CA Usha Kadam

The Hon’ble Finance Minister (FM) Nirmala Sitharaman presented the Union Budget 2023 on 1st Feb 2023. This budget was eyed upon by all taxpayers especially in the non-corporate category as this being the last full budget before the upcoming General Elections in the year 2024. While there is nothing much to offer to the corporate assessees, the budget has some incentives to the middle class assessees.

  1. Rates of Income tax

    The Government has proposed to make the revised new tax regime (section 115BAC of the Act) to be the default regime of taxation. However, the taxpayers will continue to have an option to avail the benefit of old tax regime. Some of the features of this regime is as under:

    1. Applicability of Default (New) tax regime (section 115BAC of the Act)

      Government had introduced new tax regime in the Finance Act 2020 with lower tax rate for individuals and HUFs. Now the Default tax regime would be applicable for Individuals, HUFs, Association of persons (other than Co operative Society), Body of Individuals and artificial juridical person.

    2. Tax rates for individuals etc under Default new tax regime

      The income slabs have reduced from six to five. The rates applicable under section 115BAC for

      A.Y. 2024-25 is as under:

      Total Income Tax rate under Default tax regime Tax rate under old regime
      Upto Rs 2,50,000 NIL NIL
      Rs 2,50,001 to

      Rs 3,00,000

      NIL 5%
      Rs 3,00,001 to

      Rs 5,00,000

      5% 5%
      Rs 5,00,001 to

      Rs 6,00,000

      5% 20%
      Rs 6,00,001 to

      Rs 9,00,000

      10% 20%
      Rs 9,00,001 to

      Rs 10,00,000

      15% 20%
      Rs 10,00,001 to

      Rs 12,00,000

      15% 30%
      Rs 12,00,001 to

      Rs 15,00,000

      20% 30%
      Above 15 Lakh 30% 30%

      Surcharge under the old tax regime remains the same. Further it has been proposed to reduce the highest surcharge rate from 37% to 25% in the Default tax regime for income above Rs 5 Cr.

      Surcharge on income taxable under sections 111A and income from long term capital gain from all assets and dividend income would be restricted to 15%

      Under old tax regime various deductions were allowed. The new tax regime denied a large set of exemptions and deductions available under various sections of the Act. There is no change in this except for the following additional deductions which are now allowed under the Default tax regime:

      1. Standard deduction from salary under section 16 – upto Rs 50,000
      2. Standard deduction from family pension income under section 57 – upto Rs 15,000
      3. Deduction u/s 80CCH in respect of amount paid or deposited in the Agniveer Corpus Fund

      The taxpayers intending to opt for old tax regime will have to exercise an option in the prescribed form. However, in case of assessee having income from business and profession, once such option is exercised for any previous year it can be withdrawn only once and thereafter the assessee shall not be eligible to again opt for old tax regime.

    3. Rebate u/s 87A of the Act

      In case of an individual assessee resident in India whose total income taxable u/s 115BAC does not exceed Rs 7,00,000 shall now be entitled to a rebate of an amount equal to 100% of income tax payable on total income not exceeding Rs 7 lakh. Thus for an individual having total income less than Rs 7 lakh, tax liability will be NIL.

    4. Tax rates for AOP/BOI under old tax regime

      The slab rate for AOP/BOI remains the same.

      For AOP having all corporate members, surcharge is as follows:

      Income Surcharge
      Rs. 50 Lakhs to Rs. 1 Crore 10%
      Exceeding Rs. 1 Crore 15%
    5. Tax rates for Partnership firms and LLP There has been no change in the tax rates for partnership firms and LLP. The effective tax rates (including surcharge and cess) is as under:
      Total Income Effective Rate
      Upto Rs. 1 Crore 31.2% (30+4%)
      Above Rs. 1 Crore 34.944% (30+12%+4%)
    6. Tax rates for corporates

      There has been no change in the tax rates for corporates. The effective tax rates (including surcharge and cess) is as under:

      Types of Companies Income not exceeding Rs. 1 Crore Income exceeding Rs. 1 crore and Upto Rs. 10 Crore  Income above Rs. 10 Crore 
        Normal MAT Normal MAT Normal MAT
      Domestic Company with turnover up to Rs. 400 crore In FY 2020-21 and avails any tax incentives or exemptions or tax holiday 26% 15.60% 27.82% 16.69% 29.12% 17.47%
      Other domestic company 31.20% 15.60% 33.384% 16.69% 34.944% 17.47%
      Domestic Company exercising option to pay tax as per section 115BAA 25.168% Nil 25.168% Nil 25.168% Nil
      New domestic manufacturing companies exercise ng option to pay tax as per section 115BAB 17.16% Nil 17.16% Nil 17.16% Nil
      Foreign Company 41.60% 15.60% 42.43% 15.912% 43.68% 16.38%*

      * MAT applies to foreign company if it has a PE or business connection in India.

    7. Tax rates for co operative society

      There are no changes to the slab rates. For Co operative societies opting for taxation under section 115BAD, the effective tax rates is 25.168%

      Section 115BAE has been introduced for co operative societies having income from manufacturing or production of an article of thing. Under proposed new section 115BAE of the Act, a new manufacturing co-operative society set up on or after 01.04.2023, which commences manufacturing or production on or before 31.03.2024 and does not avail of any specified incentive or deductions, may opt to pay tax at a concessional rate of 15% for assessment year 2024-25 onwards. Surcharge would be at 10% on such tax. The effective tax rate including surcharge and cess would be 17.16%.

      • The concessional tax rate is subject to fulfil of certain conditions which are similar to section 115BAB which is applicable to manufacturing companies.
      • If the income of the assessee, includes any income, which has neither been derived from nor is incidental to manufacturing or production of an article or thing and in respect of which no specific rate of tax has been provided separately under this Chapter, such income shall be taxed at the rate of twenty-two per cent and no deduction or allowance in respect of any expenditure or allowance shall be made in computing such income;
      • The income-tax payable in respect of income, being short term capital gains derived from transfer of a capital asset on which no depreciation is allowable under the Act shall be computed at the rate of twenty-two percent;
      • The Option once exercised can not be withdrawn subsequently.

        The above amendments are applicable with effect from A.Y. 2024-25.

        Provision of sections 115JC and 115JD shall not apply to co operative societies opting for taxation under section 115BAD or section 115BAE. For other co operative societies, rate of MAT under section 115JC continues to be 15%.

  2. Agnipath Scheme, 2023
    1. Agnipath Scheme in the Indian Armed forces is a scheme wherein selected candidates will be enrolled as Agniveers for four year period. The financial packages offered to these Agniveers are Composite Annual package, allowances. Seva Nidhi/ corpus fund, Death compensation, disability compensation etc.
    2. The term “Agnipath scheme” and “Agnipath Corpus Fund” has been defined in the newly introduced Section 80CCH. The same is as under:
      1. “Agnipath Scheme” means the scheme for enrolment in Indian Armed Forces introduced vide letter No.1(23)2022/D(Pay/Services), dated the 29th December, 2022 of the Government of India in the Ministry of Defence;
      2. “Agniveer Corpus Fund” means a fund in which consolidated contributions of all the Agniveers and matching contributions of the Central Government along with interest on both these contributions are held.’.
    3. The “Agniveer Corpus Fund” will be maintained under the aegis of Ministry of Defence with the following features:
      1. Each Agniveer is to contribute 30% of his monthly package to the Individual’s Agniveer Corpus Fund. Further the Government will also contribute an equivalent amount to the said fund.
      2. On completion of the engagement period, Agniveer will be paid one time “Seva Nidhi” which shall comprise of their contribution including interest thereon and matching contribution from government including interest.
    4. In order to provide benefits to the Agniveer, it is proposed to make following amendments:
      1. A new sub clause (ix) has been inserted in section 17(1) of the Act to provide that “Salary” will include the contribution made by the Central Government in the previous year to the Agniveer Corpus Fund of an individual enrolled in the Agnipath Scheme refereed to in section 80CCH.
      2. It is proposed to insert new clause (12C) in section 10 of the Act to provide that any payment received from the Agniveer Corpus Fund by a person enrolled in the Agnipath Scheme or his nominee shall be exempt from income tax.
      3. It is further proposed to insert a new section 80CCH to the Act to provide that an assessee, being an individual enrolled in the Agnipath Scheme and subscribing to the Agniveer Corpus Fund on or after 1st Day of November 2022, shall be allowed a deduction of the whole of the amount paid/deposited by him and also the amount contributed by the Central Government to his account in Agniveer Corpus Fund, from his total income.
      4. It is proposed that in the new tax regime of section 115BAC an individual enrolled in the Agnipath Scheme and subscribing to Agniveer Corpus Fund shall get a deduction of the contribution to his Seva Nidhi.

      The above amendments are applicable with effect from A.Y. 2023-24.

  3. Increase in Threshold limits for presumptive taxation schemes

Section 44AD and section 44ADA provides for presumptive income scheme.

  1. Section 44AD

    Section 44AD is applicable for individual, HUF or partnership firm who is resident, carrying on eligible business and having turnover or gross receipts of Rs 2 Crore or less. It is not applicable to LLP.

    The existing limit of Rs 2 Crore has been extended to Rs 3 Crore provided the cash receipts does not exceed 5% of total turnover or gross receipts during the year. Any amount received through a cheque drawn on a bank or a bank draft which is not account payee shall be considered as cash receipt for this purpose.

    If the cash receipts are more than 5% then the existing limit of Rs 2 Crore will apply.

  2. Section 44ADA

Section 44ADA is applicable for individual and partnership firm who is resident, who are engaged in any profession referred to in sub section (1) of section 44AA and whose total gross receipts do not exceed Rs 50 Lakh in a previous year.

The existing limit of Rs 50 Lakh has been extended to Rs 75 Lakh provided the cash receipts does not exceed 5% of total gross receipts during the year. Any amount received through a cheque drawn on a bank or a bank draft which is not account payee shall be considered as cash receipt for this purpose.

Consequently, the first proviso to section 44AB is substituted to provide that the tax audit shall not apply to persons who declare profits and gains in accordance with the provisions of section 44AD(1) and 44ADA(1).

These amendments are applicable with effect from A.Y. 2024-25.

Conclusion

While the Government is confident that 50% of the taxpayers will shift to the Default Tax Regime, it shall be interesting to see how the proposed changes in the budget are adopted by the taxpayers. The benefit of the Default tax regime will purely depend on the quantum of the tax saving investments made by each taxpayer. The regime may find popularity amongst the High Net-worth Individuals because of the drop in the rate of surcharge.

S. R. Wadhwa, Advocate

The Hon’ble Prime Minister, in his recent address to the Nation, laid down the vision of achieving ‘Amrit Kaal’ as the objective for our country in order to provide, in adequate measure, the necessities of life to every resident irrespective of his caste, creed, sex or nationality. The vision includes the creation and development of a technology-driven and knowledge-based economy. In practical terms and in the short run, the following four areas have been chosen by the Hon’ble Finance Minister for focused attention for achieving the ‘Amrit Kaal’:-

  1. Green growth – Mindless economic growth can prove counter-productive. The efforts should, therefore, need to be focused on green growth by designing and implementing green fuel, green energy, green farming, green mobility, green buildings, and green equipment. These focused efforts will help in reducing carbon intensity of the economy and would provide for large scale green job opportunities.

  2. Tourism – The Hon’ble Finance Minister has duly recognized the importance of promoting domestic and foreign tourists as an integral part of the development of tourism to meet the huge job opportunities that this sector hosts particularly for the youth of our country.

  3. Economic empowerment of women – The present programme of economic empowerment of women through the National Rural Livelihood Mission has proved very productive. It has resulted in mobalizing rural women into 81 lakhs Self Help Groups. The Government plans to scale up the programme to serve the large consumer markets to promote the employment of women particularly in rural areas where unemployment is wide spread causing grave economic hardships to a vast majority of the rural population.

  4. PM Vishwakarma Kaushal Samman (PM VIKAS) – The word ‘VIshwakarma’ refers, for centuries, to the group of people such as traditional artisans and craft persons who work with their hands using simple tools. A new Scheme has been designed for them in order to improve the quality of their products and integrating them with the Micro, Small and Medium Enterprises (MSMEs) value chain. The Scheme will involve not only financial support but also access to advanced skill training, knowledge of modern digital techniques and efficient green technologies, brand promotion, linkages with local and global markets, digital payments, and social security. It will greatly benefit our citizens belonging to Scheduled Castes, Scheduled Tribes, OBCs (Other Backward Classes), women and people belonging to the weaker sections of the society.

Saptarishi in the budget

    1. Saptarishi (seven priorities) have been listed in the budget. They are intended to complement each other and guide the nation through the Amrit Kaal and are the following:-

      1. All Inclusive Development

      2. Reaching the Last Mile

      3. Infrastructure and Investment

      4. Unleashing the Potential

      5. Green Growth

      6. Youth Power Department 

      7. Financial Sector Strengthening

Priority (i) – All inclusive development

  1. In achieving the objective of ‘Sabka Saath Sabka Vikas’, Government shall focus on an all inclusive development covering specifically the farmers, women, youth and persons belonging to OBCs, Scheduled Castes and Scheduled Tribes, Divyangjan (handicapped persons) and economically weaker sections of the society. The focus will include the areas of agriculture and co-operation, health education and skilling, medical research, teachers’ training and national digital library.

    Priority (ii) – Reaching the last mile

  2. The Government has formed the ministries of AYUSH, Fisheries, Animal husbandry and Dairying, Skill Development, Jal Shakti and Co-operation. The Prime Minister Awas Yojna will be the kingpin in the scheme providing Rs. 79,000 crores which is 66% higher over the last years’ provision.

    Priority (iii) – Infrastructure and investment

  3. Investments in infrastructure and

    productive capacity of the Indian economy will have a large multiplier impact on its growth and employment. Private investments are growing again after the pandemic and involve an increase in capital investment for the third year in a row by a handsome amount of 33% to Rs. 10 lakhs crores which is almost three times the outlay during 2019-20 and is expected to enhance job creation and growth potential significantly.

    Priority (iv) – Unleashing the potential

  4. “Good Governance’ is the key to a nation’s progress. For this purpose, mission ‘Karmayogi’ for the Centre, States and Union Territories will be launched involving the making of and implementing the capacity- building plans for civil servants through an integrated on-line training platform to provide continuous learning opportunities to upgrade their skills and facilitate the achievement of the people-centric approach. Forty two laws are being amended through the Jan Vishwas Bill to further the objective of achieving the trust-based governance in this country. Centers of excellence are being set up to nurture quality human resources notably in the areas of agriculture, health and sustainable development. Permanent Account Number (PANs) allotted by the Income-tax Department to every taxpayer will be used by the business establishments as the common identifier for all digital systems of specified government agencies.

    Priority (v) – Green growth

  5. The economic development of the country will involve green growth in very material aspects involving actions notably in the following 12 areas:-

    1. Green Hydrogen Mission – This will involve shifting the economy to low carbon intensity, reducing dependence on fossil fuel imports.

    2. Energy Transition – The Energy Transition towards green growth has budget provision of Rs. 35,000 crores and will be the responsibility of the Ministry of Petroleum & Natural Gas.

    3. Energy Storage Projects – These projects will be supported under a detailed framework for this purpose.

    4. Renewable Energy Evacuation – It is a very important aspect of shifting to green growth for which, evacuation and grid integration from Ladakh will be constructed involving an investment of Rs. 20,700 crores.

    5. Green Credit Programme – This programme will be notified providing incentives for responsive actions by companies and others to facilitate mobilization of additional resources.

    6. PM-PRANAM – It will be launched to promote alternative fertilizers and balanced use of chemical fertilizers. For this purpose, incentives will be given to States and Union Territories.

    7. GOBARdhan Scheme – An investment of Rs. 10,000 crores has been provided to establish 500 new ‘Waste to Wealth’ plants under GOBARdhan (Galvanizing Organic Bio-Agro Resources Dhan) Scheme.

    8. Bhartiya Prakritik Kheti Bio-Input Resource Centres – Over one crore farmers are proposed to be facilitated in the next three years through the national-level distributed micro- fertilizers and pesticides manufacturing network.

    9. MISHTI – For encouraging a felicitation, Mangrove Initiative for Shoreline Habitats & Tangible Incomes’, MISHTI, will be initiated for plantation along the coastline and on salt pan lands, wherever feasible.

    10. Amrit Dharohar – For availing wetlands and sustainable bio-diversity, encourage optimal use of wetlands and enhance bio-diversity, carbon stock, eco-tourism opportunities and income generation for local communities, a Scheme will be implanted for the next three years.

    11. Coastal Shipping – It will be promoted under the Private Public Participation Scheme.

    12. Vehicle Replacement – Old polluting vehicles of the Central Government will be scrapped wherever feasible and States will also be supported in this action plan.

    Priority (vi) – Youth Power Department

  6. In order to produce employable youth, a new National Education Policy has been formulated aimed at skilling them so as to create job opportunities included in businesses. For this purpose, Pradhan Mantri Kaushal Vikas Yojana 4.0 will be launched to skill lakhs of youth within the next three years. for skilling the youth to avail of international opportunities of employment, 30 Skill India International Centres will be set up across different States and demand based skills will be provided by launching a unified Skill India Digital Platform. 50 tourist destinations will be selected to improve their connectivity and other facilities so as to encourage tourism.

    Priority (vii) – Financial Sector Strengthening

  7. Reforms of the financial sector are essential in accelerating economic growth.

    The budget proposes to accelerate the reforms in the financial sector by innovating use of technology to encourage ease of access to credit and participation in financial markets. A National Financial Information Registry will be set up to serve as the one point resource for providing financial and ancillary information for which a new legislative framework will be designed in consultation with the Reserve Bank of India. In order to simplify and reduce the cost of compliance, comprehensive review of the existing regulations in the financial sector will be carried out and, among others, time limits will also be laid down to decide applications under various regulations for financial assistance.

  8. Credit guarantee for MSMEs will be provided through a scheme which will take effect from 1st April, 2023 and by that time, Rs. 9,000 crores will be infused in the corpus of the Scheme providing additional collateral- free guaranteed credit of Rs. 2 lakhs crores and reducing the cost of the credit by about one percent.

  9. The financial sector regulators will carry out a comprehensive review of the existing regulation and will consider suggestions from public and regulated agencies. Time limits to decide the applications under various regulations will also be laid down to ensure time bound disposal and follow-up action.

  10. For senior citizens, the maximum deposit limit under the Senior Citizen Savings Scheme will be enhanced from Rs. 15 lakhs to Rs. 30 lakhs and for Monthly Income Account Scheme which the deposit limits will be enhanced from Rs. 4.5 lakhs to Rs. 9 lakhs for a single account and from Rs. 9 lakhs to Rs. 15 lakhs for a joint account.

  11. To conclude, the priorities in the budget are well thought out and hopefully, they will be implemented in full both in letter and spirit. This will enable the citizens of our country to reach higher standards of economic growth and improve their standards of living.

  12. Tax professionals, for their clients, need to plan and take in a structured manner the required actions to achieve the objective of economic growth by implementing the effect of various plans for development of a technology driven and knowledge based economy. Wherever any difficulty of interpretation arise, they would need to be resolved by mutual discussion and wherever required, by a reference to the Chairman, Central Board of Direct Taxes, Ministry of Finance, North Block, New Delhi – 110001.

Manpower without unity is not a strength unless it is harmonized and united properly, then it becomes a spiritual power.

– Sardar Vallabhbhai Patel

Dr. K. Shivaram, Senior Advocate & Shashi Bekal, Advocate

Abstract

The Finance Bill, 2023 has 122 clauses proposing various amendments to the Income-tax Act, 1961 (Act). The Article aims at providing a bird’s eye view of certain important direct tax proposals contained in the Finance Bill, 2023. An attempt has been made in this article to critically evaluate certain provisions and their implications.

Table of Contents

Abstract

  1. Introduction of the Union Budget, 2023
  2. Proposals in the Finance Bill, 2023
    1. Promoting timely payments to Micro and Small Enterprises
    2. Increasing threshold limits for presumptive taxation schemes
    3. The increasing rate of Tax Collected at the Source (TCS) of certain remittances
    4. Limiting the rollover benefit claimed under section 54 and section 54F of the Act
    5. Introduction of the authority of Joint Commissioner (Appeals)
    6. Bringing the non-resident investors within the ambit of section 56(2)(viib) of the Act to eliminate the possibility of tax avoidance
    7. Extending deeming provision under section 9 of the Act to gift to not-ordinarily resident
    8. Rationalisation of the provisions of Charitable Trust and Institutions
    9. Defining the cost of acquisition in case of certain assets for computing capital gains
  3. Dénouement
  1. Introduction of the Union Budget, 2023

    The Honourable Mrs. Nirmala Sitharaman, Union Finance Minister presented the budget on February 01, 2023, and subsequently the Finance Bill, 2013 (2023) 451 ITR 1 (St), Notes on Clauses (2023) 451 ITR 156 (St) and the Memorandum explaining the provisions in the Finance Bill, 2023 (2023) 451 ITR 226 (St).

    As our Nation enters Amrit Kaal, the Budget lays down a vision for 2047, to be a superpower, when we celebrate 100 years of Independence. In the last nine years of the current administration, the Indian economy has increased in size from being 10th to 5th largest in the world. The per capita income has more than doubled to Rs. 1.97 lahks.

    Over the last few years, Our Nation gained ground in the field of technology and digitalization. The strives were leveraged during the pandemic-induced lockdown when Courts were functioning online through video conferencing. The Hon’ble Supreme Court have suo moto held hearings and provided several clarifications to not disturb the efficient functioning of the judiciary or upset its stakeholders. The Hon’ble Income-tax

    Appellate Tribunal performed the remarkable task of lowering the pendency to a historic low by disposing of several cases through virtual hearings. On the occasion of the 72nd Independence Day celebrations, the Hon’ble Prime Minster of India Shri Narendra Modi addressed the occasion by putting forward a new Indian vision and road map for the Nation. The All India Federation of Tax Practitioners had made an appeal for separate allocation of funds for the judiciary for speedy disposal of justice. It is commendable to know that Rs. 7,000/- Crores has been allotted for phase-3 of e-courts for the efficient administration of justice.

    For enhancing the ease of doing business, more than 39,000 compliances have been reduced and more than 3,400 legal provisions have been decriminalized. For furthering trust-based governance the Jan Vishwas Bill proposes to amend 42 Central Acts. This Budget proposes a series of measures to unleash the potential of the economy.

    On account of digitalisation leading to faceless assessment and faceless appeals, it has become essential for tax practitioners to know the law and procedure for better compliance and representation. An in-depth discussion of the Finance Bill will help tax practitioners to understand the law and procedure.

  2. Proposals in the Finance Bill, 2023
    1. Promoting timely payments to Micro and Small Enterprises [Clause 13] (2023) 451 ITR 70 (St)

      Micro, Small and Medium Enterprises (MSME) are the backbone of a developing economy. To promote their development, the Budget has proposed several changes such as the extension of the credit guarantee scheme, Vivad Se Vishwas, Entity level Digi locker et cetera.

      To promote timely payments to micro and small enterprises, it is proposed to include payments made to such enterprises within the ambit of section 43B of the Act.

