New Reassessment Proceedings including new Search Mechanism

 1. Introduction

This amendment/insertion is sure to set the cat among the pigeons! I attempt some new insights .

IN order to really understand a tax amendment,I firmly believe that the associated memorandum must be looked into.I proceed to recap relevant parts thereof.

2. Memorandum:

Memorandum to the Finance Bill 2021, explaining new re assessment procedure:

‘’ Under the Act, the provisions related to income escaping assessment provide that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may assess or reassess or recomputed the total income for such year under section 147 of the Act by issuing a notice under section 148 of the Act. However, such reopening is subject to the time limits prescribed in section 149 of the Act.

In cases where search is initiated u/s 132 of the Act or books of account, other documents or any assets are requisitioned under section 132A of the Act, assessment is made in the case of the assessee, or any other person, in accordance with the special provisions of sections 153A, 153B, 153C and 153D, of the Act that deal specifically with such cases. These provisions were introduced by the Finance Act, 2003 to replace the block assessment under Chapter XIV-B of the Act. This was done due to failure of block assessment in its objective of early resolution of search assessments. Also, the procedural issues related to block assessment were proving to be highly litigation-prone. However, the experience with this procedure has been no different. Like the provisions for block assessment, these provisions have also resulted in a number of litigations.

Due to advancement of technology, the department is now collecting all relevant information related to transactions of taxpayers from third parties under section 285BA of the Act (statement of financial transaction or reportable account). Similarly, information is also received from other law enforcement agencies. This information is also shared with the taxpayer through Annual Information Statement under section 285BB of the Act. Department uses this information to verify the information declared by a taxpayer in the return and to detect non-filers or those who have not disclosed the correct amount of total income. Therefore, assessment or reassessment or re-computation of income escaping assessment, to a large extent, is information-driven. ………………………..

The salient features of new procedure are as under:-

(i) The provisions of section 153A and section 153C, of the Act are proposed to be made applicable to only search initiated under section 132 of the Act or books of accounts, other documents or any assets requisitioned under section 132A of the Act, on or before 31st March 2021.

(ii) Assessments or reassessments or in re-computation in cases where search is initiated under section 132 or requisition is made under 132A, after 31^stMarch 2021, shall be under the new procedure.

(iii) Section 147 proposes to allow the Assessing Officer to assess or reassess or re-compute any income escaping assessment for any assessment year (called relevant assessment year).

(iv) It is proposed to provide that any information which has been flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board shall be considered as information which suggests that the income chargeable to tax has escaped assessment. The flagging would largely be done by the computer based system.

(v) Further, a 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 in accordance with the provisions of the Act shall also be considered as information which suggests that the income chargeable to tax has escaped assessment.

(vi) Further, in search, survey or requisition cases initiated or made or conducted, on or after 1st April, 2021, it shall be deemed that the Assessing officer has information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated or requisition is made or any material is seized or requisitioned or survey is conducted.

(vii) New Section 148A of the Act proposes that before issuance of notice the Assessing Officer shall conduct enquiries, if required, and provide an opportunity of being heard to the assessee. After considering his reply, the Assessing Office shall decide, by passing an order, whether it is a fit case for issue of notice under section 148 and serve a copy of such order along with such notice on the assessee. The Assessing Officer shall before conducting any such enquiries or providing opportunity to the assessee or passing such order obtain the approval of specified authority. However, this procedure of enquiry, providing opportunity and passing order, before issuing notice under section 148 of the Act, shall not be applicable in search or requisition cases.

(viii) The time limitation for issuance of notice under section 148 of the Act is proposed to be provided in section 149 of the Act and is as below:

in normal cases, no notice shall be issued if three years have elapsed from the end of the relevant assessment year. Notice beyond the period of three years from the end of the relevant assessment year can be taken only in a few specific cases.

