Reassessment of Search, Survey and other cases as per Finance Act, 2021 – An FAQ

 

1. What is income escaping assessment? Give some examples of income escaping assessment?

  • As per Section 147 of the Act, if any income chargeable to tax has escaped assessment for assessment year- then it is the case that income has escaped assessment
  • From the language of law only it is clear that if any income is in the hand of the assesse and it is not been subject to income tax- it shall mean that the income has escaped assessment
  • For example, an assessee has earned in any assessment year Rs. 15, 00,000 which is chargeable to income. However, when the return is filed by him, he had only declared Rs. 10,00,000/-. In this case, the income of Rs.5,00,000/- has escaped assessment.
  • Another example- Say an assessee has earned Rs. 50,00,000/- in any assessment year and he has not filed income tax return for that assessment year- In this case, the entire Rs.50,00,000 has escaped assessment.
  • Likewise, there can be many other scenarios where it can be said that the income has escaped assessment
  1. From when the new procedure shall be applicable?
  • For search cases initiated before 31-03-2021, the assessment shall be completed under old provision.
  • For search cases initiated after 31-03-2021, the assessment shall be completed under the new provision
  1. What is the major reason behind substituting the old provision with the new provisions?
  • The memorandum explaining the amendment in Finance Act, 2021, in its page no. 46,says that SFTR is the statement which is required to be filled by third parties regarding the information about the transactions made by the taxpayers.
  • Therefore, the income tax is collating information through SFTR from such third parties to verify the information declared by a taxpayer in the return and to detect non-filers or those who have not disclosed the correct amount of total income.
  • Similarly, information is also received from other law enforcement agencies.
  • Therefore, the information on the basis of which the income escaping assessment is opened in case of any assessee is now more information drive.
  • Therefore, there was the requirement to reform the entire system of income escaping assessment in alignment of current scenario of collecting information by the income tax department in opening the case for income escaping assessment.
  1. What is a brief of entire procedure of income escaping assessment along with the difference with the old procedure?

 

New Provision

Difference with old provision

Legal Issues

Step 1: Information in the hand of the AO that income has escaped assessment

As per the proviso to section 148, the AO must possess valid information suggesting him that the income in the case of any assesse has escaped assessment.

 

Meaning of information See FAQ No.- 6 and 7

Earlier the requirement in the hand of the AO was that he must have ‘reason to believe’ that the income has escaped assessment which was there in section 147 itself.

 

However, unlike new provisions of reassessment, the old provision did not define the exhaustive of meaning of ‘reasons to believe’. Therefore, the meaning of the same were derived out of various judicial pronouncements. The various principles which emerged out of it are as follows:

 

1.       The reasons must be honest, legal, capable of being proving the escapement of income,

2.      The reasons must not be suspicious emerging out gossip or rumour,

3.      Reasons must have live link with the income of the particular assesse

4.      Reasons should a conclusive finding, etc.

5.      And so many making it to be genuine reason to open the case u/s 147

 

Case reference-Hindustan Lever vs. ACIT, (2004) 268 ITR 332.

Earlier also, there had been lots of litigation in respect of what shall be considered as proper ‘reason to believe’ that the income has escaped assessment.

 

Although under the new provision exhaustive definition of information has been provided, however the principal emerging out of old case laws for reason to believe would still prevail for the cases of reassessment.

 

Also, it is expected that the RMS must follow the principal pronounced in old judicial cases.

 

Further, in respect of inclusion under the new provisions that the objection of CAG shall form the information for reopening u/s 147. However, this may nullify numerous judicial pronouncements that the audit objection and audit report cannot be basis for reopening u/s 147. Case reference- CIT vs. PVS Beedies Pvt. Ltd. (1999) 237 ITR 13 (SC).

Step 2: Enquiry to be conducted by AO, in respect of information

Also, as per section 148A(a), an additional power has been enabled in the hand of the AO that he can conduct enquiry with respect to such information.

 

This power can only be exercised only in case of requirement and that too with prior approval of the specified authority

 

There was no such provision under the old act regarding the enquiry in respect of reason to believe.

There can be legal issues in respect of in what cases the specified authority shall approve the requirement of cases to conduct the enquiry in respect of information.

Step 3: Providing an opportunity to be heard to assessee in respect of information

This is an additional procedure wherein under clause (b) of section 148A, AO has to give a SCN to the assessee to present his case why the notice u/s 148 should not be issued.

 

This notice is also required to be issued only after prior approval from specified authority

There was no such provision under the old law. Except the reasons which were recorded before issuance of notice u/s 148 could be challenged by the assessee on its validity and proper information only after filing of return in pursuance of notice u/s 148.

