interpretation of reopening of assessment / reassessment

 

interpretation of reopening of assessment / reassessment

INTRODUCTION

CBDT by exercising their powers u/s 119 of the Income-tax Act,1961 (Act), with the objective of easing the process of selection of cases for issue of notices related to assessment reopening u/s 148 of the Act, directed that there are specified categories of cases that can be considered as ‘potential cases’ for taking action u/s 148 of the Act for the Assessment Year from 2013-14 to 2017-18 by the Jurisdictional Assessing Officer (JAO). These are as follows –

1. Cases relating to Audit Objections (Revenue/Internal) requiring action by the department u/s 148 of the Act.
2. Cases filed on information received from any other Government Agency/Law Enforcement Agency requiring action u/s 148 of the Act.
3. Some potential cases formed on the basis of –

(a).Reports on investigation provided by the Directorate of Income-tax.

(b) Reports on investigation of Directorate of Intelligence & Criminal Investigation.

(c) Cases from Non-Filer Management System (NMS) & other cases as flagged by the Directorate of Income-tax (Systems) as per risk profiling;

4. Cases based on the information derived from field survey action, requiring action u/s 148 of the Act.

5. Cases based on the information provided by any Income-tax authority requiring action u/s 148 of the Act with the approval of concerned Chief Commissioner of Income Tax.

It is to be noted that, any other case, except for those mentioned above, shall not be considered for taking action u/s 148 of the Act by the JAO.

It is further clarified that any action u/s 148 shall be taken by the Assessing Officer, after forming a reasonable basis that the respective case involves tax evasion or income chargeable to tax has been escaped and such reasons to believe shall be recorded and the required sanctions be obtained from the requisite authorities.

However, these instructions shall not apply to the Central charges and International Taxation charges for which separate instructions have been prescribed.

The Income Tax Department has been provided with the power to reassess an individual’s previously filed income tax returns, under Section 147 of the Income Tax Act, 1961.

But for such reassessment, the Assessing Officer is required to perform the pre-defined criteria by sending a notice under section 148 for income Escaping Assessment.

UPDATES IN UNION BUDGET 2021

In the Union Budget 2021, CBDT proposed to reduce the time limit to re-open income tax assessment cases from 6 years to 3 years.

However, a period of 10 years be provided, for reopening of assessment, where there are reasons to believe that the case involves, concealment of income of more than Rs 50 lakh.

ACTIVITIES REQUIRING NOTICE UNDER SECTION 148

An individual, who is filing their ITR in India, shall receive a notice under section 148, where the assessing officer has reasons to believe that the income disclosed by such an individual might have been escaped, to involve in tax evasion.

For the cases, where 4 years succeeding the relevant assessment years has elapsed, the assessment under Section 143(3)/ 148 can be made, provided the following three conditions are met –

1. Reason to believe, as specified by the assessing officer, is based on the tangible material.
2. Reopening of assessment, is not made, merely on the basis of change of opinion.
3. The assessee failed to disclose true and fair material facts, necessary for him/her assessment.

Generally, where the assessing officer comes some material information disclosed fully and truly by the assessee, in their ITR, the AO may have prima facie reason to believe that income chargeable to tax has escaped assessment, on the basis of that material information.

However, the respective assessee can always raise the issue providing information that the AO was in receipt of such material facts at the time of original assessment.

The AO has the authority to receive information from any other sources including information/ material from the DIT (Investigation), which was not available at the time of original assessment.

Where the AO has to establish live link, with the information/ material provided in the return of income and/ or details filed by the assessee during original assessment, he needs to have reasonable belief that the assessee failed to disclose fully and truly all material facts necessary for his assessment.

Thus, the AO has to examine not only material facts, whether disclosed or not, but whether the same were disclosed fully and truly, since the disclosure of all material facts fully, in no matter means that it was disclosed truly also.

REASONS TO BELIEVE

PROVISIONS

1. Reasons relate to cause like a document, statement, any confirmation from a third party etc while belief relates to the conclusion, that totally depends from person to person. Thus, we can say that the reason to believe is totally different from the reason to suspect or to have an opinion.
2. Reopening of assessment shall only involve the belief of the Assessing Officer and not of any CIT or ex-officer of the department. This clause was clarified in the case of Hyoup Food and Oil Industries Ltd. vs. ACIT (2008).
3. Such belief should be based on matters relating to information provided on record, and was available with the Assessing Officer, when the reason was recorded.
4. There is a need to provide a live link between material obtained and formation of belief, as clarified in the case of ITO v Lakshmani 103 ITR 437 (SC).
5. Most importantly, the information used to form reason to believe, shall be available with the AO, at the time of reopening of the assessment and does not involve any information to be received subsequently. This matter was disclosed in the case of CIT Vs Smt. Paramjit Kaur 311 ITR 38 (P&H).
6. Apart from above rules, reopening will be valid, only if there is some new tangible material available, and the assessment is reopened after the expiry of 4 years from respective AY.

