Reassessment of Income under Income Tax Act, 1961 as Per Finance Act, 2021

[1] Introduction

The Income Tax Act 1961 [hereinafter referred to as the ‘Act’], under Chapter XIV, titled as “Procedure for Assessment” provides the mechanism for assessment as well as re-assessment of the return filed by assessee(s). However, upon the enactment of Finance Act, 2020 and Finance Act, 2021 by the Ministry of Finance by way of Union Budget, introduced reformative procedural amendments under Section 147 to 151 of the Act wherein the provisions regarding re-assessment of the return filed by the assessee(s) have been substituted w.e.f. 01.04.2021. Amongst other amendments in the Act, the substantive Amendment have been made under Section 148, 149, 151 and a new section 148A has been inserted in the Finance Act 2021 which lays down the procedure which needs to be followed by the Assessing Officer before issuing notice under section 148 and for assessment, reassessment and re-computation of assesse’s income under Section 147 of the Act of 1961. Under the substituted provisions, no notice under Section 148 can be issued without following the procedure laid down under Section 148A of the Income Tax Act 1961.

However, despite the Amendment of 2021 and the procedure being laid down under Section 148A w.e.f. 01.04.2021, the Income Tax Department [hereinafter referred to as “The Department/ I.T. Department/ Revenue”] continued to issue notices to the assessee(s) for re-assessment of their income under the unamended provisions, i.e. without following the mandatory provisions as laid down under Section 148A.

It is worthwhile to mention here that in the wake of Covid-19 pandemic situation and pursuant to the enactment of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 by the Parliament, wherein the Central Government by way of several notifications inter-alia extended time limit for issuance of notices under un-amended Section 148 of the Act of 1961 during the period 01.04.2021 to 30.06.2021. That the Department, subsequent to the Act of 2020, issued re-assessment notices under un-amended Section 148 of the Act after 01.04.2021, which were challenged before various High Courts across India under Article 226 of the Constitution of India. Majority of the High Court(s) (except the Chhattisgarh High Court) while adjudicating the dispute, being validity of the notices under section 148 upon not following the amended procedure, held that respective reassessment notices issued after 01.04.2021 under the erstwhile Section 148 of the Act of 1961, are bad in law and were held to be void-ab-initio.

Being aggrieved by the decision of the High Court(s), the Department assailed such orders before Hon’ble Supreme Court of India. The Apex Court in the lead case of Union of India vs. Ashish Agarwal[2], upheld the view taken by High Court(s)  and clarified that the procedure laid down under Section 148A of the Act is mandatory and is required to be followed for notices issued under Section 148 of the Act of 1961 post 01.04.2021. However, in the interest of justice, the Supreme Court denied to quash and set aside the impugned notices under section 148 and therefore sustained their validity upon the premises that the Department made a bonafide mistake to issue these notices under Section 148 due to various notifications published under the Relaxation Act 2020 if the view of various High Court(s) is accepted, then the same would result in no reassessment proceedings at all, even if the same are permissible under the Finance Act, 2021 and as per substituted sections 147-151 and therefore,  the Revenue cannot be made remediless.

Therefore, the present article aims to demonstrate the concept of re-assessment, the erstwhile provisions for re-assessment as well as post-amendment in the procedure for re-assessment as inserted by way of Finance Act, 2021 under the Act of 1961 that has laid down a mandate upon the Department to follow a procedure before issuing notices under section 148 which has also been validated by the Supreme Court.

Re-assessment Notice under Chapter XIV of the Act

As per the Finance Act 2021, the re-assessment notice can only be issued to an assessee under Section 148 of the Act when there is an information with the jurisdictional Assessing Officer which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant Assessment Year with the prior approval of the specified authority under Section 151 to issue such notice. Further, the Assessing Officer has the power to reassess such income and any other income which comes to his knowledge subsequently during the course of proceeding pending under Section 147 and for carrying out such reassessment, a notice under Section 148 is issued to the assessee which is known as Re-assessment Notice as per Section 148-151 of the Act.

Reasons when it is deemed that income chargeable to tax has escaped assessment.

That when the notices are issued for re-assessment of the income filed by the assessee, it is the knowledge of the Assessing Officer who, if is satisfied that the income has escaped assessment. Since, Act is silent upon such grounds of income escaping assessment, there are various judicial pronouncements that laid down such circumstances where the assessing officer can issue notices upon being satisfied that the income has escaped assessment. Amongst others, few of the grounds are as hereunder[3]: –

√ When no return is filed by the assessee even though his total income exceeds the amount which is not chargeable to income tax.

