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Income Escaping Assessment: The Old vs New Regime Procedural Changes and Critical Review in Light of Recent Judgment by the Supreme Court

Under the old provisions, prior to the amendment, Section 147 of the Income Tax Act authorized the Assessing Officer to issue notices under Section 148 for reassessment of income that had escaped assessment. However, the old provisions did not specify a detailed or mandatory procedure to be followed by the Assessing Officer before issuing such notices. This led to ambiguity and litigation.

To address this issue and to simplify tax administration, the Finance Act, 2021 introduced a new Section 148A and made amendments to Section 147. The new Section 148A lays down the procedure that the Assessing Officer must follow before issuing notices under Section 148.

New Procedure for Reassessment
After the Finance Act 2021, this procedure under the Income Tax Act, 1961, hereinafter referred to as the Act, was drastically amended and a new section 148A was introduced, which puts a procedural requirement upon the Assessing Officer to conduct an inquiry, issue a notice, and issue an order under this section before starting proceedings in Section 148. Section 147 was also substituted by new Section 147, which subtly omits the words "If the Assessing Officer has reason to believe." The conditions for reopening of assesment were shifted from section 147 to section 148. Now Explanation 1 of section 148 provides that subject to procedural requirements of Section 148A, the Assessing Officer must have "Information suggesting escapement of income chargeable to tax."

The Finance Act, 2021 also introduced changes to the limitation period for issuing notice under Section 148. The new limitation period is three years from the end of the relevant assessment year, with an extension of up to ten years if the Assessing Officer has evidence of income amounting to fifty lakh rupees or more.

Information Suggesting Escapement
In the new procedure, "Information suggesting escapement of income" is a core aspect for reassement proceedings, whether under Section 148A or Section 148. A proceeding cannot be initiated by the Assessing Officer unless he has such information that suggests escapement of income. This information is restrictively defined under Explanation 1 of section 148, which reads as follows:

For the purposes of this section and Section 148A, the information with the Assessing Officer, which suggests that the income chargeable to tax has escaped assessment, means:
  1. Any information 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;
  2. Any audit objection 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;
  3. Any information received under an agreement referred to in Section 90 or Section 90A of the Act;
  4. Any information made available to the Assessing Officer under the scheme notified under Section 135A;
  5. Any information that requires action in consequence of the order of a Tribunal or a Court.

From the above, it can be inferred that this "information" must relate to:
Income chargeable to tax: Chargeability is an important expression that limits the scope and nature of such information by:
  1. Firstly, the information must be related to any income, and;
  2. Secondly, such income must be chargeable to tax.
For example, if the Assessing Officer has information about a transaction of large cash deposit by the assessee with his bank, by virtue of this information alone, proceedings cannot be initiated unless the source of such income is unknown, and the Assessing Officer, after due application of mind, finds that it is an income chargeable to tax.

Escaped Assessment:
After determining the tax chargeability of such income, the information must suggest that such income is unknown or undeclared and has not been assessed.

From the above, it can be understood that both conditions must be satisfied, and the source and nature of such information should be between Clause (i) to (v) of the Explanation 1 of Section 148. Therefore, for the purpose of "information" under Section 148, the term "information" must not be construed in a literal or general way but in a more narrow and specific way, subject to the conditions provided under section 148 of the Act.

Section 148A: Conducting Inquiry, Providing Opportunity before Issue of Notice under Section 148

Section 148A of the Act lays down the procedural requirements that the Assessing Officer must fulfill before issuing any notice under Section 148. It includes the following steps:
  1. Conduct any inquiry, if required, with the prior approval of the specified authority, with respect to the information suggesting escapement of income chargeable to tax
  2. Provide an opportunity of being heard to the assessee, with the prior approval of the specified authority, by serving upon him a notice to show cause within a specified time, being not less than seven days and not exceeding thirty days from the date on which such notice is issued, or such time as may be extended by him on the basis of an application in this behalf, as to why a notice under Section 148 should not be issued.
  3. Consider the reply of the assessee furnished, if any, in response to the show-cause notice.
  4. Decide, on the basis of material available on record including the reply of the assessee, whether or not it is a fit case to issue a notice under Section 148, by passing an order with the prior approval of the specified authority.
Section 148A acts as an additional checkpoint before the initiation of proceedings under Section 148. The section requires the AO to conduct an inquiry, if necessary, with the prior approval of the specified authority. This inquiry is conducted regarding the information suggesting escapement of income chargeable to tax. The term "if required" does not confer any discretionary power upon the AO but is intended to ensure that the inquiry is necessary based on legal requirements or the nature of the information, considered from an objective perspective.

The provisions of Section 148A are mandatory and not merely directory. Failure to comply with these requirements would result in a jurisdictional defect, rendering the reassessment proceedings perverse and contrary to principles of natural justice.

Ashish Agarwal Judgment and its Impact
In the recent judgment of Union of India vs Ashish Agarwal (2022) 138 64 (SC), the Hon'ble Supreme Court provided important insights into the procedural changes introduced by the Finance Act, 2021, regarding income escaping assessment. The court examined the scope and applicability of the new provisions and shed light on the intent behind the amendments.

The key issue before the court was whether the Assessing Officer's failure to comply with the mandatory procedural requirements laid down in Section 148A would render the reassessment proceedings invalid.

The court upheld the view of various High Courts that the new provisions under Section 148A are not merely directory but are mandatory in nature. Non-compliance with these requirements would result in a jurisdictional defect, thereby rendering the reassessment proceedings contrary to law.

After considering all the aspects, the Apex Court took the view that while issuing notice under the old Section 148, the revenue commited a bona-fide mistake in interpreting the law and under Article 142 of The Constitution the apex court held that the impugned notices issued under section 148 shall be deemed to be show cause notice notices issued under Section 148A(b) of the Act.

The Supreme Court emphasized the importance of the procedural safeguards provided under section 148A and the limitation provided under section 149 of the Act, thus protecting the rights of taxpayers and ensuring a fair and transparent assessment process.

Furthermore, the court clarified that the Assessing Officer must obtain prior approval from the specified authority before conducting the inquiry. The requirement of prior approval acts as a check on the arbitrary exercise of power by the Assessing Officer and ensures that there is an objective assessment of the information suggesting escapement of income.

The Ashish Agarwal judgment reaffirms the significance of following the prescribed procedure under Section 148A for initiating reassessment proceedings. It serves as a reminder to the tax authorities that strict adherence to the procedural requirements is crucial to maintain the integrity of the assessment process and safeguard the rights of taxpayers.

The introduction of Section 148A and the amendments to Section 147 by the Finance Act, 2021, have brought about significant changes in the procedure for income escaping assessment. These changes aim to streamline the process, provide clarity, and ensure that taxpayers' rights are protected.

The Ashish Agarwal judgment by the Supreme Court has reinforced the mandatory nature of the procedural requirements under Section 148A. It highlights the importance of conducting an inquiry, providing an opportunity of being heard, and obtaining prior approval before issuing notices under Section 148. Failure to comply with these requirements can result in the invalidation of reassessment proceedings.

Taxpayers can take solace in the fact that the court's decision reaffirms their right to a fair and transparent assessment process. It is incumbent upon the tax authorities to strictly adhere to the prescribed procedures and ensure that their actions are in line with the principles of natural justice.

Overall, the changes brought about by the Finance Act, 2021 and the judicial pronouncements, such as the Ashish Agarwal judgment, have set the stage for a more robust and accountable process for assesment of income, which has escaped assessment. These developments contribute to building trust between taxpayers and tax authorities and foster a conducive environment for effective tax compliance.

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