New Reassessment procedure under section 147 – “Reason to believe” Vs. “Information”
Finance Act, 2021 made the existing procedure of reassessment under section 147 of the Income Tax Act (‘Act’) completely redundant by substituting it with a new reassessment procedure. Memorandum Explaining the Finance Bill, 2021 makes it amply clear that such changes are killing two birds with one stone viz. 1. Less Litigations and 2. Ease of Doing business for the taxpayers. One of the foundational change in reassessment procedure is scrapping of “Reason to believe” concept and introducing technology driven concept of “information”. This article has attempted to analyse the impact of such change on the entire reassessment procedure.
“Reason to believe” was the basic foundation of old reassessment procedure. The Assessing officer, based on “Reason to believe”, was required to form a prima facie opinion that certain taxable income has escaped assessment. This very aspect of reassessment procedure was highly prone to litigations wherefore a number of judgements have been delivered by Hon’ble Supreme Court, various High Courts and ITATs. Some of these judgements are enumerated below:
1. ACIT Vs. Rajesh Jhaveri Stock Brokers Private Limited [Civil Appeal 2830 of 2007] – Hon’ble Supreme court held that at initiation stage, what is required is reason to believe, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief.
2. CIT Vs. Atul Jain  299 ITR 383 (Delhi) – Hon’ble Delhi High Court held that Assessing officer, based on information available with him, must record reasons which warrant the holding of belief that the case should be reopened.“In United Electrical Co. P. Ltd. v. CIT  258 ITR 317, this court considered the entire issue afresh. It was observed that the expression “reason to believe” occurring in section 147 of the Act is crucial. Reference was made to Bazva Abhai Singh v. Deputy CIT  253 ITR 83 (Delhi), wherein it was observed that “reason to believe” postulates a foundation based on information and a belief based on reasons. In so far as “information” is concerned, a Division Bench of this court held in L. R. Gupta v. Union of India  194 ITR 32 that (page 322) “The expression ‘information’ must be something more than a mere rumour or a gossip or a hunch.”
Of course, this was in the context of section 132 of the Act but as held in United Electrical Co. P. Ltd.  258 ITR 317 (Delhi) the logic is equally applicable to a case under section 147 of the Act. After a foundation based on information is set up, there must still be some reasons which warrant the holding of a belief so as to necessitate the issuance of a notice under section 148 of the Act.”
3. SMCC Construction India Ltd. Vs. ACIT  38 taxmann.com 146 (Delhi) – Hon’ble Delhi High court held that “reason to believe” indicate that the belief must be that of a reasonable person based on reasonable grounds emerging from direct or circumstantial evidence and not on mere suspicion, gossip or rumour.
4. CIT Vs. Kelvinator of India Ltd.  187 taxmann 312 (SC) – Hon’ble Supreme Court held that mere change of opinion cannot be reason to reopen the case. The assessing officer has no power to review. He should have tangible material to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of belief.
5. ITO Vs. Purushottam Das Bangur  90 taxmann 541(SC)- Hon’ble Supreme Court held that for taking action under Section 147 of the Act (i) ITO must have received information and (ii) in consequence of such information he has reason to believe that income chargeable to tax has escaped assessment.
From the above cited case laws, it can be easily inferred that time and again Courts have ruled that mere availability of any information/ evidence/ tangible material is not enough to reopen the case for reassessment, in addition, the assessing officer must apply his mind on such information/ evidence/ tangible material and get a logical reason so as to form a prima facie (not conclusive) opinion that income has escaped assessment. However, Finance Act, 2021 has completely thrown away this approach and introduced the concept of “Information”. Proviso to New Section 148 of the Act reads as follows:
“Provided that no notice under this section shall be issued unless there is information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year and the Assessing Officer has obtained prior approval of the specified authority to issue such notice.
Explanation 1.—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,—
- any information flagged 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;
- any final objection raised by the Comptroller and Auditor General of India 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.”
The above provisions clearly show that assessing officer merely requires “information which suggests that taxable income has escaped assessment”. More so, he is not required to record any reasons so as to how such “information” suggests that taxable income has escaped assessment because Explanation 1 to new section 148 gives a deeming fiction to not just “information” rather it gives a deeming fiction to entire phrase “information which suggests that income chargeable to tax has escaped assessment”. In other words, where there was a lot of ambiguity on what constitute “Reason to believe” in earlier procedure, concept of “information” is quite well-defined. Explanation 1 covers two types of information viz. information flagged in accordance with Risk management strategy formulated by Board and final objection raised by CAG.