      Accordingly, it is proposed to insert a new clause (h) in section 43B of the Act to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment. Section 15 of the MSMED Act mandates payments to micro and small enterprises within the time as per the written agreement, which cannot be more than 45 days. If there is no such written agreement, the section mandates that the payment shall be made within 15 days. Thus, the proposed amendment to section 43B of the Act will allow the payment as a deduction only on a payment basis. It can be allowed on an accrual basis only if the payment is within the time mandated under section 15 of the MSMED Act.

      A few scenarios emerge from this proposed amendment:

      1. Payments are made within the period prescribed under the MSMED Act

        The expense will be allowed as an expense.

      2. Payments are made after the due at as per the MSMED Act but before the end of the financial year.

        The expense will be allowed as an expense on an actual basis under section 37 of the Act.

        It is pertinent to note that the Hon’ble Supreme Court in the case of Checkmate Services (P.) Ltd.

        v. CIT (2022) 448 ITR 518/143 taxmann.com 178 (SC) where, inter alia, it was held that for the claim of deduction of payments, the same has to be made within the timeline prescribed in the special statute.

        It is desired that the Central Board of Direct Taxes (CBDT) may clarify the claim for deduction under section 37 of the Act to avoid unnecessary litigation.

      3. Payments are made within the period prescribed under the MSMED Act but in the next financial year.

        The expense will be an expense on an accrual basis and will be allowed in the financial year.

      4. Payments are made after the due at as per the MSMED Act and after the end of the financial year.

      The expense will be allowed in the year in which the actual payment is made.

      The Auditors will have to keep this new provision in mind while preparing the Tax Audit Reports.

      According to the Memorandum explaining the provisions of the Finance Bill of 2013, it appears that the Government intends to improve liquidity and cash inflows of MSMEs. A few considerations need to be considered and clarified to avoid unintended litigation and achieve the intention of the legislature.

      Firstly, the provision should be made applicable to only registered MSMEs. Secondly, the provisions should not be made applicable to an MSME making payments to other MSMEs. Thirdly, the claim of expenses on an actual basis if the payment is made after the time prescribed under the MSMED Act but during the financial year. Lastly, the interest paid to MSMEs on delayed payment being compensatory and not penal in nature should be allowed as a deduction on a payment basis.

    2. Increasing threshold limits for presumptive taxation schemes [Clauses 15, 16 and 17] (2023) 451 ITR 72 (St)

      One of the expectations of taxpayers is always ease of compliance. On the other hand, the Government is promoting cashless transactions. This proposed amendment has hit two birds with one stone.

      The proposed amendment provides for an increase in the threshold for presumptive income for eligible businesses under section 44AD of the Act from Rs. 2 crores to Rs. 3 crores; and for professionals under section 44ADA of the Act from Rs. 50 lakhs to Rs. 75 lakhs.

      This enhancement is applicable where the amount or aggregate of the amounts received during the previous year, in cash, do not exceed five per cent of the total turnover or gross receipts.

      It is pertinent to note that the Department on their website (https://incometaxindia.gov.in/ news/finance-bill-2023-highlights.pdf) have interpreted this provision to include payments as well i.e., 95 per cent of the receipts and payments have to be through a non-cash mode. This is not as per the Finance Bill, 2023 or the Memorandum explaining the provisions of the Finance Bill, 2023. This difference is interpretation could lead to unintended litigations.

      Overall, this is a welcoming amendment as it will reduce compliance costs for taxpayers and reduce cash transactions.

    3. The increasing rate of Tax Collected at the Source (TCS) of certain remittances [Clause 90] (2023) 451 ITR 100 (St)

      The Finance Act, 2020 (2020) 428 ITR 1 (St) proposed to levy TCS on remittances made on account of Liberalized Remittance Scheme (LRS).

      The Finance Bill, 2023, proposed to increase the rate of TCS on overseas tour packages (from 5 per cent above Rs. 7,00,000/-) to 20 per cent without any threshold, and for other cases any other case at 20 per cent.

      The LRS is made under the Foreign Exchange Management Act, 1999 (FEMA) to allow all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000/- per financial year. The Scheme was introduced on February 4, 2004, with a limit of USD 25,000. The LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions. According to LRS, Individuals can avail of foreign exchange facilities for the following purposes:

      1. Private visits to any country (except Nepal and Bhutan)
      2. Gift or donation
      3. Going abroad for employment
      4. Emigration
      5. Maintenance of close relatives abroad
      6. Travel for business, attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as an attendant to a patient going abroad for medical treatment/ check-up
      7. Expenses in connection with medical treatment abroad
      8. Studies abroad
      9. Any other current account transaction which is not covered under the definition of a current account in FEMA 1999.

      Although the Memorandum to the Finance Bill, 2020 (2020) 420 ITR 326 (360) (St) and Notes to clauses to the Finance Bill, 2020 (2020)_420 ITR 249 (315) (St) are silent about the intention of the legislature in introducing TCS to LRS transactions.

      The Finance Minister during the Union Budget 2023 has stated that the country offers an immense attraction for domestic as well as foreign tourists. And that there is a large potential to be tapped into tourism. The Government plans on improving eco-tourism through Amrit Dharohar. Further, the Budget 2023 has stated that with an integrated and innovative approach, at least 50 destinations will be selected through challenge mode where aspects such as physical connectivity, virtual connectivity, tourist guides, high standards for food streets and tourists security, all the relevant aspects would be made available on an App to enhance the tourist experience. Every destination would be developed as a complete package. The focus of the development of tourism would be on domestic as well as foreign tourists. Sector-specific skilling and entrepreneurship

      development will be dovetailed to achieve the objectives of the ‘Dekho Apna Desh’ initiative. This was launched as an appeal by the Prime Minister to the middle class to prefer domestic tourism over international tourism. The intention of the Government for the increase in the TCS rates on overseas tour packages is to discourage foreign travel and prefer domestic tourism. This is a welcoming provision and in line with the Government’s intentions and policies.

      However, the levy of TCS, introduced by the Finance Act, 2020, on LRS transactions such as gift/ money given to a relative is prima facie looks unconstitutional and may lead to a challenge in an appropriate case

      Firstly, at the outset, a gift made to a relative is not a commercial transaction but rather a domestic transaction which is exempt under the Income-tax Act, 1961, and there is no necessity to bring the same within the purview of the Scheme of TCS. The Hon’ble Supreme Court in the case of GE India Technology Cen (P.) Ltd. v. CIT [2010] 187 Taxman 110/ 327 ITR 25 (SC) held that wherein it was held that payments to non-residents will be subjected to withholding tax only when such payments are chargeable to tax in India as per sections 5 & 9 of the Act. That is, a non-resident company having no PE in India nor having any business connection in India, the income on this account even if paid, is not taxable in India.

      The principle upheld by the Hon’ble Supreme Court is that if a commercial transaction is not taxable in India, there is no need to impose any tax on such a transaction at its source. The gift given by a relative is not a commercial transaction and is a non-taxable transaction.

      Hence the proposed law in Finance Act, 2020 on imposing TCS on exempt transactions was arbitrary and violative of Article 14 of the Constitution of India.

      Secondly, the levy of TCS on cross-border transactions on a gift made to a relative, merely because the relative is located outside India is

      discriminatory and violative of Article 14 of the Constitution of India i.e. Equality before the law; as the same transaction to a relative in India would be exempt from the levy of TCS.

      The Doctrine of eclipse squarely applies to the said transaction, that the inconsistency in the new law should be overshadowed by the fundamental right of equality.

      Thirdly, the LRS as the same suggests is a scheme for remittance up to a certain amount without the burden of excessive compliance. It authorizes the AD bank to undertake the remittance transaction without RBI’s permission.

      The levy of a transaction tax and subsequent compliance on the same defeats the purpose of the LRS i.e. the existing law. The proposed amendment under the Income-tax Act, 1961 is inconsistent with the LRS issued under FEMA, 1999. The repugnancy or inconsistency in the latter law should be avoided and a harmonious interpretation should be given to the provisions. Therefore, the Scheme of TCS should carve out an exception for a gift made to a relative situated abroad.

      Fourthly, as the transaction of a gift to a relative is not taxable, the amount of TCS paid will be given as credit while paying the taxes for the relevant year. This process of credit is understandable in a commercial transaction. However, in a strict domestic transaction, unwarranted collection of tax in advance is a deprivation of right property which is enshrined under Article 300A of the Constitution.

      Lastly, the rate of 20 per cent is very high. This is the same rate used for the non-furnishing of PAN, inter alia. There is no need for a payer to bear an excess of 20 per cent on a payment made to his relative.

      In conclusion, the Parliament or CBDT via delegated legislation should have carved out an exception to the amendment made via Finance Act, 2020 to save the TCS provisions from being ultra vires the Constitution. As an alternative, the newly amended TCS provisions can also be challenged via a Writ under Article 226 or 32 of the Constitution.

    4. Limiting the rollover benefit claimed under section 54 and section 54F of the Income-tax Act, 1961. [Clause 25 and 30] (2023) 451 ITR 75 (St)

      The primary objective of sections 54 and section 54F of the Act was to mitigate the acute shortage of housing and to give impetus to house- building activity. However, it has been observed Government that claims of huge deductions by high-net-worth assessees are being made under these provisions, by purchasing very expensive residential houses and this is defeating the very purpose of these sections.

      To prevent this, the Finance Bill, 2023 proposed to impose a limit on the maximum deduction that can be claimed by the assessee under sections 54 and 54F to rupees ten crores. It has been provided that if the cost of the new asset purchased is more than rupees ten crores, the cost of such asset shall be deemed to be ten crores.

      It is desired that for the purpose of section 54F of the Act, on purchase of the first house for self- occupancy, there should not be a limit of Rs. 10 Crores.

    5. Introduction of the authority of Joint Commissioner (Appeals) [Clauses 3, 60, 61, 62, 64, 65, 73, 75, 76, 78, 79, 98, 99, 100, 101, 102, 103, 104, 107, 109, 110, 111, 112, 115, 117, 120, 121 & 122] (2023) 451 ITR 102(St)

      More than 5 lakh appeals are pending before the Faceless Appeal Centre. The AIFTP made a representation to the Honourable Finance Minister to take remedial measures to expedite the hearing before the Faceless appeal centre.

      According to the Memorandum explaining the provisions of the Finance Bill, 2023, it has been noted that as the first authority for appeal, Commissioner (Appeals) are currently overburdened due to the huge number of appeals

      and the pendency being carried forward every year. To clear this bottleneck, a new authority for appeals is being proposed to be created at Joint Commissioner/ Additional Commissioner level to handle a certain class of cases involving a small amount of disputed demand. Such authority has all powers, responsibilities and accountability similar to that of a Commissioner (Appeals) with respect to the procedure for the disposal of appeals.

      The earlier section 246 of the Act was providing for the appeal functions of the Deputy Commissioner (Appeals). That institution was discontinued in the year 2000. Accordingly, it is proposed to substitute section 246 of the Act to provide for appeals to be filed before Joint Commissioner (Appeals). 100 new Joint Commissioner (Appeals) have been appointed all over India.

      An appeal cannot be filed before the Joint Commissioner (Appeals) where an order referred to under this sub-section is passed by or with the approval of an income-tax authority above the rank of Deputy Commissioner.

      The pending appeals relating to Individuals and Hindu Undivided Families will be forwarded to the Joint Commissioner (Appeals).

      The Joint Commissioner (Appeals) will function in a faceless manner and have the same powers as the Commissioner (Appeals)

      Although this is a welcoming proposal, it is important to understand that increasing the capacity without rectifying the deficiency in the system will not hold well in the long run.

      Today, as per our experience, there is not a single appeal where a remand report has been received in response to an application made under Rule 46A of the Income-tax Rules, 1962.

      Further, it is advisable to choose Joint Commissioner (Appeals) and Commissioner (Appeals) amongst the Departmental Representatives who appear before the Income-

      tax Appellate Tribunal. They have a better understanding of the appeal procedure and the expectations of the Hon’ble Tribunal. They would know how to pass orders which will be upheld by the Hon’ble Tribunal. They would also have a better understanding of the Principles of Natural Justice.

      The success of the Joint Commissioner (Appeals) will depend on how they will discharge their quasi-judicial functions.

    6. Bringing the non-resident investors within the ambit of section 56(2)(viib) of the Act to eliminate the possibility of tax avoidance. (Clause 32) (2023) 451 ITR 76(St)

      As per the existing provisions of section 56 (2)(viib) of the Act, if a closely held company receives consideration for the issuance of shares, and the consideration is greater than the Fair Market Value of the shares. The excess of consideration over the Fair Market Value of the shares was considered as Income of the closely held company. Rule 11UA of the Income-tax Rules, 1962 provides the formula for the computation of the fair market value of unquoted equity shares for Section 56(2) (viib) of the Act.

      This provision was also called Angel-tax, as it posed a threat to companies raising funds from angel investors.

      A certain class of company i.e., registered start-ups was exempted from this provision. Companies receiving consideration from Alternative Investment funds, Venture Capitalists, and Non-residents inter alia were exempted.

      Now, to prevent tax evasion, the provision is extended to funds raised from non-residents as well.

      The Hon’ble Supreme Court in the case of PCIT v. NRA Iron & Steel (P.) Ltd. (2019) 418 ITR 449/ (2020) 268 Taxman 1 (SC) held that where the assessee received share capital/premium, however, there was a failure of the assessee to establish the creditworthiness of investor companies, it was held that the Assessing Officer was justified in passing the assessment order making additions under section 68 of the Act for share capital/premium received by the assessee company.

      Therefore, even if the closely held company manages to prepare a valuation report as per rule 11UA of the Income-tax Rules, 1962 doesn’t necessarily protect the company if the genuineness of the transaction is doubted. Further, an addition under section 68 of the Act will attract tax at the rate of 60 per cent as per section 115BBE of the Act.

      Issues will arise in cases of foreign subsidiary companies in India, they would have to adhere to FEMA regulations and Transfer pricing provisions.

      The Income-tax Act, 1961 considers the date of receipt for valuation whereas FEMA considers the date of issuance. Further, FEMA accepts any internationally prescribed method for valuation, however, the Act only considers Net Asset Value Method and Discounted Free Cash Flow Method. Further, FEMA requires the shares to be issued at Fair Market Value or Higher but the Act does not allow the shares to be issued at a value higher than the Fair Market Value.

      Concerning Transfer Pricing provisions, the Hon’ble Bombay High Court in the case of Vodafone India Services (P.) Ltd. v. UOI [2014] 361 ITR 531 (Bom)(HC) where the assessee raised capital by issuance of shares from its foreign parent company, it was held that Chapter X i.e. Transfer Pricing does not apply to the said transaction as the transaction is a capital transaction and there is no element of Income.

      After the proposed amendment, the excess consideration would be deemed to be income and the same would attract transfer pricing provisions and consequent compliances.

    7. Extending deeming provision under section 9 of the Act to gift to not- ordinarily resident (Clause 4) (2023) 451 ITR 61 (St)

      The Government noticed that certain persons being not ordinarily residents are receiving gifts from a person resident in India and not paying taxes on it. To overcome this lacuna, it is proposed to extend the deeming provisions of section 9 of the Act to cover ‘not ordinary residents’.

      The Finance Act, 2019 included non-residents within the ambit of section 9 of the Act. However, ‘not ordinary residents’ were not covered. This proposed amendment plugs this lacuna.

    8. Rationalisation of the provisions of Charitable Trust and Institutions. [Clauses 5, 7, 8, 9, 57, 60] (2023) 451 ITR 67 (St)

      There are several amendments made in provisions pertaining to Charitable trusts and institutions viz. date for filing forms 9A and 10, registration for tax exemption, time frame for disposal of application for registration, powers to cancel registrations, exit tax and denial of Chapter VIA deduction on donation to certain funds.

      There are several amendments being made to charitable trusts and institutions on a year-on- year basis. The interpretation of the settled Law regarding Charitable Organizations has been remoulded by the Hon’ble Supreme Court in the case of ACIT v. Ahmedabad Urban Development Authority [2022] 449 ITR 1 (SC) and New Noble

      Educational Society v. CCIT [2022] 448 ITR 594 (SC). It becomes crucial for consultants to be updated with these changes, otherwise bona fide charitable organizations may suffer.

      For example, on delay in filing Form 10B, CBDT issued Circular No. 2 of 2020 dated January 03, 2020, (2020) 420 ITR 38 (St) wherein a delay of up to 365 days could be condoned by Commissioner (E). On further delay, an application under section 119 (2)(b) of the Act would have to be made before CBDT (As held in the case of Little Angels Education Society v. UOI [2021] 434 ITR 423 (Bom)(HC). The powers of the Commissioner (E) were further widened empowering them to condone the delay of up to 3 years by CBDT vide Circular No. 15 of 2022 dated July 19, 2022 (2022) 445 ITR 85 (St), Circular No 16 of 2022 dated July 19, 2022 ( 2022) 445 ITR 86 (St) and Circular No 17 of 2022 dated July 20, 2022 (2022) 445 ITR 87 (St). This proves the fact that there is a high level of non-compliance in the case of Charitable organizations.

      Most trustees of Charitable organizations are not well versed in the rapid changes in the law. It is an honorary position and cannot be expected to be updated either. Therefore, it is desired that the Department should release a document explaining its interpretation in simple language to avoid excessive litigation.

      UAE introduced the corporate tax with effect from June 01, 2023. The UAE Government has explained the provision on their website and other social media platforms. It is desired to have a user-friendly website giving information to the stakeholders.

    9. Defining the cost of acquisition in case of certain assets for computing capital gains (Clause 31) (2023) 451 ITR 76 (St)

      There are certain assets like intangible assets or any sort of right for which no consideration has been paid for the acquisition. The cost of acquisition of such assets is not clearly defined as ‘nil’ in the present provision. This has led to many legal disputes and the courts have held that for taxability under capital gains, there has to be a definite cost of acquisition or it should be deemed to be nil under the Act. Since there is no specific provision which states that the cost of such assets is nil, the changeability of capital gains from the transfer of such assets has not found favour with the Courts.

      The intention of the Finance Bill is to overcome the decision of The Hon’ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) wherein it was held that if the asset does not have any ascertainable cost, the computation mechanism fails and hence no capital gains can be computed.

      The Hon’ble Bombay High Court in the case of Chheda Housing Development Corpn, a Partnership firm v. Bibijan Shaikh Farid & ors 2007 (3) MHLJ 402 (Bom) (HC) held that FSI/TDR being a benefit arising from the land, consequently must be held to be immovable property.

      Now an issue arises whether TDR will be considered as an immovable-intangible property and whether the decision of the Hon’ble Bombay High Court in the case of CIT v. Sambhaji Nagar Co-op. Hsg. Society Ltd. [2015] 370 ITR 325 (Bom)(HC) held that where the assessee had not incurred any cost to acquire TDR attached to the land owned by the society, transfer of same to the developer for consideration for construction of a floor space index would not be eligible to capital gains tax. Whether the ratio will hold well after the proposed amendment is a debatable issue.

  3. Dénouement

To summarize, the budget has not proposed any harsh amendments and has also reduced the burden of compliance which will aid the ease of doing business.

The representation committee of the AIFTP is sending a detailed representation to the Hon’ble Finance Minister in the near future. We think that this special issue of the AIFTP Journal will be a useful reference to understand the various provisions of the Finance Bill, 2023.

Readers may send their suggestions for the representation to [email protected].

Friends,

The Union Budget has been announced and there are many changes in Tax laws. In this issue we had tried to cover the changes as stated in the Finance Bill-2023. The Article covers the changes and the impact of the changes in the Direct Tax Laws and the Indirect Tax Laws.

AIFTP is continuously organizing programme throughout India and we had celebrated the Republic Day on 26th January, 2023 in all Zones. The National Flag was hoisted in all the Zones and at many places. The National President was at Hyderabad where fantastic programme was organized by AIFTP South Zone along with the Telangana Tax Practitioners Associations. The National Flag was also hoisted at head office at Mumbai wherein Sh. Rajesh Mehta, Secretary General was present and Flag was hoisted by the Senior most Past President Mr. P.C. Joshi. In other Zones also the Flag was hoisted. In addition there was functions organized by AIFTP South Zone at Cochin also.

The National Tax Conference and NEC Meeting was organized at Sterling Resorts, Puri. It was attended by over 250 persons and was organized in a grand and lavish manner. The arrangements and hospitality was superb. The Conference Chairman Mr. Bibekananda Mohanti deserve all the credit for this wonderful NEC and NTC. The Team lead by AIFTP East Zone by Mr. Vivek Agarwal and Mr. Pradosh Patnaik and other team Members worked hard for the success of this grand event.

It is also a proud moment for all of us that Hon’ble Mr. Justice Rajesh Bindal has been elevated as Judge of the Hon’ble Supreme Court of India. We all at AIFTP are proud of him as he has been the Member of AIFTP and always coming to the programme of AIFTP regularly. AIFTP is organizing a felicitation function on 17th Feb., 2023 at New Delhi to felicitate Hon’ble Mr. Justice Rajesh Bindal on his elevation to the Hon’ble Supreme Court of India.

Many programmes are being organized by all the Zones of AIFTP. The complete information is available on the website of the AIFTP. In the month of March we are having the National Tax Conference and NEC at Lucknow in North Zone on 18th – 19th

March, 2023. Thereafter on 29th – 30th April we are having National Tax Conference and NEC at Kevdiya in West Zone. In addition to it one day seminars on 25th Feb., 2023 is being organized at Varanasi by the North Zone and at Puducherry by South Zone. We are also having a residential refresher course on 31st March and 1st & 2nd April at Shimla being organized by West Zone. One day seminar at Chindwara is organized with other Associations on 3rd March, 2023 by Central Zone. In the month of February Income Tax Certification Course has been announced by Central Zone on webinar covering the latest topics in Income Tax and starting from 20th February, 2023. Many other programmes in between are being organized. I will request all the members of AIFTP to join the programmes regularly.

The directory of the Team 2023 has been finalized and was formally inaugurated at the National Tax Conference at Puri. The complete Directory has been uploaded on the website of AIFTP. I am also pleased to inform that the website of AIFTP i.e. aiftponline. org has been revamped and the new website will be seen very shortly. The efforts are that it become more interactive and the latest programmes of AIFTP with photos are reflected on it.

The sub Committees formed for 2023 are having their meetings on zoom and new and constructive suggestions are received from the Members participating in the meetings.

We look forward to active participation of the Members and also request Members to update their data on the website using the online facility. Individual mail are also being sent to Members to upload their data. In case Members are having suggestions then the same may kindly be informed by sending mail at [email protected] or WhatsApp to the undersigned.

Wishing you all a very happy and colourful Holi.

Regards,

Pankaj Ghiya

National President, 2023

Dear Friends,

We professionals keenly wait for the Budget Speech of the Hon’ble Finance Minister, irrespective of the dispensation which is in power, to know the Policy thrust of the government . After listening to Hon’ble Finance Minister we eagerly wait for the fine print, as the devil lies in the details. The experts, more or less, even those who are in the opposition block qualified the policy thrust of the Budget 2023-24 as consistent. After looking into the fine print of the Finance Bill, 2023, to certain extent, I agree with this qualification. It is difficult for the North Block to give up the temptation to amend the law to neutralize the impact of Apex Court decisions. Old habits die hard. The proposed Clause 11of the Finance Bill, 2023 wants to replace the existing Section 28(iv) which reads as “the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;” with the following.

