Income Escaping Assessment – The Legal Analysis

 There are various reasons why litigation arises between the assessees and the income tax department including TDS, disallowance of certain expenditures, exemptions, and deductions, etc. One of the major reasons for litigations is when the department finds a certain income that has escaped assessment and therefore proceeds to tax the same. This is known as income escaping assessment or Reassessment under section 147 of the income tax act & Section 148. Here, we have covered everything regarding income escaping assessment, what is covered in this assessment and why it is a major contributor in litigations.

 There were significant amendments in the income escaping assessment provisions vide Finance Bill 2021. The aim was to reduce the litigations and promote ease of doing business for the taxpayers. Here are the amended provisions for income escaping assessment and some of the major reasons that give rise to litigations.   As per section 147 of the income tax act, 1961, if any income chargeable to tax has escaped assessment for any assessment year, then the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance or any other allowance or deduction for such assessment years. The assessing officer may assess or reassess income in respect of any issue that comes to his notice subsequently during the proceedings under this section, whether Section 148A has been followed or not. Section 148A provides certain preconditions before which the assessing officer cannot issue the notice.

 These include:

·         Conduct inquiry, if required, after prior approval from relevant authority that suggests escape of income;

·         Provide an opportunity of being heard by the assessee for at least 7 days but not exceeding 30 days.

·         Consider assessee’s reply to the show cause notice issued; or 

·         Decide based on the material available whether it is a fit case to issue a notice under section 148.

 

However, the above requirements need not be followed by the officer in a case where:

·         A search is initiated u/s 132 or books, documents, or assets are requisitioned u/s 132A on or after 1st April, 2021;

 

·         AO is satisfied that any money, jewelry, bullion, or other valuable article or thing that has been seized in such search or requisition on or after 1st April 2021 belongs to the assessee;

• AO is satisfied that any books or documents seized in such search or requisition from any other person on or after 1st April 2021 belong to the assessee.

Notice for reassessment shall be issued by the AO in accordance with the provisions of section 148. As per section 148, the AO must have information that income chargeable to tax has escaped assessment for a relevant assessment year in the case of the assessee. The assessing officer shall also obtain prior approval from a specified authority to issue such notice. The notice under this section shall require the assessee to furnish a return of income even if the assessee had already furnished it under section 139. 

 

The information that the AO shall possess means:

·         any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time;

• any final objections 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 made in accordance with the provisions of this Act.

 

However, a deeming fiction has been inserted whereby the AO shall be deemed to have the information in the case, where: 

• A search is initiated u/s 132 or books, documents, or assets are requisitioned u/s 132A on or after 1st April, 2021; or
• A survey is initiated u/s 133A other than under Section 133A(2A) or Section 133A (5) on or after 1st April, 2021; or
• AO is satisfied that any money, jewellery, bullion, or other valuable article or thing has been seized in such search or requisition on or after 1st April, 2021 belongs to the assessee; or
• AO is satisfied that any books or documents seized in such search or requisition from any other person on or after 1st April, 2021 belong to the assessee.

Further, Section 149 prescribes the timelines for the issue of notice for reopening of assessment. As per Section 149, no notice shall be issued for any relevant assessment year-

• If 3 years have elapsed from the relevant assessment year in general cases or;
• If 3 years, but not more than 10 years, have elapsed from the end of the relevant assessment year unless the officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to INR 50 lakhs or more for that year.

Under these provisions, the asset has been given specific meaning to include immovable property, being land or building or both, shares and securities, loans and advances, and deposits in a bank account.

Proposed Amendments vide Finance Bill, 2022

The Finance Bill, 2022 has proposed some major amendments in the provisions governing income escaping assessment. This includes:

1) Prior approval of specified authority, as provided in 1st proviso to section 148, shall not be required where the AO has passed as order u/s 148A(d) with prior approval of specified authority that it is a fit case to issue the notice.

2) The scope of information has been proposed to be expanded by inserting the following:

• any audit objection; or,
• any information received under an agreement referred to in section 90 or section 90A of the Act; or,
• any information made available to the Assessing Officer under the scheme notified under section 135A i.e., faceless scheme; or,
• any information which requires action in consequence of the order of a Tribunal or a Court.

3) Restrictions on reopening of assessment for search, survey, and requisition cases for 3 years immediately preceding the year of search and survey are proposed to be removed retrospectively from 1st April 2021.

4) Under section 149, the scope of applying the extended time limit of 10 years has been increased. Therefore, reassessment can be opened if the income escaping assessment that amounts or is likely to amount to INR 50 lakhs or more is represented in the form of:

• An asset;
• Expenditure in respect of a transaction/event / occasion; or
• Entry or entries in the books of accounts.

Reassessment Proceedings: What Could Be Anticipated?

The authority and jurisdiction of the officer to issue a valid notice have been the foremost ground of litigations. Before the amendment, ‘Reason to Believe’ was the foundation upon which the notice for income escaping assessment was issued. This led to subjective decisions and Reassessment under section 147 of income tax act & Section 148 by the officers in certain cases. Also, staggered deadlines for the issue of notice further added to the litigations.

Some of the critical judgments passed by various courts were:

• CIT vs. Kelvinator of India Ltd. (2010) (SC): The Supreme Court held that a mere change of opinion cannot be the reason to reopen the case.
• ACIT vs. ICICI Securities Primary Dealership Ltd. (2012) (SC): AO opened reassessment after 4 years even though there was no failure on part of the assessee to disclose full details in ROI. The Supreme Court held that the re-opening of the assessment was invalid as it was a mere re-look of said accounts earlier furnished by the assessee.
• Hemant Traders vs. ITO (2015) (Bom HC): The notice u/s 148 cannot be issued solely on the ground that a survey u/s 133A was carried out where nothing was found therein that would indicate escapement of income.

The above cases indicate the plight of the assesses where litigations took place because of arbitrary reasons. While the amendment aims to reduce unnecessary litigations, certain aspects still warrant clarity.

These include:

• The income tax department will collect information from multiple sources. These include GST, SFT, Customs, the investigation wing of the department, etc. What will be the logic behind the risk management strategy that will be followed by the CBDT?
• The current Section 148A has left AO with the discretion to conduct an inquiry. Insertion of the words ‘if required’ in Section 148A(a) only suggests that after AO obtains information, he can conduct an inquiry if he feels necessary or else proceeds with the issue of notice thus, making the whole thing subjective.
• After the amendment, the assessee is given an opportunity of being heard before the issue of the notice. This implies that most of the fact-finding will be done before the issue of notice. This is contrary to the earlier provision whereby the assessee was required to file the return after the issuance of notice and  Only after filing the return,  the assessee could ask for the ‘Reasons to Believe’ from the AO.
• The powers of the AO have been increased with the amended section 147 of income tax act. The explanation to Reassessment under Section 147/148 states that the AO can issue notice for any issue that comes to his notice subsequently during the course of the proceedings whether the provisions of Section 148A are complied with or not. These powers override the preconditions of Section 148A. Before the amendment, there were contrary views because of the words ‘and also’ in the provision which made it subjective as to whether other incomes for which notice was not issued can also be assessed. However, after the amendment, it is certain that any income that comes to the notice of the AO subsequently could be assessed. 

 

Conclusion

It can be anticipated that the removal of the ‘Reasons to Believe’ and introduction of a clearly defined ‘information’ concept will help in reducing the litigations and subjective approach adopted by the assessing officers for the opening of Reassessment under section 147 of income tax act & Section 148. However, CBDT needs to have a proper mechanism to correctly pinpoint the information suggesting escape of income.