With respect to second type of information (any final objection raised by the CAG to the effect that the assessment in the case of the assessee has not been made in accordance with the provisions of this Act), it is pertinent to note that any action of assessing officer in consonance with the audit objection raised by CAG will amount to change in opinion of the assessing officer in application of any particular provision of the act. In the erstwhile section 148 of the Act, the cases could not be reassessed merely on the ground of “Change in opinion”. Hon’ble Supreme court in case of Indian & Eastern Newspaper Society Vs. CIT  2 taxmann 197 (SC) held that CAG perform administrative or executive functions. CAG cannot be attributed the power of judicial supervision that it can pronounce the law. The opinion rendered by the audit party in regard to the law cannot add to or colour the significance of such law. The true evaluation of the law in its bearing on the assessment must be made directly and solely by the ITO. Further, it was held that the opinion of internal audit party of the Income tax department or CAG on a point of law cannot be regarded as “information” within the meaning of section 147 of the Act.
Hence, one may say that final audit objection by CAG, even though not form “information”, however deemed as “information” by Explanation 1 to new section 148 of the Act.
Further, Finance Act, 2021 introduced a new section 148A setting out a procedure which is required to be followed before issue of notice under section 148. Such procedure can be summarized as follows:
1. Assessing officer shall conduct any inquiry, if required, with the prior approval of specified authority, with respect to the information which suggests that the income chargeable to tax has escaped assessment.
2. Provide an opportunity of being heard to the assessee with the prior approval of specified authority
3. Consider the reply of assessee furnished, if any
4. Decide on the basis of material available on record including 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 specified authority.
The above procedure is required to be followed before issue of notice under section 148 of the Act. The Assessing officer having a bag containing “information which suggests that taxable income has escaped assessment” in terms of Explanation 1 of new Section 148 of the Act, moves to newly inserted section 148A of the Act. Now section 148A requires assessing officer to conduct an enquiry with respect to such information. It would be giving you the essence of “Reason to believe” era wherein assessing officer had to apply his mind on the information/ evidence/ tangible material to form prima facie opinion whether taxable income has escaped assessment or not. But hold on, sec. 148A of the Act does not mandatorily require assessing officer to conduct enquiry. Use of the words “if required” is vague. No cases have been specified by the new provision wherein assessing officer has to conduct enquiry with respect to “information suggesting income chargeable to tax has escaped assessment”. It will lead to a subjective approach on the part of income tax authorities – where they may conduct enquiry in one case but may not in other.
Moreover, new section 148A of the Act requires that opportunity of being heard should be given to the assessee before issue of notice under section 148 of the Act. Earlier, relying on procedure dictated by Hon’ble Supreme Court in case of GKN Driveshafts (India) Limited Vs. ITO [Appeal no. 7731 of 2002], notice under section 148 of the Act requiring to file return of income was issued and post filing of such return of income, the assessee could seek the “reason to believe” based on which assessing officer had reopened the case. But after insertion of section 148A, it seems that entire fact-finding exercise will take place even before issue of notice under section 148 of the Act. If the taxable income has escaped from assessment, then assessing officer shall pass an order that it is a fit case for reassessment and issue notice under section 148 of the Act. Now, if assessee agrees with the assessing officer’s contention, he can show that unassessed income in the return and duly pay tax. In such case, the addition by assessing officer will be ‘Nil’. However, there is a tweak.
Explanation to new section 147 of the Act reads as follows:
“Explanation.—For the purpose of assessment or reassessment or recomputation under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, irrespective of the fact that the provisions of section 148A have not been complied with.”
The erstwhile Section 147 of the Act read as follows:
“If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned”
Upon careful reading of both the provisions, one can notice that in erstwhile section 147 of the Act if taxable income escaping assessment for which assessing officer issued notice under section 148 of the Act gets assessed, then only, assessing officer could also assess other taxable income which has escaped assessment in the relevant year for which he had not issued notice under section 148 of the Act and comes to his notice in subsequent proceeding. The same contention was taken by Hon’ble Bombay High Court in case of CIT Vs. Jet Airways (I) Ltd.  195 taxmann 117 (Bombay) which held that the words ‘and also’ cannot be ignored. The words ‘and also’ cannot be read as being in the alternative. On the contrary, the correct interpretation would be to regard these words as being conjunctive and cumulative.
However, new section 147 of the Act nowhere uses the word “also”. Resultantly, the assessing officer would have excessive power to do reassessment on any issue for that year irrespective of the fact that addition of income for which “information” was raised has been done or not.
In conclusion, unlike old reassessment procedure where meaning of “Reason to believe” was subject to litigations, it a good step that basis for reopening the case has been well-defined by new provisions. Further, since there is no compulsion that assessing officer must conduct enquiry with respect to the “information suggesting income chargeable to tax has escaped assessment”, it may result into reopening of plethora of irrelevant cases and causing hardship to the taxpayers. To reduce such instances, CBDT must come with a robust technology having strong logics/ rules which correctly flag “information suggesting income chargeable to tax has escaped assessment.”