Section 148 – Income Escaping Assessment (Reopening Cases)

Even after an Income Tax Return (ITR) has been filed and processed, or even if no return was filed by a person liable to do so, the Income Tax Department retains the power to reopen past assessments if it believes that certain income has "escaped assessment." This crucial power is enshrined in Section 148 of the Income Tax Act, 1961, often referred to as the provision for "reopening of assessment" or "reassessment."

The primary objective of Section 148 is to ensure that all taxable income is brought to tax, preventing tax evasion or under-assessment due to oversight, concealment, or insufficient disclosure by the taxpayer.

Significant amendments introduced by the Finance Act, 2021, have streamlined and rationalized the reassessment proceedings, focusing on providing greater clarity and reducing litigation.

What is Income Escaping Assessment?

Income is said to have "escaped assessment" if it should have been subjected to tax but has, for some reason, not been taxed or has been under-taxed. This can happen in several scenarios:

• No Return Filed: When a person who is liable to file an ITR has not filed it by the due date, and the Income Tax Department later discovers taxable income.
• Under-assessment or Incorrect Assessment: Even if a return was filed and processed, income is considered to have escaped assessment if:
  • Income chargeable to tax was understated or omitted from the return.
  • Income was assessed at a rate lower than the applicable rate.
  • Excessive relief (e.g., deduction, allowance, or set-off of loss) was granted.
  • Excessive loss or depreciation allowance was permitted.
• New Information Suggesting Escapement: The department now acts on "information suggesting that income has escaped assessment." This information can originate from various sources, including:
  • Information flagged by the department's sophisticated risk management strategy.
  • Audit objections.
  • Information received from other government authorities or law enforcement agencies.
  • Data analytics from sources like Form 26AS, AIS (Annual Information Statement), TIS (Taxpayer Information Summary), etc.

Example: Mr. Anil sold shares worth ₹1 Crore during a financial year, earning a significant long-term capital gain. He filed his ITR but inadvertently forgot to report this gain. The transaction, however, was reported by the stockbroker to the Income Tax Department through SFT (Statement of Financial Transaction). This mismatch constitutes "information suggesting income has escaped assessment."

The New Reassessment Procedure (Post-Finance Act, 2021)

The Finance Act, 2021, introduced a completely new and assessee-friendly procedure for reassessment, moving away from the more subjective "reason to believe" criterion. The process now primarily involves Section 148A and Section 148:

1. Step 1: Notice under Section 148A (Show Cause Notice):
   • The Assessing Officer (AO) must first issue a notice under Section 148A (with prior approval from the specified authority).
   • This notice explicitly states the "information suggesting that income has escaped assessment" and provides the assessee with an opportunity to show cause (explain) why a notice under Section 148 should not be issued.
   • The assessee is typically given 7 to 30 days to respond.
2. Step 2: Order under Section 148A(d) (After Considering Reply):
   • After receiving and considering the assessee's reply (or if no reply is submitted), the AO passes an order under Section 148A(d).
   • This order will either:
     • Drop the reassessment proceedings if the AO is satisfied that income has not escaped assessment.
     • Or, conclude that income has indeed escaped assessment and that it is a fit case to proceed with reassessment.
3. Step 3: Issuance of Notice under Section 148:
   • Only if the AO passes an order to proceed under Section 148A(d), a formal notice under Section 148 is issued.
   • This notice requires the assessee to file a return of income or recompute the income that has escaped assessment for the relevant Assessment Year.
4. Step 4: Reassessment Proceeding (Section 147):
   • Once the Section 148 notice is issued, the AO proceeds to conduct the reassessment under Section 147, considering the escaped income and the taxpayer's submissions.

Time Limits for Issuing Section 148 Notice

The time limits for issuing a Section 148 notice (after the Section 148A procedure) are:

• Normal Cases: Within 3 years from the end of the relevant Assessment Year.
• Serious Cases: Up to 10 years from the end of the relevant Assessment Year, but only if the income escaping assessment amounts to ₹50 lakhs or more.

Consequences of a Reopening Notice

If income is found to have escaped assessment after the reassessment proceedings under Section 147:

• Additional Tax Liability: The assessee will have to pay tax on the income that has now been brought to tax.
• Interest: Interest may be levied under Section 234B and 234C for default in payment of advance tax.
• Penalties: If the escaped income leads to an under-reporting of income, penalties under Section 270A (50% to 200% of the tax payable on under-reported income) can be imposed.
• Prosecution: In grave cases of willful evasion or concealment, prosecution proceedings can be initiated against the taxpayer.

What to Do if You Receive a Section 148A / Section 148 Notice

Receiving a reassessment notice is a serious matter requiring careful handling. Here's a general approach:

1. Do Not Ignore: Failing to respond will lead to the AO proceeding with the reassessment unilaterally (best judgment assessment).
2. Understand the Basis: Carefully review the Section 148A notice to understand the specific "information" based on which the department believes income has escaped assessment.
3. Prepare a Detailed Reply: Draft a comprehensive response to the Section 148A notice. Clearly explain why the income has not escaped assessment, providing all necessary documents, explanations, and legal arguments. This initial reply is critical as it can lead to the dropping of proceedings.
4. File Return (if Section 148 notice issued): If the AO decides to proceed and issues a Section 148 notice, you must file a return in response, reporting the escaped income if applicable.
5. Maintain Records: Ensure all relevant financial documents, bank statements, proofs of income and expenses, and past assessment orders are readily available.
6. Seek Professional Advice: Reopening cases are legally and procedurally complex. It is highly recommended to engage a qualified tax professional (like a Chartered Accountant or tax lawyer) to represent you and handle the proceedings effectively.

Conclusion

The power to reopen assessments under Section 148 is a vital tool for the Income Tax Department to ensure tax compliance. While the revised procedure introduced by the Finance Act, 2021, aims to be more transparent and taxpayer-friendly, it still places a significant burden on the assessee to respond effectively. Diligent record-keeping and professional guidance are indispensable when navigating such notices to safeguard your financial interests and avoid unnecessary liabilities and penalties.