Demystifying Re-assessment procedure in Income Tax Act, 1961

CA. Rohit Kapoor

The procedure for the reassessment of income under the Income Tax Act, 1961 is outlined in Sections 147 to 151A. The Assessing Officer (AO) was empowered to reassess income that has escaped assessment on the basis of reasons to believe and other issues identified at the time of assessment proceedings. These provisions underwent significant changes with the Finance Act, 2021.

Before April 1, 2021, under Section 147, the AO could reassess income if he had a “reason to believe” that taxable income had escaped assessment for the relevant assessment year. Section 148(2) mandated the AO to record the reasons in writing. However, post-amendment in the Finance Act, 2021, no notice under Section 148 can be issued unless the AO possesses “information” indicating that income has escaped assessment for the relevant assessment year.

Now, it is compulsory for the AO to adhere to the procedures outlined in Section 148A, introduced with effect from April 1, 2021 in all the cases. However, proviso to section 148A provides the exhaustive list where the procedure as laid down in section 148A is not required. The AO must pass an order u/s 148A(d) explaining how the information suggests that income has escaped assessment. Section 148A requires conducting an inquiry and providing the taxpayer with an opportunity of being heard by issuing a show cause notice under Section 148A(b). Thereafter, order u/s 148A(d) is passed by the Assessing Officer by taking into consideration the replies and documents submitted by the assessee.

I. SECTION 148A(a): TO CONDUCT ENQUIRY

•  Section 148A – The Assessing Officer shall, before issuing any notice u/s 148: –

148A(a) – Conduct an inquiry, if required, with the prior approval of the specified authority, with respect to the information in his possession, which suggests that the income chargeable to tax has escaped assessment.

•  ISSUES-

The legal question arises whether the phrase used “if required” is to be interpreted as mandatory or directory. That there are two foods of thought that the word ‘if required’ used in the statute is considering proviso to section 148A. It is very much evident that the procedure of 148A is not required in search and other cases as embedded in first proviso to section 148A. Now the question is that it is mandatory for the AO to conduct enquiry in other cases before issuing the notice u/s 148A(b). However, the different views have been interpreted for the phrase ‘if required’ in different manner. This matter has been addressed by several courts, asserting that conducting an inquiry is discretionary1.”

Conclusion

That the inquiry process as motioned in section 148A(a) is directory as if the Legislature had the intent and object of mandating an enquiry before issuing a show cause notice under clause (b) of section 148, the Legislature would not have specifically used the words “if required”, following the words “conduct an enquiry”. In these circumstances, if a harmonious interpretation is to be arrived at without rendering the words “if required” meaningless, keeping in view the above the word ‘shall’ would mean ‘may’ as Section 148A(a) grants discretion to the Assessing Officer to conduct an enquiry.

That conducting an enquiry is not a condition precedent for issuance of notice under section 148A(b); however, if respondent department conducts an enquiry; then, it is mandatory for respondent department to provide report of enquiry along with notice issued under section 148A(b).

1 Chotanagpur Diocesson Trust Asson. v. UOI- [2023] 156 taxmann.com 273 (Jharkhand)</em >

1 Champa Impex (P.) Ltd. v. Union of India – [2024] 158 taxmann.com 629 (Calcutta)

1 satguru Sai Extrusions Pvt. Ltd. v. UOI – 2024 (2) TMI 50 – Bombay High Court

1 Popatlal Umedmalji Jain v. ITO – 2024 (2) TMI

344 – Bombay High Court

II. SECTION 148A(b): SHOW CAUSE NOTICE TO ASSESSEE

The Assessing Officer has to provide an opportunity of being heard to the assessee, with the prior approval of specified authority. The time to be specified in the notice shall not be less than 7 days but not exceeding 30 days from the date on which such notice is issued. SCN requiring assessee to explain, as to why a notice u/s 148 should not be issued on the basis of information, which suggest that income chargeable to tax has escaped assessment in the case for the relevant assessment year and as results of enquiry conducted if any, as per Clause (a) of Section 148A.  

•  ISSUES –

a.  Mandatory or directory to provide the information on the basis of which SCN under section 148A(b) was issued –

The issue at hand is bifurcated into two components: firstly, the notice issued in pursuant to the order pronounced by the apex court in the matter of Ashish Aggarwal, concerning notices served during the period spanning from April 1, 2021, to June 30, 2021, (in converted cases); and secondly, the examination of notices issued under the newly instituted framework delineated in section 148A(b).The Assessing Officer is obligated to provide the entire material and information relied upon for reopening the assessment to the assessee along with the notice under Section 148A or Show Cause Notice. Mere assertions about the escapement of income without supporting material are insufficient to validate the issuance of a notice under Section 148A.

