Practical Guide to Dealing with a notice for Reopening of Assessment Proceedings under IT Act 1961

Reopening of an assessment concluded under section 143(1) or even under section 143(3) (Scrutiny Assessment) of Income Tax Act, 1961 is a dreaded nightmare of any assessee.

While there are many articles on the subject on internet, author seeks to elucidate the concept in brief and in a simple language with many pointers having practical applicability that could be applied in majority of situations. In a separate sample reply file being published simultaneously, titled as "Sample Reply to s.148A Notice", an elaborate sample reply to an actual notice u/s.148A is shared for readers benefit while removing the details and specifics from the same to maintain confidentiality.

Regime Prior to introduction of s.148A under ITA, 1961 and changes brought about by Act No. 13 of 2021 w.e.f. 01.04.2021

Major changes were incorporated in provisions pertaining to reopening of assessment; provisions of previously existing sections from 147 to 151 were superseded with amended sections 147, 148, 149, 150 and 151 and s.148A was introduced newly with effect from April 1, 2021.

Prior to introduction of s.148A, the assessing officer could issue a notice u/s.148 asking the concerned assessee to file his return of income for a particular assessment year falling within the time limit of four, six or sixteen years applying to different situations as prescribed under the then existing s.149 of ITA, 1961 without disclosing the reasons for issuing such a notice to reopen assessment. Assessee could file an application before the AO for sharing of reasons to reopen and satisfaction arrived at by the AO for issuing notice u/s. 148 of ITA, 1961. In terms of court made law, after getting the reasons from AO, assessee could file objections against such reasons recorded by the AO and AO was obligated to dispose off the same through speaking order.

Many litigations used to happen surrounding the issues of non-supply of reasons, satisfaction notes or sanctions and w.e.f. 01.04.2021 s.148A was introduced under ITA, 1961. S.148A essentially provides that before issuing a notice u/s.148 of ITA, 1961, the AO shall, if required conduct an inquiry with respect to information that suggests that income chargeable to tax has escaped assessment, provide an opportunity of being heard to assessee through show cause notice, consider the reply of assessee and based on material available on record including the reply of the assessee, decide if it is a fit case to issue a notice u/s.148 of ITA, 1961 with prior approval of specified authority.

W.e.f 01.04.2021 s.149 was also amended rewriting the time frame within which notice could be issued. S.149 now provides that notice could be issued u/s.148 within three years only unless the AO has in his possession the books of accounts or other documents or evidence revealing that income chargeable to tax and represented in form of an asset or expenditure in respect of a transaction or in relation to an event or occasion or an entry or entries in the books of account, in which case notice could be issued within ten years from the end of the relevant assessment year.

S.147 was also amended. While erstwhile s.147 prescribed that AO should have reason to believe that income chargeable to tax had escaped assessment, amended provisions simply state that if income chargeable to tax has escaped assessment for any assessment year, the same could be reassessed or assessed subject to the provisions of s.148 to s.153. Removal of phrase "reason to believe" from s.147, in authors opinion, requires establishment of escapement of income by AO as a matter of fact beyond a purely subjective satisfaction about reason to believe.

Typical Notice u/s.148A of ITA, 1961

A typical notice u/s.148A normally contains an assertion of the AO about he being in possession of information revealing escapement of income e.g. "Whereas I have information which suggests that income chargeable to tax for the Assessment year ABCD-XY has escaped assessment within the meaning of s.147 of ITA, 1961, details whereof are enclosed with this notice along with supporting documents." and assessee will be required to show cause within specified time limit as to why, in view of details in enclosure/ attachment, a notice u/s.148 should not be issued for a given assessment year.

How to Respond to the Notice

As the name of the article suggests, the idea is to provide a practical guide to responding to an SCN u/s.148A of ITA, 1961 and I therefore do not seek to elaborate in detail about what is held in what judgments; I rather seek to proceed to the requirements for reopening of assessment through reference to sections or judgments and share my points of view on possible pointers for reply to and SCN u/s.148A.