(iv.) The value of any benefit or perquisite arising from business or the exercise of a profession, whether;-

  1. convertible into money or not; or
  2. in cash or in kind or partly in cash and partly,

Thus, the Finance Bill proposes to over come the decision of the Apex Court in the case of CIT v. Mahindra and Mahindra ltd (2010) 93 Taxmann.com 32 (SC.) wherein it was held that “ on a plain reading of section 28(iv), prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of section 28(iv), the benefit which is received has to be in some other form rather than in the shape of money. By doing this the Hon’ble Supreme Court up held the finding of the Hon’ble Bombay High Court in the case of the same assessee reported in (2003) 261 ITR 501 (Bom.) that “The income which can be taxed under section 28(iv) must not only be referable to benefit or perquisite, but it must be arising from business. Secondly, section 28(iv) does not apply to benefits in cash or money”

The Finance Bill, 2023 has been consistent with the earlier practices of reversing the decisions of Hon’ble Supreme Court in favour of Assessee through legislative might with retrospective amendments. As a professional I expect from the present Government to do away with this practice of overturning the judicial pronouncements through legislative might and be gracious in accepting the same.

In this issue of the Journal, we have attempted to cover and explain the important changes proposed in the Finance Bill, 2023 to the Income Tax Act, 1961 and its implications. I thank all the

esteemed professional colleagues for accepting to contribute to this issue of the Journal inspite of a short period of time is provided to them. I am grateful to all my friends in the Journal committee, specifically, the Chairman CA Mitesh  Kotech for the constant support and guidance. I once again thank all the friends for the encouragement given to me and my team.

K. Gopal,

Editor

Sr. No. Name of Members Profession Zone
1 Partha Sarthi Karmakar Adv. East
2 Palash Khurpia Adv. Central
3 Awani Kant Pandey Adv. North
4 Gaurav Rajendra Luthra CA. North
5 Hemant Nandkishore Marathe GSTP West
6 Jai Kumar Mittal CA. North
7 Animesh Mittal Adv. North
8 Saurabh Jain CA. North
9 Jayesh Sejpara CA. Central
10 Jwaria Kainaat Adv. North
11 Ashish Kapoor CA. North
12 Sharad Srivastava CA. North
13 Garvil Jain CA. Central
14 Anand Kumar Hetamsaria Adv. East
15 Yeshwanth Pamaiahgari GSTP South
16 Amarnath Adv. North
17 Klee Fredrick Singh Adv. North
18 Gururaj Murugesh Andanimath GSTP South
19 Pallav Dave CA. Central
20 Mohit Golchha CA. North
21 Vivek Gupta CA. East
22 Madan Kumar Maroti CA. East
23 Mahendra Kumar Patni CA. East
24 Dilip Kumar Patni CA. East
25 Vijaykumar Mishra Adv. West
26 Chandra Kant Swain Adv. East
27 Arun Chhajer CA. North
28 Srihari Hara Chilla CA. South
29 Chaitanya Suhas Sadekar GSTP West
30 B. Gopalakrishnan Adv. South
31 Piresh Kumar Jain CA. Central
32 Manish Kumar Jain CA. North
33 Nirbhik Gandhi CA. Central
34 Vishal Pravinchandra Shah GSTP West
35 Krunalkumar Maheshkumar Soni GSTP West
36 Anshul Garg CA. North
37 Amit Kumar Gupta Adv. East
38 Dr. Santosh Gupta CA. Central
39 Sahib Choudhary CA. East
40 Deepak Bhatt CA. South
41 Sunil Das CA. East
42 Ashok Goyal CA. North
43 Arnish Goyal Adv. North
44 Kapil Mahajan CA. North
45 Sachindra Pratap Singh Adv. North
46 Prathik Mehta CA. Central
47 Ajay Kumar Agrawal CA. East
48 Sunita Kedia CA. East
49 Rakesh Kumar Singh CA. East
50 Lalit Kumar Jalan Adv. East
51 Sharin Nessa Adv. East
52 Manisha Shankar Saraf CS. East
53 Jitendra Lohia CA. East
54 Kamal Nayan Jain CA. East
55 Vaishali Loyalka CA. East
56 Omprakash Jhunjhunwala Adv. East
57 Sukanya Dutta Adv. East
58 Sweta Sharma Adv. East
59 Ghaffar Farhan Adv East
60 Ayush Gupta CA. East
61 Pinky Agarwal CA East
62 Samya Sengupta CA East
63 Sushil Agarwal CA. East
64 Pawan Agrawal CA. East
65 Bina Rathi CA. East

Tanu Priya

In this ever changing world, virtual currency has replaced all the various lucrative assets and investment products around the globe. However, this block-chain technology, which claims to be non-regulatory and decentralized, has unfortunately confused the masses. Even with ambiguous regulatory methods implied on the Crypto transactions, middle class investors did not back down from pooling their money it.

RBI, the national regulation authority, has not recognized VAs (Virtual asset) as a legal tender. This decision of government has directly affected the tax implications on the VAs. Prior to the Finance Bill 2022, income generated from VAs was taxed under the Capital Gains head or business income under Profits and Gains from Business and Profession (PGBP), based on the usage by the assessee. However, the central government has changed their stance by imposing a heavy levy of 30% on income earned from VA trading under the Other Sources head. This move is being praised for being the first step of government towards regulating Virtual Currencies like Crypto. We cannot overlook upon the intention of authorities behind the act. It is primarily to discourage masses from investing in crypto. This was done to decrease the huge number of young investors moving towards the industry.

The position under direct taxation can still be considered as great if we were compare it with the Indirect sector. Cyrptominning has still not been recognised by the statues. An effort was made by Central Economic Intelligence Bureau (CEIB) to impose 18% GST on Bitcoin Transaction. The classification of Crypto is the most crucial task for it to fall under the pursuit of GST. The virtual assets need to recognised either as a Good or Service under the statue. Furthermore, a rate of levy needs to be decided. Considering the rates under Income Tax, the government might settle on a GST slab of 18%. Trading Platforms like Wazirx and CoinDX to pay service tax on for facilities they provide in assisting the transactions.

Crypto is highly criticized for the role played by it in black market and funding terrorist activities. Government aims at promoting more reliable investment products like Stocks and securities mainly because they are covered by regulation authorities so any upcoming economic crises could be monitored and prevented. However, the wave of crypto has already hit the cities and staying in denial is not the right recourse. Positive attitude is the key. The volatile Indian market can be used in a way by authorities to directly help in increasing revenue and which will also help it in becoming a most suitable virtual trading hub.

INTRODUCTION

“Cryptocurrency is here to stay, so we hear on cryptosphere everyday. But there are some fundamental situations that needs to take place for this speculated ‘store of value’ to really have its foot to stand on, and that is, government’s ability to enforce taxation on businesses and individuals making gains with this currency.

So, either we like it or not, crypto taxation needs to be enforced for government to really entertain any form of adoption. Asian countries dominates the cryptocurrency spaces but the governments are finding it a bit hard to really tax crypto transactions.”

– Olawale Daniel, Founder – TechAtLast International

WHAT IS A VIRTUAL DIGITAL ASSET ?

A virtual asset is a virtual illustration of an item that has price in a specific surroundings. This medium of trade or assets may be digitally traded, transferred or used for price or investment purposes.1 The Supreme Court, in the case of Internet and Mobile Association of India v. Reserve Bank of India2 conducted a detailed analysis into the existing literature on the matter. It extensively quoted the Financial Action Task Force (“FATF”) report titled ‘Virtual Currencies Key Definitions and Potential AML/ CFT Risks’.3 The FATF in this report defines ‘virtual currency’ as a digital representation of value that can be traded digitally and functions as (i) a medium of exchange; (ii) a unit of account; and/or (iii) a store of value, but not having a legal tender status in any jurisdiction. It is not issued, nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the virtual currency. The report further distinguishes between e-money and virtual currency and defines the former as a digital representation of fiat currency used to electronically transfer value denominated in fiat currency. Due to this fundamental distinction between virtual currency and legal tender, many believe that the expression virtual “currency” can be misleading. The expression “payment tokens” is therefore often used to more precisely denote the concept of “virtual currencies” and can usually be interchangeably used.

VAs include things :

A. Crytpocurrrencies

B. NFTs – non fungible tokens

Both of these are one-of-a-kind software of blockchain technology. Cryptocurrencies wherein a finite set of ‘currency’ devices, known as cash, are used as an electronic coins machine. This may be connected to an underlying asset or have a few inherent fee.4

Non Fungible tokens, which are much like cash, may be sold and offered in a virtual form. Unlike cryptocurrencies where the coins are homogenous, NFTs are non-fungible, i.E., non- interchangeable by using nature such that every token is particular and has a fee this is wonderful from different tokens. NFTs are connected to one or greater underlying assets including artwork or actual estate, which offers it its price5

TAXES AND THEIR PURPOSE

Taxes are one of the number one resources of profits for the government through which it fulfils various tasks and tasks. Tax serves numerous functions and is crucial for any nation’s economic development, sustenance and development. Even as the tax cash is utilised for pleasing various initiatives, it’s also the primary supply of funding for numerous important authorities welfare schemes. It enables the authorities in enforcement of legal guidelines and the judicial system. The Indian Constitution under Article 246 enlists different taxations in the country between the Centre and the State.6

BLOCKCHAIN AND WORKING OF VDS

Both cryptocurrencies and NFTs are primarily based on blockchain or different dispensed ledger technology. Oversimplified, blockchain is a way of storage of statistics in a decentralised way such that nobody person (or institution) can exercise absolute control over the records. The term ‘blockchain’ refers to the manner in which new packets of records (referred to as blocks) whilst delivered are linked to the closing delivered block of facts, as a result forming a sequence of records blocks linked chronologically. A key feature of blockchain era is the way wherein facts blocks are proven and brought. This happens thru a community of computer systems running in parallel,7 without any one laptop regulating the blockchain or exercise advanced control over the management or storage of the data or the verification processes. Records once added to a blockchain cannot be deleted, modified or tampered with, for this reason a blockchain forms an correct and reliable chronologically organized report of all records that has been introduced to the blockchain. As a end result, despite the fact that there is any human error in the facts being added, the added facts cannot be edited to rectify the error; only a new block can be introduced to well-known and address the mistake.8

EVOLUTION OF VDAs IN INDIA

The crypto story in India started in 2013, when India’s primary bank, the Reserve financial institution of India (RBI), has warned residents of the dangers related to buying and selling virtual currencies, and how buying and selling of such currencies in overseas exchanges might also bring about violation of forex regulations (FEMA).

RBI has clarified that digital currencies might not be used as felony gentle in India. In that feel, a cryptocurrency could neither be handled as a foreign foreign money (as recognized under FEMA) or be used in lieu of the Indian Rupee. It may be inferred that the fee of attention with cryptocurrency for buy of goods or services would be handled as an trade in place of an outright sale.

In parallel, reacting to the pointy appreciation in value of Bitcoin and comparable traits with different cryptocurrencies, the income Tax department had in December 2017 issued half a million notices to high internet well worth individuals who personal cryptocurrencies seeking confirmation that there are not any unpaid taxes arising from their buying and selling of cryptocurrencies.

Having realized the underwhelming impact of such warnings, RBI adopted a one of a kind technique issuing a circular in April 20189 restricting banks and different economic institutions from facilitating the buying and selling of cryptocurrencies on both Indian and distant places exchanges. These instructions rendered Indian cryptocurrency exchanges efficiently defunct in a single day.

This changed into challenged before the Indian ideally suited court in may also 2018 via the net and cell affiliation of India on the ground that this sort of round would tantamount to a denial of cryptocurrency investors’ constitutional proper to carry on any exchange or profession, and might therefore be violative of Article 19(1)

(g) of the Indian constitution. In its judgement of March 2020, the splendid court set aside the RBI round staring at that within the absence of any legislative ban at the shopping for or promoting of cryptocurrencies, RBI isn’t legal to impose disproportionate restrictions on Indian cryptocurrency exchanges. While maintaining that casual investors or those undertaking buying and selling of cryptocurrencies as a commercial enterprise could now not be entitled to a claim beneath the stated article, the supreme courtroom discovered that the round disconnected the banking area from cryptocurrency exchanges no matter the RBI no longer having located whatever wrong with the functioning of those exchanges. It became also stated that earlier than issuing the round, the RBI did now not discover the availability of alternative less intrusive measures consisting of regulating cryptocurrency buying and selling and cryptocurrency exchanges. The popularity of cryptocurrency in India is clear from the fact that it houses 10.07 crore crypto owners, which is more than every other country in the world.10

It is now a long-settled position that the legality of or manner of acquiring income has no bearing on its taxability.11 Therefore, a lack of clarity with respect to its tax treatment is not only depriving the crypto community of certainty and stability, but it is also robbing the nation’s treasury of its fair share of tax revenue.

MONEY LAUNDERING AND TERROR FUNDING CONCERNS

The Cryptocurrency & regulation of legitimate virtual forex invoice, 2019 launched in December 2019 meant to prohibit and criminalise the maintaining, selling or trading of cryptocurrency, punishable with imprisonment of up to ten years, or a quality, or both. The bill in addition outstanding and accepted the other programs of the underlying disbursed ledger technology for experiments, research, or teaching. It moreover accredited RBI to roll out a government advocated virtual foreign money.

Presently, RBI continues to explicit its apprehensions in legalising cryptocurrency transactions, and its capacity to destabilise the Indian economy, and to pass government efforts to monitor and manipulate the waft of cash by illegal way and for illicit activities. In light of this, RBI indicates a hard-line technique by means of banning and criminalising all decentralised cryptocurrency transactions. This contrasts sharply with the critical government’s concept to give digital virtual assets criminal repute. As a result, this differing stance at the legality of virtual virtual property, coupled with the evolving view of courts, simply makes the future of digital virtual belongings unsure.12 Virtual assets are at risk of being misused through criminals to launder money and fund terrorism as they allow extra ranges of anonymity, have international reach making it easier for go-border payments, and they can be traded effortlessly.13

PRE FINANCE BILL 2022 STATUS OF VDAs IN INDIA

Besides regulatory actions, there have also been concerted efforts to “ban all private cryptocurrency”. Most notably, a bill in this regard was set to be placed before the Parliament in its winter session in late 2021.14 Though this bill has not been made public yet and was never actually placed before the Parliament, it disrupted the crypto ecosystem in India. In parallel, other disincentives have continued. For instance, the Advertising Standards Council of India which is a self- regulatory organisation of the Indian advertising industry, came out with guidelines to regulate the advertising and promotion of cryptocurrencies.15 It noted that several crypto advertisements did not adequately disclose the risks associated with such products. The guidelines required all such advertisements to carry the disclaimer that “Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.” It also required the disclaimer to be carried in such a manner that it is prominent and unmissable by an average consumer. On the tax front too, there has been an immense lack of clarity. Back in 2021, Minister of State for Finance, Mr. Anurag Singh Thakur had said in response to a question in the Rajya Sabha that “the gains resulting from the transfer of cryptocurrencies/ assets are subject to tax under the head of income, depending upon the nature of holding of the same”. However, within a span of a year since this aforementioned statement, the Ministry of Finance took a completely different and classification agnostic approach to taxing cryptocurrencies. In the Budget for the Financial Year 2022-23, the Finance Minister made four key amendments to the Income-tax Act, 1961 (“IT Act”).16

The Finance Act 2022 inserted:

  1. Section 2(47A) to define virtual digital assets;
  2. Section 115BBH that specifies the rate at which transfer of these ‘virtual digital assets’ will be liable to income-tax, the rate pf tax being 30 percent;
  3. An explanation under clause (x) of section 56(2) to the effect that property would include ‘virtual digital asset’; and (iv) Section 194S that provided for tax deduction at source on payment towards consideration for transfer of virtual digital assets.

FINANCE BILL 2022 AND 30% TAX IMPOSED

Profits bobbing up from transactions in cryptocurrencies have become taxable from April 1, 2022, following the Budget announcement to that effect by means of Union Minister of Finance Nirmala Sitharaman in February, 2022. She introduced a scheme of 30% taxation on virtual digital assets (VDAs), other than tax deducted at source (TDS) implications, which got here into effect from July 202217

TAX ON INCOME FROM VIRTUAL DIGITAL ASSET

The IT Act defines the term “income” in a broad manner.18 It further stipulates “heads of income” under which all income needs to be classified for the purpose of charge of income- tax.19 This list inter alia includes ‘profits and gains from business or profession’, ‘capital gains’ and ‘income from other sources’.20

The Supreme Court in Commissioner of Income- tax v. G.R. Karthikeyan21 has observed that the idea behind providing an inclusive definition of income under section 2(24) of the IT Act is not to limit its meaning but to widen its net and the word ‘income’ is of widest amplitude, and that it must be given its natural and grammatical meaning. Accordingly, any income earned from cryptocurrency would naturally fall within the ambit of the IT Act.

Section 28, Finanace Act, 2022 – Intersertion of new sections 115BBH and 115BBI

After section 115BBG of the Income-tax Act, the following sections shall be inserted with effect from the 1st day of April, 2023, namely:-

Section 115BBH, The Income Tax Act, 1961:

  1. Where the total income of an assessee includes any income from the transfer of any virtual digital asset, notwithstanding anything contained in any other provision of this Act, the income- tax payable shall be the aggregate of,-
    1. the amount of income-tax calculated on the income from transfer of such virtual digital asset at the rate of thirty per cent.; and
    2. the amount of income-tax with which the assessee would have been chargeable, had the total income of the assessee been reduced by the income referred to in clause
  2. Notwithstanding anything contained in any other provision of this Act,-
    1. no deduction in respect of any expenditure (other than cost of acquisition, if any) or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the income referred to in clause (a) of sub-section (1); and
    2. no set off of loss from transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years.
  3. For the purposes of this section, the word “transfer” as defined in clause (47) of section 2, shall apply to any virtual digital asset, whether capital asset or not.

Specified income of certain institutions Section (115BBI)22

  1. Where the total income of an assessee, being a person in receipt of income on behalf of any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub- clause (v) or any university or other educational institution referred to in sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (via), of clause (23C) of section 10 or any trust or institution referred to in section 11, includes any income by way of any specified income, notwithstanding anything contained in any other provision of this Act, the income-tax payable shall be the aggregate of,-
    1. the amount of income-tax calculated at the rate of thirty per cent. on the aggregate of such specified income; and
    2. the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the aggregate of specified income referred to in clause (i).
  2. Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the specified income referred to in clause (i) of sub-section (1).

Explanation.-For the purposes of this section, “specified income” means,-

  1. income accumulated or set apart in excess of fifteen per cent. of the income where such accumulation is not allowed under any specific provision of this Act; or
  2. deemed income referred to in Explanation 4 to the third proviso to clause (23C) of section 10, or sub-section (1B) or sub-section (3) of section 11; or
  3. any income, which is not exempt under clause (23C) of section 10 on account of violation of the provisions of clause (b) of the third proviso of clause (23C) of section 10, or not to be excluded from the total income under the provisions of clause (d) of sub-section (1) of section 13; or
  4. any income which is deemed to be income under the twenty-first proviso to clause (23C) of section 10 or which is not excluded from the total income under clause (c) of sub-section (1) of section 13; or
  5. any income which is not excluded from the total income under clause (c) of sub-section (1) of section 11.23

THE EFFECT OF INCOME TAX IMPLICATION

Though there is a lot of doubts and ambiguousness regarding the functionality of the new introduced changes, the crypto investor and the general public should keep in mind that The entire 30% tax on any crypto assets will be deducted from the profits earned via various crypto tokens in an entire financial year. The starting of this 30% tax will be from the Assessment of the FY 2023-24. The following points shall also be kept in mind

  1. Income from the transfer of virtual digital assets such as crypto and NFTs will be taxed at 30% at the end of each financial year.
  2. No deduction, except the cost of acquisition, will be allowed while reporting income from the transfer of digital assets.
  3. Loss from digital assets cannot be set off against any other income.
  4. The gifting of digital assets will attract tax in the hands of the receiver. Losses incurred from one virtual digital currency cannot be set off against income from another digital currency. 1% TDS point should also be mentioned in this list of pointers as it was announced in Budget 2022.24

ASSETS SUBJECT TO TAX IMPLICATIONS

The earnings Tax Act turned into amended with effect from April 1, 2022 to provide for the taxation of profits and, or, profits derived from VDAs. Below the earnings Tax Act, VDAs are:

Cryptocurrencies not being Indian or foreign foreign money (the proposed virtual Rupee could seemingly be exempt as a end result) – the particular terminology used underneath the income Tax Act is “…any facts or code or range or token (now not being Indian forex or foreign foreign money), generated through cryptographic way or otherwise, through something call referred to as,25 supplying a digital illustration of fee exchanged with or without attention, with the promise or representation of having inherent fee, or functions as a shop of cost or a unit of account which include its use in any monetary transaction or funding, but no longer restrained to investment scheme; and may be transferred, saved or traded electronically…”

NFTs or similar tokens as the critical government may additionally notify; and

Such other virtual property as the crucial government may additionally notify.

Interestingly, the income Tax Act does no longer point out either blockchain or DLT within the definition of VDAs. The relevant government has but to notify the NFTs, tokens or different VDAs to which the provisions of the profits Tax Act will observe. While it can, therefore, be argued that no NFTs are currently protected via the brand new tax regime, there is a opportunity that the tax authorities will select to tax NFTs under the cryptocurrency head as the definition consists of tokens and can be considered wide enough to consist of NFTs. It’d, therefore, be prudent for taxpayers to count on that the NFTs they accumulate, sell, and, or, otherwise address are in all likelihood to be taxable under the regime.

Under the Income Tax, there could be three scenarios. First, where if someone gets a VDA without attention and the fair market value of that VDA exceeds INR 50,000 – the entire truthful marketplace fee of the asset is taken into consideration taxable profits in the fingers of the individual that obtained the VDA. The applicable price of tax will depend upon the income tax bracket within that man or woman in most cases falls. Second, when someone gets a VDA for consideration lower than the fair marketplace price, and the truthful market price exceeds the consideration by using extra than INR 50,000 – the difference between the honest marketplace fee and the consideration paid is considered taxable earnings within the hands of the individual that obtained the VDA. The relevant rate of tax will rely on the profits tax bracket within that person by and large falls. Third, in which a person earns earnings from the switch of a VDA – the profits earned by using that character less the price of acquisition, if any, is problem to tax on the fee of 30%. Moreover, an equalization levy of 2% will be levied on the non-resident proprietor of the blockchain on which NFTs are traded.26

1% TDS DEDUCTION AND SECTION 206AB

The earnings Tax Act in addition complicates subjects through requiring that, where a resident transfers a VDA for attention, the person liable for paying that attention must deduct 1% of the consideration at supply as earnings tax. The requirement to deduct 1% of the attention applies regardless of whether or not the consideration is in cash, in part in cash and in part in attention for another VDA, or in attention for only some other VDA.