In specific cases where the Assessing Officer has in his possession evidence which reveal that the income escaping assessment, represented in the form of asset, amounts to or is likely to amount to fifty lakh rupees or more, notice can be issued beyond the period of three year but not beyond the period of ten years from the end of the relevant assessment year;

………… limitation provisions………..NOT REPRODUCED……….

(ix) The specified authority for approving enquiries, providing opportunity, passing order under section 148A of the Act and for issuance of notice under section 148 of the Act are proposed to be —

(a) 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;

(b) 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.

(x) Once assessment or reassessment or re-computation has started the Assessing officer is proposed to be empowered (as at present) to assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently in the course of the proceeding under this procedure notwithstanding that the procedure prescribed in section 148A was not followed before issuing such notice for such income.

These amendments will take effect from 1st April, 2021 ‘’

3. ANALYSIS/ISSUES:

1. So the frank admission first is that both 158BC and 153A failed in their objective which supposedly was to bring a quick finality and avoid prolonged and humongous litigation.That then is the yardstick with which the revenue wishes to judge the new provisions.To me, tax law is supposed to bring every legitimate taxable rupee to tax in a just manner.Rest is collateral consequence.

But here,?

Time will tell whether even this objective stood fulfilled in what is admittedly attempt 3[to old timers like me it is attempt 4,because prior to 158BC too were search assessments done.But we are not enlightened as to what is the perception of revenue regarding its first attempt.To me it represents the finest that there was.I guess I am in a minority!]

2. The assessment or the reassessment in respect of the search conducted on or after 31^st March, 2021 shall be conducted as per the new procedure.

3. The time limit for issuing the notice U/s 148 which was earlier six years from the end of the relevant assessment years, has now been curtailed to three years from the end of the relevant assessment year.

3.1 In case where the Assessing Officer has EVIDENCE that the income escaping assessment is rupees fifty lakhs or more represented in the form of an asset, in such a case, reassessment notice can be issued beyond the period of three years but not beyond the period of ten years from the end of relevant assessment year.

Some apprehensions have been raised like  whether deemed income u/s 68 could be interpreted as Asset of assessee ? Or In case of Search & Survey where evidence of Bogus Expenditure is found without corresponding  asset ?

An inclusive definition is provided in s 149(1)(b) Explanation:

Explanation.—For the purposes of clause (b) of this sub- section, “asset” shall include immovable property, being land or building or both, shares and securities, loans and advances, deposits in bank account.

And cash in hand? And entries in books?….And the above apprehensions?

Reduction in litigation?

3.1.1 A much bigger question is :WHAT WOULD CONSTITUTE ‘’EVIDENCE which reveals’’ in case of reopening beyond 3 years?This forms subject matter of a subsequent article by me .

3.Extended Time Period of 10 Years would not be applicable wherein the Period for Reopening has already Expired as per former section 148.

4. For resorting to the provisions of section 148 for reopening the case, there should be “information” with the Assessing Officer. The “information” means the following:

A. Information which has been flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board; Annual Information Return of assessee that is a compiled based upon reporting of financial transactions by banks, mutual funds, depositories, registrars as per section 285BA of the Act could be used. Could AIR information available at the time of making regular assessment could be utilized by department again for the purpose of initiating reassessment proceedings ? [ second innings?]

B. A final objection raised by the Comptroller and Auditor General of India shall also be considered as information which suggests that the income chargeable to tax has escaped assessment;

C. In case where the search has been conducted on or after 1^st April, 2021. The Assessing Officer shall be deemed to have the information for three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated or survey has been conducted.

This(para C) ,to me,is a legal oxymoron.In time to come,the very legality of this provision could be under serious threat.

4.1 A lexicographic and  judicial perspective:

Oxford Dictionary holds ‘Information’ to mean facts told, heard or discovered about somebody/something. The Law Lexicon describes the term ‘information’ as the act or process of informing, communication or reception of knowledge. Black’s ,9^th ed. defines it as a criminal charge and is not relevant here.In CIT v. A. Raman & Co.[1968] 67 ITR 11 (SC) it was held that the expression ‘information’ means ‘instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment’. Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC) included information as to the true and correct state of the law. We can add as much law lexicon or case laws as we wish.