This SCNs can be challenged by the assessee on the ground of valid issuance of notice in respect of proper approval being actually taken from specified authority before issuing the same to the assessee. Like validity on ground of date, signature, only approval was south but not received, etc.

Step 4: Submission of Reply by the Assessee for SCN

In respect of the SCN received by the assessee in step no. 4, he has to submit his response within the time specified in the notice which may vary from 7 days to 30 days.

 

However, for extension of time, assessee may apply to the AO.

This procedure was not under the old law.

Proper submission has to be made by the assessee for this SCN.

Step 5: Passing of the order by the AO u/s 148A

After considering the reply submitted by the assessee in step 4, the AO has to pass the order on the basis of all the information on record, as to how the case is fit to be reopened u/s 147.

 

Time period to pass this order-The order has to be passed within the period of one month from the end of the month when the reply to SCN received by the AO or if no reply is made by the assessee, from the end of one month when the time period to submit reply expires.

 

Approval-Also, before passing this order prior approval from specified authority is required to be taken.

 

Exemption-Providing SCN and passing the order is not required in some exempted cases. Refer FAQ No.10.

This procedure was not under the old law.

The order may be challenged by the assessee on the following grounds:

 

1.       Whether the reply of the assessee has been properly considered or not

2.      Whether the order has been passed within the provided time period

3.      Whether approval from specified authority was properly taken or not before passing the order

Step 6: issue of notice u/s 148

After passing of the order u/s 148A, the AO has to issue the assessee the notice u/s for reopening the case u/s 147 requiring him file income tax return for the relevant assessment year.

 

Approval-Also, before issuing notice u/s 148 prior approval from specified authority is required to be taken.

 

Time limit- Refer FAQ No. 17

This was also there in old provision with only difference that now the order u/s 148A is required to be passed as described in step no. 5, however, earlier the AO had to record reason to believe in writing before issuing notice u/s 148.

The notice u/s 148 can be challenged on the following grounds:

1.       Whether approval from specified authority was properly taken or not before issuing the notice u/s 148.

2.      This notice can be challenged on time bar limitation

3.      Notice u/s 148 can also be challenged on the ground of any discrepancy in compliance with section 148A.

 

Step 7: Filing of Return by the assessee

After receiving notice u/s 148, the assessee as to file the return of income for the relevant assessment year.

This provision was also there under the old law

If the assessee do not file return against notice u/s 148, best judgement assessment can be made by the AO.

Step 8: Completion of income escaping assessment

In terms of section 153(2) the AO has to pass the reassessment order u/s 147 On basis of return filed by the assessee and all the information on record within the time period 12 months (for 148 notice issued on or after 01-04-2019) from the end of F.Y in which 148 notice was served to the assesse.

This provision was also there under the old law

Normal appellate procedure shall follow. The order u/s 147 can be appealed before commissioner of income tax (appeals).

 

  1. What shall be the re-assessment procedure for cases beyond 3 years?
  • If as per the information in the hand of the AO, the income likely to have escaped assessment is Rs. 50 lacs of more for the relevant A.Y, the only the reopening u/s 147 can be made by the AO beyond 3 years.
  • Normal procedure shall be followed as given in FAQ No. 4 above.
  1. What is considered as “information” in income escaping assessment?
  • In the new provision the exhaustive (since the word ‘means’ is used in the definition) meaning of ‘information’ is provided under Explanation 1 of Section 148 as follows:
  1. Information flagged in case of assessee as per ‘Risk Management Strategy’ (RMS) – However, no strategy has been yet issue by CBDT.
  2. Objection raised by the Comptroller and Audit General(CAG).
  1. For what cases, the information shall be deemed to suggest that income has escaped assessment?
  • In following cases, initiated on or after 01-04-2021, the information shall be deemed to be in the hand of the AO suggesting that income has escaped assessment and therefore there is no requirement of flagging as per RMS and objection:
  1. Search cases u/s 132
  2. Requisition of books of account, other documents or any assets u/s 132A
  3. Survey u/s 133A
  4. Money, bullion, etc. in case of other found to belong to assessee- However, for this prior approval of Pr. Commissioner or Commissioner is required.
  5. Any information from books of accounts or documents of any other person relates to assessee- However, for this prior approval of Pr. Commissioner or Commissioner is required.
  • The above shall be applicable for three A.Ys. preceding the A.Y in which the above stated proceedings were initiated or conducted
  1. What shall be time period for reply for assessee in respect of information in possession with the AO?
  • The reply for an assessee has to be made within the time specified in the notice which may vary from 7 days to 30 days or such extended time if applied by the assessee.
  1. Who can issue a notice u/s 148? Under what circumstances approval has to be obtained by A.O. from higher authorities before issue of notice u/s 148?
  • The Assessing Officer has to issue and serve upon the assesse the notice u/s 148 of the Act.
  • For every issue of notice u/s 148 the prior approval the authority is required as follows:

Authority

Case

Principal Commissioner or Principal Director or Commissioner or Director

If the notice is issued within 3 years from the end of the relevant assessment year.