The duty to withhold tax may also be imposed on the proprietor of the blockchain on which NFTs are traded (whether or not they’re resident in India) as they will be taken into consideration e-trade operators facilitating the trading of NFTs.

Tax does now not need to be deducted where:

  1. The consideration is paid by a “specified person” and the aggregate value of the consideration being paid does not exceed INR 50,000 during the financial year; or
  2. The consideration is paid by a person other than a “specified person” and the aggregate value of the consideration being paid does not exceed INR 10,000 during the financial year. A “specified person” is defined as an individual or Hindu undivided family:
  3. whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed INR 1 crore in case of business or INR 50 lakhs in case of profession, during the financial year immediately preceding the financial year in which such VDA is transferred;
  4. that does not have any income under the head “profits and gains of business or profession”.

As a consequence, tax will generally need to be deducted at source by most persons acquiring VDAs unless they fit the criteria of “specified persons” or only make purchases of VDAs infrequently and for small amounts.

Section 206AB, Income Tax Act, 1961:

  1. If any user has not filed their Income Tax Return in the last two years and the amount of TDS is Rs. 50,000 or more in each of these two previous years, then the tax (TDS) to be deducted for Crypto related transactions will be at 5%.27
  2. If an order is placed before 1st July 2022, but the trade is executed on or after 1st July 2022, TDS provisions will apply.28

Regarding the 1% TDS reduction on crypto assets According to the revised Income Tax regulations, it will applicable on all sell transactions of the crypto assets. This will be effective for 1 July, 2022. Whether there is any profit earned or not, TDS will be deducted irrespective of that.

SET-OFF OR CARRY FORWARD OF LOSSES NOT ALLOWED

The Income Tax Act expressly prohibits them set-off of losses from transfers of VDAs against profits or gains derived from other VDAs. Illustratively, if someone were to promote an NFT and incur a loss, the loss can’t be set-off against a benefit made on the transfer of another VDA. Illustratively, if A sells an NFT paintings for a loss of INR 10,000 after which sells units of Ethereum for a profit of INR 50,000, A could be prone to tax on the whole income of INR 50,000 from the sale of Ethereum and could not be able to set-off the lack of INR 10,000 at the NFT. Basically, beneath the earnings Tax Act, gains and profits from VDAs are taxable however no comfort is furnished within the event losses are incurred, and, to that extent VDAs are taxed otherwise than most different belongings in India.29

CRYPTO AND THE CAPITAL ASSETS

Any earnings or profits springing up from the sale of capital property together with equity stocks, mutual finances, bonds, and different commodities are problems for short-term and long-term capital gains taxation. Capital assets that might be held for more than 36 months are called short-time period capital assets. In some cases, belongings like fairness or choice shares in a listed corporation, different listed securities, UTI gadgets, fairness-oriented budget gadgets, or 0-coupon bonds – held now for not more than one year also are categorized as short- term belongings. Within the case of unlisted shares and immovable belongings, those belongings held no longer extra than 24 months are also said to be short-time periods. In the meantime, capital belongings held for greater than 26 months or 24 months, or twelve months inside the above-cited cases – are referred to as long- term capital belongings.30

Underneath short-term capital profits tax, if Securities Transaction Tax (STT) is not applicable – then the fast-term capital gains grow to be other earnings tax go back gadgets, and the taxpayer is taxed in step with the profits tax slab quotes. However, if STT is relevant then the short-term capital gains tax is 15%. With regard to long-term capital gains tax, a ten% tax rate is levied on the sale of equity stocks/devices of fairness-orientated budget on amounts above Rs. 1 lakh. The tax rate is 20% on belongings besides fairness stocks/equity-oriented price range.

Presently, there are not any TDS relevant to domestic buyers on their capital gains. However, NRIs are a problem to 30% TDS on short-time period capital profits and 20% over a long time. Form 15G /15H anyplace relevant is to be had and needed to be submitted to the IT branch to avoid TDS.31

From the above, it can be said that cryptocurrency gains or losses still have higher tax rates as compared to the quick term and long term capital profits taxation. Also, TDS is limited to NRIs in capital assets in contrast to the 1% on crypto belongings to be had for citizens.32

Problems can also arise in figuring out a taxpayer’s taxable profits or profits from the receipt or switch of a VDA:

  1. Where a VDA is received without attention or for a attention decrease than the fair market value, difficulties can also stand up in determining the character’s taxable earnings in recognize of the asset. Cryptocurrencies and NFTs are commonly extremely risky with valuations fluctuating on a ordinary foundation. Consequently, it could be difficult to pinpoint the honest market fee of the asset.
  2. Where cryptocurrency is purchased on a crypto-change or an NFT is bought on a market, it is able to normally be argued that the truthful marketplace fee is the price winning on that change or marketplace on the time of the purchase.

However, this may no longer preserve water with the profits tax government as fair marketplace price under the profits Tax Act is to be determined in accordance with the income Tax regulations, 1962 (regulations). At the same time as the policies do prescribe mechanisms for determining the truthful market cost of numerous assets, they do no longer especially cope with the valuation of VDAs, as a consequence creating a lacuna.

Troubles might also stand up where someone is vulnerable to tax on transfer of a VDA. The handiest deduction permitted at the profits earned from the switch of a VDA is the fee of acquisition. In which a VDA is bought and offered for an recognized amount in INR or in a foreign forex, the income and the cost of acquisition are easily identifiable. However, if a VDA is acquired using, or offered in exchange for, another VDA (example an NFT is purchased using Bitcoin), the price of acquisition and, or, consideration for the switch of the VDA may be difficult to envision as a selected INR fee for the purchase and, or, switch will no longer be comfortably to be had.

The problems in valuing VDAs for the purpose of taxation may want to result in disputes with the tax authorities. The authorities have additionally confirmed that expenditure incurred in mining cryptocurrency is taken into consideration capital expenditure and no longer a cost of acquisition. Consequently, the full-size expenditure on the hardware required to mine cryptocurrency can’t be deducted from any earnings derived from the transfer of cryptocurrency. Whilst no rationalization is to be had in admire of the deduction of costs incurred to mint NFTs, those costs will probable be handled in the identical way as mining charges for cryptocurrencies.33

IMPACT ON THE INDUSTRY- ECONOMICALLY AND SOCIALLY

Taxation has definitely made the enthusiasm of Indian crypto investors, cold. Trading volumes on WazirX and CoinDCX dropped by using as a minimum 80 in line with cent. According to data received from facts aggregator nomics. Com, change volumes on Indian cryptocurrency exchanges have considerably decreased after the 1 in keeping with cent TDS came into effect from July 1, 2022.34

Some crypto finance experts consider that the big step by the government has been precise for traders, as it has reduced hypothesis and price manipulation inside the unsupervised cryptocurrency industry. The Industry expert, Mr. Gaurav Mehta, founder of Catax – a blockchain auditing and taxation start-up, in an interview had explained in great details the positive impact of the action. People at the moment are buying and maintaining virtual belongings, inclusive of Bitcoin and Ethereum for longer durations of time, with the intention to be high-quality for the crypto financial system in the end. Crypto investors appear to have widely widespread the imposition of a 30 percentage without a loss offset and made peace with it. Due to taxation on each transaction, pump-and-unload activities that prey on unsuspecting traders, are now not viable. Traders may also acquire a clean image of market participation, trading volume, and adaption, which changed into what formerly claimed to be billions at the greenback on a day basis and became normally driven by way of buying and selling bots and phony quantity that dazzled and enticed new traders into the unregulated and risky crypto asset elegance.35

GST IMPLICATIONS ON CRYPTO

As for now, there is not GST implication on VDAs however; it is being predicted by the people of the industry that the government might soon move towards this direction. It can be deciphered from the steps the government had taken recently. Recently, The Central Economic Intelligence Bureau (CEIB), proposed to impose 18% GST on Bitcoin transactions. The CEIB told CBIC that Government could potentially gain Rs. 7,200 crores annually on bitcoin trading.

CEIB has also suggested that Bitcoin be categorized as an ‘intangible assets’ by which GST could be imposed on all the transactions. It was also added that cryptocurrency could be treated as currents assets and GST be charged on the margins made when traded. The CBIC is still reflecting upon a proposal that is yet to be put forth the GST Council. The key points presented included definition of Cryptocurrency  mining’ and how it will be treated as a supply of service since it generates cryptocurrency and involves rewards and transaction fees. Tax will be collected from the miner on transaction fees or reward. If the value of the reward exceeds Rs. 20 lakh, individual miners will need to register themselves under the Goods and Services Tax (GST). The proposal also considers Rs. wallets’ storing keys taxable. Wallet service providers should be registered under GST. Cryptocurrency exchanges need to register and pay tax on their earning. Trading may attract 18 percent GST. Buying and selling of crypto currencies will be considered under the category of supply of goods. Other related facilitating transactions will be counted under services and these would include supply, transfer, storage, accounting, among others. The transaction value in rupees or the equivalent of any freely convertible foreign currency will be used to determine the value of cryptocurrency. In a scenario where both buyer and seller are in India, a transaction would be treated, as a supply of software and the buyer’s location will be the place of supply. For transfer and sale, the location of the registered person will be the place of supply. However, in a scenario where sale has to be made to non-registered persons, the location of the supplier would be considered as the place of supply. Integrated GST would be applicable for transactions conducted beyond the Indian territory and would be considered as import or export of goods. IGST will be levied on cross- border supplies.36

There is a debate regarding the classification of VDAs as a good or services however, it can be concluded there is a good chance that GST would become applicable on cryptocurrency and perhaps also on the mining services. But no stated rules and regulations with regard to cryptocurrency and the precipitous speed at which the blockchain technology is growing, it is high time taxation and regulatory principles are brought in to stabilize the current situation and clear off all the grey areas.37

With the proliferation of cryptocurrencies, the concept of money is evolving at a rapid speed. While this evolution poses several pertinent threats, it also offers many valuable opportunities. Most of the challenges associated with cryptocurrencies can be effectively addressed by designing an appropriate regulatory framework. The taxation framework should thus be designed such that taxes do not factor into investment or business decisions. They should not be designed to disproportionately encourage or deter activity in this space. Their sole aim should be to earn revenue, without stifling innovation and development of the ecosystem. With this aim in mind, it is suggested that an assessment should be conducted on whether cryptocurrencies qualify as “goods” or “money” under the GST framework and the issue should be clarified. If it is concluded that they constitute “goods”, then an amendment should be made to the GST law specifically including cryptocurrencies to the definition of goods.

VDA TAXATION POLICIES AROUND THE GLOBE

Cryptocurrency transactions defined and taxed differently in many countries like Canada, USA, Germany, UK, and Australia. In June 2014, Canada is the first country in the world to establish a tax on virtual currencies. The Bank of Canada has expressed a willingness to acknowledge the developing virtual currency market, but currently recognizes cryptocurrencies as investments. Other countries, specifically, within the developed world, have adopted various tactics to the taxation of VDA. Their method seems to be predicated on how they classify VDAs.

Certain nations consisting of the U.S. Recall cryptocurrencies to be assets and tax profits derived from transfers. The fair price for the purposes of figuring out such profits is the fee at which the cryptocurrency turned into buying and selling on the trade while the transaction was finished. In Canada and the United Kingdom, despite the fact that the two countries classify cryptocurrencies in a different way (as commodities and capital assets, respectively), they’ll be challenge to both income tax and capital profits tax relying on the relevant statistics and circumstances – example, whether the cryptocurrency changed into obtained through professional mining or interest mining).38

As NFTs are nonetheless a fairly new concept, many developed countries have not begun to formulate unique coverage for his or her taxation. At present, maximum evolved international locations, apart from Malta, appear to tax NFTs inside the equal way as cryptocurrencies. Malta has created a framework for DLT belongings — which it categorizes as coins and tokens — and taxes cash within the same way as fiat currencies and levies profits tax on returns earned from monetary tokens.

WAY FORWARD

The authorities has brought a simplified regime of levying a excessive, but widespread fee of tax on all kinds of transactions. Within the brief time period, a simple tax mechanism will probably assist in lowering ambiguity and providing fact to taxpayers. However, inside the longer run adopting a widespread price may additionally disrupt the cryptocurrency industry as a high tax rate could be relevant on every switch thereby substantially increasing the tax price.39

Additionally, from 01 July 2022 onwards, any man or woman paying consideration to a resident of India in change for Cryptocurrency will be obligated to withhold tax on the charge of one per cent at the consideration so paid, issue to positive financial thresholds. The applicability of such withholding tax on every transaction will have a sizable unfavorable impact on the liquidity within the cryptocurrency ecosystem and discourage innovation in that space. In which the consideration payable is absolutely or partially in-kind, the payer ought to make certain that tax is paid in recognize of such transaction, before paying the consideration. Implementing this will be tough and might result in the payer being held in default. Hence, from a withholding tax compliance attitude, there may be positive practical challenges, in particular for investors of cryptocurrency, which includes maintaining a report of the identification or tax residence of sellers and so on. A withholding tax mechanism also does not serve any significant reason for the tax government because it does not add to the treasury’s sales, as an alternative it most effective will increase administrative fee. Such an hard requirement could be argued to theoretically help the authorities with obtaining statistics approximately transfers of cryptocurrencies but given that any such mechanism is almost not possible to implement at a peer-to-peer degree.40

CONCLUSION

The brand new taxation regime delivered by using the authorities does not appear to recollect the nuances of cryptocurrencies and NFTs. Prior to the modification of the earnings Tax Act, experts in India and someplace else had raised questions as to how cryptocurrencies and NFTs have to be categorized – capital property,

foreign money, securities, etc. An analysis of the character of every class of VDAs is vital to the formula of a clear and powerful tax regime.

At present, the earnings Tax Act treats cryptocurrencies, NFTs and other VDAs homogeneously. Whilst both cryptocurrencies and NFTs use DLT and blockchain technology, the similarities cease there. Cryptocurrencies are, through their very nature, fungible whilst NFTs aren’t. Cryptocurrencies have restrained utility. NFTs, then again, can be deployed in some of approaches – as artwork, instruments, certificate of possession, and so on.

The fact that the income Tax Act does no longer deal with the traits of VDAs and how they may be acquired and utilized could lead to confusion. Illustratively, if cryptocurrency is acquired thru mining, is it considered to had been transferred to the recipient and, therefore, situation to the 30% tax? Instead, is it considered a receipt of a VDA without attention making the honest marketplace cost of that VDA taxable within the hands of the miner? At the same time as experts have differing views on how the receipt of VDAs pursuant to mining may be taxed, the fact remains that the law does no longer deal with or make clear the placement.41

The brand new taxes imposed on VDAs appear like geared toward discouraging funding in such belongings. The tax price of 30% – relevant no matter the income bracket of the taxpayer – is similar to that imposed on different belongings of which the authorities seems to disapprove consisting of lottery winnings. The refusal to permit any deductions other than fee of acquisition, or to permit the set-off of losses, and the requirement to deduct tax are in addition evidence of the purpose to deter investments in VDAs.

The government has not prescribed the way wherein VDAs should be valued regardless of linking the imposition of tax in positive cases to the truthful marketplace price of the applicable asset. This may invariably cause disputes and further lessen religion inside the Indian tax regime.

In the end, the choice to tax VDAs isn’t indicative of the legalization of cryptocurrencies or NFTs in India. In India, assets acquired via the proceeds of crime are problem to tax. In addition, belongings received in an unlawful style (benami assets or undisclosed overseas assets) also are taxed. The mere incidence of taxation can’t be interpreted as legitimization or legalization of VDAs.

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    November 2022.

  10. Explained: Why was bitcoin trading cheaper in India today compared to global prices?, https://www.cnbctv18. com/cryptocurrency/explained-why-was- bitcoin-trading- cheaper-in-india-today- compared-to-global-prices-11578612.htm, CNBCTV18.com (November 24, 2021) 19 October, 2022

    (Source: The Padma Vibhushan N. A. Palkhivala Memorial National Moot Court (Virtual) Competition and research paper writing Competition, 2022 was held on November 24 to 27, 2022 Ms. Tanu Priya won the first place in the research paper writing competition for Students.)


  1. Robert Shelon, Virtual Asset, <www.techtarget.com/whatis/definition/virtual-asset>, Whatls.com, accessed 31 October, 2022
  2. Internet and Mobile Association of India v. Reserve Bank of India, Writ Petition (Civil) Nos. 528 and 373 of 2018, Decided On: 04.03.2020, MANU/SC/0264/2020MANU/SC/0264/2020
  3. FATF Report, Virtual Currencies Key Definitions and Potential AML/CFT Risks (June 2014) available at https://www. fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft- risks.pdf,accessed 3 November 2022
  4. ibdi
  5. Sharanya Ranga and Farshad Ali, India: Virtual Digital Assets In India: A Sneak Peek Into India’s Regulatory Framework, <www.mondaq.com/india/fin tech/1164634/virtual digital assets in india a sneak peek into india39s regulatory framework>2022, Monaq, accessed 8 Novemeber 2022
  6. ABC of Money, Aditya Birla Capital blog, <https://www.adityabirlacapital.com/abc of money/what is tax>, 2019,

    accessed on 29 October, 2022

  7. FATF Report, Virtual Currencies Key Definitions and Potential AML/CFT Risks (June 2014) available at https://www. fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft- risks.pdf,accessed 3 November 2022
  8. ibdi
  9. Ministry of Finance, Press Release dated 1 February 2022 available at, https://pib.gov.in/PressReleasePage.aspx?PRID=1794160, accessed on 17 October 2022
  10. Press Trust of India, “India has highest number of crypto owners in the world at 10.07 crore: report”, Livemint (13 October 2021) available at https://www.livemint.com/market/cryptocurrency/india-has-highest-number-of-crypto- owners-in- the-world-at-10-07-crore-report-11634110396397.html, accessed on November, 2022.
  11. Commissioner of Income-tax v. K. Thangamani [2009] 309 ITR 15 (Madras); V.V. Minerals [100% EOU] v. Commissioner of GST & CE (CESTAT Chennai), Service Tax Appeal Nos. 40343 to 40346 of 2020-DB
  12. Sharanya Ranga and Farshad Ali, India: Virtual Digital Assets In India: A Sneak Peek Into India’s Regulatory Framework, <https://www.mondaq.com/india/fin tech/1164634/virtual digital assets in india a sneak peek into india39s regulatory framework>2022, Monaq, 8 Novemeber 2022
  13. Department of Internal Affairs Building, Virtual Asset Service Provider, 2019, <https://www.dia.govt.nz/AML CFT Virtual Asset Service Providers>, accessed on 29 October, 2022
  14. Asit Ranjan Mishra, Prasid Banerjee, “Govt. to move bill to ban all private cryptocurrencies”, Livemint (24 November 2021), <www.livemint.com/market/cryptocurrency/govt-to-move-bill-to-ban-all-privatecryptocurrencies- html>accessed on 23 October 2022
  15. Pooja Sitaram Jaiswar, After 30 perecent tax rate, cryptocurrency assets to bear 1 percent TDS, https://www.livemint. com/market/cryptocurrency/after 30 tax cryptocurrency assets to bear 1 tds how taxes impact cryptos 11656245759063. html>, Livemint, accessed on 31 October, 2022
  16. Vidushi Gupta, Yeesha Shriyan, Aashima Sawhney,   Taxing   Cryptocurrencies:   The   concept,   the   challenges and the required changes, 2022, VIDHI Centre For Legal Policy, <https://vidhilegalpolicy.in/wp- content/ uploads/2022/05/20220527_WP_Taxing-Cryptocurrencies_VCLP.pdf>, accessed on 02 November, 2022
  17. Harsh Kumar, 6 Months After Crypto Taxation, A Look At Its Impact on Industry, Investors, <https://www.outlookindia.com/business/6-months-after-crypto-taxation-a-look-at-its-impact-on-industry-investors- news- 227172>, 2022, accessed on 23 October, 2022
  18. Section 2, sub-section 29, Income Tax Act, 1961
  19. Section 14, Income Tax Act, 1961
  20. Section 14, Income Tax Act, 1961
  21. CIT v. G.R. Karthikeyan (1993) 112 CTR (SC) 302).
  22. Section 115BBI, Income Tax Act, 1961
  23. Section 28, Finance Act, 2022
  24. Budget 2022 Crypto Tax Update <https://coindcx.com/blog/cryptocurrency/crypto tax guide india/>, accessed 9 November 2022
  25. Shehnaz Ahmed and Swarna Sengupta, “Blueprint of a Law regulating for regulating Cryptoassets” (January 2022) available at https://vidhilegalpolicy.in/research/blueprint-of-a-law-regulating-cryptoassets/ ,accessed on 3November 2022
  26. Shehnaz Ahmed and Swarna Sengupta, “Blueprint of a Law regulating for regulating Cryptoassets” (January 2022) available at https://vidhilegalpolicy.in/research/blueprint-of-a-law-regulating-cryptoassets/ ,accessed on 3November 2022
  27. Section 206AB of the Income-Tax Act, 1961
  28. ibdi
  29. Justin M Bharucha, Aashika Jain, How Cryptocurrencies Are Taxed In India,

    <https://www.forbes.com/advisor/in/investing/cryptocurrency/cryptocurrency-tax-in-india>, Forbers Advisors, 2022, accessed 9 November 2022

  30. Pooja Sitaram Jaiswar, After 30 perecent tax rate, cryptocurrency assets to bear 1 percent TDS, https://www.livemint.com/market/cryptocurrency/after 30 tax cryptocurrency assets to bear 1 tds how taxes impact cryptos 11656245759063.html>, Livemint, accessed on 31 October, 2022
  31. Pooja Sitaram Jaiswar, After 30 perecent tax rate, cryptocurrency assets to bear 1 percent TDS, https://www.livemint. com/market/cryptocurrency/after 30 tax cryptocurrency assets to bear 1 tds how taxes impact cryptos 11656245759063. html>, Livemint, accessed on 31 October, 2022
  32. ibdi
  33. Justin M Bharucha, Aashika Jain, How Cryptocurrencies Are Taxed In India, <https://www.forbes.com/advisor/in/investing/cryptocurrency/cryptocurrency-tax-in-india>, Forbers Advisors, 2022, accessed 9 November 2022
  34. Explained: Why was bitcoin trading cheaper in India today compared to global prices?, https://www.cnbctv18.com/ cryptocurrency/explained-why-was-bitcoin-trading-cheaper-in-india-today-compared-to-global- prices-11578612.htm, CNBCTV18.com (November 24, 2021) 19 October, 2022
  35. ibdi
  36. 36 Aporna Dasgupta, GST on Cryptocurrency< https://www.taxmanagementindia.com/visitor/detail_article>, Tax Management India, 2021, accessed 7 November 2022
  37. ibdi
  38. Vidushi Gupta, Yeesha Shriyan, Aashima Sawhney, Taxing Cryptocurrencies: The concept, the challenges and the required changes, 2022, VIDHI Centre For Legal Policy, <https://vidhilegalpolicy.in/wp- content/ uploads/2022/05/20220527_WP_Taxing-Cryptocurrencies_VCLP.pdf>, accessed on 02 November, 2022
  39. Shehnaz Ahmed and Swarna Sengupta, “Blueprint of a Law regulating for regulating Cryptoassets” (January 2022)available at https://vidhilegalpolicy.in/research/blueprint-of-a-law-regulating-cryptoassets/ ,accessed on 3November 2022
  40. Vidushi Gupta, Yeesha Shriyan, Aashima Sawhney, Taxing Cryptocurrencies: The concept, the challenges and the required changes, 2022, VIDHI Centre For Legal Policy, <https://vidhilegalpolicy.in/wp- content/ uploads/2022/05/20220527_WP_Taxing-Cryptocurrencies_VCLP.pdf>, accessed on 02 November, 2022
  41. Shehnaz Ahmed and Swarna Sengupta, “Blueprint of a Law regulating for regulating Cryptoassets” (January 2022) available at https://vidhilegalpolicy.in/research/blueprint-of-a-law-regulating-cryptoassets/ ,accessed on 3November 2022