4.1.1 But we already have a ‘’means’’ information definition…dare I say a legal fiction is introduced because it begets a narrow interpretation and no purposive definition is possible in case of a legal fiction…an attempt to reduce litigation….or a self goal? Court wit has it: ‘’’11. The Legislature is entitled to engraft a deeming provision on a certain statute. It may even say that a man shall be deemed to be a woman or a woman shall be deemed to be a man for certain purposes and when it is so enacted, it is not open to the Courts to start looking for various attributes of a man or a woman to see whether one is a man or a woman. The Court must accept the verdict of the Legislature for the given purpose. Biological or physical realities may be any..’’[153 ITR 1.P& H. Swaroop Kishan]

4.2 Interestingly the aspect of ‘’INFORMATION’’ EXISTED earlier in s 147 without being legislatively circumscribed as it is this time.

1962:

147. INCOME ESCAPING ASSESSMENT

If–

(a) the Income-tax Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or

(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year,

he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year).

Explanation 1.— For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:–

(a) where income chargeable to tax has been under-assessed; or

(b) where such income has been assessed at too low a rate; or

(c) where such income has been made the subject of excessive relief under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), or

(d) where excessive loss or depreciation allowance has been computed.

Explanation 2.— Production before the Income-tax Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Income-tax Officer will not necessarily amount to disclosure within the meaning of this section.

This was done away in 1989.

4.3 It is a matter of pride that this country has such a rich history of tax jurisprudence.But it is said that those who forget their history shall be condemned to repeat it.We are now repeating it.In fact a judgment which could have been a beacon in validating assessments related to audit objection and information was so many times successfully utilized to defeat the reason to believe (due to sheer incompetence of the AOs and complete failure and ineptitude of the supervisory officers) that half of the definition of ‘’information’’was devoted to audit in extant law.The decision in question: Indian & Eastern Newspaper Society v. CIT[1979] 119 ITR 996 (SC) and the relevant para being concluding part of para 11  ’’ Neither statute supports the conclusion that an audit party can pronounce on the law, and that such pronouncement amounts to “information” within the meaning of section 147(b) of the Income-tax Act, 1961.’’

In para 13 the hon’ble SC goes down wonderfully to explain the apparaently revenue contrary view (supra) by saying that’’ That part of the note of an audit party which mentions the law constitutes alone “information” within the meaning of section 147(b)’’.And para 12 is a virtual guideline as to how audit para is to be used (a/w para 13) to be classified as information ,for a very valid reason to believe to be recorded.They had it ,the revenue,and they blew it.

4.3.1 But such is the level of non awareness that inspite of having a three judge SC decision (which is clearly laying down law), that it had to be negated in ignorance by a legislation .Now this very judgment stands again in direct conflict with the amended law .

Does this again create a legal oxymoron,challengable in a Court of Law?

Alongwith this,the definition is in direct conflict with section 16 of the Comptroller and Auditor-General’s (Duties, Powers and Conditions of Service) Act, 1971. The hon’ble SC’s view in para 11 of IENS judgment(supra) can be conveniently referenced.

Reduction of litigation?

4.3.2 There is another aspect to this.When does ‘’final objection raised by the Comptroller and Auditor General of India’’happen?What is ‘’final?’’When RAP raises it?When department does not accept it?When it becomes part of CAG report?And the time gap may lead to a time barring situation-which in any case now stands reduced to THREE years? This can go on to be the self goal of the century.

5. A new section i.e. section 148A is inserted. As per the said section, before issuance of notice the Assessing Officer, may conduct enquiries,after obtaining the approval of specified authority and provide an opportunity of being heard to the assessee. After considering his reply, the Assessing Office shall decide, by passing an order, whether it is a fit case for issuance of notice under section 148 and serve a copy of such order along with such notice on the assessee. Before doing so, the Assessing Officer shall take the approval of the prescribed authorities.

