovable property, etc. is against the provisions of new section 148 and section 149 because this, at the most, can be treated as information with the AO. However, it cannot be said that AO has in his possession any books of accounts or other documents or evidence and will not meet the requirement of Section 149(1)(b).

Section 148A – Conducting Inquiry, providing opportunity before issuing Notice u/s. 148 (w.e.f. 1^st April, 2021):

The AO shall conduct enquiry u/s. 148A(a) (if required) before issuing Notice u/s. 148 with the prior approval of specified authority (Approval-1), with respect to information which suggests that income chargeable to tax has escaped assessment.

Then, the AO shall provide opportunity to the assessee by issuing Show Cause Notice u/s. 148A(b) as to why Notice u/s. 148 should not be issued. The AO should provide minimum time of 7 days to the assessee (Maximum time – 30 days). Show Cause Notice u/s. 148A(b) issued upto 31.03.2022 had to be issued after obtaining approval from specified authority (Approval-2). w.e.f. 01.04.2022, this approval is not required.

After considering the reply of the assessee received (if any), the AO will decide whether or not it is a fit case for issuing Notice u/s. 148, by passing an Order u/s. 148A(d) with the prior approval of specified authority (Approval-3). Order u/s. 148A(d) has to be passed within 1 month from the end of the month in which reply of assessee has been received or within 1 month from end of month upto which time is allowed to assessee to furnish reply.

If the AO decides that Notice u/s. 148 is not required, the AO should pass Order u/s. 148A(d) to drop the proceedings. However, if the AO decides that it is a fit case for issuing Notice u/s. 148, then the AO shall serve upon the assessee Notice u/s. 148 of the Act alongwith copy of Order passed u/s. 148A(d) where the AO has information which suggests that income chargeable to tax has escaped assessment and AO has obtained prior approval of specified authority (for Notices u/s. 148 issued upto 31.03.2022) (Approval-4). This approval for issuing Notice u/s. 148 is not required w.e.f. 01.04.2022 where Order u/s. 148A(d) has been passed with prior approval of specified authority.

Specified Authority for granting approval u/s. 151:

Upto 3 years from the end of the relevant AY – Pr.CIT / Pr. DIT / CIT / DIT Where more than 3 years have elapsed from the end of the relevant AY – Pr.CCIT / Pr.DGIT / CCIT / DGIT.

Cases where Notice u/s. 148 can be issued without conducting inquiry, without providing opportunity u/s. 148A:

1. Assessee in whose case search initiated u/s. 132 or books of accounts, other documents, etc. requisitioned u/s. 132A on or after 1^st April, 2021. (i.e., the searched person as per old Section 153A)

2. Cases where AO is satisfied (with prior approval of Pr.CIT / CIT even after 3 years) that any money, bullion, jewellery, other valuable article or thing seized / requisitioned from any other person, belongs to the assessee. (i.e., the person other than the searched person as per old Section 153C)

3. Cases where AO is satisfied (with prior approval of Pr.CIT / CIT even after 3 years) that any books of account or documents, seized / requisitioned in case of any other person, pertains to the assessee or any information relates to the assessee. (i.e., the person other than the searched person as per old Section 153C)

4. Cases where AO has received information u/s. 135A – Faceless collection of information u/s. 133 / 133B / 133C, etc. [w.e.f. 01.04.2022]

In above cases, AO shall be deemed to have information which suggests that income chargeable to tax has escaped assessment (as per Explanation 2 to Section 148) and will not be required to conduct inquiry or provide opportunity to assessee u/s. 148A and may proceed directly to issue Notice u/s. 148 with the prior approval of specified authority.

It is pertinent to note that in search / requisition cases covered u/s. 132 or 132A of the Act, the AO would not be required to follow the procedure laid down u/s. 148A of the Act. However, in survey cases u/s. 133A, although the AO shall be deemed to have information which suggests that income chargeable to tax has escaped assessment but will have to still follow the procedure of conducting inquiry laid down u/s. 148A before issuing Notice u/s. 148.