√ When return is furnished by the assessee but no reassessment is made and Assessing Officer notices that the assessee had understated the income or has claimed excessive loss, deduction, allowance or relief in return.

√ When the assessee fails to submit a report in respect of international transaction as required under Section 92 E.

√ When income chargeable to tax has been under assessed, assessed at low rate or excessive loss or depreciation allowance has been computed.

√ When a person is found to have assets outside India.

Amended Procedure for Reassessment of Income chargeable to Tax has escaped assessment.

Prior to the amendment in Chapter XIV of the Act, the erstwhile section 147 authorised the Assessing Officer to issued notices to the assessees under section 148 with respect to the income that has escaped assessment. Here it is pertinent to mention that the erstwhile provision of section 147 did not provide any mandatory procedure to be followed by the Assessing Officer before issuing notices under section 148. This position was challenged before the Supreme Court upon which the Supreme Court in the case of GKN Driveshafts (India) Pvt. Ltd vs. Income Tax Officer[4] laid down the guidelines which were to be followed by the Assessing Officer before issuing notices under section 148. However, the guidelines laid down in above case were ambiguous and led to further litigation leading to further complications in the procedure.

In order to remove such mischief in section 147 of the Act and to further simplify tax administration and also to give effect to the guidelines laid down in the case of GKN Driveshafts[5], the Parliament of India introduced the Finance Act, 2021 w.e.f. 01.04.2021 and inserted a new section 148A along with amendment in section 147.

Subsequent to the Amendment vide Finance Act, 2021, section 148A mandates the Assessing Officer to follow the procedure laid down therein for issuing notices under section 148.

Section 148A as inserted vide Finance Act 2021.

The Parliament enacted the Finance Act, 2021 wherein the procedure has been laid down which has to followed by the Assessing Officer for issuing notices under section 148. The procedure laid down mandates the Assessing Office in the following matter:

a) Conduct any enquiry, if required, with the prior approval of specified authority under Section 151 of the Income Tax Act 1961, with respect to the information which suggest 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 suggest 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 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.[6]

Limitation under Section 149 for issuing notice under Section 148.

Prior to Finance Act 2021, the limitation for issuing notice under Section 148 is provided under Section 149 which reads as hereunder:

(1) No notice under Section 148 shall be issued for the relevant assessment year-

(a) If four years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b) or clause (c);

(b) If four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or likely to amount to one lakh rupees or more for that year.

(c) If four years, but not more than sixteen years, have elapsed from the end of the relevant assessment year unless the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment.

Exceptions:

Reopening of the assessment is permissible within 4 years in the cases herein below:

1. If income chargeable to tax which has escaped assessment is less than Rs. 1 lakh.

2. If assessment framed earlier u/s 143(3) and assesses has disclosed fully and truly all material facts in the assessment [proviso to section 147] [except where income relates to asset located outside India][7]

However, subsequent to amendment in the Act of 1961 vide Finance Act, 2021, the period of limitation for issuing notice under Section 148 has amended which now reads as hereunder:

1. No notice under Section 148 shall be issued for the relevant assessment year-

(a) If three years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b)

(b) If three years, but not more than ten years, have elapsed from the end of the relevant assessment year unless the Assessing Officer has in his possession books of accounts 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 likely to amount to fifty lakh rupees or more for that year.

Provided that no notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of this section, as they stood immediately before the commencement of the Finance Act, 2021.

(c) When a notice under Section 153A or 153C r/w Section 153A is required to be issued in relation to search initiated under Section 132A on or before 31^st March 2021.[8]

In the matter of R. K. Upadhyay v. Shanab Bhai P. Patel[9], the Supreme Court held that the limitation period for issuance of notice under Section 148 as prescribed under Section 149 commences from the date of its issuance and not from the date of service.

However, despite clear procedure laid down under Section 148A, Department further issued notices to the assessee(s) for re-assessment of their income under section 147 as per the procedure provided prior to Amendment, i.e. without following the mandatory provisions laid down under Section 148A even after 01.04.2021.

Meanwhile, in the wake of pandemic situation being worsened and in view of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 which was enforced by the Parliament for facilitating the Department, wherein the Central Government by way of several notifications inter-alia extended time limit for issuance of notices under un-amended Section 148 of the Act during the period 01.04.2021 to 30.06.2021. The Department, subsequent to the Act of 2020, issued re-assessment notices under section 148 without following the procedure being introduced by way of Finance Act, 2021.

Being aggrieved by such notices without following the mandatory procedure as per law, the assessee(s) assailed the validity of such notices being issued without following the procedure under section 148A, before various High Courts across India. While adjudicating such challenge to the notices issued under un-amended procedure despite the amended procedure being in force, majority of the High Court(s) (except the Chhattisgarh High Court) held that respective reassessment notices issued after 01.04.2021 under the un-amended section 148, are bad in law and were held to be void-ab-initio.

