INTRODUCTION
The realm of taxation in India has witnessed significant developments over the years, and one of the crucial aspect that has an impact on both taxpayers and tax administration is the re-assessment process. Reassessment is the process through which tax authorities review a taxpayer’s income and tax liability for a particular assessment year after the initial assessment has been completed. This is typically done when the tax department has reason to believe that there has been income escapement or tax evasion by the taxpayer[1].
The provisions governing reassessment are enshrined in Section 147 to 153 of the Income Tax Act, 1961(Hereinafter referred as “the Act”). In this article, we will delve into the key highlights of Reassessment under the Act: Pre and Post Ashish Agarwal Judgement delivered by the Hon’ble Supreme Court (hereinafter referred as “Landmark Judgement”) along with the subsequent CBDT Direction 1/2022[2] (dated 11-05-2022) of the Department.
THE OLD PROVISIONS
Prior to the landmark judgment, the provisions relating to reassessment under the Income Tax Act were subject to various interpretations and raised concerns among taxpayers and tax authorities alike. The earlier provisions, particularly section 147 and section 148 of the Act, governed the process of reopening of assessments.
Section 147[3] empowers the tax authorities to reopen assessment if they have reason to believe that taxable income has escaped assessment for a particular assessment year. However, the phrase “reason to believe” was susceptible to various interpretations, leading to controversy and litigation over the legality of reopening the assessment.
The meaning of the proviso to Section 147 was stated that, where there had previously been a scrutiny, an assessment could have been reopened if four years from the end of the Assessment Year had not passed on the date of issuing the notice to the assesse under Section 148[4], and this is deemed to have been done knowing that the Assessing Officer was first given an opportunity to present the case against the assesse. This can also be reopened, but only if there is concrete evidence supporting the conclusion that the assesse income was evaded. It is also crucial to consider the assesse refusal to provide relevant information when articulating the reasons for reopening.
The Hon’ble Supreme Court in “CIT v. Kelvinator of India Ltd” in Para 7 had clearly stated that “One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, Assessing Officer has power to re-open, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief[5].”
Therefore the provisions related to reassessment under the Income Tax Act before the landmark judgment were riddled with uncertainties and open to varying interpretations. The lack of clarity on “reason to believe,” the issue of “change of opinion,” and the absence of stringent time limits contributed to challenges in the reassessment process. The potential for harassment and misuse of power also created apprehensions among taxpayers.
THE NEW PROVISIONS
With respect to the amendment of Sections 148 of the Act mandate that, before making any assessment under Section 147 of the Act, the Assessing Officer serve a notice to the assesse requesting him to file his income tax return within a certain time frame, and that, prior to such notice, the Assessing Officer record his reasons for the same. While the previous provision required the Assessing Officer to have “reasons to believe” that income is being evaded, the new provision required any information stated in Explanation1[6] has to be present for the case to be reopened.
Furthermore Section 148A which was inserted by the Finance Act, 2021, w.e.f. 1-4-2021. , requires assessing officers to follow the procedure upon receiving such information including making any inquiry regarding the information obtained, providing an opportunity of being heard to the assesse by serving upon him a notice to show cause (which is less than 7 days and not more than 30 days on the date of service of notice or time period up to which extension was obtained by the assesse).
Changes in Limitation Period:
The Hon’ble Supreme Court in its landmark Judgement emphasized the importance of adhering to the statutory limitation period while reopening the assessment. Prior to amendment made by Finance Act, 2022, notices under section 148 can be issued for 4 years from the end of AY. Further, Notice u/s. 148 could have been issued up to 6 years from the end of AY in cases where income escaping assessment is Rs. 1 Lakh or more.
Section 149[7] of the Act prescribes different time limits for reopening of assessments which states that no notice under section 148 can be sent if three years have elapsed since the end of the relevant assessment year, However, If the Assessing Officer has books of account or other records or evidence to show that the taxable income, shown in the form of an asset, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more for that year[8].
Notice U/s. 148 requiring him to furnish return of income within[9] 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 assesse. However, 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 assesse under this section and furnished beyond the period allowed shall not be deemed to be a return under section 139”.
CBDT INSTRUCTION 1/2022
To give effect to the landmark judgment of the Hon’ble Supreme Court, CBDT had issued Instruction No. 1/2022 dated 11.05.2022 whereby the CBDT has stated as under:
1. 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 the specified authority u/s. 151(ii) only if the case falls under Section 149 (1) (b), as amended by Finance Act, 2021[10].
2. For AY 2016-17 and AY 2017-18: Fresh Notice u/s. 148 can be issued with the prior approval of Specified Authority 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 year[11].
Judgements regarding Section 148 and 148A-
After the several amendments in the Act, several High Courts ruled in favour of the assesse and set aside such notices issued under the old provisions between 1-4-2021 and 30-6-2021, including the Hon’ble Madras High Court in Vellore Institute of Technology v. CBDT[12], the Hon’ble Rajasthan High Court in BPIP Infra Pvt. Ltd. Vs. Income Tax Officer & Ors[13]etc.