Principal Chief Commissioner or Principal Director General or where there is no Principal Chief Commissioner or Principal Director General, Chief Commissioner or Director General

If the notice is issued after the end of 3 years from the end of the relevant assessment year.

 

10.  Is it mandatory to pass order u/s 148A before issuing notice u/s 148? 

  • Yes, passing of the order considering the reply of the assessee against the SCN, the AO has to mandatorily pass the order with the prior approval of the specified authority
  • However, the requirement of issue of SCN against the information and passing of the order u/s 148A is not required in following cases if initiated or conducted on or after 01-04-2021;
  1. Search cases u/s 132
  2. Requisition of books of account, other documents or any assets u/s 132A
  3. Money, bullion, etc. in case of other found to belong to assessee- However, for this prior approval of Pr. Commissioner or Commissioner is required.
  4. Any information from books of accounts or documents of any other person relates to assessee- However, for this prior approval of Pr. Commissioner or Commissioner is required.
  5. What shall be the assessment procedure of search cases after 01-04-2021?
  • In terms of clause (i) of Explanation 2 of section 148 of the Act, if any search is initiated u/s 132 of the Act, it shall be completed under the reassessment procedure u/s 147 only.
  • It shall be deemed that the AO has information to make income escaping assessment u/s 147.
  • Therefore, for search initiated after 01-04-2021, it will be completed under reassessment provisions only.
  1. What shall be the assessment procedure of requisition of documents cases after 01-04-2021 u/s 132A?
  • In terms of clause (i) of Explanation 2 of section 148 of the Act, if any books of accounts or documents or assets are requisitioned u/s 132A of the Act, it shall be completed under the reassessment procedure u/s 147 only.
  • It shall be deemed that the AO has information to make income escaping assessment u/s 147.
  1. What shall be the assessment procedure for cases where any money, billion, jewelery, other valuable article or thing, books of account or documents belong to any assessee found in any other person’s case, after 01-04-2021?
  • In terms of clause (iii) and clause (iv) of Explanation 2 of section 148 of the Act, if any such documents or asset or document is found to belong to assessee in case of any other person after 01-04-2021, it shall be completed it under the reassessment procedure u/s 147 only.
  • It shall be deemed that the AO has information to make income escaping assessment u/s 147.
  • Therefore, for search initiated after 01-04-2021, it will be completed under reassessment provisions only.
  1. What shall be the assessment procedure of survey cases after 01-04-2021?
  • In terms of clause (ii) of Explanation 2 of section 148 of the Act, if any survey is conducted u/s 133A of the Act, it shall be completed it under the reassessment procedure u/s 147 only.
  • It shall be deemed that the AO has information to make income escaping assessment u/s 147.
  • Therefore, for survey conducted after 01-04-2021, it will be completed under reassessment provisions only.
  1. Whether any other income which was not subject matter for reopening of the case under 147 be assessed by the AO?
  • Yes, as per explanation to section 147, the additional income for any issue which comes to the notice of AO during the course of income escaping assessment, can also be assesses or reassessed by the AO.
  • Also, additional extract has been inserted under the new provision regarding the assessment or reassessment of such other income i.e. “irrespective of the fact that the provisions of section 148A have not been complied with”.
  • Therefore, it means that for assessment or reassessment of such additional income, the AO is not bound to conduct enquiry or provide any opportunity to be heard to assessee.
  • Power of AO to assess or reassess of such additional income was also there under under old provision of section 147.
  • In this respect, it is settled law as pronounced in various judicial pronouncements that the AO can assess or reassess such additional matter only when the original income which was subject matter of reopening under section 147 is actually added in the final order of assessment under section 147. Refer case laws- Martech Peripherals Pvt. Ltd vs. DCIT. (2017) 394 ITR 733.
  1. Can AO assess or reassess income of an A.Y which is subject matter of appeal, reference or revision?
  • As per Section 150 of the Act, the notice under section 148 can be issued at any time in consequences to give effect to finding and direction of contained in the order by way of appeal, reference or revision.
  • Even the time limit prescribed u/s 149 of the Act shall not be applicable in such cases.
  • However, it may be noted that if such appeal, revision or reference is made at the time when the time limit prescribed u/s 149 has already been lapsed, then the reopening u/s 147 cannot be made in respect of such orders.
  • There is no difference is this provision as compared to old law.
  1. What is the time limit for issue of notice u/s 148?

 case

Time limit

If the AO has in his possession books of accounts or other documents or evidence revealing that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more for that year

Upto 10 years form the end of the relevant A.Y.

