MARCH 23, 2021

By Mr Raghavan Ramabadran (Executive Partner) and Janane G (Senior Associate), Lakshmikumaran & Sridharan

RE-ASSESSMENT under the IT Act has always been a subject matter of frequent stand-off between the Assessors and the Assessee. The Finance Bill, 2021 proposes to revamp the entire scheme of re-assessment at a time when one thought jurisprudence on this subject has well evolved with various Courts establishing settled positions of law.

Existing Vs Proposed

The existing provisions of re-assessment enables an Assessing Officer (AO) to assess or re-assess the income of an Assessee where he has a "reason to believe" that some or entire income of an assessee has escaped assessment. ¹The AO has the power to issue notice within a period of 4 years but not exceeding 6 years. ²

Due to advancement in technology, initiation of assessment or re-assessment procedure in the case of income escaping assessment/search assessments have all become information driven to a large extent. To recognize the same, the proposed amendment brought in by way of Finance Bill, 2021 has completely revamped the existing procedure.

The most significant and notable change is removal of the phrase "reason to believe" and substituting it with "information suggesting income escaping assessment". The circumstances which would suggest income escaping assessment are proposed to be given the following meaning, ³

a) Any information that is flagged in the case of an assessee with the risk management strategy by CBDT; or

b) Final objection raised by Comptroller and Auditor General that the Assessment in the case of the Assessee is not in accordance with the Income Tax Act.

Unless and until either of the two 'pre-conditions' mentioned above are satisfied, the AO cannot invoke his power to initiate re-assessment.

The Finance Bill also brings in changes with respect to time limit for issuing re-assessment notice reducing the initial period to 3 years as against 4 years with an extended period of upto 10 years. The extended time period can be invoked in cases where income escaping assessment is "represented in the form of asset" and is in excess of Rs.50 lakh in that year.

It is pertinent to, however, keep in mind that the proposed bill provides that where the proceedings could not have otherwise been initiated under the earlier scheme of re-assessment, recourse cannot be taken to the newly proposed provisions to initiate reassessment. In other words, if as on the date of coming into effect of the new provisions, re-assessment already stood barred by time under the existing provisions for any assessment year, then extended time limit upto 10 years under the new Scheme cannot be applied to that year. ⁴

Re-assessment to include search cases

To simplify the manner of carrying out assessment in search cases, the Finance Bill proposes to include search cases as well within the ambit of Section 148 replacing the separate procedure contained under Section 153A to 153C. In cases where search is initiated on or before 31st March, 2021, the erstwhile law will continue to be applicable.

For search cases, Assessment proceedings upto 3 years from the end of the relevant assessment year can be initiated without satisfying the pre-conditions. However, to initiate proceedings beyond 3 years and upto 10 years, it appears that the pre-conditions are necessary along with the requirement of the income escaping assessment being "represented in the form of an asset."

Relevance of Change of Opinion:

The expression "change of opinion" postulates formation of opinion and then a change thereof. This was embedded within the phrase "reason to believe" as held in various judgements of Supreme Court and multiple High Courts. Now, with the removal of the phrase "reason to believe" and substituting it with "information suggesting income escaping assessment", it appears that change of opinion will no longer be an obstructing factor for the AO to initiate re-assessment. If that be the case, the Assessees are liable to face hardship as "change of opinion" has been the predominant factor on which cases on reassessment have been challenged and quashed on multiple occasions.

However, it is pertinent that some guidelines/clarifications be introduced by CBDT to set out what all information would be flagged in the risk management strategy. This would provide some form of clarity to analyse if change of opinion would still be a governing factor for initiating re-assessment under the new scheme.

Relevance of Audit Objection

The law laid down by various judgements based on the existing provisions, prevent department from placing reliance on audit report for initiating re-assessment proceedings. ⁵ The proposed section, however, has now given a free pass to the AO to initiate re-assessment proceedings solely based on any audit objection and has, in fact, listed it as one of the qualifying conditions to fall within the definition of the term "information suggesting income escaping assessment". ⁶Going forward, reliance on an audit report is no longer a bar for the department to initiate re-assessment. But, this audit objection must be a final audit objection contained in C & AG report.

New Provisions - Beneficial to Assessees?

The answer to this question appears to be both in the affirmative and negative. The reduction of time limit from 4/6 years to 3 years is no doubt beneficial but at the same time, the 6 years limitation period provided in the erstwhile section 148 has now been extended to 10 years in certain cases. Further it also appears that the powers of an AO to initiate re-assessment under the proposed scheme has been widened by enlarging the circumstances to initiate such action. Observed from this angle, it gives an impression that the proposed provisions although reduces the period from 4 to 3 years, also empowers the AO to invoke an extended period of 10 years in certain circumstances.

Meaning of 'Represented in the form of an Asset'

The meaning to the expression "represented in the form of asset" does not flow either from the Finance Bill, 2021 or from the Memorandum to the Finance Bill, 2021.

However, this expression already finds place in the existing provision of Section 153A, in the fourth proviso inserted vide Finance Act, 2017. Owing to its recent insertion, there are no judicial precedents explaining the scope of "represented in the form of asset". Going by the plain meaning of the expression, it may be possible to contend that unless and until the income escaping assessment can be identified to a particular asset, the extended period cannot be applied. Therefore, it may not be possible for the Department to take recourse to the proposed provision of Section 147 to initiate reassessment beyond 3 years for issues concerning claim of deduction, rate of depreciation etc.

It may, however, be welcome, in the interest of avoiding litigations stemming from different plausible interpretations that some clarity or meaning be assigned to this expression covering the following possible issues.

(i) What would fall within the ambit of "asset"?

(ii) Whether income "represented in the form of asset" should be existing at the time of re-assessment or would it include past transactions also?

Conclusion

The Budget 2021, no doubt has simplified the assessment procedure by grouping search cases also into the ambit of re-assessment which is laudable. However, for a pragmatic approach towards re-assessment and assessment in search cases. it is pertinent that clarifications as pointed out by the Authors in this Article may be brought in by the Government vide Notifications/Circulars so that both the Assessees and the Department are clear on application of law, find a sense of clarity and need not approach the Court, clogging the judiciary with yet another round of battle on reassessments.

[The views expressed are strictly personal.]

¹Section 147 and 148 of the Income Tax Act, 1961

²16 years in cases where income escaping assessment relates to any foreign asset

³Explanation 1 to the proposed section 148 of the Finance Bill, 2021

⁴Proviso to the proposed section 149 of the Finance Bill, 2021

⁵ Indian & Eastern Newspaper Society v. Commissioner of Income Tax; - 2002-TIOL-870-SC-IT-LB, FIS Global Business Solutions India Pvt. Ltd. v. ACIT - 2018-TIOL-1729-HC-DEL-IT

⁶ Clause (ii) of Explanation 1 to the proposed section 148 of the Finance Bill, 2021