The Finance Act, 2021 has completely replaced the provisions of assessment and reassessment under Section 147 of the ITA. In order to set the context, let’s first gain clarity on the terms: assessment and escaping assessment.
Every earning individual is required to file the return to the income tax department if the earning is chargeable to tax. The tax authorities examine your income tax return (ITR). This process of examining the return of income is referred to as assessment.
Types of Assessment
Further, assessments are of various types, self-assessment, preliminary assessment, regular assessment, and special assessment.
Any income or earnings during a particular year are assessed by the taxpayer (self-assessment) in the immediately following year referred to as the assessment year.
For instance, anything you earned in the financial year (FY) 2020-21 is assessed in the assessment year (AY) 2021-22. After self-assessment, the taxpayer will compute the tax liability and will have to pay that amount and file ITR. Thereafter, the income tax department (ITD) conducts preliminary checking of returns for any arithmetical errors, incorrect claims, etc., which is a fully-computerised process. At this stage, there is no detailed scrutiny of ITR filed.
Now, regular assessment has been sub-divided into scrutiny assessment, under Section 143(3) and best judgment assessment, under Section 144.
Also, special assessment had two categories: income escaping assessment, under Section 147 and assessment in consequence of search, under Sections 153A to 153C.
It may so happen that a few heads of income may escape assessment during initial assessment proceedings. In such a scenario, and if the assessing officer (AO) finds that some income that is actually chargeable to tax has not been assessed, the AO can re-open the cases to reassess the individual’s ITRs under Section 147 of the ITA.
The AO is likely to assess/reassess such income, recompute the loss/depreciation allowance or any other allowance/deduction for the assessment year (AY), as per the provisions of Sections 148 to 153. Re-assessment can be done multiple times provided other conditions laid down in Section 147 have been satisfied.
Now, any income in the hands of the assessee, which has not been subject to the income tax, shall mean that it has escaped assessment. The income can be said to be escaped assessment if the losses have been overreported by the taxpayer.
For example, an individual earned Rs 24 lakh in AY 2021-22, which is chargeable to tax. However, when the return of income was filed, the said individual had declared Rs 20 lakh. In this case, the income of Rs 4 lakh has escaped assessment.
Similarly, a businessman earned Rs 40 lakh in a particular financial year, but failed to file the income tax return. The complete amount of Rs 40 lakh has escaped assessment.
The Income Tax Act, 1961, empowers the Assessing Officer (AO) to reassess income that may have escaped assessment (“IEA”) under Sections 147 and 148. While this aims to ensure tax fairness, it can also lead to litigation due to ambiguities and complexities in the provisions. Recent amendments in the Finance Bill 2021 and proposed changes in the Finance Bill 2022 seek to address these concerns and promote a more transparent and efficient IEA process.
Finance Act, 2021: Amendments Introduced
The Finance Act, 2021 has substituted the existing Sections 147 to 149 with new Sections 147, 148, 148A and 149 of the ITA. Also, it has removed Sections 153A to 153C and merged all of them under Section 147.
The Finance Act, 2021 has inserted Section 148A, wherein the AO must first conduct an inquiry and provide an opportunity to the taxpayer of being heard before issuing a notice. It is only after considering the reply of the assessee, the AO should then decide, based on the material facts available, whether reassessment provisions should be invoked or not.
Earlier, the AO could reopen reassessments if it had ‘reason to believe’ that the income had escaped assessment. Then subject to provisions of Sections 148 to 153, he/she may assess such income or any other income which comes to his notice, subsequent to the course of proceedings of Section 147.
However, the AO while reopening reassessments will take into consideration information rather than relying on best judgment, the government has specified this now. Any subjectivity and discretion in the hands of an AO has been removed.