CA Istiyak Ahmad

1. Brief background of income escaping assessment

  1. Income escaping assessment is also known as reassessment, reopening, 147 assessment etc. These words are used interchangeably in this article.
  2. Under the scheme of the Income-tax Act, 1961 (‘the Act’), Tax Authorities (“TA”) has the general power the assess the income of the or the tax return (ITR) filed by the taxpayer u/s 143(2) of the Act.
  3. Apart of general assessments, TA has also various other remedial measures viz. reopening, rectification and revision for taking appropriate actions to plug revenue leakages when they come to notice of TA. Reopening is perhaps the most preferred remedial measure.
  4. The objective of carrying out reopening u/s 147 of the Act is to bring any income which has escaped assessment in the original assessment under the tax net.
  5. It is well accepted that the proceedings u/s 147 are for the benefit of the revenue and not taxpayer1. The same cannot be allowed to be converted as ‘revisional’ or ‘review’ proceedings at the instance of the taxpayer.
  6. The law governing reopening has more or less remained same since Prior to 1989, there were 3 distinct conditions which were required to be fulfilled before the TA could exercise jurisdiction to reopen viz.
    1. TA must have reason to believe that income has escaped assessment;
    2. TA must have reason to believe that such escapement is a result of failure on the part of the Assessee to make a return or to disclose fully and truly all material facts necessary for his assessment for the relevant year;
    3. Reason to believe should be in consequence of information received after the original assessment.
  7. With effect from 1989, the law has undergone a major However, the spirit and substance of the provisions were retained. Under the amended provision, if the assessing officer has ‘reason to believe’ that any income chargeable to tax has escaped assessment, he could exercise the powers of reopening. Concept of information was discarded.
    1. The scope of the expression ‘reason to believe’ has always been a subject matter of Generally, courts have taken a position that ‘change of opinion’ cannot be considered as valid reason to believe2. Also, there should be some tangible material.
  8. Under the erstwhile provision, there was no specific procedure included in the Act to be followed by the TA and taxpayer in relation to reassessment notice. However, the SC in the case of GKN Driveshafts India Ltd ITO3 has provided specific procedure to be followed by taxpayers and TA for reassessment proceedings. The Hon’ble SC has laid that when a notice for reopening of assessment u/s 148 of the Act is issued, the proper course of action for the assessee is to file the return and, if he so desires, to seek reasons for issuing the notices. The TA is bound to furnish reasons within a reasonable time. On receipt of reasons, the assessee is entitled to file objections to issuance of notice and the TA is bound to dispose the same by passing a speaking order.
  9. Further, reassessment proceedings, often, have been challenged in writ proceedings before the High Courts (HC) on the ground that the notice for reassessment lacks legal validity on account of failure by the TA to follow due process of law enshrined in the provisions and established under common Rather than the merits of concealment, courts are overwhelmed with cases to decide upon the sustainability of the core issue of initiation of reassessment i.e. whether the TA had ‘reasons to believe’, did he ‘record his reasons’ appropriately, did the assessee fail to ‘disclose fully and truly all material facts necessary for his assessment’, was proper ‘sanction’ of the appropriate authorities taken, ‘whether notice was issued in time’, etc.
  10. Now, e.f. 01 April 2021, the law governing the provisions of reopening has been completely overhauled. Finance Act, 2021, introduced a new procedure for reassessment. These provisions were further modified by Finance Act, 2022 so as to expand its scope, take care of some anomalies and iron out some interpretational issues.
  11. Under the new regime, out of other things,
    1. the system of writing reasons of reopening before initiating the proceedings has been done away with.
    2. Inquiries and proceedings prior to issuance of notice u/s 148 have been introduced.
    3. “Reason to believe” is ommited.
    4. Search cases are covered under the provisions of reopening.
    5. Time limit to reopen is modified in a major way. Unlike the old regime, limitation period for reopening of the assessment is curtailed Now reopening is permitted generally for 3 years and in exceptional case fulfilling specified conditions, reopening can be made upto 10 years. However, reopening of assessment of past years upto AY 2021-22 is grandfathered to maximum 6 years as per old law.
    6. Additional protection in the cases of scrutiny assessment not allowed to be reopened beyond a period of 4 years from the end of the relevant AY unless there is failure in disclosing fully and truly all material facts necessary is now taken away.
    7. Information that could trigger reopening is specially defined.
    8. New regime specifically provides for checks on TA actions. It require TA to obtain prior approval of specified authority at different stages of proceedings.
    9.   The above differences have been dealt in detail below.
    10. Like in case of erstwhile regime, under the new regime as well, power to reassess is only in case where the income chargeable to tax has escaped
    11. It may be noted that, law on the earlier provisions of reopening was to a great extent However, with the introduction of completely new provisions, lot of uncertainty is now created.

In the paper, I have tried to bring out the key differences and issues arising pursuant to introduction of new reassessment regime. It may be noted that as the topic for the paper is comparative analysis of the old v. new regime, I have restricted my analysis only of finding out the key differences. I have not analysed the new regime and issues arising under the new regime except wherever required for comparative analysis.

2. Comparison chart of erstwhile v. new regime (snapshot view)

Below table captures broad comparison of old v. new regime

Particulars Old regime New regime Para reference where the issue is dealt in detail
Applicability date Applicable for notice of reassessment issued on or before 31 March 2021 Applicable for notice of reassessment issued from 1 April 2021 Refer para 5
Relevant sections ss. 147 to 153 ss. 147, 148, 148A, 148B, 149 and 151 (provisions of s. 150, 152 and 153 are unamended and will continue to apply as is)
Basis for reassessment • TA has ‘reason to believe’ that income has escaped assessment • TA should possess ‘information which suggests that income chargeable to tax has escaped assessment’ Refer para 3
Recording of reasons • TA is required to record reasons for reopening before initiating the reassessment proceedings • Technically, there is no requirement to record reasons separately. Order u/s 148A(d) of the Act itself will be treated as reasons. Refer para 4
• However, there may be internal requirement of recording reasons for seeking approval of higher authority at various stages of proceedings.
Procedure to be followed by TA before issuance of reassessment notice • No formal provisions in the Act except that TA was required to issue notice to file ROI and record reasons for reopening.

• However, SC in the case of GKN Driveshafts (Supra) has laid certain procedures viz a viz supply of information, disposal of objection by TA etc.

• Procedures are prescribed separately u/s 148A Refer para 4
Time limit for issue of notice of reassessment • 4 years – if escaped income is less than Rs. 1,00,000.

• 6 years- if escaped income is more than Rs. 1,00,000

• 16 years – If escaped income is associated with any assets located outside India

• 3 years- if not covered below

• 10 years – where quantum of escaped income is more than INR 50L and TA has in his possession books of accounts/ other documents /evidence which reveals that escaped income is represented in the form of assets/ expenditure/ entries in books.

Refer para 5
Prior approval from higher authority • If reopening is for 4 years or less – JCIT

• If reopening is for more than

4 years – PCCIT/ CCIT/

PCIT/ CIT

• If reopening is for 3 years or less – PCIT/ PDIT/ DIT

• If reopening is for more than 3 years – PCCIT/ PDGIT (or in case where there is no PCCIT/ PDGIT, approval of CCIT/ DGIT) Above approval will be required at different stages as under-

• For conducting pre – notice enquiry with respect to

information in possession of TA which suggest that income has escaped assessment

• While providing opportunity to taxpayer u/s 148A

• Passing an order u/s 148A(d)

• Before issuance of notice u/s 148

Is taxpayer required to furnish ROI in response to notice u/s 148? Yes Yes
Whether TA is required to provide the

taxpayer reasons for reopening?

Yes. Taxpayer may demand reasons of reassessment from TA. The TA is duty bound to provide the copy of reason recorded within the reasonable time as per guidelines of Hon’ble SC. If such reasons are not demanded by the taxpayer, the TA can proceed to complete assessment. Yes. TA is required to supply reasons as prescribed u/s 148A(b) Refer para 4
Once reopening is validly made, can TA reassess items of income not indicated

in reason so recorded by TA

Yes, but judicial conflict of view on whether reassessment will survive if no addition is made on primary issue identified for reassessment [explanation 3 to s. 147 of the erstwhile Act] Yes. [explanation to s. 147 of the Act] Refer para 6
Challenge of reopening notice or the order passed disposing the objections against the notice Reopening notice u/s 148 was not made specifically an appealable order. Thus, writ before the HCs used to be filed against the notice/order. However, in case taxpayer fails to file writ, as a practice, taxpayer used to challenge the Since order u/s 148A(d) is not an appealable order, only writ can be filed against such order. However, as per the previously followed practice, taxpayer may include as one of the ground in the appeal filed against the reassessment order. Refer para 4
notice by including as one of the ground in the appeal filed against the reassessment order.
Time limit for completion of reassessment Within 12 months from end of the FY in which notice was served [s. 153(2) of the Act] Same
Whether reassessment can be done where the taxpayer

has disclosed all material necessary for the assessment u/s 143(3)?

• Proviso to s. 147 provided that no reassessment can be done beyond 4 years unless taxpayer fails to disclose fully and truly all material facts.

• Proviso to s. 147 reads as

under –

“Providedthat where an assessment under sub-section

(3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section

(1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year”

• Explanation 1 to s. 147 provided an exception to the above that mere production of books of accounts or other evidence from which

No such provision is there in the new regime. Thus, if the issue is highlighted under any of the limb of Explanation 1 to s. 148 then TA may reopen the case.
material interference could have been drawn by the AO with due diligence will not necessarily amount to disclosure.

• In respect of the above, following principles have been laid down by the courts o The onus on proving that the taxpayer has failed to disclose all material facts is on the tax authority4 o The facts refer to only those facts within the knowledge of the taxpayer at the material time5

o Taxpayer has to only disclose the primary facts and he is not required to indicate what factual or legal interference should properly be drawn from the primary facts6

• Thus, reassessment was restricted under the old regime where the original assessment has been done u/s 143(3) and the taxpayer has disclosed all material necessary for the assessment.

Assessment in case of search, survey and seizure • Under the erstwhile regime, search assessments were governed by separate scheme of provisions (s. 153A to s. 153D) Where search, survey conducted after 01.04.2021, new regime provides for assessment/ reassessment under normal provisions of s/ 143(3)/147 of the Act. Operation of s. 153A to s. 153C are suspended. Refer para 7
Maintenance of books of accounts Before 01.04.2021, the taxpayers used maintain books for 7-8 years. Rule 6F Income-tax rules, 1962 also required to maintain the books for six years. Now the taxpayer will be compelled to maintain the books and vouchers for ten years requiring him to incur expenditure on their maintenance and preservation.

3. Information required in possession with the TA to form the basis for valid reopening

  1. Under the erstwhile regime, reassessment was permitted if TA had ‘reason to believe’ that income has escaped
    1. The scope of the expression ‘reason to believe’ has always been a subject matter of litigation. Various courts7 have taken a position that
      • ‘change of opinion’ cannot be considered as valid reason to believe.
      • Subsequent judicial developments may be one of the reason for reopening
      • There should be some tangible material with the TA for exercising the power of reopening.
      • Further, the material should have ‘live link’ with the reason to believe that income has escaped assessment.
      • Reopening not permissible for roving and/or fishing inquiries
      • Reopening on the basis of assumption or surmise or conjectures was considered as bad-in-law.
      • Reopening cannot be made on mere suspicion, gossip or rumour.
  2. Further, certain instances of deemed escapement was provided under explanation 2 to erstwhile 147 i.e.,
    1. where no return of income has been furnished by the assessee although his total income exceeded the maximum amount which is not chargeable to income-tax;
    2. where a return of income has been furnished but no assessment has been made and it is noticed by the TA that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;
    3. where the assessee has failed to furnish a report in respect of any international transaction u/s 92E;
    4. where an assessment has been made, but—
      • income chargeable to tax has been underassessed ; or
      • such income has been assessed at too low a rate ; or
      • such income has been made the subject of excessive relief under the Act ; or
      • excessive loss or depreciation allowance or any other allowance has been computed;
      • reassessment basis information or document received from the prescribed income-tax authority u/s 133C(2)
    5. where a person is found to have any asset (including financial interest in any entity) located outside India.
  3. However, unlike reopening basis ‘reason to believe’ under the erstwhile regime, under new regime reopening is permissible if TA has information with him which suggest that income chargeable to tax has escaped assessment.
    1. Perusal of the above would indicate that the concept of “reason to believe” has been given a complete go-bye and the entire emphasis for invoking section 147 of the Act is on “escapement of income”. Thus, as per the existing provisions, an TA has to prove beyond any shadow of doubt that there is “escapement of income”. Unless “escapement of income chargeable to tax” is proved, provisions of section 147 of the Act cannot be invoked.
    2. Thus, now the burden is more on the revenue before issuance of notice u/s 148 of the Act to prove escapement of Income.
  4. Further, the expression ‘information which suggest that income chargeable to tax has escaped assessment’ has now been defined in Explanation 1 to 148 in a restrictive manner to mean –
    1. any information in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Central Board of Direct Taxes (CBDT) from time to time.
      • In this respect, CBDT has issued Instruction dated December 10, 2021 bearing no N0. 225/135/2021/TA-II
    2. 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.
      • It may be noted that underthe old regime, it was well settled that reassessment is not permitted merely on account of C&AG objections. This was on the ground that ‘reason to believe’ requires satisfaction of AO himself and not borrowed satisfaction from someone else8.
    3. any information received under an agreement referred to in section 90 or section 90A of the Act; or
      • Information from leaks (such as Panama leaks etc.) may be considered as the same is received under 90/90A
      • Similarly, information from CbCR not being under section 90 or section 90A may not be covered
    4. any information made available to the Assessing Officer under the scheme notified under section 135A; or
    5. any information which requires action in consequence of the order of a Tribunal or a Court.
  5. The phrase used in the first proviso i.e. information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment clearly indicates that the information is required to have live link with escapement of income. Further, mere listing in Explanation 1 may not suffice as such item shall carry with ‘income escaping assessment’ inherently in it.
  6. Further, under the new scheme, there is no concept of deemed escapement as existed under Explanation 2 to S. 147 of the Act under the old scheme.
  1. Deemed Escapement’ as defined in Explanation 2 to old 147 has the effect of presumption of escapement and since it was part of the old jurisdictional section, such presumption would confer jurisdiction on the TA. As against the same, Explanation 1 to S. 148 deals with specific information which suggests that an assessee has escaped assessment so reopening can be initiated if suggestive information can result into escapement of income.
  2. Further, explanation 2 to 148 goes one step further and creates a deeming fiction in as much as whenever there is search/survey action, the existence of information suggestive of escapement of income would be presumed for all the years falling within the period of limitation. However, the same is not equal to deemed escapement. What is presumed by deeming fiction is availability of information suggestive of escapement of income for the entire period. But the same is not deemed escapement as existed under the old Act.

4. Procedure to be followed before proceeding with the reassessment

  1. Under the erstwhile regime, there was no specific provision providing procedure to be followed by the TA for issuance of notice for reassessment except the following –
    1. Before making any reassessment, the TA is required serve a notice to the taxpayer (after taking prior approval from specified authority) requiring him to file ROI [s. 148(1)].
    2. Before issuing the above notice, the TA shall record his reasons for reopening.
    3. Taxpayer is required to file ROI against the above notice.
  2. Apart from the above, there were no other procedure prescribed under the However, certain procedures were laid down by the SC in its landmark judgement in the Case of GKN Driveshafts (India) Ltd. (Supra) which are as under-
    1. When a notice u/s 148 is issued, taxpayer is required to file the ITR in response to such notice.
    2. Taxpayer can seek the reasons recorded by the TA for reassessment after filing of ROI
    3. On receipt of such request, TA is bound to furnish the reasons within a reasonable time
    4. On receipt of such reasons, taxpayer may file objections
    5. TA is required dispose off the taxpayer’s objections by passing a speaking order before proceeding for reassessment

It may be noted that there was no specific provision to file an appeal against the rejection order so passed by the TA. However, taxpayer may file writ petition against the same.

3. With the introduction of S. 148A of the Act, the law laid down by the SC in GKN Drive Shaft is more or less now legislated. The new provisions provide the following procedure to be followed by TA before issuing a notice for reassessment u/s 148.

  1. Conduct any enquiry, if required, with prior sanction of the specified authority, with respect to the information suggesting escapement of income;
  2. Provide the assessee an opportunity of being heard by serving a show cause notice (SCN) within such time (being not less than 7 days and not exceeding 30 days) as to why a notice under section 148 should not be issued on the basis of information suggesting escapement of chargeable income and results of enquiry conducted, if any;
  3. SCN shall specifically indicate basis of information suggesting escapement of income and the result of inquiry (if conducted)
  4. Consider the reply of assessee, if any, furnished and basis the material including reply of the assessee, decide whether a notice is to be issued by passing an order, with the prior approval of specified authority, within 1 month from the end of the month in which the reply referred to in received/ time allowed to furnish a reply expires9.

4. The above procedure can be summarised as under

  1. Old law: Get a notice to file return, file a return, ask for reasons, get reasons, file objections and await order overruling objections
  2. New law: Get a notice u/ 148A(b) along with reasons, respond to the same, get an order u/s 148A(d), get a notice u/s 148 and then file the return

5. The aforesaid procedure is not required to be followed in cases relating to search and seizure, or where books of account, other documents or any assets are requisitioned under section 132A, (i.e. situations where TA is deemed to have information suggesting escapement of assessment.).

It may be noted that this proviso does not cover survey cases and therefore 148A procedure needs to be followed in case of reopening as a result of survey.

5. Time limits for reopening

  1. Under erstwhile regime, the notice of reassessment was required to be issued-
    1. within 4 years from the end of the relevant AY, if the escaped income is less than 1,00,000.
    2. If the income which is escaped is equal to or more than Rs. 1,00,000 then notice can be issued for up to 6 years from end of the relevant AY.
    3. If escaped income is associated with any assets located outside India, then notice can be issued up to 16 years from the end of the relevant AY.
  2. Now under the new regime, time limit to reopen is modified in a major way. Now reopening is permitted
    1. generally for 3 years from end of the relevant AY; and
    2. in exceptional cases, reopening can be made upto 10 years where TA has in his possession books of account or other documents or evidence which reveal that escaped assessment amount is INR 50 Lakh or more and the income chargeable to tax is represented in the form of
    3. an asset; or
      • “Asset” is defined in an inclusive manner to include immovable property, being land or building or both, shares and securities, loans and advances, deposits in bank account [Explanation to 149 provides].
      • There is no attached conditions with asset meaning thereby that if books of accounts or documents or other evidence show that there is outflow of escaped income in an asset, it will satisfy the There is no limit of amount of outflow, it can be in one year or it can be in several years in the same asset. Also, there is no restrictions as to the number of assets wherein there is outflow of escaped income in several years10.
      • expenditure in respect of a transaction or in relation to an event or occasion; or
      • For satisfying this condition, the AO has to only identify an expenditure either in a transaction or in an event or on an Such expenditure may be either in one or two or all the three, it can be one transaction or more than one transaction, it can be one event or more than one event, it can be one occasion or more than one occasion, it can be in one year or more than one year. So, the spectrum is very wide and accordingly the AO is empowered to carry out arithmetical exercise to make-up aggregation above Rs. 50 lakhs and then reopen the assessment for all the ten years. One cannot stop the AO to add up Rs. 10,000/- of any innocuous outflow in a transaction to make up the aggregate amount to Rs. 50 lakhs or more. One may not surprise that this small amount of Rs. 10,000 of alleged escaped income is found in year ten enabling the AO to reopen the assessment for year ten for that petty sum and this may be compulsive action as if this amount is excluded, the aggregate will fall below Rs. 50 lakhs and as a result reopening of all the other assessment years will fail11.
  • an entry or entries in the books of  account
    • in the long line at the beginning of the provision, reference is made to books of accounts, documents or evidence, whereas in this clause only books of accounts are referred, therefore, for invoking this clause initial long line is qualified by the attachment with this clause i.e. such entry has to be only in the books of accounts. But here also spectrum is very wide i.e. whether it is entry for credit or for debit or is a journal entry, all will be covered. But the entries found in the documents or in other evidence will be outside the scope of this clause11.

3. It may be noted that the 16 years time limit for reopening in cases of foreign assets has been deleted under the new regime and accordingly, reopening even in such cases shall be restricted to 10 years at the most. However, this is subject to Black money (undisclosed foreign income and assets) and imposition of tax Act, 2015.

4. Where the escaped income represented in the form of (i) an asset; or (ii) expenditure in respect of a transaction or in relation to an event or occasion; has been made/ incurred in more than 1 year then notice us/ 148 shall be issued for every such year.

5. While determining period of limitation for issuance of notice u/s 148 under the new regime, following period is required to be excluded

  1. Time allowed to taxpayer to reply to SCN u/s 148A
  2. Time period for which 148A proceedings are stayed by court order / injunction

6. Further, if the time left to pass an order u/s 148A(d) after above exclusion is less than 7 days, then such remaining period for passing an order is extended to 7 days and period of limitation u/s 149 shall be deemed extended till the end of 7 days.

7. Moreover, 1st proviso to s. 149 provides grandfathering benefit to past It provides that the years which have already become time barred under the old regime, cannot be reopened due to change in the law which provides extended limitation period of 10 years. The new provision grandfather issuance of notice for reopening of assessment till FY 20-21 This would imply that reassessment upto FY 2011-12 cannot be reopened as the 6 year time period under old law got expired on 31.03.2019. FY 2012-13 and 2013-14 also cannot be reopened as 6 year time period expired as on 31.03.2021, however, CBDT has granted general extension of time upto 30 April 2021 for issue of notice vide Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 dated 31 March 202012. Hence, the cases of these years can be reopened under the extended time period.

8. Following table captures comparative time limit available to TA for issue of notice under old and new [For simplicity, period considered for reopening under old regime is 6 years and under new regime is 3 years. The principle can be applied even for other years available under old and new regime]

AY Last date for issue of notice under old regime Last date for issue of notice under new regime Comments
Upto AY 2012-13 31.03.2019 Time barred under old regime itself
2013-14 31.03.2020 • These years got time barred before the effective date of new regime.

• However, on account of COVID -19, TA was given general extension of time upto 30 April 2021 by the Central Govt. through the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 dated 31 March 202013.