EXCLUSIONS FROM REASON TO BELIEVE

1. In the matter of ACIT Vs. Dhariya Construction Co. (2010) 328 ITR 515 (SC), it was clarified that the opinion of the DVO cannot be termed as the information for the purpose of reopening assessment under Section 147 of the Act.
2. Any sought of fishing inquiries, cannot be termed as reasons to believe, as clarified in the matter of Ajanta Pharma Ltd. v. ACIT (2004) 267 ITR 200.
3. Any sought of unaccounted expenditure on renovation of premises at the time of survey cannot be termed as the reason to believe that such discrepancies existed in earlier years as well. The same was held in the matter of CIT v. Gupta Abhushan (P) Ltd. (2008) 312 ITR 166 (Del).
4. Where the information is derived by applying one of the different legally permissible methods to assess larger income, is also not acceptable, provided in the matter of CIT v. Simon Carves Ltd.105 ITR 212 (SC). Eg. Calculation Of ALP.
5. Any statement made by an unconnected person, shall also be invalid. Reference in case of Praful Chunilal Patel vs. M.J. Makwana, ACIT (1999) 236 ITR 832 (Guj).
6. Cases where the intimation is passed under section 143(1), the authority has no right to reopen the case for scrutinizing the return or verification of the expenditure. The same was clarified in the case of Inductotherm (India) v. DCIT (2013) 356 ITR 681 (Guj).
7. Any notice received, enquiring about the source of funds for purchasing flat by assessee, shall not constitute a reason to issue notice.
8. Intimation or reassessment cannot be reopened without the availability of fresh material.
9. Reason to believe having different meanings under section 143(3) & 143(1), are invalid.
10. Any information relating to mismatch of Income as per TDS Certificates, is also not a valid reason.
11. Reopening of assessment, solely on the basis of objections raised by the audit party, without application of mind by the AO is not valid.
12. Any source of information, involving opinion of audit party on a point of law, shall not be a valid source, as clarified in the matter of Indian & Eastern Newspaper Society v. CIT, (1979) 119 ITR 996.
13. No reassessment be ordered on the basis of Tax Audit Report/Accounts/Transfer pricing report as they do not constitute a valid new tangible material. The same was discussed in the case of CIT Vs Modipon Ltd., reported in 2011 334 ITR 106.

VALID REASON TO BELIEVE

1. Any sought of material unearthed during survey performed by the authority, can be the basis of reassessment, as provided in the case of Lata Chouhan Vs. ITO, (2010) 329 ITR 400 (MP).
2. Any decision of the High Court would constitute valid information and the same could be used for the initiation of reassessment proceeding. This was held in the matter of Income Tax Officer Vs. Saradbhai M. Lakshmi, (2000) 243 ITR 1.
3. Reopening of the assessment on the basis of finding of fact, made on the basis of the fresh materials in the course of assessment in any subsequent assessment year is valid. This was held by the Supreme Court, in the case of EssEss Kay Engineering Co. P. Limited Vs. CIT, (2001) 247 ITR 818.

Thus, from the above information on reasons to believe, we can make out that for a valid reopening of assessment, it is one of the core ingredients required. There is a requirement of a new tangible material, and shall not be merely a change of opinion. There is a procedure to be followed to systematically perform and produce the reasons to believe. The procedural requirement includes the “Recording of Reasons”, “Requesting for reasons and disposal of its objection”.

Where the proof supporting the belief of the AO is available, the same be recorded in writing and be sent to the individual under section 148. Some facts or new documents are required evidencing the escaping of income during the original assessment. Where such new information or documents is available with the AO, he has the full authority to take action against such assessee under section 147 & 148.

NOTICE ISSUING AUTHORITY FOR ASSESSMENT REOPENING

As per Section 151(1) of the Income Tax Act, 1961, no notice be issued under section 148, by an Assessing Officer, after the expiry of four years from the end of relevant AY, provided the Principal Chief Commissioner or Principal Commissioner is satisfied, that the reason to believe recorded by the AO, is fit and valid under the law.

In case, the above requirement by the AO is not fulfilled, then the AO has no right to issue notice under section 148, if he is below the rank of a Joint Commissioner, provided the Joint Commissioner is satisfied, on reasons recorded by such AO.

