FINANCE ACT, 2021, for the first time in the Income Tax Act, 1961, introduced rapid changes in one of the most potent tools of the revenue, which is Section 147. In the pre-amendment regime, w.e.f. 01.04.2021, an Assessing Officer (A.O.) could trigger a reopening proceeding by merely issuing a Section 148 notice to the assessee or non-assessee for any escapement of undisclosed income, with a mandate to file a mandatory return of income u/s 148, disclosing and admitting the alleged undisclosed escaped income of the noticee. That provision gave birth to significant litigation, particularly concerning the “reason to believe” issue of the A.O. issuing the said notice, which ultimately reached the Hon’ble Apex Court. In its historic judgment in G.K.N. Drive Shaft vs. CIT, the Hon’ble Apex Court laid down procedural guidelines for both the department and the assessee to streamline reopening proceedings.
Post the 2021 amendment, a new Section 148A was introduced, mandating the A.O. to conduct an enquiry and, after receiving the reply and supporting documents from the assessee, to pass a reasoned order u/s 148A(d) either justifying the reopening proceeding or dropping it, considering the veracity of the submissions and documents provided by the assessee. The time frame for issuing the notice and monetary limitations were reset by co-amending Section 149 through the same Finance Act.
The most pertinent issue now is whether the issuance of a u/s 148A(b) enquiry notice in a reopening proceeding is mandatory or discretionary. The answer is that it is discretionary for the A.O. Why? In Section 148A, the word “may” is used, not “shall”, in clause (4), meaning the issuance of a mandatory 148A(b) notice can be dispensed with under Section 135A. Under Section 135A, the A.O. is empowered to issue an enquiry notice u/s 133(6) to gather necessary information to detect the escapement and its volume, and may initiate a reopening proceeding by issuing a direct u/s 148 notice to the assessee or non-assessee, bypassing the 148A(b) enquiry notice. This implies that a notice issued u/s 133(6) is equivalent to a notice issued u/s 148A(b).
In practice, many reopening cases arise where the A.O. initiates the reopening by directly issuing a u/s 148 notice and a subsequent u/s 142(1) notice, without conducting any prior enquiry u/s 148A or 135A. During the reopening scrutiny, a u/s 133(6) notice is sometimes issued under the incorrect belief that the enquiry procedure has been complied with, contrary to the mandatory requirement of issuing u/s 133(6) to the sources of the escaped income and supplying the information to the assessee with an opportunity to file objections, as mandated by the Hon’ble Apex Court in the G.K.N. Driveshaft judgment. Many A.O.s bypass this requirement, assuming jurisdiction not permissible under Sections 148A(4)/135A, and pass invalid assessment orders with large mechanical additions.
Section 148A – Procedure for Reopening Assessments:
Section 148A was introduced to streamline and regulate reopening proceedings under Section 147 of the Income Tax Act. It mandates that before issuing a notice under Section 148, the Assessing Officer (A.O.) conduct a preliminary enquiry to ascertain the validity of reopening the assessment. The A.O. must provide the assessee an opportunity to respond by submitting replies and supporting documents. Based on these submissions, the A.O. is required to pass a reasoned order u/s 148A(d), either justifying the reopening or dropping it. The section ensures that reopening is not mechanical, reduces arbitrary notices, and protects the assessee from unjustified assessments. While Section 148A(b) requires an enquiry notice to be issued, the use of the word “may” makes it discretionary in certain circumstances, particularly if an enquiry has already been conducted under other provisions.
Section 135A – Enquiry for Detection of Escapement:
Section 135A empowers the Assessing Officer to gather information from third parties to detect escaped income, assess its volume, and support the reopening of assessments under Section 147. Under this provision, the A.O. can issue an enquiry notice u/s 133(6) to relevant sources, seeking details about transactions, deposits, or other income streams. The information obtained is then shared with the assessee, giving them an opportunity to respond before any reopening notice is issued. Section 135A serves as a procedural safeguard, ensuring that the reopening of assessments is based on verified data rather than assumptions, and aligns with judicial guidelines laid down by the Hon’ble Supreme Court in cases like G.K.N. Drive Shaft vs. CIT. It effectively allows the A.O. to bypass Section 148A(b) notice in specific cases while still ensuring due process.
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