Income Escaping Assessment

Under section 147 of the Income Tax Act 1961 (the Act), if the Assessing Officer (AO) has ‘reason to believe‘ that any income chargeable to tax has escaped assessment for any assessment year, he/she may and subject to the relevant provisions of the Act, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to notice subsequently in the course of such proceedings.

Scrutiny/Regular Assessment and the ‘4 year rule’

Where a ‘scrutiny/regular’ assessment under section 143(3) of the Act or a ‘reassessment’ under section 147 of the Act has been made for the relevant assessment year, no action can be taken for further assessment/reassessment after the expiry of 4 years from the end of the said assessment year, unless –

  • Any income chargeable to tax has escaped assessment by reason of the failure on the part of the Assessee to make an Income Tax Return as required under the Act; or
  • Failure on the part of the said Assessee to disclose fully and truly all material facts necessary for such assessment, for the said relevant assessment year.

Section 148 Notice

The Act requires a mandatory Notice under section 148 of the Act be sent to the assessee concerned before making the assessment, reassessment or recomputation under section 147. The said Notice would require the said assessee to furnish within the period specified therein, an Income Tax Return of his/her/its income or the income of any other person in respect of which he/she/it is assessable under the Act during the relevant assessment year.

> Read more about ‘Income Tax Notices’


Crucial First Steps and Safeguards

All income tax notices have to be treated with urgency and due care, and none more so than a Notice under section 148, as such exercise of powers by the relevant authority can result in serious consequences for the assesse concerned. The relevant provisions of the Act and various judicial pronouncements on the same however do provide some safeguards to ensure that such powers are lawful and justified. Some of these safeguards include –

  • Mandatory section 148 Notice be sent to the assessee concerned and within the prescribed time limit
  • The relevant Assessing Officer (AO) record his/her ‘reasons’ for exercising such powers before issuing such Notice
  • ‘Sanction’ from a prescribed superior officer be obtained for the issue of such Notice when 4 years have elapsed from the end of the relevant assessment year, and such sanction also record the said officer’s ‘satisfaction’ as based on the reasons recorded by the AO, that it is a fit case for the issue of such Notice
  • A copy of such ‘reasons’ be provided to the said Assessee when demanded and any objections thereto be disposed off by a reasoned order etc.

Writ Remedy and Necessity for Professional Analysis of Reasons/Reply to Objections

Where one or more of the above mentioned safeguards and others (established through judicial pronouncements/case laws) are violated by the relevant authority and a potential ‘jurisdictional error’ committed, the assessee concerned may be in a position to approach the jurisdictional State High Court for a Writ to ‘quash’ or terminate any proceedings undertaken or powers exercised under section 147 read with section 148 of the Act.

The contents of the said Notice including the ‘Reasons’ recorded and thereafter provided (as the case may be), and those of the ‘reasoned order’/reply (if any) to any objections raised, would therefore need to be carefully examined and analysed, preferably by a professional to determine whether grounds for pursuing a Writ remedy is made out. Failure to do so may not only fail to stop the said proceedings concerned, but may also result in loss of time and significant monetary resources.

Demonetisation and Cash Credits, Unexplained Money, Jewelry etc.

Under section 68, 69A etc. of the Act, where any sum (eg. cash or bank deposits) is found credited or the concerned assessee is found to be the owner of any money, bullion, jewellery or other valuable article not recorded in the books (if any) of an assessee maintained for any previous year etc., and the concerned assessee offers no explanation about the nature and source thereof or such explanation is not ‘satisfactory’ in the opinion of the AO, such sum or value thereof may be charged to income-tax as the income of the assessee of that previous year under the relevant provision of the Act, chiefly section 115BBE. Furthermore, such sum and surrounding facts/circumstances, as interpreted by the authorities concerned, may also become subject to ‘penalty’ and/or ‘prosecution’ action.

> Read more about ‘Cash Credits’

Following the recent ‘Demonetisation’ of certain currency notes by the Government of India, there has been a significant spike in cash/bank deposits of money by various persons, some of whom are being issued Income Tax Notices (including via e-portal) for the purposes of explaining the same.

It is therefore advisable that professional help be accessed before providing such explanation, especially where such sums relate to financial years (FY) prior to the current FY 2016-17. This is so as such sums may result in proceedings under section 147/148 and potential penalty/prosecution action, when the same is interpreted as ‘income escaping assessment’ by the concerned authorities.


Related Developments

> The CBDT has through Circular No. 40 of 2016 (dated 9 December 2016) clarified that a ‘mere increase in turnover, because of use of digital means of payment or otherwise, in a particular year cannot be a sole reason to believe that income has escaped assessment in earlier years.’ The said Circular thereafter advises the AOs concerned to not reopen past assessments in cases merely on such ground, that the current year’s turnover has increased.

> The CBDT has also through a Press Release (dated 1 December 2016) issued clarifications with respect to ‘Gold Jewellery’ under the Act and any related ‘search/seizure’ action, stating that there is no limit on holding of gold jewellery or ornaments by anybody, provided the same is acquired from explained sources of income including inheritance.

> The CBDT has also vide Press Release (dated 14 December 2016) forewarned assessees contemplating filing ‘Revised Returns’, that where the same is interpreted by the concerned authorities as ‘manipulation in the amount of income, cash-in-hand, profits etc. and fudging of accounts’, it may necessitate scrutiny of such cases and potential penalty/prosecution action under the Act.

Access Professional Help

This subject area of law under the Act is subject to constant litigation and the case law on the subject is therefore quite extensive and too voluminous to detail in this Article. It is therefore advisable that a professional be consulted to determine which (if any) of such case laws would be relevant and applicable to the concerned assessee’s facts and circumstances.

Professional help would also be advisable for analysing the contents and consequences of an Income Tax Notice as well as drafting/determining what would constitute an ‘appropriate’ reply and/or objections to the same. It is therefore highly prudent and recommended that a tax and legal professional be consulted before such steps are taken including providing an e-reply via e-portal in response to such Notices.

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