Section 147 – Reassessment Order (Income Escaping Assessment)
Section 147 of the Income Tax Act, 1961, is a crucial provision that empowers the Assessing Officer (AO) to assess or reassess income that has "escaped assessment" in an earlier assessment year. This section serves as a corrective mechanism to ensure that all taxable income is brought to tax, preventing tax evasion or under-reporting of income.
In essence, if the AO has information suggesting that any income chargeable to tax has not been assessed, has been under-assessed, has been assessed at too low a rate, or has been the subject of excessive relief or excessive loss/depreciation allowance, they can initiate reassessment proceedings.
Understanding "Income Escaping Assessment"
The core concept behind Section 147 is "income escaping assessment." This term refers to situations where taxable income, for various reasons, has not been properly included in the total income assessed for a particular assessment year. Common scenarios include:
- Non-disclosure: The taxpayer failed to file an Income Tax Return (ITR), even though their income exceeded the basic exemption limit.
- Under-reporting of Income: The taxpayer filed an ITR but omitted certain sources of income or understated the actual income earned.
- Excessive Claims: The taxpayer claimed excessive deductions, allowances, or reliefs, or computed excessive loss or depreciation allowance, leading to a lower tax liability than due.
- Incorrect Assessment: Even if the taxpayer provided all information, there was an error on the part of the tax authorities during the original assessment that resulted in income escaping tax.
- New Information: Subsequent to the original assessment, the AO receives new information (e.g., from other government departments, third-party sources, or risk management strategies) that suggests income has escaped assessment.
Initiation of Reassessment Proceedings (Section 148A & 148)
The process of reassessment is governed by Sections 148A and 148, which were significantly revamped by the Finance Act, 2021, to make the process more taxpayer-friendly and reduce litigation.
Section 148A: Conducting Inquiry, Providing Opportunity Before Issue of Notice
Before issuing a notice under Section 148, the AO must generally follow these steps:
- Conduct Inquiry: The AO must conduct a preliminary inquiry, if required, and obtain prior approval from the specified authority regarding information that suggests income has escaped assessment.
- Show Cause Notice: The AO issues a show-cause notice under Section 148A(b) to the assessee, providing the information that suggests income has escaped assessment and giving them an opportunity to explain why reassessment proceedings should not be initiated.
- Assessee's Response: The assessee is given a minimum of 7 days (and a maximum of 30 days, or more with extension) to respond to the show-cause notice.
- Consideration of Reply: The AO considers the assessee's reply and any evidence furnished.
- Decision by AO: Based on the material available and the assessee's response, the AO decides whether it is a fit case to proceed with reassessment. This decision is communicated through an order under Section 148A(d).
Important Note: The requirement to follow Section 148A before issuing a notice under Section 148 is a significant safeguard for taxpayers, providing them with an opportunity to explain their position before a formal reassessment proceeding begins.
Section 148: Issue of Notice Where Income Has Escaped Assessment
If the AO, after considering the assessee's reply under Section 148A (or without following Section 148A in specific cases like search/survey), is satisfied that income has escaped assessment, they can issue a notice under Section 148 requiring the assessee to furnish an ITR or provide relevant information.
Time Limits for Issuing Notice (Section 149)
The time limits for issuing a notice under Section 148 are critical and have also undergone significant changes:
- Up to 3 years: Generally, a notice under Section 148 can be issued within 3 years from the end of the relevant assessment year.
- Beyond 3 years but up to 10 years: A notice can be issued beyond 3 years but not beyond 10 years from the end of the relevant assessment year, only if the AO has evidence that income chargeable to tax, amounting to ₹50 Lakhs or more, has escaped assessment. This evidence must be in the form of an asset, expenditure in respect of a transaction, or entry in the books of account.
- No time limit for certain cases: There is no time limit if the income that has escaped assessment relates to an asset located outside India.
Crucial Point: The AO's jurisdiction to initiate reassessment proceedings is strictly governed by the conditions and time limits laid down in Section 147 and Section 149. Any deviation can render the entire proceedings invalid.
Procedure after Issuance of Notice (Section 147)
Once a valid notice under Section 148 is issued, the AO proceeds to assess or reassess the escaped income. During these proceedings, the AO may also assess or reassess any other income that has escaped assessment and comes to their notice subsequently, even if Section 148A provisions were not specifically complied with for that "other income" issue.
The assessee has the right to present their case, provide documents, and seek clarifications. The AO, after considering all submissions and evidence, passes a reassessment order under Section 147, typically along with Section 143(3) or Section 144 (Best Judgment Assessment) if information is not provided.
Rights of the Taxpayer
Taxpayers have significant rights during reassessment proceedings:
- Right to reasons: The assessee has a right to know the reasons recorded by the AO for initiating reassessment.
- Right to object: The assessee can file objections to the initiation of reassessment, especially if they believe the conditions for reassessment are not met.
- Right to be heard: The assessee must be given a reasonable opportunity to be heard and present their case.
- Right to appeal: If aggrieved by the reassessment order, the assessee can file an appeal with the Commissioner of Income-tax (Appeals) and further to the Income Tax Appellate Tribunal (ITAT), High Court, and Supreme Court.
Conclusion
Section 147 is a powerful tool for the Income Tax Department to ensure tax compliance and prevent income from escaping the tax net. However, its application is strictly governed by procedural safeguards and time limits, which have been strengthened by recent amendments. For taxpayers, understanding this section and their rights is crucial to effectively respond to reassessment notices and avoid unwarranted tax demands. Given the complexities, seeking professional advice is highly recommended if you receive a notice under Section 148.
Received a Section 148 Notice? Don't Panic, Contact DisyTax!
A notice under Section 148 for income escaping assessment can be daunting, but it's not the end of the road. With the right strategy and expert guidance, you can effectively respond and protect your interests.
DisyTax offers comprehensive assistance for Section 147 reassessment proceedings:
- Review of Notice: Detailed analysis of the notice and underlying information.
- Drafting Objections: Crafting robust objections to the initiation of reassessment under Section 148A.
- Document Preparation: Assisting in compiling and presenting all necessary documents and explanations.
- Representation: Representing you before the Assessing Officer during the reassessment proceedings.
- Appeals: If needed, preparing and filing appeals to higher authorities.
Ensure your reassessment is handled professionally and efficiently. Contact DisyTax for expert support on Section 147 matters.
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