• The Delhi HC in the case of Touchstone Holdings Pvt. Ltd14 upheld the validity of notice for AY 2013- 14 which was issued post 01.04.2021.

o In the present case, the Taxpayer contended that as per the new scheme of reassessment which is effective from 1 April 2021 a notice cannot be

2014-15 31.03.2021
issued for reassessment of given AY on or after 1 April 2021 if the time period for issuance of notice under the old regime of reassessment has already expired on the date of issuance of such notice.

o The tax authority, however, rejected the Taxpayer ’s contention citing the CBDT Instruction 1/2022 which was issued in the matter of implementation of said SC ruling in Ashish Agarwal’s case and passed an order together with notice of reassessment dated 20 July 2022 which was challenged by the Taxpayer before HC in Writ.

o The HC held that since the reassessment proceedings were initiated during the time extended by the Relaxation Act and were undisputedly within time, the Grandfathering Provision is not attracted in the facts of this case

2015-16 31.03.2022 31.03.2019 • This is strange situation as reopening turns time barred under new regime on 01.04.2021 while it was very much alive as on 31.03.2021.

• It seems that TA has forfeited its right to reopen the case

• It is to be seen whether court can provide some reasonable time limit to TA after 31.03.2021 basis theory of vested right?15

2016-17 31.03.2023 31.03.2020
2017-18 31.03.2024 31.03.2021
2018-19

onwards

31.03.2025 31.03.2022 These years are alive as on the effective date of new regime. Hence, notice can be issued under the new regime.

5.9 Further, s. 149 under the old as well new regime prescribes time limits for issuance of notice u/s 148 of the Here the legislature uses the word ‘issued’ and not ‘served’. In this respect, following may be noted –

  1. In interpreting the word ‘issued’ courts have held that notice can be said to have been issued when the same is given to independent agent for service. Gujarat High Court in the case of Kanubhai M. Patel HUF v. Hiren Bhatt16 has held that if notice is not given to post department for service before expiry of limitation period, the same is time barred.
  2. In a recent decision, Delhi HC in the case of Suman Jeet Agarwal17 laid down the following principles with regard to point of time of issuance of notice:
    • For reassessment proceedings to be valid, what is relevant is the issuance of notice within the limitation period. The date mentioned on the notice or the date on which the notice is served on the taxpayer is irrelevant.
    • Reassessment notices need not be digitally signed for being valid, as long as the notice mentions the name, designation and the jurisdiction of the relevant tax authority issuing the notice.
    • Nonetheless, in a case where the tax authority has opted for digitally signing the notice, the date on which the digital signature is affixed may be said to be the date of the notice (irrespective of the date which is mentioned on the said notice). In such case, it may be suggested that a notice cannot be issued prior to the date of digital signature.
    • For valid issuance of notice, the tax authority must make an overt act to ensure due dispatch of notice to the It is only on due dispatch, that is beyond the control of the jurisdictional tax officer (JTA), can the notice be said to have been issued. Accordingly, neither the act of generation of the notice nor the date of affixing digital signature on the notice will signify issuance of notice.
    • In case of electronic mode of sending notices, such notices may be said to be dispatched (and, therefore, issued) when the email leaves the last server of the ITBA system and enters a computer resource over which the tax authorities have no control.
    • Separately, mere uploading of reassessment notices on the taxpayer’s e-filing account, in the absence of any dispatch through email, will not be considered as valid service of reassessment notice.

5.10 Validity of notices issued after 1 April 2021 under old regime

  1. As stated above, the new regime of reassessment is made effective from 1 April Amongst other changes, the new regime of reassessment provides a separate mechanism to be followed by the tax authority before issuing the notice for reopening assessments and is materially different than the procedure laid down under the old regime of reassessment applicable till 31 March 2021.
  2. Due to onset of the COVID-19 pandemic, the parliament had promulgated an ordinance18 in March 2020, which was succeeded by the Relaxation Act in September 2020 (w.e.f. March 2020) to relax various compliances under various laws, including the income tax law, both for taxpayers and the tax authority. Pursuant to the powers granted by the Relaxation Act, the central government has extended the period for issuance of reassessment notice till 30 June 2021 in respect of tax years which were getting time barred as on 31 March 2020 or 31 March 2021 as per the old regime.
  3. The validity of notices issued after 1 April 2021 under the erstwhile reassessment regime pursuant to the time extended under the Relaxation Act, despite the introduction of the new regime, was questioned before various HCs.
  4. The HCs generally ruled in favor of the taxpayers and quashed the reassessment notices issued from April to June 2021 for past tax year/s, which followed the old procedure of The HCs unanimously held that the old provisions of reassessment were substituted and repealed vide FA 2021 w.e.f. 1 April 2021 and, in the absence of any saving provisions, the same cannot be resurrected by the tax authority under the guise of the Relaxation Act and various notifications issued thereunder. One of the roles of the Relaxation Act (enacted due to the onset of the COVID-19 pandemic) was held to be limited to extend the time limit for initiation of proceedings as per the law.
  5. Upon appeal, the SC19 has upheld the validity of reassessment notices issued between 1 April 2021 and 30 June 2021 following the old reassessment regime, by exercising its extraordinary power under Article 142 of the Constitution of India for complete According to the SC, its order will strike a balance between the rights of the taxpayer and the tax authority and will avoid detrimental consequences to the tax authority (and ultimately, the public exchequer) which acted under the bona fide belief that amendments to the reassessment regime were not effective on the date of issue of such notice in view of subsequent extensions provided by The Taxation and Other Laws (Relaxation of Certain Provisions) Act, 2020 (Relaxation Act) till 30 June 2021. The SC directed to treat notices so issued as show-cause notices issued under the pre-notice inquiry procedure enunciated under the new regime of reassessment, while preserving all rights and defenses available to taxpayers, including application of limitation period as per the new reassessment regime.
  6. In terms of SC order, for the tax years covered by the Relaxation Act under reference, the Tax Authority was required to issue fresh notice for reassessment during tax year 2022-23 after completion of pre notice inquiry as directed by the Consequently, the period for passing of order of reassessment will stand extended till 31 March 2024 instead of 31 March 2023.

5.11 After the above ruling, CBDT has introduced Instruction20 dated 11 May 2022 explaining tax authority’s understanding of the SC’s ruling in the case of Ashish Agarwal and the way forward in the matter of cases reopened The CBDT, amongst others, clarifies that for AY 2013-14 to 2015-16, notices for reassessment cannot be issued unless the conditions for invoking the extended time limit of 10 years from the end of the AY under the new regime of reassessment are satisfied. Similarly, for AY 2016-17 and 2017- 18, the fresh notices for reassessment can be issued considering the 4 year time limit from the end of the AY as per the new regime reassessment, read with the extensions granted under Relaxation Act.

6. Validity of items of additions in a reassessment without adding the very item which was the ground for reopening

  1. The erstwhile 147 reads as under – “If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year)
  2. The pre-amended 147 of the Act was in two parts viz (a) reassessment of income which Tax Authority has ‘reason to believe’ that it has escaped assessment; ‘and’ (b) any other income which has escaped assessment and comes to Tax Authority’s notice in the course of reassessment.
  3. Further, Explanation 3 was inserted by Finance (No. 2) Act 2009 which reads as under.   “Explanation 3.—For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.”
  4. Prior to insertion of Explanation 3, there was conflict of views on TA’s ability to take up new issues in reassessment without recording reasons and issuing This aspect was settled by inserting Explanation 3. But another facet related to the controversy was if the TA does not make addition in respect of issues identified for initiating reassessment, whether he can still go ahead and make additions in respect of other issues coming to his notice in the course of reassessment. This limb of controversy survived even after insertion of Explanation 3.
  5. Majority of the HCs21 have taken view that if the TA does not make addition on identified issue, he cannot make addition on new issues. The lead decision taking this view is the Bombay HC ruling in Jet Airways case. This view is primarily supported on the interpretation that the phrase “and also” separating first and second parts of s. 147 of the TA is conjunctive in Therefore, unless addition is made on identified issue, TA cannot make addition on new issue. The logic of favourable view has been extended to situations where the addition made on identified issue is deleted in appeal.
  6. On the other hand, P&H22 and Karnataka HCs23 have taken view against the taxpayer once the reassessment is validly initiated based on ‘reason to believe’ but Tax Authority does not make addition on identified issue, nevertheless, he is entitled to make additions on other issues. As per this view, the reassessment proceedings are for the benefit of Tax Department and the phrase “and also” is both conjunctive and disjunctive.
  7. The new s. 147 post amendment by FA 2021 does not carry reference to second part ‘and also any other income chargeable to tax which has escaped assessment and comes to his notice subsequently in the course of proceedings under this section’. But old Explanation 3 to s. 147 of the TA is continued in the form of Explanation to new s. 147 of the TA.
  8. As discussed above, the premise of favourable rulings was on the phrase “and also” as appearing in the old 147 is separating first and second parts of s. 147 and the phrase “and also” is conjunctive in nature. Once the second part of s. 147 is deleted, the foundation on which favourable rulings were rendered, is taken away. Thus, the safeguard of the favourable case laws that no addition can be made on additional issues unless addition is made on the primary issue seems to be taken away by omitting the second part from main s. 147 of the Act. Mere continuance of Exp 3 may not be sufficient for the taxpayer to rely on the favourable rulings.

7. Reassesment in case of search, seizure, requisition, survey.

Under erstwhile regime

  1. Under the erstwhile regime, search assessments were governed by separate scheme of provisions (s. 153A to 153D)
  2. If any search was conducted, the TA was required to issue notice of assessment/ reassessment for last 6 years in addition to the year of search
  3. Notice can be issued for additional 4 years (making it to 10 years in all) if-
    1. TA has in possession books of accounts or other document or evidence which reveal that the income (represented in the form of asset) which has escaped assessment is more than INR 50 lakh; and
    2. Income covered above or part thereof has escaped assessment; and
    3. Search was conducted on or after 1 April 2017
  4. If during the course of search proceedings, any information in relation to some other taxpayer is also unearthed, TA is empowered to assess or reassess the income of such other person for last 6/10 years as the case may be [s. 153C].

Under new regime

  1. Any assessment/ reassessment pursuant to search conducted on or before 31 March 2021 shall be continued to be governed by pre amendment provisions.
  2. In case search initiated on or after 1 April 2021, new regime provides for assessment/ reassessment under normal provisions of the Act. Operation of 153A to s. 153C are suspended. In other words now assessment/ reassessment proceedings in relation search will be carried under normal provision of s. 143(3) / 147 of the Act.
  3. The procedure discussed above in case of reassessment proceedings will also apply to in case of search/survey cases with some modification.
  4. In case of search u/s 132, requisition u/s 132A, survey u/s 133A (other than TDS survey u/s 133(2A)) and third party search and requisition (falling under earlier provisions of 153C of the Act) taking place after 1 April 2021, explanation 2 to s. 148 provides deeming fiction as per which the above event itself will constitute information which suggests that the income chargeable to tax has escaped assessment.
  5. Further, the procedure as prescribed u/s 148A is not required to be followed in cases relating to search, requisition and third-party search & requisition before issuance of reassessment notice [proviso to s. 148A]. In other words, there is no requirement on TA to make pre notice inquiry or give an opportunity to taxpayer to object to reopening basis evidence given etc. However, this proviso does not cover survey cases and therefore 148A procedure needs to be followed in case of reopening as a result of survey.
  6. It may be noted that between 01.04.2021 to 03.2022, such deemed information under Explanation 2 to s. 148 was available only for a period of 3 years immediately preceding the assessment year relevant to the previous year in which search is initiated. However, after 01.04.2022, the presumption as regards deemed information is not restricted to 3 years. It could be for as long as 10 years. What is worse is the fact that search cases are excluded from the purview of S.148A of the Act and therefore even for the years covered u/s 149(1)(b) (i.e. 4 to 10 year), where reopening is subject to fulfilment of certain conditions, there would be automatic reopening without any order u/s 148A(d). So, technically the taxpayer would not even know the reason for reopening for these years.
  7. It may further be noted that explanation 2 does not dilute the requirement for there being a nexus of such search with escapement of Mere search, without any indication of escapement of income may not suffice to trigger reassessment.

8. Principles of Merger after deletion of 3rd proviso to old s.147

  1. 3rd Proviso to old 147 of the Act provided for exclusion of matters which are subject matters of any appeal, reference or revision from the purview of reassessment
  2. 3rd Proviso to old 147 reads as under- “Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.”
  3. It is well accepted principle that the order of higher authority gets merged with lower authorities order such that it is the order of the higher authority that holds the filed and continues to subsist. However, the issue was whether entire assessment order stands merged with the order of superior authority (full merger) or only portion of the order which was subject matter of challenge before such superior authority (partial merger).
  4. The language of above 3rd proviso takes a position of partial merger24e. issues which are not subject matter of challenge can be taken up for reassessment.
  5. There is no similar provision under the new Thus, under the new regime the issue will arise whether the assessments which are subject matter of appeal/revision can be taken up for reassessment.
  6. While presence of specific provision along the lines of 3rd proviso to erstwhile s. 147 would have avoided the controversy, but absence of provision would not mean that TA has power to reassess issues which subject matter of challenge.
  7. Based on the logical conclusion, position may be taken that the law followed under the erstwhile regime (partial merger) may be applied to the new regime as well e. issues which are not subject matter of challenge can be taken up for reassessment. When an issue is challenged in appeal or by way of revision, the original order merges into the order of the appellate or revisionary authority upon passing of the order by respective authority and hence beyond the scope of reopening by TA.

9. Penalty under new regime for reassessment

  1. Under the erstwhile regime, taxpayer was not aware of ‘reasons’ for reopening until it filed ITR against the notice u/s 148.
  2. However, under the new regime, the reasons are provided prior to filing of ROI in the notice issued u/s 148.
  3. In case where taxpayer include the alleged income in the ROI filed in repose to notice under new 148, issue may arise whether mere inclusion of income in ROI, penalty u/s 270A is defensible?
  4. Per the 270A(2), under reporting of income covers a case where the income reassessed is greater than the income assessed or reassessed immediately before such reassessment. The amount of under reported income shall be the difference between the amount of income reassessed or recomputed and the amount of income assessed, reassessed or recomputed in a preceding order.
  5. However, taxpayer may claim the benefit of s. 270A(6) where bona fide explanation is provided to the satisfaction of TA and all material facts have been suitably disclosed. This is on the assumption that the case of taxpayer does not fall within the scope of mis-reporting of income as defined u/s 270A(8)/(9) of the Act.
  6. Further, in case of wilful attempt for evasion of tax, risk of prosecution u/s 276C cannot be ruled However, immunity u/s 270AA for penalty and prosecution may be available also in case of reassessment order u/s 147 provided the case is not of mis-reporting of income.

10. Faceless assessment of income escaping assessment.

  1. 151A of the Act provides that entire process of reassessment including proceedings u/s 148A and issuance of notice u/s 148 and the entire reassessment proceedings shall be carried out in faceless manner. CBDT has issued Notification No.18/2022 dated 29.03.22 which prescribes scheme for reassessment.
  2. As per clause (b) of section 3 of the said notification, issuance of notice under section 148 of the Act shall be through automated allocation, in accordance with risk management strategy formulated by the Board as referred to in section 148 of the Act for issuance of notice, and in a faceless manner, to the extent provided in section 144B of the Act with reference to making assessment or reassessment of total income or loss of assessee. Thus, notice under section 148 of the Act has to be issued by the “National Faceless Assessment centre” Such notice cannot be issued by “jurisdictional AO”. Many cases have come to light where such notices have been issued by the “jurisdictional AO” who did not have jurisdiction to issue such notice and therefore, validity of such notices would be questioned.

Abbreviations

Abbreviation Full name
The Act Income-tax Act, 1961
TA Tax Authorities
ITR Income tax return
AY Assessment Year
FY Financial Year
HC High Court
SC Supreme Court
CBDT Central Board of Direct Taxes
AO Assessing officer
SCN Show Cause Notice
FA Finance Act
w.e.f. with effect from

Bibliography

  1. Kanga and Palkhivala’s The Law and Practice of Income Tax, 11th edition
  2. Sampath Iyengar’s Law of Income Tax
  3. Taxmann and Taxsutra for case law search
  4. CA firms tax alerts on reassessment related amendments
  5. Articles
  • https://www.mondaq.com/india/income- tax/1035508/income-escaping-assessment- a-revamped-law-on-reassessment- proceedings
  • https://TAtonline.org/digest/articles/ clause-by-clause-analysis-of-provisions- of-reassessment-under-the-income-tax- act-1961/
  • https://www.taxmann.com/budget/ budget-story/349/whether-proposal-in- finance-bill-2022-for-reassessment-are- retrograde

(Source: The Padma Vibhushan N. A. Palkhivala Memorial National Moot Court (Virtual) Competition and research paper writing Competition, 2022 was held on November 24 to 27, 2022 CA Istiyak Ahmad won Second Prize in the research paper writing competition for Professional)


  1. CIT v. Sun Engg Works 198 ITR 297 (SC); Sudhakar v. ITO 241 ITR 865
  2. Illustratively refer Phoolchand v. ITO 196 ITR 302; Pancharatna Cement P. Ltd. v. UOI 317 ITR 259; Siemens Information System Ltd v. ACIT 295 ITR 333; CIT v. Eicher Ltd 294 ITR 310; Transworld International Inc. v. JCIT 273 ITR 242; ICICI Prudential Life Insurance Co. Ltd. v. ACIT 325 ITR 471;
  3. (2002) 125 Taxman 963
  4. Illustratively refer, Tantia Construction Co Ltd [2002] 129 taxman 971 (Calcutta)
  5. Illustratively refer, Canara Sales Corpn. Ltd (1989) 176 ITR 340 (Kar)
  6. Refer Calcutta Discount Co. Ltd (1961) 41 ITR 191 (SC)
  7. Refer illustratively Gujrat HC decision in Desai Bros. (240 ITR 121); SC decision in Barium Chemicals Ltd. v. Company Law Board AIR 1967 SC 295; CIT v. Kelvinator of India Ltd. [2010] 187 Taxman 312 (SC); Krupesh Ghanshyambhai Thakkar v. DCIT 77 taxmann.com 293 (Guj); MP Inds v. ITO 57 ITR 637 (SC), on final appeal 77 ITR 268 (SC); Chhugamal v. Chaliha 79 ITR 603 (SC); Bhimraj v. CIT 32 ITR 289, affirmed in 41 ITR 221 (SC); Kantamani v. ITO 64 ITR 516.
  8. Refer Mobis India Ltd. (2018) 90 taxmann.com 389 (Mad HC); PCIT v. Lalit Bagai (2019) 111 taxmann.com 71 (Del HC); CIT v. Rajan A. Aswani (2018) 403 ITR 0030 (Bom HC)
  9. It may be noted that there is no safeguard how the AO will frame the order u/s 148A(d). He has to simply decide, every order u/s 148A(d) will be a decision against which there is no appeal.
  10. https://www.taxmann.com/budget/budget-story/349/whether-proposal-in-finance-bill-2022-for-reassessment-areretrograde
  11. https://www.taxmann.com/budget/budget-story/349/whether-proposal-in-finance-bill-2022-for-reassessment-areretrograde
  12. Ordinance was succeeded by the Relaxation Act in September 2020 (w.e.f. March 2020)
  13. Ordinance was succeeded by the Relaxation Act in September 2020 (w.e.f. March 2020)
  14. WPC 13102/2022, [TS-726-HC-2022(DEL)] dated 9 September 2022
  15. Refer Sadhu Singh Hamdard Trust (2013) 263 CTR 77 (P&H HC)
  16. 334 ITR 25
  17. [TS-752-HC-2022(DEL)]
  18. The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 dated 31 March 2020
  19. Union of India & Others v. Ashish Agarwal – Civil Appeal No. 3005/2022
  20. Instruction No 01/2022
  21. Illustratively refer Commissioner of Income-tax v. Jet Airways Ltd. (2011) 331 ITR 236 (Bom HC); Ranbaxy Laboratories Ltd. v. Commissioner of Income tax [2011] 336 ITR 136 (Delhi HC); Commissioner of Income tax-II v. Mohmed Juned Dadani [2014] 355 ITR 172 (Gujarat HC); Assistant Commissioner of Income-tax, Raipur v. Major Deepak Mehta [2012] 24 taxmann.com 147 (Chhattisgarh HC)
  22. Majinder Singh Kang v. CIT (2012)(344 ITR 358)(SLP dismissed by SC on 19 August 2011); Commissioner of Income tax v. Mehak Finvest (P.) Ltd. [2014] 367 ITR 769 (Punjab & Haryana HC)
  23. N. Govindraju v. ITO (2015)(377 ITR 243)
  24. Refer Bom HC ruling in Sakseria Cotton Mills Ltd 124 ITR 570