For the purpose of Section 147 and Section 148, the information with the AO, which suggests that the income chargeable to tax has escaped assessment, means:
Any information flagged in the case of an assessee for the relevant assessment year AY, in accordance with the rules (risk management strategy) formulated by the Central Board of Direct Tax (CBDT) from time to time
Any final objection raised by the Comptroller and Auditor General of India (CAG of India) in case the assessment of the assessee for the relevant assessment year has not been conducted in accordance with the provisions of this Act
In cases where the AO shall be deemed to have information, which suggests that the income chargeable to tax has escaped assessment in the case of the assessee where:
Search: A search is initiated under Section 132 or books of accounts, other documents or any assets are requisitioned under Section 132A on or after April 1, 2021 in the case of assessee
Survey: A survey is conducted under Section 133A, other than under sub-section (2A) or sub-section (5) on or after April 1, 2021 in the case of the assessee
Seizure:The AO is satisfied with the prior approval of the Principal Chief Commissioner of Income-tax (PCIT) if any money, bullion, jewellery or other valuable article or thing being seized or requisitioned under Section 132A in case of any person, on are after April 1, 2021, belongs to the assessee
Finance Bill 2022 Amendments:
In certain cases, prior approval for IEA notices may no longer be required if the AO has already established grounds under Section 148A(d).
The information scope is proposed to include expenditure related to transactions and entries in books of accounts.
For search, survey, and requisition cases, the 3-year restriction on reopening assessments before the search/survey year is proposed to be removed retrospectively.
The 10-year time limit for IEA based on INR 50 lakhs or more is proposed to extend to cases where income is represented by expenditure or book entries.
Other Related Provisions
The AO will comply with the provisions of Section 148A before issuing a notice to the assessee under Section 148. Section 148A requires that the assessing officer shall give an opportunity to the assess to reply why notice for income escaping assessment under Section 147 should not be issued.
While Section 148 is concerned with issue of notice in cases where income has escaped assessment or audit
1. What is Section 147 of the Income Tax Act, and what does it entail?
– Answer: Section 147 empowers the assessing officer to reopen cases where income has escaped assessment. It allows for the reassessment of income that may not have been properly assessed or declared by the taxpayer.
2. When can the Income Tax Department issue notices under Section 147?
– Answer: Notices under Section 147 can be issued when the assessing officer has reason to believe that income chargeable to tax has escaped assessment for a particular assessment year.
3. What triggers the need for reassessment under Section 147?
– Answer: Reassessment under Section 147 is triggered when the assessing officer finds that certain income, which should have been taxed, has not been properly assessed in the original assessment proceedings.
4. What steps should taxpayers take upon receiving a notice under Section 147?
– Answer: Upon receiving a notice under Section 147, taxpayers should carefully review the notice, gather relevant documents, and respond to the assessing officer within the stipulated time frame.
5. What documents are required for responding to a notice issued under Section 147?
– Answer: Taxpayers may need to provide documents related to their income, investments, deductions, and other financial transactions as requested by the assessing officer.
6. Is there a deadline for taxpayers to respond to notices under Section 147, and what happens if the deadline is not met?
– Answer: Yes, there is usually a deadline mentioned in the notice for responding to notices under Section 147. Failure to respond within the specified time frame may lead to further action by the tax authorities.
7. What are the legal consequences of non-compliance with notices issued under Section 147?
– Answer: Non-compliance with notices issued under Section 147 may lead to adverse consequences such as additional tax liabilities, penalties, and legal proceedings.
8. How can taxpayers ensure they meet the compliance requirements under Section 147?
– Answer: Taxpayers can ensure compliance by providing accurate information, cooperating with the assessing officer, and responding to notices within the stipulated time frame.
9. Can an individual appeal against a reassessment order passed under Section 147?
– Answer: Yes, individuals can file an appeal against a reassessment order passed under Section 147 to the Commissioner of Income-tax (Appeals) if they are adversely affected by the decision.
10. Are there any restrictions on the assessing officer’s ability to reopen cases under Section 147?
– Answer: Yes, there are certain conditions and limitations specified under Section 147 regarding the reopening of cases beyond a certain time limit or threshold amount of income.