Introduction
The reassessment provisions under the Income-tax Act, 1961 (‘IT Act’) have been a focal point of legislative reform and judicial scrutiny. The framework for reassessment has undergone several amendments over the years, reflecting the government’s intent to balance the interests of the Revenue and the rights of taxpayers. The Finance Act (‘FA’) introduced the most recent overhaul in 2021 and was modified by the Finance Bill (‘FB’) in 2024, effective from 01.09.2024. These changes, which impact ss. 148, 148A, 149, and 151 of the IT Act aim to streamline reassessment proceedings and reduce litigation. This update examines the pre- and post-amendment frameworks, highlighting the significant changes and their implications.
The Pre-Amendment Framework (Effective from 01.04.2021)
Prior to the amendments introduced by the FB, the reassessment procedure was governed by the provisions laid down in the FA. This framework significantly altered the traditional approach to reassessment, primarily by introducing s. 148A, which mandated a preliminary inquiry before issuing a notice under s. 148 of the IT Act.
Under the pre-amendment regime, the assessing officer (‘AO’) initiated the reassessment process by issuing a notice under s. 148 of the IT Act. This notice was contingent upon the AO having ‘information’ that suggested income had escaped assessment.
S. 148A of the IT Act required the AO to conduct an inquiry, allowing the assessee to present their case before issuing the notice. The AO was then required to pass an order under s. 148A(d) of the IT Act, either accepting the assessee’s explanation and dropping the reassessment proceedings or rejecting the explanation and proceeding with issuing the notice under s. 148 of the IT Act. The time limits for issuing reassessment notices were also revised in the FA. Generally, notices could be issued within three years from the end of the relevant assessment year, but in cases where the escaped income was likely to exceed Rs. 50 Lakhs, the limit was extended to ten years.
The Post-Amendment Framework (Effective 01.09.2024)
The FB introduced further refinements to the reassessment provisions, reflecting the legislature’s intention to address the challenges and ambiguities that persisted under the FA framework. The key amendments introduced by the FB can be summarised as follows:
Issuance of Notice under s. 148 of IT Act: The amended s. 148 of the IT Act requires the AO to issue a notice to the assessee, accompanied by a copy of the order passed under s. 148A (3) of the Act. This notice must be issued within a specified period, not exceeding three months from the end of the month in which the order under s. 148A (3) of the IT Act was passed. The existence of ‘information’ suggesting that income has escaped assessment remains a prerequisite for issuing the notice, consistent with the pre-amendment regime.
Approval for Issuance of Notice: In cases where the AO has received information under s. 135A of the IT Act, prior approval from the specified authority is mandatory before issuing the notice. While the pre-amendment provisions required approval from senior officers such as the Principal Commissioner of Income Tax (PCIT), the FB amendments limit the approval authority to the rank of Additional Commissioner of Income Tax (ACIT) or equivalent. This change is intended to expedite the reassessment process by reducing administrative delays.
Substitution of S. 148A of the IT Act: Procedure Before Issuance of Notice Under S. 148 of the IT Act
The substituted s. 148A of the IT Act introduces a pre-notice procedure for issuing a notice under s. 148 of the IT Act. As per the provision, upon having information suggesting that income chargeable to tax has escaped assessment, the AO must serve a show cause notice to the assessee, providing an opportunity to be heard before issuing a notice under s. 148.
Further, the assessee is allowed to furnish a reply to the show cause notice within a specified period. Based on the material available on record and the assessee’s reply, the AO must determine whether it is a fit case to issue a notice under s. 148, with prior approval from the specified authority.
Substitution of S. 149 of the IT Act: Time Limits for Issuance of Notice
The revised s. 149 of the IT Act sets new time limits for issuing notices under ss. 148 and 148A of the IT Act. The time limits for issuing reassessment notices have been revised to three years and three months from the end of the relevant assessment year for general cases and five years and three months for cases involving escaped income exceeding Rs. 50 Lakhs. This represents a significant reduction from the ten-year limit previously allowed in specific cases, thereby providing greater certainty to taxpayers.
Further, show cause notices under s. 148A of the IT Act cannot be issued if more than three years have elapsed from the end of the relevant assessment year unless the escaped income amounts to or is likely to amount to Rs. 50 lakh or more, in which case, the period is extended to five years.
Amendment to S. 152 of the IT Act: Transitional Provisions for Pending Cases
The amendments to s. 152 of the IT Act introduce transitional provisions for cases involving search, requisition, or survey conducted before 01.09.2024:
Pre-Amendment Provisions: For searches, requisitions, or surveys conducted before the effective date, the provisions of ss. 147 to 151, as they stood before the Finance (No. 2) Act, 2024, will continue to apply.
Pending Notices and Orders: For notices issued or orders passed before 01.09.2024, the assessment, reassessment, or recomputation will be governed by the provisions as they stood prior to the Finance (No. 2) Act, 2024.
Conclusion
The FB has significantly revamped the reassessment provisions of the IT Act. These proposed amendments, effective from 01.09.2024, build upon the amends introduced by the FA, aiming to reduce litigation, enhance taxpayer rights, and improve administrative efficiency. The revised framework introduces stricter time limits, a clearer definition of ‘information’, and a streamlined approval process, all of which contribute to a more balanced reassessment procedure. However, the success of these amendments will depend on their implementation and the ability of the Revenue to adapt to the new requirements. As the amendments come into effect, taxpayers and the Revenue must navigate the new framework carefully to ensure compliance and avoid disputes.
Authored by Onam Singhal, Chartered Accountant at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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