Introduction:
In recent years, the Indian tax system has undergone a technological transformation aimed at improving compliance and enhancing transparency. One of the most significant developments in this context is the introduction and widespread adoption of the Annual Information Statement (AIS) by the Income Tax Department. The AIS is a comprehensive statement that collates various financial transactions of taxpayers from a wide range of third-party sources, banks, mutual funds, registrar and transfer agents, stock exchanges, and other financial institutions. Its intent is to ensure that taxpayers are aware of the information the tax department already possesses and to nudge voluntary compliance.
However, the increasing use of AIS has also given rise to a new wave of reassessment notices under Section 148 of the Income Tax Act, 1961. These notices are often based solely on mismatches between the income or transactions reported by the taxpayer in their return and those reflected in the AIS. This development has triggered a host of legal and procedural questions, particularly with respect to the legitimacy and constitutional validity of such reassessment actions.
One central question this article explores is: Can a reassessment proceeding under Section 148 be validly initiated solely on the basis of an AIS mismatch, without any independent enquiry or verification by the Assessing Officer (AO)? The concern is not only about the reliance on technological tools for enforcement but also about the possible erosion of taxpayer rights due to mechanical and non-judicious use of third-party data.
Background:
The Income Tax Department increasingly uses AIS data to detect discrepancies. Reassessment notices under Section 148 are often triggered where the AIS reflects additional income not disclosed in the return.
The key legal question is whether such reliance on AIS data, without further enquiry, satisfies the requirement of “reason to believe” that income has escaped assessment.
Relevant Legal Provisions under the Income Tax Act, 1961:
1. Section 147: empowers the Assessing Officer to reassess income if there is a “reason to believe” that income has escaped assessment. Such reassessment must comply with procedural safeguards under Sections 148 and 148A.
2. Section 148: deals with the issuance of a notice to the assessee when the Assessing Officer has reason to believe that income has escaped assessment.
3. Section 148A: (introduced by the Finance Act, 2021), mandates preliminary enquiry and opportunity of hearing before issuing notice under 148.
Judicial Precedents:
Courts have repeatedly emphasized that reassessment must be based on independent application of mind, not mechanical reliance on third-party data.
In this case the Supreme Court addressed the validity of reassessment notices issued under the old provisions of the Income Tax Act, 1961, after the introduction of the new reassessment regime by the Finance Act, 2021. Although the notices issued without following the newly mandated Section 148A procedure were technically invalid, the Court chose a balanced approach to protect both taxpayer rights and public revenue. It “deemed” these notices as show-cause notices under Section 148A(b), thus saving over 90,000 reassessment cases from being quashed entirely. The judgment reinforced that reassessment after April 1, 2021, must comply strictly with the new procedural safeguards, particularly the requirement of independent enquiry and opportunity of hearing under Section 148A.
The Hon’ble Bombay High Court highlighted that it is mandatory for the AO to independently apply his mind to the materials on record. Non application of mind on the part of AO to the information received can vitiate the initiation of reassessment proceedings.
The Delhi ITAT observed that the reasons recorded make it evidentially clear that the AO has acted in a mechanical manner based on so-called Investigation Wing Report and without own application of mind and without objectively ascertaining the facts before recording reasons towards alleged escapement. Essentially, the assessment has been re-opened on the basis of borrowed satisfaction of the Investigation Wing without his own independent application of mind and thus consequential action and proceedings under s. 147 are illegal and bad in law.
Conclusion:
While AIS mismatch may trigger an initial enquiry, it cannot alone justify reassessment under Section 148. The AO must independently verify the information and provide the assessee with a reasonable opportunity to explain discrepancies through the Section 148A(b) process. Failure to do so renders the reassessment notice procedurally defective and open to challenge.
Taxpayers facing reassessment purely on AIS grounds should scrutinize the notice process and challenge mechanical actions where necessary.
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Author: Samiksha Singh, University Institute of Legal Studies, Panjab University, Chandigarh
