Re-opening of Income Tax assessment and Things to keep in Mind

In this article we would discuss Re-opening of Income Tax assessment and Things to keep in Mind, as this has become  one of the crucial subject in the area of income tax. Frankly speaking, an authority is not permitted to revise an earlier order merely on the basis of whims or fancies or upon change of opinion due to subsequent events.However, we know that to err is human. So the same holds for the income tax department. Despite care and diligence, there can be instances where after passing the assessment order it may come to the light that income which should have been charged to tax had escaped assessment.  images

So, let us know when can an assessing officer re open an assessment. An AO should comply with all the following requirements before re opening an assessment:

1)      First and foremost, the assessing officer must have “reasons to believe” that some income has escaped assessment. Thus an AO cannot resort to reopening of assessment proceedings unless he himself genuinely has reasons to believe that some income has escaped assessment.  Now, reasons to believe is not the same as reason to suspect or reason to re- examine the concluded issues. The reason should be based on some tangible material or information and such material or information must have led to the formation of AO’s belief that some income has escaped assessment. Now, do not confuse, the AO is not required to have absolute certainty that an income chargeable to tax has escaped assessment. All that is required is that the material and information disclosed in the recorded reasons must show that the relationship between material and formation of belief is direct and not remote or vague. If there are no reasons to believe or the reasons to believe are remote then in such cases the actions of the AO are open to judicial scrutiny.

2)      Now, not only should there be a reason to believe but also that the AO must have recorded the reasons for reopening of the assessment. Such reasons should be recorded before the issue of notice. If the reasons are recorded after the issue of notice to the assessee then the proceedings are liable to get quashed. The reasons recorded should be clear and precise. It should disclose the information on the basis of which the AO has formed his reasons to believe that income chargeable to tax has escaped assessment. Also, the AO should quantify the income which in his opinion has escaped assessment.

3)      The AO must issue a notice under Section 148(1) to the assessee directing him to file a return of income for that assessment year.

4)      The notice under Sec 148 can be issued by the AO only within the time prescribed under Section 149 of the Act. As per section 149, no notice of reassessment shall be issued after expiry of 6 years from the end of the relevant assessment year. Please note that the notice should be ‘issued’ within time but may be ‘served’ after the expiry of time. However, it is important that the notice is actually served. If the notice is not served at all then the proceedings of reassessment are liable to be quashed. Moreover, care should also be taken that the notice is addressed and served on the correct person and served by proper mode. Adequate evidence should be kept in the assessment records for service of notice.

5)      And at last, if the assessment is completed under section 143(3) or section 147 then in such case notice should be issued within 4 years from the end of the relevant assessment year unless the assessee has failed to disclose fully and truly all material facts necessary for assessment for that year.   Now, once the AO issues and serves a legally valid notice then what are the duties and rights of the assessee? What is the assessee supposed to do in such circumstances?

Things the assessee is required to keep in mind :

Firstly, the assessee is required to file a return in response to the notice. He is then furnished with the recorded reasons. If the assessee is not satisfied with the recorded reasons, he has a right to furnish his objections with regard to the start of reassessment proceedings. Now, the AO can proceed with the proceedings only when he has disposed off the objections. Unless and until each of the objections are dealt with, the reassessment proceedings are not in tune with the law.

Now, what if the AO disposes off the objections and proceed with the assessment? Does the assessee have any other way out? The answer is yes! The assessee can challenge the reassessment in High Court in writ jurisdiction. The court may permit the assessee to invoke writ jurisdiction if it feels that the same is necessary.

Lastly, one must understand that the reassessment is for the benefit of department and not the assessee. In no case, the income under reassessment order can be below the income which was originally assessed. The assessee cannot claim deductions, allowances or benefits which were not claimed earlier. There is however one exception. If the claim for deduction is in respect of the income which has escaped assessment then the same is allowed, but then the claim should not be more than the income.