Requirements for reopening of Assessment

Reopening of assessment is not to be analysed simply through reference to s.148A or s.148 in isolation; rather it must be appreciated that provisions of s.147 to s.151 are required to be looked at as a complete code as regards reopening of assessment and such provisions must be read together.

Requirements for reopening of assessment as emerging from reading of different provisions are detailed below:-

1. Assessment or reassessment can happen for a given assessment year, subject to provisions of s.148 to s.153 if income chargeable to tax has escaped assessment. (s.147)
2. Before making assessment u/s.147, AO shall serve on the assessee a notice, requiring him to furnish return of income within period specified in notice. (s.148)
3. The escapement of income must be established as a matter of fact as against the possibility in the form of subjective satisfaction of AO as regards "reason to believe" based on direct nexus between material in AO’s notice and formation of belief and thus greater burden of proof is on the department. (s.147- by virtue of absence of phrase "reason to believe")
4. No notice u/s. 148 could be issued unless there is information in terms of Explanation 1 to s.148 or a deemed information in terms of Explanation 2 to s.148 with the AO suggestive of income chargeable to tax having escaped assessment. (Proviso to s.148)
5. The information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment means,—

(i) any information 95[***] 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;

(ii) 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; or

(iii) any information received under an agreement referred to in section 90 or section 90A of the Act; or

(iv) any information made available to the Assessing Officer under the scheme notified under section 135A; or

(v) any information which requires action in consequence of the order of a Tribunal or a Court. (Explanation 1 to s.148)

6. Before issuing a notice u/s.148, AO shall conduct an inquiry, if required, with the approval of specified authority with respect to information suggesting that income chargeable to tax has escaped assessment. (s.148A(a))
7. AO must serve SCN upon the assessee of specified time limit asking him to show cause as to why a notice u/s.148 should not be issued. (s.148A(b)).
8. Service must be made in compliance to provisions of s.282 of ITA r/w rule 127 of Income Tax Rules, 1962.
9. AO must consider reply of assessee and material on record and decide by passing an order whether a given case is a fit case to issue notice u/s.148. (s.148A(c) and (s.148A(d))
10. Notice could be issued u/s.148 ( in case of information with AO suggesting that income chargeable to tax has escaped assessment) within three years only form the end of relevant assessment year. (s.149(1)(a))
11. Only if AO has in his possession:-

- the books of accounts or other documents or evidence
-revealing that income chargeable to tax and
- represented in form of an asset or expenditure in respect of a transaction or in relation to an event or occasion or an entry or entries in the books of account
- has escaped assessment and amounts to or is likely to amount to fifty lac rupees or more;
- he could issue a notice u/s.148 within up to ten years from the end of the relevant assessment year. (s.149(1)(b)).

12. For any notices for AY 2013-14 to 2017-18, escapement of income amounting to or likely amounting to fifty lac rupees or more must be represented solely in the form of an "Asset" and for any such income even if represented in the form of "expenditure in respect of a transaction in relation to an event or occasion or an entry or entries in the books of account", no notice could be issued for reopening of assessment as such phrase came to be inserted through Finance Act, 2022 w.e.f. 01.04.2022 only.
13. No notice u/s.148 could be issued at any time in a case for assessment year beginning before 01.04.2021, if a notice u/s.148 or s.153A or s.153C could not have been issued on said date on account of being beyond the time limit specified under relevant provisions as they stood before commencement of Finance Act, 2021. (Proviso 1 to s.149(1))
14. Notice must be issued with prior approval of Principal Commissioner or Principal Director or Commissioner or Director, if three years or less than three years have elapsed from the end of relevant assessment year. (s.151(i) r/w s.148 and s. 148A)
15. Notice must be issued with prior approval of Principal Chief Commissioner or Principal Director General or where there is no Principal Chief Commissioner or Principal Director General, Chief Commissioner or Director General, if more than three years have elapsed from the end of relevant assessment year.(s.151(ii) r/w s.148 and s. 148A).