Points to keep in mind while dealing with 148 / 148A Notices:

While handling cases u/s. 148 / 148A of the Act, we should check the information contained in the notice with the facts of the case. All the approvals obtained from the specified authority should be checked whether the requisite approval has been obtained or not? whether the approval has been from correct authority. In cases approval is required from CIT within 3 years, approval from CCIT would be against the provisions of Section 151. The approval should not be obtained in a mechanical manner. Various Honourable Courts have held that granting of approval u/s. 151 is not a mere formality. The satisfaction has to be with objectivity on objective material. Further, since prior approval is required at various stages (as mentioned above), and now all the things are governed by Document Identification Number (DIN), Digital signature, we should also check the time stamping of digital signature to verify whether prior approval has been obtained which is not mechanical. Primary objections may be raised alongwith submission on merits of the case with a request to drop proceedings u/s. 148A and that no Notice u/s. 148 may be issued upon the assessee.

Approval for passing reassessment orders in search / survey / requisition cases:

As per Section 148B – Approval from Addl. CIT / Addl. DIT / Jt.CIT / Jt. Director is required before passing Order in cases pertaining to search / survey / requisition cases. This provision is similar to earlier provision of Section 153D. However, in Section 153D, only search / requisition cases were covered. Now, even survey cases will require prior approval u/s. 148B.

Validity of Notice u/s. 148 issued between 01.04.2021 to 30.06.2021 and analysis of the Latest Judgment of Hon’ble Supreme Court of India:

The Finance Act, 2021, had introduced new provisions of making reassessment as discussed hereinabove which have been made applicable w.e.f. 01.04.2021. Various writ petitions were filed in High Courts across the country challenging the validity of Notice u/s. 148 issued without following the procedure laid down under the new section 148A. Various High Courts including that of Bombay, Calcutta, Allahabad, Rajasthan, Madras and Delhi have held Notices u/s. 148 issued from 01.04.2021 to 30.06.2021 to be invalid and were quashed.

Aggrieved from the same, the revenue filed Civil Appeal before the Hon’ble Supreme Court of India (Civil Appeal No. 3005/2022) [2022] 138 taxmann.com 64 (SC) which has now been finally decided by the Supreme Court vide its judgment dated 4^th May, 2022 whereby the Hon’ble SC has exercised Article 142 of the Constitution of India and has held that the Order of the Hon’ble SC dated 04.05.2022 will be applicable PAN INDIA.

The Hon’ble SC has held as under:

1. Notice issued u/s. 148 shall be deemed to be Show Cause Notice u/s. 148A(b).

2. AO shall provide the information and material relied upon by the revenue within 30 days from the date of judgment of Hon’ble SC, i.e., upto 3^rd June, 2022.

3. Assessee to reply to SCN within two weeks thereafter. (i.e., from the date of receipt / information from the AO)

4. Requirement of conducting any enquiry u/s. 148A(a) dispensed with as a one-time measure only for Notice u/s. 148 issued between 01.04.2021 to 30.06.2021.

5. AO to pass an Order u/s. 148A(d) (prior approval of specified authority would be required).

6. Issue Notice u/s. 148 if required (prior approval of specified authority would be required).

7. All the defences which may be available to the assessee under section 149 and/or which may be available under the Finance Act, 2021 and in law and whatever rights are available to the Assessing Officer under the Finance Act, 2021 are kept open and/or shall continue to be available.

It is very important to note that as the provisions of Section 149 of the Act are applicable w.e.f 1^st April, 2021, and thus, validity of Notice will be governed by the new Section 149. Accordingly, to check whether the notice is valid or not, new time limit of 3 years or 10 years, as the case may be, will apply.