Converted Matters (01.04.2021 to 30.06.2021) The Apex Court in the case of Ashish Aggarwal stated that instead of setting aside impugned reassessment notices issued under old regime between 01.04.2021 to 30.06.2021, same should be deemed to have been issued under section 148A as substituted by Finance Act, 2021 and were to be treated as show cause notices in terms of section 148A(b). Thus, the requirement of issuance of notice u/s 148A(a) was dispensed where the notice u/s 148 was issued between 01.04.2021 to 30.06.2021. Furthermore, it was also stated that the AO shall provide the information to the assessee within a period of 30 days from passing the order. Thereafter, CBDT issued Instruction No. 1 dated 11.05.2022 in which it has been categorically stated that AO to provide information and material relied upon so that assessee can reply to notices.

Notices issued in new regime

It is mandatory for the AO to share the information with the assessee on the basis of which show-cause notice is issued. Furthermore, in Guidelines 299/10/2022-Dir (Inv.III)/611 [Dated: 01/08/2022] similar issue has been addressed stating that –  “In the cases whereinformation is received from the InvestigationWing or any other law enforcement agency,details of letter, brief summary of informationalong with relevant portion of such reportand details of relied upon documents may beenclosed. (Refer annexure 1) Furthermore, it has been held by various courts that the supply of material is necessary under section 148A(b)2–

2 Lakhendra Kumar Raushan v. PCIT – [2023] 157 taxmann.com 248 

2 Chotanagpur Diocesson Trust Asson. v. UOI – [2023] 156 taxmann.com 273 (Jharkhand)

2 Alkem Laboratories Ltd. v. PCIT- [2023] 152 taxmann.com 133 (Patna) 

2 Best Buildwell (P.)(Ltd.) v. ITO – 141 taxmann. com 558

b. Whether Show cause Notice can be replaced by questionnaire –

It is a settled law that SCN cannot be replaced with the questionnaire. It must necessarily embody the material or the grounds on the basis of which an action is proposed to be initiated. It was further held by various courts that a notice to show cause must also necessarily disclose the particular penalty or action which is proposed to be taken. The same view is supported by various courts3 –

3 Swal Ltd. v. Union of India- [2022] 141 taxmann. com 523 (Calcutta)

3 BT (INDIA) Pvt. Ltd. v. UOI & ANR. – 2023 (11) TMI 478 – Delhi High Court

3 Gorkha Security Services – 2014 (8) TMI 1081 – Supreme Court].

c. Whether opportunity of being heard should be equated with physical hearing?

That the word used in section 148A(b) is opportunity of being heard and now the question is whether opportunity of being heard is required to be given by personal hearing or mere by furnishing reply. The same issue has been addressed by various courts by taking into consideration Instruction No. F.No.299/10/2022- Dir (Inv.III)/611, dated 01.08.2022. That if a request for personal hearing is made by the assessee then the same should be provided by the AO and the same has been expressed in Clause viii of the Department instruction. The circulars are binding on the revenue and it may not be open to the revenue to contend to the contrary4.

4 MR. Beboy Joseph John v. ACIT – 2022 (12) TMI 1283 [Madras High Court] 

4 Babcock Borsig Limited v. Union of India – [2022] 141 taxmann.com 85 (Calcutta) 

d. Time period allowed to reply was less than 7 days in the SCN

Time limit provided is less than 7 days – Section 148A(b) provides for an opportunity of being heard to assessee which shall not be less than seven days. That it has been clearly mentioned in Section 148A(b) of the Income Tax Act, 1961 that a minimum time of seven days and maximum time of 30 days has to be granted to the assessee to file reply to the show cause notice. That on violation of the said requirement the complete assessment proceedings renders to be bad in law. Furthermore, this 7 day is required to be calculated by ignoring the date of issue and the last date of submission. In other words, minimum 7 clear days has to be provided to the Assessee for filing reply. The same view has been dealt by various courts in following cases5: –

5 Jindal Forgings v. Income Tax Department – 143 taxmann.com 263 (Jharkhand)

5 Srivenkateshwar Tradex (P.) Ltd. v. PCIT – [2023] 156 taxmann.com 496 (Delhi) 

5 Satish Kumar v. PCCIT – 2023 (12) TMI 812 – Jharkhand High Court 

Time limit to be provided excluding any holidays – That show cause notice issued under section 148A(b) has to be considered by excluding holidays. In a case where the period provided in the SCN is short of 7 days after excluding the holidays and excluding the date of issue and date of reply, in such cases the courts have remanded the matter back to the AO as there was violation of principle of natural justice6.

6 R.N. Fashion v. UOI – 139 taxmann.com 539 (Calcutta)</em >

6 Girdhar Gopal Dalmia v. Union of India – [2022] 141 taxmann.com 251 (Calcutta) 

6 Bird Worldwide Flight Services (I.) (P.) Ltd. v. DCIT – 144 taxmann.com 120 (Delhi)

6 PANJOS BUILDERS P LTD. v. PCCIT – 2024 (2) TMI 585 – Karnataka High Court 

e. Whether AO to verify the information flagged on the insight portal?