Observation of the Supreme Court in the case of Ashish Agarwal[10]

Being aggrieved by the decision of the High Court(s), the Department assailed the orders passed by various High Courts before the Supreme Court of India whereby the notice issued under section 148 as void-ab-initio. The Supreme Court in the lead case of Union of India vs. Ashish Agarwal[11], upheld the view taken by the High Court(s) and clarified that the procedure laid down under Section 148A of the Act is mandatory in nature and is to be followed by the Assessing Officer before issuing notices under Section 148 of the Act of 1961 post 01.04.2021.

However, in the interest of justice, the Supreme Court denied to quash and set aside the impugned notices under section 148 and therefore sustained their validity upon the premises that the Department made a bonafide mistake to issue impugned notices under Section 148 due to various notifications published under the Relaxation Act 2020.

The Supreme Court further observed that if the view of various High Courts is accepted, then the same would result in no reassessment proceedings at all, even if the same are permissible under the Finance Act, 2021 and as per substituted sections 147-151, the Revenue cannot be made remediless. Therefore, the Supreme Court held that the High Court(s) ought to have passed an order construing the notices issued under un-amended Finance Act 2020 as those deemed to have been issued under Section 148A as per the amended provision and shall be treated as Show Cause Notice as per Section 148A(b) of the Act of 1961.

It was further held that the Revenue must be permitted with the reassessment proceedings as per substituted provisions as per the Finance Act 2021, subject to compliance of all the procedural requirements and defences. It was further held that the Revenue must be permitted with the reassessment proceedings as per substituted provisions as per the Finance Act 2021, subject to compliance of all the procedural requirements and defences. The Supreme Court while upholding the view taken by various High Court(s) further observed that the said notices ought to have been issued under the substituted provisions of Section 147 to 151 as per the Finance Act 2021 and while exercising its power under Article 142 of the Constitution of India, held as hereunder:

1. The respective impugned notice(s) issued under Section 148 of the Act the respective assesse(s) shall be deemed to have been issued under Section 148A of the Act as substituted by the Finance Act 2021 and treated to be show-cause notice in terms of Section 148A(b) of the Act;

2. The respective Assessing Officers shall within 30 days provide the information and material relied upon by the department while issuing notice so that the assesses can reply to the notices within 2 weeks thereafter;

3. The pre-requisite for conducting an enquiry with the prior approval of the specified authority under Section 148A(a) of the Act be dispensed with as a one-time measure;

4. The Assessing Officers shall thereafter pass an order in terms of Section 148A(d) of the Act after following due procedure as required under Section 148A(b) of the Act in respect of each of the concerned assesses;

5. All the defences which may be available to the assessee under Section 149 of the Act and/or which may be available under the Finance Act 2021 and in law and whatever rights are available to the Assessing Officers under the Finance Act 2021 are kept open and/or shall continue to be available.

Further, in order to implement the aforesaid judgement of the Supreme Court in a uniform manner across the country, the Central Board of Direct Taxes vide Instruction No. 01/2022 dated 11.05.2022 issued Directions and clarified that the judgement of the Supreme Court shall apply to all cases where extended reassessment notices have been issued irrespective of the fact whether such notices have been challenged or not.

­­­Therefore, as on date, with reference to issuance of notice under section 148 with effect from 01.04.2021, it is mandatory for the Assessing Officer to comply with the amended provisions of section 148A before issuing notice under section 148 of the Act of 1961.

[2] Union of India vs. Ashish Agarwal (Civil Appeal No. 3005 of 2022) available at: https://main.sci.gov.in/supremecourt/2021/32623/32623_2021_12_1502_35515_Judgement_04-May-2022.pdf  [last accessed on 22.02.2023]

[3] Available at: https://incometaxmanagement.com/Pages/Tax-Ready-Reckoner/Return-Of-Income/Income-Escaping-Assessment-Section-147.html [last accessed at: 03.03.2023]

[4] [(2003) 1 SSC 72].

[5] Supra

[6] Section 148A of the Income Tax Act, 1961 w.e.f. 01.04.2021.

[7] Section 149 prior to Amendment vide the Finance Act, 2021.

[8] Section 149 amended vide Finance Act, 2021 w.e.f. 01.04.2021.

[9] (1987) 3 SCC 96.

[10] Supra

[11] Supra

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Authored by Adv. Kanishk Singhal, Adv. Aditya Bohra, Rajasthan High Court, Jaipur