Sukhsagar Syal, Advocate

  1. Background
    1. Justice Khanna had the following to remark1 on what the connotations of reopening a concluded assessment are “We have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity.” Similarly, it was held in ITO v. Lakhmani Mewal Das2 that reopening a concluded assessment is a ‘serious matter’ and should not be resorted to unless the prescribed conditions are fulfilled.
    2. The underlying principle in both the judgements is that finality of an assessment is the norm, and reopening it constitutes an exception, and one which must not be lightly resorted to. As the provisions are extraordinary in nature, they must be strictly construed3. Therefore, the language of the section, its scope and more importantly, the restrictions to be imposed while invoking these provisions calls for a thorough analysis.
  2. A brief history-
    1. The provisions relating to reassessment are codified in sections 147 to 152 of the Income-tax Act, 1961 (‘the Act’). Although susceptible to frequent amendments, these provisions have seen three major phases, each marked with transformative changes.
    2. The provisions as originally introduced in the Income-tax Act, 1961 permitted Assessing Officers to reopen assessments in only two situations. The Assessing Officers either had to have a reason to believe that any income chargeable to tax had escaped assessment on account of a failure on the part of the assessees to disclose truly and fully all material facts or the Assessing Officers had to have such a reason to believe in consequence of ‘information’ received after the original assessment.
    3. The provisions then underwent drastic amendments by the Direct Tax Laws (Amendment Act), 1989. The resultant provisions inter alia gave a go-by to the concept of ‘information’ and placed the defense of the Assessing Officer having to show an assessee’s ‘failure to disclose’ if he wished to reopen an assessment after a period of four years from the end of the relevant assessment year in the proviso. These provisions, in substance, stood largely in the same manner for more than two decades. During this period, the law on reassessments was judicially sculpted and streamlined. One crucial judgement was that of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO4, wherein a new procedure for how reassessments were to be done was put in place. The procedure so prescribed required the assessees to file a return of income in response to the notice issued under section 148 of the Act; to then ask the Assessing Officer for a copy of the reasons recorded by him prior to the issuance of the notice; the assessees would then be eligible to file their objections to the reasons; and the Assessing Officers were expected to dispose of such objections before proceeding with the actual assessment.
    4. A plethora of amendments which were ushered in by the Finance Act, 2021 and then some ‘corrective’ amendments by the Finance Act, 2022 marked the beginning of the last of the three phases of the provisions. The breadth of these amendments and their departure from the provisions in the two earlier phases is the subject matter of this research paper.
  3. Amendments by the Finance Act, 2021 and 2022-The transition-
    1. The transition of the provisions to how they stand today was anything but smooth. In March, 2020, almost an year before the amendments were made by the Finance Act, 2021, the country washit by the COVID-19 pandemic that saw nationwide lockdowns. Understandably, tax compliances could not be made either by the assessees or by the Assessing Officers. This led to the promulgation of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (‘the Relaxation Act’) whereby certain limitations and due dates were relaxed and the Central Government was empowered to continue to grant such relaxations by way of notifications after taking stock of the prevailing circumstances.
    2. Such extensions continued to come well into the second half of 2021, by which time the Finance Act, 2021 had also been promulgated and had brought about a sea change in the provisions dealing with reassessments. These amendments, per the Finance Act, 2021, were to take effect from 1st April, 2021. The Department took the view that in view of the extensions carried out pursuant to the Relaxation Act, the provisions of the erstwhile regime continue to stay in vogue till 30th June, 2021 (i.e., till the last of the extensions). On the other hand, it was argued by the assessees, that all notices issued under section 148 of the Act after 1st April, 2021 had to have been issued in terms of the law, as it stood, after the amendments by the Finance Act, 2021. This disharmony saw an unprecedent litigation as to the correctness of the 90,000 notices issued by the Department in the period beginning from 1st April, 2021 and ending on 30th June, 2021. Finally, the Supreme Court, in the case of UOI v. Ashish Agarwal5 brought the issue to rest by holding that although, in law, the notices should have been issued in terms of the amended A comparative analysis of the old reassessment regime vis-à-vis the new reassessment regime provisions, nevertheless, a one-time concession could be granted to the Department by holding that the notices issued under section 148 of the Act in this period should be deemed to be notices issued under section 148A(b) of the Act.Intention behind the amendments-
    3. Looked at broadly, the amendments seek to achieve two broad objectives. Firstly, in view of the increasing use of automation in collecting and disseminating information in carrying out income- tax assessments, even the reassessment provisions are sought to be made information-driven, which can be sourced in line with certain pre-defined criteria. Secondly, having regard to the large scale litigation which ensued as a result of following the procedure prescribed in GKN (supra), the law, now seeks to modify that procedure and pre-pone it to a stage, prior to the issuance of the notice under section 148 of the Act. The aforesaid twin objectives are brought out in the Memorandum explaining the provisions of the Finance Bill, 2021 as well as in the judgement of the Hon’ble Supreme Court in the case of Ashish Agarwal (supra).Fate of the provisions/principles of the erstwhile sections-
    4. With the above background, the nature of these amendments can now be considered. The provisions as they stood prior to the Finance Act, 2021 (‘the erstwhile regime’) had certain key elements. Some of these have been retained in the Act as it stands today (‘the new regime’) and some have been omitted. The following analysis contains a discussion on these key elements.I. Reason to believe (erstwhile section 147) –
    5. As per section 147 of the erstwhile regime, an assessment could be reopened by an Assessing Officer only if he had a ‘reason to believe’ that any income chargeable to tax had escaped assessment. The import of the expression ‘reason to believe’ was understood in two ways. Firstly, it was held in Lakhmani Mewal Das (supra) and followed in a series of judgements thereafter, that this expression is used in contradistinction to the expression ‘reasons to suspect’ so as to suggest that an assessment cannot be reopened on the basis of a surmise and that the Assessing Officer issuing a notice must at least reach a prima facie conclusion that some income chargeable to tax has escaped assessment. Secondly, it was held in ACIT v. Rajesh Jhaveri Stock Brokers6 that at the stage of issue of the notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage.
    6. This expression has not been used in the new regime. Such an omission could be interpreted in two ways. It could be argued by the assessees that since these words did not require the Assessing Officer to establish escapement of income at the stage of issuance of notice, the absence thereof, must be meant to now cast an obligation on the Assessing Officers to establish, as a matter of fact, that some income chargeable to tax has escaped assessment. On the other hand, the Department could argue that the absence of this expression in the new regime would suggest that an Assessing Officer need not even show a prima facie escapement of income at the stage of issuance of notice and that such escapement may only be established in the course of the assessment. In the opinion of the author, the former view seems more reasonable. In view of the fact that the Assessing Officers are now empowered to carry out an exhaustive enquiry under section 148A (the details whereof will be discussed in the ensuing paragraphs), should come with a responsibility that at the end of such enquiry, the Assessing Officers would be in a position to conclude whether or not any income has escaped assessment, and not defer such conclusion to the very end of assessment.II. Failure to disclose truly and fully all material facts (first proviso to erstwhile section 147)-
    7. Under the erstwhile regime, where an assessment was reopened beyond a period of four years from the end of the relevant assessment year, an assessee would be entitled to call upon the Assessing Officer to demonstrate as to what was the failure of disclosure on the part of such assessee before the Assessing Officer could reopen its assessment. This defense has now been done away with in the new regime.
    8. It is interesting to note, that of all the arguments available to the assessee under the old regime, this was the only argument which hinged on the conduct of the assessee itself, as opposed to other arguments which hinged on the conduct of the Assessing Officer. With the new regime now dropping this proviso, the intention is made clear that the manner in which the assessee participates in an assessment will not be determinative of whether or not an Assessing Officer will be entitled to reopen a concluded assessment.III. Change of opinion (erstwhile section 147)-
    9. While interpreting the erstwhile section 147 of the Act, the Hon’ble Supreme Court in the case of CIT v. Kelvinator of India7 held that the concept of ‘change of opinion’ must be considered as an in- built test to check abuse of power by the Assessing Officer, failing which Assessing Officers would be reviewing their assessments, in the garb of reopening, something which they cannot do. In the opinion of the author, the defense of alleging change of opinion is still very much available to the assessees. This is for the reason that at the foundation of this concept, as propounded by the Hon’ble Supreme Court, was the use of the word ‘reassess’, as opposed to ‘review’ in the erstwhile section 147. Since the amended section 147 continues to use the word ‘reassess’, there is no good reason to hold that such defense can no longer be pressed into service.
    10. In fact, while dealing with a case of reassessment under the new regime, the Hon’ble Delhi High Court in the case of Ernst and Young LLP v. ACIT8 has held that the defense of change of opinion was not available to the Petitioner as the original assessment in that case was completed with the issuance of an intimation under section 143(1) of the Act. A reasonable inference that can be drawn from the above would be that the defense of change of opinion would be available even under the new regime, provided the original assessment is completed under section 143(3) of the Act. The Hon’ble Supreme Court has also dismissed the SLP9 against the High Court’s judgement.
    11. In another case10 dealing with reassessment under the new regime, the Delhi High Court held that the since the issue, which was the subject matter of reassessment was examined in the course of the original proceedings, the same amounted to a case of change of opinion. However, interestingly, the Court remanded the matter back to the file of the Assessing Officer to proceed afresh. In the humble opinion of the author, such an approach perhaps needs reconsideration. Once the Court had come to the conclusion that it was a case of change of opinion, it ought to have either held that the test of change of opinion is not relevant under the new regime and dismissed the writ petition, or it should have held that the test is relevant and quashed the proceedings. Remanding the issue to the Assessing Officer’s file, perhaps, did not serve any purpose.IV. Tangible material (erstwhile section 147)-
    12. Another test propounded in the case of Kelvinator (supra) in the context of the erstwhile section 147 was that of ‘tangible material’, which is closely connected with the concept of change of opinion. It has been held in a series of judgements that the existence of ‘tangible material’ is a pre-requisite to reopening a concluded assessment. In the opinion of the author, this defense also continues to survive in the new regime since its genesis is in the concept of change of opinion.
    13. In fact, while dealing with reassessment under the new regime, the Courts11 seem to concur that the test is still relevant.V. Principle of merger (third proviso to the erstwhile section 147 of the Act)-
    14. Under the erstwhile regime, an Assessing Officer was precluded from reopening an assessment on an issue which was the subject matter of any appeal, reference or revision. The new regime has not retained the same. However, in the opinion of the author, an assessee may still be entitled to argue that if a higher authority, appellate or revisional, is seized of an issue, then applying the general principle of merger/ judicial discipline, an Assessing Officer may not be competent to comment upon/ assess the same.VI.Cases of deemed escapement (Explanation 2 to erstwhile section 147)-
    15. In a major departure from the erstwhile regime, the Legislature has chosen to not retain Explanation 2 to erstwhile section 147, which set out a series of cases in which it would be deemed that income chargeable to tax had escaped assessment. Again, this could be looked at in two ways. It could be argued by the assessees that cases of deemed escapement did not represent escapement in the real sense, so an Explanation had to be brought in and in the absence of such Explanation, it must be presumed that such deemed escapement cases are no longer within the purview of the reassessment regime. On the other hand, it could be argued by the Department that the Explanation was only clarificatory in nature and its absence does not take away from the power of the substantive provision to bring such cases within its fold. In the opinion of the author, the second view seems more reasonable because the erstwhile Explanation also covered those cases of escapement which clearly fall within the contours of the substantive provision. For instance, clause a) of the Explanation provided that where an assessment was made but income chargeable had been under assessed or excessive loss, depreciation or other allowance had been claimed, it would be deemed to be a case of income chargeable to tax having escaped assessment. Similarly, clause b) provided that where a return of income had been furnished by the assessee but no assessment was made and it was noticed by the Assessing Officer that the assessee had understated the income or had claimed excessive loss, deduction, allowance or relief in the return, it would be deemed to be a case of income chargeable to tax having escaped assessment. Other clauses had the same tenor. It would not be unreasonable to say that in the absence of the aforesaid clauses, cases involving such circumstances would in any event have been covered under section 147. Therefore, the absence of the Explanation in the amended section 147 cannot be taken to mean that such cases are now outside the realm of reassessment.VII. Discovery of new issues in the course of the reassessment (Explanation 3 to erstwhile section 147)-
    16. The erstwhile section 147, read with Explanation 3 thereto, permitted the Assessing Officer to ‘also’ assess any income chargeable to tax which came to his notice in the course of the assessment, notwithstanding the fact that the recorded reasons did not allude to the same. Under the new regime, an Explanation to a similar effect can be found in section 147. However, it differs from the earlier provision in one significant manner inasmuch as the words ‘and also’ in the erstwhile section 147 are not to be found in the amended section. These words, in the erstwhile section 147, were interpreted by several High Courts12 to mean that if the Assessing Officer accepts the contention of the assessee that the income which he had initially believed to had escaped assessment has, in fact, not escaped assessment, it is not open to him to independently assess another source of income. The absence of these words is suggestive of the fact, that under the new regime, an Assessing Officer’s assessment of a new source of income is completely independent of his assessment of the income which formed the subject matter of the initial show cause notice issued under section 148A(b) of the Act.VIII. No reassessment to carry out enquiries (erstwhile section 147)-
    17. Dealing with reopening under the erstwhile regime, the Courts13 have held that reassessment proceedings cannot be initiated to carry out fishing and roving enquiries. In the author’s opinion, the position under the new regime remains the same. The Assessing Officer must first ascertain for himself whether any income chargeable to tax has escaped assessment, and only then can he proceed with the reassessment. The contrary, i.e., initiating reassessment proceedings with the intent of carrying out enquiry with the hope of discovering an escaped assessment should not be permissible. The Hon’ble Rajasthan High Court14 has held to the same effect.
    18. However, the Delhi High Court in the case of Divya Capital One P. Ltd. v. ACIT15 has held that reopening can be done for carrying out verification, however, before doing so, a preliminary enquiry under clause (a) of section 148A must first be done.IX. Independent satisfaction of the Assessing Office (erstwhile section 147)-
    19. In the context of the erstwhile section 147 of the Act, Courts16 have held that the material which leads to reopening an assessment may come to the Assessing Officer form any source, but it is the Assessing Officer who is required to form an independent belief that any income chargeable to tax has escaped assessment. He cannot reopen an assessment at the diktat of another authority, as the same would amount to a borrowed satisfaction, something which is not permissible under the reassessment regime.
    20. In the opinion of the author, this principle will continue to hold the field even under the new regime of reassessment. Although, section 148 of the new regime defines what is information for the purpose of reassessment, and that information may come from the prescribed sources, however, the Assessing Officer having regard to such information must carry out the necessary enquiries before forming an independent belief that any income chargeable to tax has escaped assessment. The information, without independent satisfaction of the Assessing Officer, cannot ipso facto lead to a valid reassessment.The new provisions-
    21. Having examined the elements of reassessment under the erstwhile regime and their possible fate under the new regime, it may be apposite to now consider the elements which have been introduced under the new regime.I. Preliminary enquiry under 148A(a)-
    22. As discussed hereinabove, the new regime seeks to codify the procedure set out in GKN (supra) inasmuch as the Assessing Officer is now expected to carry out a pre-notice enquiry before determining whether the case is fit for the issuance of a notice under section 148 of the Act. The first step in such pre-notice enquiry is that provided under clause (a) of section 148A of the Act. Under this clause, the Assessing Officer, having regard to the information which suggests that the income chargeable to tax has escaped assessment, conducts an independent enquiry without issuing a notice to the assessee. The provision, however, does not mandate the Assessing Officer to carry out such preliminary enquiry and the decision is left to his discretion.II. Granting the assessee an opportunity of being heard-
    23. Having carried out an independent preliminary enquiry the Assessing Officer is required to provide an opportunity of being heard to the assessee, by serving upon him a notice to show cause as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment. The assessee, in response thereto, under clause (c) of section 148A is entitled to oppose the initiation of the proceedings and submit as to why a notice under section 148 of the Act should not be issued. With the introduction of these provisions, the legal position17 under the erstwhile regime that no opportunity of being heard is required to be given at the time of issuance of the 148 notice has been done away with.III. Passing of an order under section 148A(d)-
    24. The Assessing Officer, has to then decide, on the basis of material available on record including reply of the assessee, whether or not it is a fit case to issue a notice under section 148, by passing an order to the above effect. This order, if passed against the assessee, becomes a precursor to the issuance of the notice under section 148 of the Act and the validity or otherwise of the Assessing Officer ’s jurisdiction to carry out reassessment would stand and fall on the basis of the validity of this order, as it is the last step in the proceedings before issuance of the notice under section 148 of the Act.
    25. An interesting question which arises is whether, while passing the order under this clause, is the Assessing Officer restricted to dealing only with the assessee’s rebuttal to his initial show cause notice issued under clause (b) or can he allege in the order, something which was not the subject matter of the initial notice. In this regard, the Calcutta High Court18 has held that the Assessing Officer’s powers while passing an order under section 148A(d) are circumscribed to the extent of his allegations in the initial show cause notice. He does not have jurisdiction, at this stage, to venture into any issue, which was not the subject matter of the initial notice. Similar is the finding of the Rajasthan High Court19 which holds that as the order has to be passed on the basis of the ‘material available on record’, a fetter has been put on the powers of the Assessing Officer from referring to anything but the material on record, which would comprise only of the initial notice and the assessee’s response thereto.
    26. Experience would show that the Assessing Officers often argue that at the stage of passing a 148A(d) order, they need not comment upon the escapement of income as at this stage the only question to be decided is whether or not a 148 notice is to be issued. In the opinion of the author, this stand of the Assessing Officers is misaligned with the scheme of section 148A. It is submitted that at every stage of the proceeding, right from the enquiry under 148A(a) to the passing of the assessment order under section 147 read with section 143(3), regard has to be had to the escapement of income chargeable to tax. Under clause (a) of section 148A, an Assessing Officer conducts enquiry with respect to the information which suggests that the income chargeable to tax has escaped assessment. Under clause (b), the Assessing Officer provides an opportunity of being heard to the assessee as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment. After considering the assessee’s reply, the Assessing Officer passes an order under clause (d) to decide on the basis of material available on record whether or not it is a fit case to issue notice under section 148 and then the assessment is completed bringing such income to tax. The Assessing Officers’ assertion that they need not have regard to escapement of income at the stage of section 148A, would reduce these proceedings to an empty ritual. This sentiment has also been echoed by the Rajasthan High Court in the case of Abdul Majeed (supra).
    27. It is also important to note that the aforesaid procedure set out in section 148A of the Act is mandatory in nature, as evidenced from the usage of the word ‘shall’. In the opinion of the author, not following the same should vitiate the proceedings and not be considered a curable defect. In order to bolster this argument, one may draw support from the judgements of various High Courts20, which, in the context of the erstwhile regime, had held that not following the GKN (supra) procedure would be fatal to the assessment.Exceptions to 148A proceedings-
    28. The proviso to section 148A has carved out two categories of cases, where the proceedings under section 148A will not have to be carried out, and a notice under section 148 can be issued, subject to the satisfaction of other conditions.IV. Information to suggest (section 148)-
    29. Perhaps, one of the most significant facets of the new regime is the revival of the concept of ‘information’ as it stood in section 147 of the Act, prior to its amendment by Direct Tax Laws (Amendment Act), 1989. Having said so, it is important to note that the context in which ‘information’ was used in the first phase of section 147 and the context in which it is used in the present regime are entirely different. In the first regime, the provisions did not contain any definition of the word ‘information’. The only requirement was that it must come after the completion of the original assessment. On the hand, the new regime, gives a precise definition of the word and does not specify as to at what stage should such information emerge. The components of the definition of the word ‘information’ are discussed hereunder-
    30. The definition contemplates five categories of ‘information’.
      1. Information in accordance with the risk management strategy for the relevant assessment year formulated by the Board from time to time- The precise outline of what would constitute a risk management strategy (‘RMS’) is yet to be made available by the Board. However, the fact that there would be different RMS for each year, and that the same would be formulated from time to time gives a touch of dynamism to the provision. Having said so, this also gives unregulated and unbridled powers to the Board to prescribe by itself, without any legislative control, as to what information is, and basis such prescription, assessments can be reopened. Perhaps, the constitutional validity of this provision would, at some stage, have to tested before the High Court.The limited guidance on the contours of RMS comes from Instruction No. 225/135/2021/ ITA-II dated 10th December, 2021, wherein it was stated that for effective implementation of risk management strategy, the Assessing Officers would identify the following categories of information pertaining to Assessment Year 2015- 16 and Assessment Year 2018-19, which may require action under section 148 of the Act, for uploading on the Verification Report Upload (VRU) functionality on Insight portal- Information from any other Government Agency/Law Enforcement Agency; Information arising out of Internal Audit objection, which requires action u/s 148 of the Act; Information received from any Income-tax Authority including the assessing officer himself or herself; Information arising out of search or survey action; Information arising out of FT&TR references; Information arising out of any order of court, appellate order, order of NCLT and/or order u/s 263/264 of the Act, having impact on income in the assessee’s case or in the case of any other assessee; Cases involving addition in any assessment year on a recurring issue of law or fact.
      2. Audit objection- In complete repugnancy to the erstwhile regime, wherein the Supreme Court in the case of Indian and Eastern Newspaper Society vs. CIT21 had held that an audit objection cannot form the basis of reassessment, the new regime, explicitly provides to the contrary. Therefore, under the new regime, 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 would constitute information for the purpose of reassessment.
      3. Information received under an agreement referred to in section 90 or section 90A of the Act- This category would cover information received under both, Tax Information Exchange Agreements (TIEAs) as well as the information received under the Article dealing with ‘Exchange of Information’ under a Double Taxation Avoidance Agreement (‘DTAA’). It may be worthwhile to note that the scope of exchange of information under these agreements is quite wide. A typical agreement would permit the competent authorities of the Contracting States to exchange any information, which is foreseeably relevant for carrying out the provisions of either the agreement or for the administration or enforcement of the domestic laws concerned taxes of every kind and description.
      4. Information made available to the Assessing Officer under the scheme notified under section 135A of the Act- Section 135A of the Act empowered the Central Government to make a scheme for the purpose of calling for information from various sources in a faceless manner. Such scheme, titled ‘e-verification scheme, 2021’ was notified vide notification no. 137/2021 dated 13th December, 2021 which permits gathering of information in a faceless manner by taking recourse to sections 133, 133B, 133C, 134 and 135 and to corroborate it with the information received from certain other reporting agencies. In case there is a mismatch, the information can be used to initiate reassessment proceedings.
      5. Information which requires action in consequence of the order of a Tribunal or a Court- The last category of information is that which would require action in consequence of an order passed by a Tribunal or a Court. Some possible instances which could attract this limb are if the Tribunal or a Court in the appeal for a particular assessee gives a direction for the income to be assessed in the hands of another assessee, or where in an appeal arising out of a particular assessment year, it gives a direction for the income to be assessed in a different assessment year.
    31. A very crucial aspect, which is often lost sight of by the Assessing Officers is that the existence of information, by itself, is not sufficient for issuing a notice under section 148A(b). In the proviso to section 148, the word ‘information’ is qualified by the words ‘which suggests that the income chargeable to tax has escaped assessment’. In the opinion of the author, given the scheme of section 148A, the proper course of action to be adopted by the Assessing Officers on receipt of information would be to apply their mind and conduct enquiry under clause (a) to determine whether the information is suggestive of escapement. If the answer is in the affirmative, only then should a notice under clause (b) be issued. However, one would see in practice, that notice under clause (b) is issued immediately upon receipt of information, completely disregarding the requirement of establishing a nexus of some degree with the escapement of any income. In this light, the Delhi High Court22 has held that “whether it is “information to suggest” under amended law or “reason to believe” under erstwhile law the benchmark of “escapement of income chargeable to tax” still remains the primary condition to be satisfied before invoking powers under section 147 of the Act.”General principles of ‘information’-
    32. While Explanation 1 to section 148 defines ‘information’, there is sufficient obscurity in the definition which has necessitated the Courts to set out the parameters in line with which the definition has to be considered. The Hon’ble Delhi23 and Calcutta High Court24 have held that the definition of information in Explanation 1 cannot be lightly resorted to so as to reopen an assessment. If so done, it would give unbridled powers to the Department.
    33. Further, the Hon’ble Orissa High Court25 has adopted the meaning of the word ‘information’ from the judgement of the Hon’ble Supreme Court in the case of Larsen & Toubro Limited v. State of Jharkhand26 for the purpose of Explanation 1. In the aforesaid judgement, the Hon’ble Supreme Court had held that the word ‘information’ is of the widest amplitude and should not be construed narrowly. Therefore, there is an apparent dichotomy between the Delhi and Calcutta High Court on the one hand, and the Orissa High Court on the other.
    34. Although, in the context of section 147, as it originally stood in the 1961 Act, the Hon’ble Supreme Court in Lakhmani Mewal Das (supra) has held that ‘information’ cannot be wholly vague, indefinite, far-fetched or remote. These parameters, in the opinion of the author, would apply with equal force while construing the definition of ‘information’ under Explanation 1.Cases of deemed information-
    35. Explanation 2 to section 148 carves out certain exceptional circumstances, wherein reassessment can be done without having ‘information’ as defined in Explanation 1. Such exceptions can be put in two categories- a) where a search under section 132 or a survey under section 133A is initiated in the case of an assessee on or after 1st April, 2021 or b) where in the course of a search on any other person on or after 1st April, 2021, the Assessing Officer is satisfied that any money, bullion, jewelry or other valuable article or thing or any books of account or documents, seized or requisition pertain to or relate to the assessee.Assessments pursuant to search subsumed in reassessments-
    36. A very crucial aspect of the new regime is the unification of assessments pursuant to a search under section 132 of the Act with reassessment under sections 147 to 152 of the Act. To ensure such merger, a spate of amendments was made by the Finance Act, 2021. Firstly, sections 153A and 153C were amended to provide that nothing contained therein will apply in a case where a search is initiated on or after 31st March, 2021 (‘the cut off date’). Secondly, as mentioned hereinabove, in a case where search is initiated on or after the cut-off date, the Assessing Officer would be deemed to have ‘information’ for the purposes of section 148 of the Act. Thirdly, second proviso to section 148A carves out cases of search after the cut-off date from having to go through the procedure of pre-notice enquiry prescribed under section 148A of the Act. Finally, the second proviso to section 149 states that the provisions of that section will not apply in a case where a notice under section 153A or 153C is required to be issued in relation to a search initiated before the cut-off date. A combined effect of all these amendments is that the assessments pursuant to a search initiated after the cut-off date has to be done in terms of sections 147 to 152 of the Act. Additionally, two relaxations have also been provided to such search cases inasmuch as they do not require ‘information’ and the procedure under section 148A does not have to be followed.
    37. The rationale for the above merger as borne out from the Memorandum explaining the provisions of the Finance Bill, 2021 is that the procedural issues in the provisions of sections 153A/153C were resulting in a lot of litigation. However, it is interesting to note that the Finance Act, 2021 has done more than just move the search assessments from sections 153A/153C to sections 147 to 152. A series of substantive changes have also been made in the process. Unlike the assessments under sections 153A/153C which recognised the concept of abated (pending) and unabated assessments, no such distinction is drawn in the new regime, which would mean that the defense of the existence of ‘incriminating material’ is also sought to be legislatively derecognized. The second major difference is that unlike assessments under sections 153A/153C which mandated the assessment of 6 years, extendable to 10 years in specified circumstances, there is no such compulsion in the new regime. Under the new regime, it is for the Assessing Officer to decide which assessment years are to be reopened pursuant to a search. Furthermore, Explanation 2 to section 148 which deems the existence of ‘information’ in search cases does not say that the search should result in the discovery of any income that has escaped assessment. In terms of the said explanation, the very factum of search is deemed to be ‘information which suggests that income chargeable to tax has escaped assessment’. Therefore, wider powers are sought to be conferred on the Assessing Officers carrying out assessments pursuant to a search under the new regime.VI. Changes in limitation under section 149-
    38. The standard limitation under the erstwhile 149 of the Act was 4 years from the end of the relevant assessment year, which could be extended to 6 years if the income escaping assessment was more than Rs. 1 lac, and further extendable to 16 years where the income was in relation to an asset located outside India. As opposed to the quantitative test of limitation in the earlier regime, the new regime has an amalgam of quantitative and qualitative tests. The standard limitation is reduced to 3 years from the end of the relevant assessment year, which is extendable to 10 years in case the income that has escaped assessment is more than Rs. 50 lacs and the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax is represented in the form of i) an asset, ii) expenditure in respect of a transaction or in relation to an event or occasion, or iii) an entry or entries in the books of account. Section 149, as amended by the Finance Act, 2021 only covered representation in the form of an asset, the other two categories were inserted only by the Finance Act, 2022.
    39. In order to appreciate the import of the extended period of limitation provided in section 149(1)(b), it may be appropriate to consider the legislative history of the provision. Section 149(1) (b) as amended by the Finance Act, 2021 used the same language as the fourth proviso to section 153A which extended the limitation from 6 years to 10 years in search cases. The said fourth proviso was introduced by the Finance Act, 2017. While introducing the proviso, late Mr. Arun Jaitley, the then Finance Minister explained the rationale behind the proviso in his budget speech, wherein he stated that he proposed to omit section 197(C) of the Finance Act, 2016 which provided for assessment of undisclosed income relating to any period prior to commencement of the Income Declaration Scheme, 2016. However, in search cases, it was proposed to provide that in case tangible evidence is found during the search, the Assessing Officer can assess income upto ten years preceding the year in which search took place. The same rationale was echoed in Circular no. 2 of 2018, which contains the Board’s explanatory notes to the provisions of the Finance Act, 2017 and the Memorandum explaining the provisions of the Finance Bill, 2017 wherein it was stated that where tangible evidence(s) are found during a search or seizure operation (including 132A cases) and the same is represented in the form of undisclosed investment in any asset, assessment under section 153A can be made. It can be gleaned from aforesaid legislative history, that extension of limitation to ten years as well representation in the form of an asset, the two elements of the fourth proviso to section 153A which are also present in section 149 are meant to cover only those cases where certain undisclosed income is discovered. It is trite law that amending provisions may be considered in the light of the previous history of the legislation. Justice Cardozo in Duparquet Co. v. Evans27 said that in questions relating to construction, “history is a teacher that is not to be ignored”. In a similar vein, Chief Judge Learned Hand said that “statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning”28. [Quoted with approval in ACIT v. Ahmedabad Urban Development Authority (2022) (143 taxmann.com 278)]
    40. There is also a transitionary provision, i.e., the first proviso to section 149 which states that for the A.Y. 2021-22 and earlier years (‘the earlier assessment years’), if a notice under sections 148 or 153A or 153C could not have been issued in terms of the provisions of the respective sections as they stood prior to the amendments, then a notice can also not be issued in terms of the amended law. This recognizes the taxpayer ’s vested right of finality of assessment, which was hitherto recognised only in judgements. In this regard, it was held in KM Sharma v. ITO29 and SS Gadgil v. Lal & Co.30 that when limitation is extended by an amendment, the amended provision will not apply to those cases where the limitation under the erstwhile provision had come to an end. In view of the above legal position, the limitation for the earlier assessment years will be determined in this manner. If the conditions of the amended section 149(1)(b) (which extends the limitation to ten years) are not met, then the limitation would be three years under section 149(1)(a) and the proviso will not apply. On the other hand, if the conditions of section 149(1)(b) are met, then the proviso will spring into action and put a ceiling of six years (i.e., limitation under the erstwhile 149) as opposed to ten years provided in 149(1)(b). In fact, when the erstwhile section 149 was amended by the Finance Act, 2012 to extend the limitation of 6 years to 16 years where escapement of income was related to assets located outside India, it was clarified by way of an Explanation that the amended provisions providing for an extended period of limitation will also apply to assessment years beginning on or before 1st April, 2012, which is principally contrary to what the first proviso now provides.
    41. By way of the third and fourth proviso, the section also provides that while computing the limitation under section 149, the time granted to the assessee under clause (b) of section 148A and the period during which the proceedings under section 148A were stayed by a Court are to be excluded and if after such exclusion, the period available to an Assessing Officer to issue a 148 notice is less than 7 days, the limitation would be extended to seven days.
    42. Sub-section (1A) provides that for the purposes of section 149(1)(b), where the investement in asset or expenditure in relation to an event or occasion of more than Rs. 50 lacs is spread over more than 1 previous year within the period prescribed under section 149(1)(b), then the 148 notice is to be issued for each of those years.
    43. The new regime retains as it is section 150 of the erstwhile regime which gives a go by to limitation under section 149 in cases where a notice under section 148 is to be issued in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under the Act by way of appeal, reference or revision or by a Court in any proceeding under any other law.VII. Sanction of the prescribed authority-
    44. Under the erstwhile section 151, where a notice was issued within a period of four years from the end of the relevant assessment year, sanction of Joint Commissioner of Income-tax was required to be obtained and if it was to be issued after the end of four years, sanction of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner of Income-tax was required to be obtained.
    45. Under the new regime, where a notice is to be issued within a period of three years from the end of the relevant assessment year, sanction of Principal Commissioner or Principal Director or Commissioner or Director is required to be obtained and where a notice is to be issued after a period of three years, sanction 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 is required to be obtained.
  4. Parting comments-
  1. While the new regime is certainly well intentioned, but given the fact that the principles under the erstwhile regime had become well settled and that the new regime puts in place an entirely new procedure, it is only natural to expect that it would lead to even more litigation, in its formative years at the very least.
  2. The Hon’ble Supreme Court in the case of Ashish Agarwal (supra) lauded the new regime and observed that the same is ‘a game changer’ with an aim to achieve the ultimate object of simplifying the tax administration, ease compliance and reduce litigation. Only time will tell how far will this statement hold good.(Source: The Padma Vibhushan N. A. Palkhivala Memorial National Moot Court (Virtual) Competition and research paper writing Competition, 2022 was held on November 24 to 27, 2022 Sukhsagar Syal, Advocate won First Prize in the research paper writing competition for Professional)