For successful and valid reasons, the AO shall apply his mind and make his own findings rather than, relying on others, or using frivolous information received from any department. Apart from this, a valid reason shall be drafted appropriately indicating the valid Reason to Believe.

TIME LIMIT FOR ISSUANCE OF NOTICE UNDER REASSESSMENT

It is clear from the above discussion, that where the provisions related to issuance of notice are not fulfilled, the notice shall be invalid. Thus, any reassessment under an invalid notice, shall be declared invalid. Section 153 specifies the time limit within which such reassessment be completed. As per the section, any reassessment relating to Section 148 of the Income Tax Act, shall be issued within a period of 4 years from the end of relevant AY, and the same shall involve escaping of income up to INR 1 lakh.

Where the case involves escaping of income exceeding Rs 1 lakh, the notice under the said section shall be issued within a period of 6 years from the end of relevant AY, subject to the fulfilment of provisions contained in section 151.

Similarly, the notice under section 148 could be served within a period of 16 years from the end of relevant AY, where the escaping of income relates to assets located outside India. Also, where the assessment has been completed under section 143(3) or 147, no further notice for reassessment be issued, after expiry of 4 years from end of relevant AY, provided the income chargeable to tax has escaped assessment for such AY due to failure on assessee’s part to file the return under section 139 or 142 or 148 and in case where the assessee fails to disclose the material facts, fully and truly, in the original assessment.

TIME LIMIT FOR COMPLETION FOR REASSESSMENT

It is to be noted that every assessment, opened under any of the above sections, is required to be completed and closed, within 1 year from the end of the financial year in which notice is served. However, the said period is extended to 2 year, where any reference is made to TPO u/s 92CA.

REPLY TO NOTICE WHEN U/S 148 REASSESSMENT

Every assessee is advised not to take any notice lightly. Where any notice is received under section 148, the following points be taken care of –

1. The first thing is to check the notice for reasons to believe, recorded by the assessing officer, which is the basis for issuing such notice under section 148. Where, no reason to believe is provided in the notice, the assessee is required to request the assessing officer to send a copy of the recorded reasons.
2. Where the assessee is satisfied with reasons to believe, they should file the revised return at the earliest and send the copy of the same, to the assessing officer.
3. While filing revised returns in response to notice issued under section 148, ensure that proper due diligence is performed and all the income and expenses be carefully disclosed.
4. In case, the assessee is not satisfied with the reasons provided by the assessing officer for opening assessment under section 147, then they could challenge the validity of such notice before the assessing officer or higher authorities.
5. Where the notice is challenged and the assessee wins the case, the Court would halt the assessment proceedings. However, if the case goes against them, the assessing officer could proceed with the reassessment.

FAQ’S ON REASSESSMENT

Q.: Can any further claims be filed by the assessee during the reassessment?

Earlier, it was in practice that the income for purposes of reassessment cannot be proceeded with income beyond that originally assessed. Thus, new claims or deduction were not allowed in reassessment proceedings.

However, in the case of Vishwanath Products (2008) 117 TTJ 549, it is held that a fresh deduction can be claimed, provided, it does not reduce the income below the originally assessed income.

Q.: Can audit objections be a valid reason for reopening of assessment by the AO?

As discussed above, any opinion made by the AO, based on the opinion of the audit party, is not a valid source of information and the same was held by the Supreme Court in the matter related to Indian & Eastern Newspaper Society v. CIT, (1979) 119 ITR 996.

However, it was further clarified that the audit note could be valid information, provided the same is not regarded as reason to believe by the AO without application of his mind. This provision was clarified in the case of P. V.S beedies P Ltd- 237 ITR 13(SC).

Q.: Can any retrospective amendment be a valid reason to reopen the assessment?

Where the reassessment is made within 4 years after the end of relevant assessment year, retrospective amendment is a valid reason for reopening the assessment, but where the reassessment is made after the expiry of 4 years, the same is not allowed.

Q.: What are some of the tax management issues to be considered during the reassessment proceedings?

• Every assessee is advised to file their revised return in respect of notice u/s 148 on a timely basis, otherwise it will authorize the AO to reopen the assessment, even after the expiry of 4 years from the end of relevant AY.
• Another important thing is that the copy of reasons recorded by the AO, must be obtained first by the assessee, then only proceeds with the reassessment proceedings. Where the A.O. is not willing to give reasons, then the assessee is required to provide a continuous reminder to AO to provide the reasons.
• After receiving the reasons, read them carefully and raise objections in case the reassessment is based on AIR information and bogus purchases/sales.
• Apart from this, the assessee is also advised, to take a copy of inspection of assessee’s file, by paying nominal fee of Rs.50/- before objecting reasons recorded, to have an idea about the documents available in the file with A.O.

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