GKN Driveshafts (India) Ltd. v. ITO [2002] 125 Taxman 963/259 ITR 19(SC) already said so in a different manner.

5.1 This procedure of enquiry, providing opportunity and passing order, before issuing notice under section 148 of the Act, shall not be applicable in search or requisition cases.

Statutory interdict negating the principle of natural justice?

Would this stand the judicial eagle eye?

Reduction in litigation?

6. Even before the issuance of the notice U/s 148, the assessee shall have a impugned order to challenge the same in the writ jurisdiction in specified cases.

Reduction in litigation?

7. Reassessment in respect of New Issues for which information was not available appear permitted as standalone additions. Hence CIT v. Jet Airways (I) Ltd. [2011] 331 ITR 236 (Bom.) seems nullified.Explanation to amended section 147 unequivocally assigns power to assess or reassess irrespective of the fact that the provisions of section 148A in respect of those issues have not been complied with.

8. GONE? :

a. Concept of Reason to believe [CIT v. Amitabh Bachchan [2012] 349 ITR 76 (Bom.) nullified?]

b. Application of mind(definitions are provided.AO has to just slot it).

c. Establish a direct nexus or live link between the material coming to the notice of the AO and the formation of his belief.

c1. It appears that what is required now is only possession of information suggesting escapement of income chargeable to tax in ‘’normal’’ cases.

d. Failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessment finds no place.[ Dy. CIT v. Aishwarya Rai Bachchan [IT Appeal No.3873 (Mum) of 2013, dated 18-1-2017] nullified?] [Sunil Gavaskar v. ITO(IT) [2017] 88 taxmann.com 372 (Mum.) has no impact now?]

d1. So change of opinion goes as well?. But hon’ble Supreme Court had observed that concept of ‘change of opinion’ must be treated as an in-built test to check abuse of power by Assessing Officer.[ CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC)].

Reduction in litigation?

9. The assessment which are framed in pursuance to the search conducted after 1^st April, 2021 shall be made in accordance with section 147/148 as per the new scheme. In case of the earlier arrangement, notice U/s 153A/153C is to be issued for six assessment years preceding the assessment in which case the search proceedings was conducted.

10.

a. Section 148 does not provide for abatement of pending assessment as on date of initiation of search and accordingly now department can reopen concluded assessment proceedings as well if those fall within preceding three years. [Asstt. CIT v. Ms. Katrina Rosemary Turcotte [2017] 87 taxmann.com 116 (Mum)is no longer pleadable? ]

b. The procedure is silent as to whether the assessment shall be carried on ‘incriminating material’ or it will be regular assessment.

Following  expresum facit cessare taciturn [ “when there is express mention of certain things, then anything not mentioned is excluded”] it can be assumed that this is no longer a condition. Ratio laid down by following judgements is  nullified where it was held that in absence of incriminating material, no addition could be made for unabated assessments.

1.Pr. CIT v. Meeta Gutgutia [2018] 257 Taxman 441 (SC)

2.CIT v. Kabul Chawla  [2016] 380 ITR 573 (Delhi)

3.CIT v. Sinhgad Technical Education Society(2017) 397 ITR 344 (SC)

4.CIT v. Continental Warehousing Corpon. Nhava Sheva Ltd. [2015] 374 ITR 645 (Bom.)

5.CIT v. Gurinder Singh Bawa [2016] 386 ITR 483 (Bom)

So, in the absence of any concept of abated or unabated assessments, and especially in view of the express deeming fiction of possession of information by the AO suggesting that income of the assessee has escaped assessment is all cases of search u/s 132, survey u/s 133A or requisitions u/s 132A, the presence of incriminating material is no more a mandatory requirement.

11. Concluding remark:

Finally and most respectfully,assessment can never be (even largely) INFORMATION DRIVEN to be judicially sustainable.It has to be LAW DRIVEN.

Information is an enabler,never a settler.

The most fascinating aspect for me remains though.’Evidence which reveals’.We continue this journey.