    1. Parashuram Pottery Works Co. v. ITO (1977) (106 ITR 1
    2. (1976) (103 ITR 437) (SC)
    3. New Kaiser I Hind Spg. v. CIT (1977) (107 ITR 760) (Bom)
    4. (2003) (259 ITR 19)
    5. (2022) (444 ITR 1)
    6. (2007) (291 ITR 500) (SC)
  1. (2010) (320 ITR 561)
  2. (2022) (WPC 11862/2022)
  3. SLA no. 17235/2022
  4. Seema Gupta v. ITO (2022) (140 taxmann.com 463) (Del)
  5. Ernst and Young LLP (supra), Abdul Majeed Son of Shri Ali Mohammed v. ITO (2022) (140 taxmann.com 485) (Raj)
  6. CIT v. Jet Airways (I) Ltd. (2011) (331 ITR 236) (Bom), Ranbaxy Laboratories Ltd. v. CIT (2011) (336 ITR 136) (Del)
  7. Vipin Khanna v. CIT (2000 (7) TMI 2 (P&H)), Amrinder Singh Dhiman v. ITO (2003 (9)(TMI 19)
  8. Abdul Majeed (supra)
  9. (2022) (445 ITR 436)
  10. Aroni Commercials Ltd. v. DCIT (2014) (362 ITR 403) (Bom), PCIT v. Shodiman Investments P. Ltd. (2020) (422 ITR 337) (Bom)
  11. CIT v. Mahaliram Ramjidas (1940) (8 ITR 442) (PC)
  12. Excel Commodity and Derivative Pvt. Ltd. v. UOI (2022) (APOT 132/22)
  13. Abdul Majeed (supra)
  14. Bayer Material Science P. Ltd. v. DCIT (2016) (382 ITR 333) (Bom), KSS Petron Pvt. Ltd. v. ACIT (2016) (ITA 224/14), Fomento Resorts & Hotels Ltd. v. ACIT (2019) (TA no. 63 of 2007)
  15. (1979) (119 ITR 996)
  16. Divya Capital One (supra)
  17. Divya Capital One (supra)
  18. Excel Commodity (supra)
  19. Stewart Science College v. ITO (2022) (143 taxmann.com 80) (Orissa) and Auroglobal Comtrade Pvt. Ltd. v. The Chairman, CBDT (2022) (143 taxmann.com 120) (Orissa)
  20. (2017) 13 SCC 780
  21. (297 U.S. 216 (1936)) 105
  22. Cabell v. Markham (1945) 148 F 2d 737106
  23. (2002) (254 ITR 772)
  24. (1964) (53 ITR 231)

K.K. Singla, Advocate

Legislative History

Summary assessment was introduced through Income Tax Act 1961 w.e.f. 01/04/1962 with the insertion of Section 143(1) which read as under:-

143(1) Assessment:-

Where a return has been made under section 139 and the Income Tax Officer is satisfied without requiring the presence of the assesse or the production by him of any evidence that the return is correct and complete, he shall assess the total income or loss of the assesse, and shall determine the sum payable by him or refundable to him on the basis of such return.

This provision corresponds to section 23(1) of the 1922 Act.

As it evident from wording of the section the ITO was not empowered to make any adjustments even for apparent errors rather he was to determine the tax payable or refundable to the assesse on the basis of such return.

Section 143(1) was amended by the Taxation Laws (Amendment) Act 1970 w.e.f. 01/04/1970 with a view to authorize the officer to make adjustments to income or loss declared in the return. The adjustments could be by way of:-

  1. Rectifying any arithmetical errors in the return and the accounts and documents, if any, accompanying it;

  2. Allowing any deduction, allowance or relief which, on the basis of the information available in such return, accounts and documents is, prima facie, admissible though not claimed in the return; and

  3. Disallowing any deduction, allowance or relief claimed in the return but which, on the basis of the information available in such return, accounts and documents, is prima facie, inadmissible.

This section was subsequently amended from time to time as per following Acts:-

Finance Act 1974, Finance Act 1976, Finance (No 2) Act 1980, Finance Act 1987, The Direct Tax Laws (Amendment) Act 1987, The Direct Tax Laws (Amendment) Act 1989, The Direct Tax Laws (Second Amendment) Act 1989, Finance Act 1990, Finance Act 1992,

Finance Act 1993, Finance Act 1994,

Finance Act 1997, Finance Act 1999,

Finance Act 2001, Finance Act 2008,

Finance Act 2012, Finance Act 2016,

Finance Act 2021.

Finally as section 143(1) to 143(1D) which relate to summary assessment and processing of returns stands as on today is reproduced as under:-

Assessment.

143. (1) Where a return has been made under section 139, or in response to a notice under sub-section (1) of section 142, such return

shall be processed in the following manner, namely:—

  1. the total income or loss shall be computed after making the following adjustments, namely:—

    1. any arithmetical error in the return;

    2. an incorrect claim, if such incorrect claim is apparent from any information in the return;

    3. disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond the due date specified under sub-section of section 139;

    4. disallowance of expenditure [or increase in income] indicated in the audit report but not taken into account in computing the total income in the return;

    5. disallowance of deduction claimed under [section 10AA or under any of the provisions of Chapter VI-A under the heading “C.—Deductions in respect of certain incomes”, if] the return is furnished beyond the due date specified under sub-section (1) of section 139; or

    6. addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return:

      Provided that no such adjustments shall be made unless an intimation is given to the assessee of such adjustments either in writing or in electronic mode:

      Provided further that the response received from the assessee, if any,

      shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made:

      Provided also that no adjustment shall be made under sub-clause (vi) in relation to a return furnished for the assessment year commencing on or after the 1st day of April, 2018;

  2. the tax, interest and fee, if any, shall be computed on the basis of the total income computed under clause (a);

  3. the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax, interest and fee, if any, computed under clause (b) by any tax deducted at source, any tax collected at source, any advance tax paid, any relief allowable under section 89, any relief allowable under an agreement under section 90 or section 90A, or any relief allowable under section 91, any rebate allowable under Part A of Chapter VIII, any tax paid on self-assessment and any amount paid otherwise by way of tax, interest or fee;

  4. an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

  5. the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee:

    Provided that an intimation shall also be sent to the assessee in a case where the loss declared in the return by the assessee is adjusted but no tax, interest or fee is payable by, or no refund is due to, him:

    Provided further that no intimation under this sub-section shall be sent after the expiry of [nine months] from the end of the financial year in which the return is made.

    Explanation.—For the purposes of this sub-section,—

    1. “an incorrect claim apparent from any information in the return” shall mean a claim, on the basis of an entry, in the return,—

      1. of an item, which is inconsistent with another entry of the same or some other item in such return;

      2. in respect of which the information required to be furnished under this Act to substantiate such entry has not been so furnished; or

      3. in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction;

    2. the acknowledgement of the return shall be deemed to be the intimation in a case where no sum is payable by, or refundable to, the assessee under clause (c), and where no adjustment has been made under clause (a).

    (1A) For the purposes of processing of returns under sub-section (1), the Board may make a scheme for centralised processing of returns with a view to expeditiously determining the tax payable by, or the refund due to, the assessee as required under the said sub- section.

    (1B) Save as otherwise expressly provided, for the purpose of giving effect to the scheme made under sub-section (1A), the Central Government may, by notification in the Official Gazette, direct that any of the provisions of this Act relating to processing of returns shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in that notification; so, however, that no direction shall be issued after the 31st day of March, 2012.

    (1C) Every notification issued under sub- section (1B), along with the scheme made under sub-section (1A), shall, as soon as may be after the notification is issued, be laid before each House of Parliament.

    (1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2):

    Provided that the provisions of this sub- section shall not apply to any return furnished for the assessment year commencing on or after the 1st day of April, 2017.

    The returns are processed according to the Central Processing of Return Scheme, 2011, vide Notification No. S 016(E) Dt. 04/01/2012, as per the scheme the following points are worth consideration:-

    Rule 13. Service of notice or communication.

    1. The service of a notice or order or any other communication by the Centre may be made by

      1. sending it by post;

      2. delivering or transmitting its copy thereof, electronically to the person sent by the Centre’s e-mail;

      3. placing its copy in the registered electronic account of the person on the official website ; or

      4. any of the modes mentioned in sub- section (1) of section 282 of the Act.

    2. The date of posting of any such communication on official website, email or other electronic medium shall be deemed to be the date of service.

    3. The intimation, orders and notices shall be computer generated and need not carry physical signature of the person signing it.

Rule 6. Invalid or defective return.

  1. The Commissioner may declare-

    1. a return invalid for non- compliance of procedure for using any software not validated and approved by the Director General.

    2. a return defective under sub- section (9) of section 139 of the Act on account of incomplete or inconsistent information in the return or in the schedules or for any other reason.

  2. In case of a defective return, the Centre shall intimate this to the person through email or by placing a suitable communication on the e-filing website.

  3. A person may comply with the notice regarding defective return by uploading the rectified return within the period of time mentioned in the notice.

  4. The Commissioner may, in order to avoid hardship to the person, condone the delay in uploading of rectified return.

  5. In case no response is received from the person in reply to the notice of defective return, the Commissioner may declare a return as not having been uploaded at all or process the return on the basis of information available.

Rule 9. Rectification of mistake.

  1. With a view to rectifying any mistake apparent from the record under section 154 of the Act, the Centre, on its own or on receiving an application from the person may amend any order or intimation passed or sent by it under the provisions of the Act.

  2. An application for rectification shall be filed electronically to the Centre in the format prescribed and will be processed in the same manner as a return of income-tax.

  3. Where the rectification order results in a demand of tax, the order under section 154 of the Act passed by the Centre shall be deemed to be a notice of demand under section 156 of the Income-tax Act.

  4. In case of error in processing due to an error in data entry or a software error or otherwise, resulting in excess refund being computed or reduction in demand of tax, the same will be corrected on its own by the Centre by passing a rectification order and the excess amount shall be recovered as per the provisions of the Act.

  5. Where a rectification has the effect of enhancing an assessment or reducing the refund or otherwise increasing the liability of the person, intimation to this effect shall be sent to the person electronically by the Centre and the reply of the person has to be furnished through electronic mode only.

    Rule 10. Adjustment against outstanding tax demand.

    The set-off of refund, if any, arising from the processing of a return, against tax remaining payable will be done by using the details of outstanding tax demand lying against the person as uploaded onto the system of the Centre by the Assessing Officer.

    Further a notification No. SO 17(E) Dt.04/01/2012 was also issued regarding application of provisions of act relating to processing of returns.

    Practical problems faced by the tax payer’s and Tax Professionals and resolution thereof:-

    1. Issue of Notice/Communication

      The service of notice or communication to the assesse sometimes remains unnoticed. If the communication is made by way of placing its copy in the registered electronic account of the person on the official website (ITBA), the same is most likely to go unnoticed because it is not possible for the assesse to login the account on daily basis and sometimes the Email Id is not updated on the portal. The problem can be resolved if the communication is made in more than one modes i.e. through email/SMS etc.

    2. Adjustments to the returned income

      Sometimes the adjustments are made for the lack of evidence in support of the claim of any deduction/allowance or exempt income. It appears that CPC is not empowered to make such adjustments and the adjustments are not within the scope of section 143(1)(a). CBDT had been issuing instructions from time to time. In a recent case of Anita Sethi VS DCIT, CPC Banguluru decided on 18/04/2022 (ITA No. 109/Kol/2022 A/Y 2017-18). It was held that AO has wrongly assumed jurisdiction under the Act and no adjustment could be made.

    3. Response filed by assesse ignored

      Most of the times the response filed by the assesse is not considered. CBDT has been issuing circulars from time to time regarding procedure to be followed at the time of processing of the returns. In this regard Circular No. 1/2018 Dt. 10/01/2018 is relevant, wherein the Board has instructed that based upon response of the taxpayer and the information so available with the CPC-ITR. Such return shall be taken up for processing by CPC as per provisions of section 143(1). 143(1) read with instruction No. 9 and 10/2017 of CBDT.

    4. Same income cannot be taxed twice

      Income declared under one head of income is again taxed under another head of income by way of adjustment U/S 143(1)(a). This is done in spite of the proper response filed by the assesse in response to notice U/S 143(1)

      (a). It is trite law that same income cannot be taxed under different heads or in the hands of two different persons. It was so held by Honorable ITAT Chandigarh Bench A in the case of Haryana Financial Corporation v. Deptt. of Income Tax Dt. 25/07/2014 in ITA No. 353,411&412.

    5. Brought forward losses

      Certain cases have come to notice where carried forward losses in the previous return filed U/S 139(1) have been either not adjusted or were disallowed without giving any notice for making the adjustment. This is again the case of exceeding the jurisdiction by CPC and such mistakes should be avoided at end of CPC

    6. Defective Return

      Rule 6 of the Centralized Processing of return Scheme 2011 provides that the return can be declared defective U/s 139(9) of the Act on account of incomplete or inconsistent information in the return or in the schedules or by any other reason. The assesse is required to comply with the notice regarding defective return by uploading the rectified return within the period of time mentioned in the notice.

    7. Updation on the portal

Sometimes the assesse receives certain information/notice through SMS and Email id but the information is not updated on the portal for months together. In this regard Grievances raised with the Web Manger or e filing website are not responded.

Portal updation should be prompt and simultaneously.

Conclusion

From the discussion in the foregoing paragraphs of this article it can be inferred that filing of return of income tax is very technical process and the return should be filed by a qualified person very carefully, keeping in view the following points:-

  1. The information in the return should be complete in respect of all the declared sources of income and the schedules relating thereto should also be filled up properly. The attachments wherever required should be made.

  2. Before preparing the return the information available on the portal relating to the assesse should be thoroughly checked and considered. In case of any inconsistency with the facts of the case in form 26AS, AIS and TIS, a proper feedback should be furnished on the portal.

  3. In case of any wrong adjustment in the intimation order, an appeal or rectification should be filed within the permissible time. In my view an appeal should be preferred.

  4. In case the notice U/s 143(1)(a) is based on any improper or wrong information in the Audit report then we should obtain a revised audit report after correction and should be approved before submitting the response to the notice.

  5. In case the assesse is in receipt of any notice proposing to declare the return defective U/S 139(9), the response should be submitted after removing the defect depending upon the facts and circumstances of each case.

  6. As per third proviso to Section 143(1)

    (a) no adjustment/addition of income can be made on the basis of Form 26AS or Form 16A

    or Form 16 in relation to a return furnished for the Assessment year commencing on or after the 1st day of April 2018.

  7. It is also worth noting that no intimation under this sub section can be sent after the expiry of nine months from the end of the financial year in which the return is made.

DISCLAIMER

While every care has been taken in the preparation of this article to ensure its accuracy. The author will not be responsible for any error despite all precautions may be found herein. The contents of this article are purely for information purpose.

(Source : Article published in Souvenir released at National Convention 2022 held at Jaipur on 17th & 18th December, 2022)