In any other case

Upto 3 years form the end of the relevant A.Y

 

  1. Whether in case the time limit of issuing notice under section 148 under provision has already lapsed as on or before 01-04-2021, it can be opened under new time limit?
  • No as per proviso to section 149(1)(b) of the Act, in such cases the notice u/s 148 cannot be issued under new time limit given under new provision.
  • Case reference- K.M. Sharma v. Income Tax Officer 254 ITR 772 (SC)
  1. Whether a notice u/s 148 can be issued on the ground that the claim of expenditure has been allowed in the assessment which was disallowable u/s 40(a)(ia) above Rs. 50 lacs?
  • This issue can be fought on the ground of change of opinion by Assessing officer, if the scrutiny assessment has already been completed under section 143(3) of the Act
  • Under the old provision, various judicial pronouncements gave the opinion that change of opinion of assessing office cannot be the basis for reopening for income escaping assessment u/s 147 of the Act.
  • Change is opinion is not valid. Case reference- [2014] 360 ITR 380, NTPC Ltd. vs. DCIT.
  • Case Reference- Parashuram Pottery works Co. Ltd. vs. ITO, [1977] 106 ITR 1 (SC)- held that when all material facts was disclosed by the assessee at the time of original assessment, the AO thereafter cannot change opinion on the basis of same information on record.
  1. Whether notice u/s 148 can be issued for re-examining the allowability of an expenditure, which has been allowed in the course of an assessment u/s 143(3)?
  • Notice u/s 148 can only be issued on the basis of information in the hand of the AO which suggests that income has escaped assessment and not to re-examine the data on record
  • Any enquiry can only be made before issuance of notice u/s 148.
  • Moreover, the expenditure which was already allowed, re-examination of the same shall be change of opinion of assessing officer.
  • Change is opinion is not valid. Case reference- [2014] 360 ITR 380, NTPC Ltd. vs. DCIT.
  1. Can A.O. issue notice in the name of amalgamating company after amalgamation or on a dead person despite the fact that A.O. being in knowledge of such amalgamation or death?

In case of dead person

  • No, notice u/s 148 cannot be issued in the name od dead person,
  • Such defect cannot be even cured u/s 292B of the Act
  • Case Reference- Alamelu Veerappan vs. ITO, [2018] 12 ITR-OL 95 (Mad)

In case of amalgamating Co.

  • In the case of Sky Light Hospitality LLP vs. ACIT, (2018) 13 SCC 147 (SC)– It was held that the notice to be valid if issued in the name of company dissolved and converted into LLP
  • However, the above may be distinguished and in some cases the said cannot be said to be valid if issue in the name of amalgamating co. Case Reference- PCIT vs.Maruti Suzuki India Ltd., (2019) 107 taxmann.com375 (SC)
  1. What are the advantage of replacement of old provision of income escaping assessment by new provisions?
  • Opportunity of being heard to assessee- Under the new provision, the AO is bound to give opportunity to be heard to assessee via a SCN regarding the information in his possession that suggest that the income in the case of the assessee has escaped assessment.
  • The above said SCN shall be issued that too with the prior approval osf the authority assigned in this respect
  • Passing of the order before issuing notice u/s 148- Also, the AP has to pass an order considering the reply of the assesse that how the information suggest that the income has escaped assessment. Thereafter, onlythe notice u/s 148 for reopening under income escaping assessment can be issued by the AO.
  1. What are the major disadvantages of replacement of old provision of income escaping assessment by new provisions?
  • Increase of time for issue of notice u/s 148-Earlier no notice u/s 148 could be issued after the expiry of six years from the end of the relevant assessment years, except in cases of asset located outside India.
  • However, under the new provision, in cases of income likely to have escaped assessment is likely to be Rs. 50 lacs or more, the time period has been increased to upto 10 years form the end of the relevant A.Y.
  • This is an adverse provision for the assessee, since it shall be difficult for the assessee to keep the books of accounts and documents on record upto 10 years
  • Department is itself not confident in digital assessment procedure- Department is giving reason of reform of reassessment provision that it shall be conducted on the basis information available digitally and due to digitization procedure of assessment. So in this respect time period should not be increased to 10 years when all the information and record is available digitally.
  • Objection of Comptroller and Audit General to be considered as information- Under the new provision, if any objection is made by CAG, it shall be considered as information for reopening the case u/s 147.
  • However, CAG is a non quasi judicial body. It doesn’t have any power of judiciary.
  • There had been many judicial pronouncements holding that on the basis of object of CA, reopening of case u/s 147 cannot be made in any manner whatsoever. Case reference- CIT vs. PVC Beedies Pvt. Ltd. (1999) 237 ITR 13 (SC)

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