Thus, Notice u/s. 148 issued between 01.04.2021 to 30.06.2021 issued for AY 2018-19 will be valid. However, Notice u/s. 148 pertaining to AY prior to AY 2018-19 (i.e. AY 2013-14 to AY 2017-18) will be invalid unless the condition specified u/s. 149(1)(b) is fulfilled that the AO should have in his possession books of account or other documents or evidence which reveal that income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to Rs. 50 Lakhs or more PER YEAR. (i.e., in search / survey / requisition cases)

Although, the Hon’ble SC has ruled in favour of revenue, however, due to applicability of new time limits u/s. 149 majority of the Notices of reassessment will remain invalid. Hence, reassessment proceedings in such cases will have to be dropped. Therefore, this is a welcome judgment for taxpayers.

CBDT Instruction No. 1/2022 dated 11th May, 2022 for implementation of the judgment of Hon’ble Supreme Court in the case of UOI vs. Ashish Agarwal dated 04.05.2022:

 To give effect to the above-mentioned judgment of Hon’ble Supreme Court, CBDT had issued Instruction No. 1/2022 dated 11.05.2022 whereby the CBDT has stated as under:

For AY 2013-14, AY 2014-15 and AY 2015-16: Fresh Notice u/s. 148 of the Act can be issued with the approval of Pr.CCIT u/s. 151(ii) only if the case falls u/s. 149(1)(b).

For AY 2016-17 and AY 2017-18: Fresh Notice u/s. 148 can be issued with the prior approval of Pr.CIT/CIT u/s. 151(i) and it has been stated that cases for AY 2016-17 and AY 2017-18 fall within time limit of 3 years.

However, it is my humble opinion that the above interpretation of Hon’ble SC judgment by the CBDT is incorrect. In the period from 01.04.2021 to 30.06.2021, Notice u/s. 148 of the Act cannot be issued for any AY prior to AY 2018-19, unless the case falls u/s. 149(1)(b) i.e. income escaping assessment is Rs. 50 Lakhs or more and is represented in the form of asset or expenditure in respect of transaction / event / occasion or in the form of an entry or entries in the books of account (i.e. similar to 153A / 153C in search / requisition cases).

Conclusion:

The provisions relating to reassessment has been completely reformed and entire new provisions have been introduced. Concepts relating to change of opinion, that reopening cannot be initiated for making roving / fishing inquiries or merely for verification of claim of the assessee will continue to hold good. Further, the information with the AO should not be vague / generic and should be suggestive that income chargeable to tax has escaped assessment. Information flagged (word flagged removed vide Finance Act, 2022 w.e.f. 01.04.2022) in accordance with Risk management strategy and final audit objection from C&AG are cases which means that AO has information which suggests that income chargeable to tax has escaped assessment for Notices issued upto 31.03.2022. The word ‘suggest’ will be of great importance. CBDT had also issued instructions dated 10.12.2021 bearing F. No. 225/135/2021/ITA-II for taking action u/s. 148. This new regime of reassessment is new for both the tax officials as well as the tax professionals and therefore, we will have to stay updated with the recent amendments and developments including the latest judicial pronouncements.

I hope you find this Article helpful.

Bibliography:

1. The decision of Hon’ble Supreme Court of India dated 4th May, 2022 in the case of Union of India vs. Ashish Agarwal [2022] 138 taxmann.com 64.

2. CBDT Instruction No. 01/2022 dated 11th May, 2022 [F. No. 279/Misc./M-51/2022-ITJ]

3. The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 dated 31st March, 2020.

4. CBDT Notification No. 35/2020 dated 24th June, 2020 [F. No. 370142/23/2020-TPL]

5. CBDT Notification No. 93/2020 dated 31st December, 2020

6. CBDT Notification No. 20/2021 dated 31st March, 2021

7. CBDT Notification No. 38/2021 dated 27th April, 2021

8. CBDT Instruction dated 10th December, 2021 (F. No. 225/135/2021/ITA-II)

(Republished with Amendments)