To provide relief to taxpayers in view of the disruptions caused by the Covid-19 pandemic, the Government enacted “Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020” (TOLA). The TOLA seeks to enact legislative amendments in direct and indirect tax laws, which were introduced by the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 (Ordinance) as a part of Covid-19 related relief measures. 

CA Dindayal Dhandaria discusses the substituted provisions of Sec. 149 by Finance Act, 2021  which have reduced the time limit for re-opening of cases.The author shares his opinion as to whether by reducing the time limit for assessment or re-assessment or re-computation of income, the Department has either taken a bold step of confidence pursuant to its newly acquired technology or has granted an unintended benefit to the tax evaders. Elucidating on the new reassessment regime, the author illustrates how the amended structure of the provision is an unintended boon to certain taxpayers as there cannot be any assessment of income that would have escaped assessment after the expiry of three years. The author remarks this to be a bold step taken by the Department and states “If the Department is confident that, on the strength of its risk management strategy, technology, information-driven database, and inputs from CAG, it would capture all cases of escapement of income within a short period of 3 years from the end of the relevant assessment year, it would, undoubtedly, be a bold step”.

“New Time Limits For Reassessment Of Income - A Bold Step Or An Unintended Boon?”

INTRODUCTION

Due to Covid-19 pandemic, the Income Tax Department (“the Department”) could not issue notices under section 148 of the Income Tax Act, 1961 (“the Act”) within the time prescribed under section 149 of the Act, in many cases.  So, the Government came to its rescue by enacting the “Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020” (“TOLA”) and enabled issuance of Notifications for extending the limitation period for issue of notice. Under TOLA and notifications thereunder, the time to issue notice u/s. 148 of the Act was extended on four occasions and the last one being extension upto 30.6.2021. Presently, the validity of the notices issued as above are being contested before various High Courts and is of prime concern to several assessees. 

Contrary to the likely expectations of the readers, this article is not about the above controversial and hot topic.  

Section 149 of the Act has been substituted by Finance Act, 2021 w.e.f. 1-4-2021 reducing the time limit for re-opening of cases. The Author feels that by reducing the  time limit for assessment or re-assessment or re-computation of income, the Department has either taken a bold step of confidence pursuant to its newly acquired technology or has granted an unintended benefit to the tax evaders.

HIGHLIGHTS OF THE NEW REASSESSMENT REGIME

[As relevant for the purpose of this Article]

1. As per the substituted section 149, re-opening can be made within 3 years from the end

of the relevant assessment year, without any condition and irrespective of the amount involved. For re-opening beyond 3 years but within 10 years from the relevant assessment year, reopening is possible only if Assessing Officer (“AO”) has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the from asset, which has escaped assessment amounts to or is likely to amount to INR 50 lakhs or more for that year.

2. A proviso to section 148 takes care of the situation where the earlier time limit of 4 or 6 years expired on or before 1-4-2021 and no notice could be issued under old section 148. In such cases, the extended time of 10 years would not be available.

3. Under the old regime, re-opening within 16 years from the end of the relevant assessment year was also possible if the income in relation to an asset (including financial interest in any entity) located outside India had escaped assessment. Under the new regime, 16 years limit is not prescribed as such cases are intended to be covered under Black Money (Undisclosed foreign Income and Assets) and Imposition of Tax Act, 2015.

4. As per the substituted Section 148, notice under section 148 can be issued by the AO if there is “information with the Assessing Officer which suggest that the income chargeable to tax has escaped assessment” in the case of the assessee for the relevant assessment year; and the AO has obtained prior approval of the specified authority to issue such notice.

5. As per Explanation 1 to section 148, the expression “information with the Assessing Officer which suggest that the income chargeable to tax has escaped assessment” means: (a) “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” and (b)“any final objection raised by the Comptroller and Auditor General of India (“CAG”) 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.” 

6. Explanation 2 to section 148 provides that the AO shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the following cases:

• Search under section 132.

• Requisition under section 132A.

•Survey under section 133A.

• Assets seized or requisitioned during search belonging to another assessee.

• Documents seized or requisitioned during search relates to or pertains to another assessee.

7. The AO is required to conduct enquiry under the newly inserted section 148A in cases covered by Explanation 1 to section 148 only.

BOON FOR TAXPAYERS

The way the law has been amended, the Department would not be able to assess or re-assess or recompute, inter alia, the following incomes escaping assessment, after the expiry of 3 years from the end of the relevant assessment year:

1. Income not represented by any asset.

2. Income which is not likely to amount to INR 50 lakhs or more PER YEAR.

3. Bogus expenditure claimed which are not represented by any asset.

4. Disallowable expenses/deductions claimed which are not represented by any asset.

5. Acquisition of assets (e.g. land or building, etc.) for less than INR 50 lakhs per year.

6. Ostentatious expenses.

7. Non-compliance with TDS/TCS provisions.

8. Even if the escaped income is INR 50 lakhs or more in a year beyond 3 years, no presumption is possible, and the AO must have incriminating materials with him. [reminds one of Hon’ble Delhi High Court’s judgment in Kabul Chawla’s case]. Moreover, the AO cannot make any preliminary enquiry under section 148A in search, seizure and survey cases.

IS IT A BOLD STEP?

When the Author started his professional career more than a half century ago, whenever an assessee received a notice for re-assessment of his case, the first and foremost question in his mind was who has disclosed his secrets.  Most of the cases of re-opening were based upon “anonymous complaints/disclosures” by a disgruntled employee, a rival businessman and/or other persons.  The assessees were not kin to find out the reasons for reopening but the person who might have written anonymous letter.  Since then, much water has flown down the river Ganges.

The following extract from the Memorandum Explaining the Finance Bill, 2021 reveals the source of information, currently available to the Department:

“Due to advancement of technology, the department is now collecting all relevant information related to transactions of tax payers from the parties under section 285BA of the Act (statement of financial transactions or reportable account).  Similarly, information is also received from other law enforcement agencies. This information is also shared with the taxpayer through Annual Information Statement under section 285BB of the Act.  Department uses this information declared by a taxpayer in the return and to detect non-filers or those who have not disclosed the correct amount of total income. Therefore, assessment or re-assessment or re-computation of income escaping assessment, to a larger extent, is information-driven.” 

If the Department is confident that, on the strength of its risk management strategy, technology, information-driven database, and inputs from CAG, it would capture all cases of escapement of income within a short period of 3 years from the end of the relevant assessment year, it would, undoubtedly, be a bold step.  Otherwise, the escapement of escaped income from taxation would be an unintended boon to the tax evaders, in certain circumstances, illustrated hereinbefore.