Finance Act, 2021 has brought a major overhaul in the law pertaining reassessment proceedings under the Income-tax. This will change not only the procedure under which reassessment proceedings were held but shall also change the structure of litigation that used to arise in any typical reassessment case.

Substitution of section 147 of the Act

Section 147 of the Act has been amended and has been simplified to a larger extent. The new provisions of the Act are as under:

“147. If any income chargeable to tax, in the case of an assessee, has escaped assessment for any assessment year, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance or any other allowance or deduction for such assessment year (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year).

Explanation.—For the purposes of assessment or reassessment or recomputation under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, irrespective of the fact that the provisions of section 148A have not been complied with.”.

The major changes from the earlier regime in this section are as under:

Words ‘Reason to believe’ have been done away with

The words ‘reason to believe’ have been done away with which used to be the prime factor for litigation in such proceedings. Now, section 148A has been inserted to validate the fitness of the case to be assessed or reassesses under section 147.

Thus now a simple reason to believe written on a notice will not serve the cause and the assessing officer would have to follow the set of procedures given in section 148A to open or reopen the case under section 147.

Issues coming into notice of the assessing officer subsequently

As per the explanation to section 147, if there is any income which comes in notice of the assessing officer subsequently which is not related to the reason for which the assessment or reassessment proceedings are initiated, provisions of section 148A shall not apply to such subsequent issues and they can be very well adjudicated under the provisions of section 147.

However, the same does not change the settled position that such subsequently found escaped income can be added to the income of the assesse only if the income escaped for which the proceedings were initiated under the said Act were assessed and added to the income of the assesse.

No immunity in case of prior assessment proceedings

Old section 147 of the Act provided that where assessment under section 143(3) or section 147 of the Act have been made for any earlier years, no action shall be taken after the expiry of the 4 years from the end of the relevant assessment year, unless such income has escaped assessment during such earlier held proceedings by reason of failure on the part of assesse to furnish income under section 139 or the assesse failed to respond to a notice issued under section 142(1) of section 148 of the Act or if the assesse failed to disclose fully and truly all material facts necessary for his assessment.

However, as such proviso is omitted, there is no bearing of any earlier held assessment proceedings and the assesse would be at risk to be reassessed under this section.

Income arising out of appeal matters

Old section 147 refrained assessing officer from assessing or reassessing the income which was the subject matter of any appeal, reference or revision. However, with the omission of the proviso, it can be said that the now the assessing officer can venture into the ambit of such income too.

However, validity of their order subsequent to the order of the appellate authority or order arising from reference or revision would be in grey area.

Deemed cases where income chargeable to tax has escaped assessment

Old section 147 vide explanation 2 provided a list of cases which were deemed cases where income chargeable to tax had escaped assessment. However, vide the amendment such deemed cases have been omitted thus giving larger role to procedure mentioned under section 148A of the Act.

Further Explanation 2 of section 148 have given certain cases where deemed cases have been given.

Substitution of section 148 of the Act

Section 148 speaks about issuance of notice where the income has escaped assessment. In the new regime, section 148 notice can be issued only after the Assessing Office has material in hand suggesting that income has escaped assessment and prior approval has mentioned in section 148A of the Act have been obtained by the Assessing Officer.

Section 148 vide explanation 1 provides that the information which suggest that the income has escaped assessment means-

  • any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time;
  • any final objection raised by the Comptroller and Auditor General of India to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act.

However, this has broadened the scope of the assessment as if there is any information flagged in the case of the assessee, the assessee will be eligible to be issued notice under this section.

This aforementioned explanation r.w.s. 147 again would see a number of litigations seeing sunset wherein the assessee would argue that information from third party received and acted on by the Assessing Officer without applying his independent mind and recording reason is not eligible for initiating reassessment proceedings.

Explanation 2 of section 148 has provided for certain cases where the Assessing Officer shall be deemed to have material available in hand suggesting that the income has escaped assessment. In the following cases, the deeming fiction shall apply to previous 3 assessment year to the assessment year relevant to financial year in which search is initiated or books of account, other documents or any assets are requisitioned or survey is conducted in the case of the assessee or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person.   

(i) a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A, on or after the 1st day of April, 2021, in the case of the assessee; or

(ii) a survey is conducted under section 133A, other than under sub-section (2A) or sub-section (5) of that section, on or after the 1st day of April, 2021, in the case of the assessee; or

(iii) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner, that any money, bullion, jewellery or other valuable article or thing, seized or requisitioned under section 132 or section 132A in case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or

(iv) the Assessing Officer is satisfied, with the prior approval of Principal Commissioner or Commissioner, that any books of account or documents, seized or requisitioned under section 132 or section 132A in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, relate to, the assessee,

Insertion of Section 148A

Before issuing any notice under section 148 of the Act, the assessing officer must:

(a) conduct any enquiry, if required, with the prior approval of specified authority, with respect to the information which suggests that the income chargeable to tax has escaped assessment;

(b) provide an opportunity of being heard to the assessee, with the prior approval of specified authority, by serving upon him a notice to show cause within such time, as may be specified in the notice, being not less than seven days and but not exceeding thirty days from the date on which such notice is issued, or such time, as may be extended by him on the basis of an application in this behalf, as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted, if any, as per clause (a);

(c) consider the reply of assessee furnished, if any, in response to the show-cause notice referred to in clause (b);

(d) decide, on the basis of material available on record including reply of the assessee, whether or not it is a fit case to issue a notice under section 148, by passing an order, with the prior approval of specified authority, within one month from the end of the month in which the reply referred to in clause (c) is received by him, or where no such reply is furnished, within one month from the end of the month in which time or extended time allowed to furnish a reply as per clause (b) expires:

However, such provisions shall not apply for the cases which are mentioned in Explanation 2 to section 148 of the Act as well as cases where during the course of assessment proceedings, issues other than for which proceedings are initiated are found out.

With section 148A inserted, now it is almost certain that the ratio laid down by the decision of Hon’ble Supreme Court in the case of GKN Driveshaft (2003) 259 ITR19 (SC), shall stand redundant.

Substitution of section 149 of the Act

Notice under section 148 have to be issued only before 3 years from the end of the relevant assessment year.

However, if more than 3 years but less than 10 years have been elapsed, the notice can be issued only if the Assessing officer 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 amounts to or is likely to amount to fifty lakh rupees or more for that year

Substitution of section 151 of the Act

Specified authority for the purposes of section 148 and section 148A shall be

Principal Commissioner or Principal Director or Commissioner or Director, if three years or less than three years have elapsed from the end of the relevant assessment year;

Principal Chief Commissioner or Principal Director General or where there is no Principal Chief Commissioner or Principal Director General, Chief Commissioner or Director General, if more than three years have elapsed from the end of the relevant assessment year.”

These were major amendments which has changed the whole course of action for the Department as well for the assesses in assessment or reassessment cases.

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