DRAFTING OF A REPLY TO SCN U/S148A

Drafting of reply to the show cause notice is an exercise of response on facts specific to assessee’s case coupled with the aspect as to whether the requirements as pointed out above are met with.

The assessee should, upon receipt of a notice u/s.148A of ITA:-

1. Firstly check what is the information, which is in possession of the AO based whereupon he seeks to show escapement of assessment of income. If the information / material is not fully disclosed and it is a generic document titled as "Case Related Information Detail" or something else from insight portal that is shared by the AO along with the notice, assessee must demand full particulars of all material/ information and evidence in AO’s possession. If the full particulars of information are not given, submit the reply without prejudice to the contention that full particulars are not provided and therefore proceedings are happening in violation of principles of natural justice and in violation of provisions of s.148A itself.
2. Once the information/ material is fully provided, assessee should analyse whether the information /material is relevant and admissible for any purposes whatsoever in terms of Indian Evidence Act and accordingly deal with the same in your reply. E.g. department frequently seeks to rely upon loose sheet of papers / diaries obtained from one assessee to show cash payment from an otherassessee, however such loose papers/ diaries are not books of accounts maintained in regular course of business and therefore not relevant/ admissible at all.
3. Analyse if relevant and admissible material is actually suggestive of escapement of income and accordingly draft a reply considering whether it could be contended that AO could not have arrived at such a conclusion before conducting an inquiry as prescribed u/s.148A.
4. Analyse whether information provided is actually information within the meaning of s.148 and Explanation 1 to s.148 and accordingly deal with the information in the reply; if it is not the case, it could be contended that no notice u/s.148A could be issued.
5. Analyse further whether such relevant material establishes escapement of income as a matter of fact beyond the realm of probabilities based on subjective satisfaction of AO as regards reason to believe and deal with the notice considering said aspect.
6. In case of reopening having been sought for an Assessment year ended prior to 3 years of date of issuance of notice, analyse if the information/ material in possession is in form of books of accounts, other documents or evidence. If that is not the case, one should incorporate a submission in reply that assessment could not be reopened in terms of provisions of s.149(1)(b).
7. In case of reopening having been sought for an Assessment year ended prior to 3 years of date of issuance of notice, analyse if, pursuant to the information shared, income can be said to be represented in form of an asset or expenditure in respect of a transaction or in relation to an event or occasion or an entry or entries in the books of account. In case the income is represented in any other form, one should incorporate the submission in reply that assessment could not be reopened in terms of provisions of s.149(1)(b).
8. Also, one must keep in mind that if the notice is for any assessment year for up to 2017-18, income must be represented in form of an ASSET only and accordingly raise an objection in reply.
9. Carefully check up all the timelines in terms of s.149 of ITA read with Taxation and Other Laws (Relaxation of Certain Provisions) Act, 2020 and if the notice falls beyond time line, raise an objection accordingly.

What happens if you get a negative order u/s.148A(d) after consideration of your reply

In such a case, assessee has remedy of participating in assessment proceedings and deal with the matter through channel of faceless assessment, faceless appeal and appeal before ITAT or the assessee could challenge the very order of reopening of assessment and issuance of notice u/s.148 before the jurisdictional High Court by a writ petition under article 226 of the constitution of india. In such a petition, assesee could raise all grounds in reply and also take up the contentions as regards s.148 notice and s.148A(d) order having been issued with proper approval in terms of s.151 of ITA or otherwise and in case the assessee has not been able to participate in proceedings of s.148A by virtue of non-service of notice in terms of s.282 of ITA r/w 127 of Income Tax Rules, the said point could be taken up writ petition.

Author of this article: Adv. Ravish Bhatt, Solicitor, Senior Courts of England and Wales, ADIT, Chartered Institute of Taxation