However, the Hon’ble Chhattisgarh High Court ruled in favour of the Department in Palak Khatuja v. Union of India[14], declaring that the notices issued under the previous provisions as of April 1, 2021, would be valid. The court reasoned that the Taxation and other Laws (Relaxation and Amendment of certain provisions) Act, 2020 (hereinafter referred as “TOLA”) was a conditional law passed during COVID-19 for flexibility and that it would continue to be in effect even after the Finance act, 2021.
The Hon’ble Supreme Court in the landmark Judgement and decided that the reassessments would henceforth be legitimate in the light of the law.
DEVELOPMENTS IN THE ACT:-
After the landmark Judgement of the Hon’ble Supreme Court, there have been several developments and amendments in the Income Tax Act to align with the court’s ruling. Below are the key changes that have taken place:-
1. Clarity on “Reason to Believe“:
The Supreme Court’s judgment emphasized that tax authorities must have a valid reason to believe that income has escaped assessment before reopening assessments. This clarification ensures that tax authorities cannot reopen assessments based on mere change of opinion or a different interpretation of the same facts.
2. Time Limit for Reopening Assessments:
The Landmark judgment clarified that the time limit for reopening assessments under Section 149 of the Income Tax Act has been reduced to three years from the end of the relevant assessment year. This provides certainty to taxpayers and prevents tax authorities from reopening assessments after an unreasonable period.
3. Burden of Proof:
The burden of proof has been shifted to the Tax Authorities to establish that there is tangible material justifying the reopening of assessments. Furthermore, the Hon’ble Supreme court clarified that the Assessing Officer must obtain prior approval from the specified authority before conducting the inquiry[15]. This protects taxpayers from arbitrary and baseless reassessments. Tax authorities are now required to provide specific and credible evidence to support their claims.
4. Judicial Review:
The Supreme Court reiterated that the reopening of assessments is subject to judicial review. Taxpayers have the right to challenge the reopening of assessments before the appropriate forums, ensuring a fair and transparent process.
5. Enhanced Compliance and Reporting:
In light of the Landmark judgment, tax authorities are required to maintain proper records and documentation related to the reopening of assessments. This promotes transparency and accountability in the process. Tax authorities are also directed to report the details of reopened assessments to the CBDT as per the prescribed guidelines.
6. Technological Advancement: Since the Ashish Agarwal judgment, the tax administration has adopted technological advancements to streamline tax procedures. Implementation of online portal and electronic filing mechanism has made tax compliance more efficient and accessible to taxpayers.[16]
CONCLUSION:
Overall, the changes brought about by the Finance Act, 2023 and the judicial pronouncements, such as the Ashish Agarwal judgment, have left a lasting impact on the reopening of assessments under Section 148A and 149 of the Income Tax act. The subsequent amendments and developments in tax laws reflect an attempt to strike a delicate balance between taxpayer rights and revenue collection. By curbing arbitrary assessments and encouraging adherence to the principles of natural justice, fair and just tax system that fosters confidence among taxpayers.
[1] Section 147 of Income Tax Act, 1961, as Amended by Finance Act, 2023, substituted by the Finance Act, 2021, w.e.f. 1-4-2021.
[2] Instruction No. 01/2022 dated 11.05.2022.
[3] Section 147 of the Income Tax Act, 1961, as amended by Finance Act, 2020.
[4] Section 148 of the Income Tax Act, 1961, as amended by Finance Act, 2020.
[5] CIT v. Kelvinator of India Ltd, 19 April 2002, (2002 (64) DRJ 109).
[6] Section 148, Explanation 1 of Income Tax Act, 1961, as amended by Finance Act 2023.
[7] Section 149 of IT Act, 1961 states the “Time Limit for Notice”, Substituted by the Finance Act, 2021, w.e.f. 1-4-2021.
[8] Section 149 (1) (b) of the Income Tax Act, 1961, as amended by Finance Act 2023, Substituted by the Finance Act, 2022, w.e.f. 1-4-2022, read with CBDT notification no. 01/2022, para 7.1.
[9] Substituted for “such period, as may be specified in such notice” by the Finance Act, 2023, w.e.f. 1-4-2023.
[10] Notification 01/2022-Income Tax, para 6.2(i).
[11] Inserted by the Finance Act, 2023, w.e.f. 1-4-2023.
[12] (2021) 436 ITR 483).
[13] (W.P. (C) No. 13297 of 2021).
[14] (W.P. (T) No. 149 of 2021).
[15] Section 148 of IT Act, 1961, Substituted by the Finance Act, 2021, w.e.f. 1-4-2021, Inserted by the Finance Act, 2022, w.e.f. 1-4-2022.
[16] Section 151A (1) (a) of Income Tax Act, 1961, as amended by Finance Act 2023, Inserted by the Finance Act, 2021, w.e.f. 1-4-2021.
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