Reassessment Under Sections 147 & 148 of Income-Tax Act: Has Finance Act, 2021 Truly Rebalanced the Scales?
Introduction
Assessment and re-assessment under the Income Tax Act 1961 is one of the more contentious issues. While the Revenue needs to make adequate provision for taxable income that has escaped assessment the occasional re-opening of long completed assessments cannot be a casual event. Certainty in taxation is a constitutional value.
Until a few decades back, Sections 147 and 148 of the Income Tax Act, 1961 were under constant judicial scrutiny. With amendments brought about by the Finance Act, 2021 to these provisions, the law and practice pertaining thereto has undergone a paradigm shift. In the process of making the law more objective, less discriminatory, and doing away with unnecessary litigation, reforms were introduced to make the administration of income tax more certain and less contentious. This article attempts to explore and understand the changes in the law and the practice in this regard.
The Earlier Position: Reason to Believe and Judicial Safeguards
Prior to 1 April 2021 the assessment could be reopened where the Assessing Officer (AO) had ‘reason to believe’ that any income had been left out of assessment. The courts had interpreted this phrase to restrain its abuse.
In CIT v. Kelvinator of India Ltd.¹ the Supreme Court held that re-assessment could not be based on change of opinion alone and that there must be some material. A very important judgment in law of taxation.
In GKN Driveshafts (India) Ltd. v. ITO2 the Court held that the assessment order has to be recorded and a speaking order has to be given in case of objections being raised. Another Judicial rule was added in this regard as well. The assessment was not being carried out as per the provisions of the Act. The law as evolved by the Courts was again and again violated and assessments were routinely issued without any inquiry or scrutiny, thereby reducing the litigation to a mere formality.
The 2021 Reform: A Structural Overhaul
While amending the provisions, the Finance Act, 2021 drastically altered them. The sections 147, 148, 149 and 151 were heavily rewritten. Changes in respect of assessment of income arising from assets held in the jurisdiction of any Authority have been noticed directly. A new section 148A has been brought in. Section 148A deals with the requirement of a pre-notice, which is a huge change in law.
Section 148A: From Post-Notice Challenge to Pre-Notice Hearing
Under Section 148A, before issuing a reassessment notice, the AO must:
- Conduct inquiry (if required),
- Provide the assessee an opportunity of being heard,
- Consider the reply,
- Pass a reasoned order deciding whether notice should be issued.
A change of great significance has taken place. So far, it was the assessee who would contend that the reassessment cannot proceed after the assessment notice had been served. The law itself has now incorporated the principle of natural justice. The Supreme Court, in the case of Union of India v. Ashish Agarwal4, held that reassessment notices under the old law, issued after the amendment came into force, are to be treated as nothing more than a show cause notice under Section 148A. The Supreme Court has thus brought about equilibrium between legislative intent and the principle of natural justice.
The whole idea of bringing in Section 148A was good. It is the nature of good ideas that the reality and practicality of implementation overcomes the initial feeling. The impact of Section 148A shall be directly proportionate to the manner in which the reaction of the Assessee is dealt with by the Revenue. In the event of the Order under Section 148A (d) being a mere formality, then the legislation shall amount to mere rhetoric and shall not really bring about any change in the methodology of assessment.
Limitation Period: Greater Certainty, With an Exception
New time limit of 3 years under amended section 149 repels general provision of 6 years. For the Real Estate and Infrastructure sector the amended Section 149 has done a balancing act in curbing litigation while reducing uncertainty in terms of limitation period for making assessment orders. The amendment has reduced the general period of 6 years to just 3 years thereby being a huge relief for the industry. Uncertainty has always been a cause of worry for the Industry and the ambiguity in Section 149 had only lengthened the period of uncertainty.
Although the proposed section aims at curbing the large tax evasion, it can be argued that it harasses a small case. Assessing the cases of large tax evasion of income amounting to more than Rs.50 lacs (which is received after a period of 10 years and is invested in the form of asset) shows that the legislation is dealing with a serious case of tax evasion and not with small cases.
As mentioned previously, there are some outstanding issues that need to be clarified, in particular, what is meant by the expression ‘represents assets’ and how these are to be dealt with for preceding assessment years.
‘Information Suggesting Escapement’: A New Standard
Reason to believe (RTB) has been referred to as information which means that income has escaped assessment. The Explanation to Section 148 mentions the information received under risk management systems, audit objections and under international agreements.
This one is supposed to be more neutral. But it raises a new set of issues. If societies are opened based on risk flags determined by an algorithm, how do citizens influence the criteria for those flags? In this case, maximum transparency is needed. The language has changed but the scope of the judicial review may not.
The Approval Mechanism
Section 151 has been amended with an added clause that the issuance of notice to the concerned officer would require the sanction of the higher authority. The law as it presently stands has been explained and substantiated in the landmark case of Chhugamal Rajpal v. S.P. Chaliha⁵.
So surely the principle applies just the same in the post-Dodds era? Here, the question is whether the decision to approve the Minister will be based on reasonable consideration of the circumstances or merely as a matter of procedure.
A Balanced Reform: But Not the End of Litigation
This 2021 reform has introduced a larger number of procedural safeguards in relation to the law on natural justice, an issue that had a judicial origin and is now dealt with in an entirely different way. This is a step in the right direction.
The law of taxation is a law of interpretation. The meanings of the words “information”, “asset” and “enquiry” will have to be worked out in judicial decisions. Whether the number of cases actually brought before the courts will fall will depend less on the wording of the Act than on its administration.
A significant change in the terms of the argument between the Revenue and the taxpayer. And a very small step in the right direction.
Conclusion
Assessment powers have to be built into any tax system. These powers have to be exercised in a fair, certain and accountable manner. The Finance Act 2021 has attempted to deal with these aspects.
The change in the law is an important topic for law students and practitioners and it is a developing area of law where issues will arise which will have to be addressed in terms of constitutional law, administrative law and taxation.
Only time will tell if this move will help to reduce the number of divorces or if it merely changes the way that divorce cases are contested.
Citations
1. CIT v. Kelvinator of India Ltd., (2010) 320 ITR 561 (SC).
2. GKN Driveshafts (India) Ltd. v. ITO, (2003) 259 ITR 19 (SC).
3. Finance Act, 2021 (Act No. 13 of 2021).
4. Union of India v. Ashish Agarwal, (2022) 444 ITR 1 (SC).
5. Chhugamal Rajpal v. S.P. Chaliha, (1971) 79 ITR 603 (SC).
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