Before initiating proceedings under Section 148/147 of the Act, any information available on data-base/portal of the Income Tax Department shall be verified before drawing any adverse inference against the taxpayers. The said issue has been addressed in the Instruction No. 299/10/2022-Dir(Inv. I)/647 and the board has accepted that the information made available/ data uploaded by the reporting entities may not be fully accurate due to inter alia, error of human nature technical nature, etc. Therefore, due verification may be carried out and opportunity of being heard be given to the taxpayer before initiating proceedings under Section 148/147 of the Act. Furthermore, the various courts have also addressed the issue that the information appearing on the insight portal is required to be verified before drawing any adverse inference against the assessee.

7 SR Cold Storage v. UOI – 2022 (8) TMI 806 – Allahabad High Court 

7 Narendra Kumar Shah v. ACIT & ORS. – 2023 (11) TMI 345 – Bombay High Court 

III. SECTION 148A(c): AO TO CONSIDER REPLY OF ASSESSEE

The Assessing Officer is obliged to consider, the reply, if any furnished by the assessee in response to notice referred in Clause (b) of section 148A, i.e., Show Cause Notice.

The law mandates the Assessing Officer (AO) to consider the reply and submissions submitted by the assessee, and such consideration must be explicitly discussed in the order passed under Section 148A(d) of the Act. Despite being a relatively new provision, there is a surge in Writ Petitions challenging non-consideration of assessee’s replies under Section 148A(c) of the Act.

V. ORDER U/S 148A(d) & NOTICE U/S 148 OF THE INCOME TAX ACT, 1961

If the Assessing Officer is dissatisfied with the submissions filed by the assessee, he is required to pass an order under clause (d) of section 148A along with approval from the specified authority as mentioned u/s 151. Subsequently, the AO issue a notice under Section 148 for the relevant assessment year, instructing the assessee to file a return of income for that specific assessment year. This procedural step ensures that the reassessment process is initiated in a systematic manner following the examination of the assessee’s responses.

VI. TIME LIMIT FOR PASSING ORDER U/S 148A(d)

The AO is required to pass the order u/s 148A(d) within one month from the end of month in which the reply referred in Clause(c) is received by the Assessing Officer or where no such reply is furnished, within one month from the end of month in which time or extended time was allowed to furnish a reply as per Clause (b) expires.

However, the period of limitations envisaged in section 149 along with the proviso are required to be kept in mind for purpose of passing the order u/s 148A(d) and issuing of notice u/s 148. The Assessing Officer is mandated to seek approval from the authorities outlined in section 151(i) when the three-year time period from the end of the relevant assessment year has not elapsed and u/s 151(ii) if the period of three years but not later than ten years have elapsed from the end of relevant assessment year. Additionally, if the approval from the appropriate authority has been obtained under section 148A(d), there is no necessity to seek approval again when issuing a notice under section 148 of the Income Tax Act, 1961.

•  ISSUES

a) Reassessment proceedings stemming from Revenue’s deviation from prior view sans cogent reasoning

Order passed on similar facts and circumstances on which the proceedings were dropped in previous or later assessment year – The order u/s 148A(d) was passed for the year under consideration but on the same facts proceedings u/s 148A were dropped by passing order u/s 148A(d) for other assessment year. The reopening made on the basis of same facts for which opinion has already been taken in the favour of assessee such reopening is not permissible in the eyes of law. That the assessee, deals with the income tax department as a whole, like a body and not its individual organs, especially where left hand does not know what right had sanctioned. The said issue has been dealt by various courts8.

8 Prem Kumar Chopra [TS-284-HC-2023(DEL)

b) The notice passed u/s 148A(b) and order passed u/s 148A(d) are on different issues

The notice u/s 148A(b) is a SCN and the order u/s 148A(d) is based on the SCN issued u/s 148A(b). Therefore, the order passed u/s 148A(d) should align with the issues and quantum of escapement as mentioned in the SCN. That if the foundational allegation is missing in the notice issued under section 148A(b), the same cannot be incorporated by issuing a supplementary notice after passing the order u/s 148A(d). The order passed u/s 148A(d) is required to be quashed if it does not align with the notice u/s 148A(b). The same preposition has been held by the following courts9:

9 Catchy Pro-Build (P.) Ltd. v. Asstt. CIT [2022] 145 taxmann.com 510

9 Usha Rani Gisdhar v. ITO – 146 taxmann.com 547

c) Whether it is mandatory to share copy of approval u/s 151 with assessee?

The statutory framework outlined in the Act dictates that reassessment proceedings cannot be initiated unless there is information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year and the Assessing Officer has obtained prior approval of the specified authority to issue such notice. The approval granted by statutory authorities, as mandated by the provisions of the Act, must be provided to the assessee along with the information in Annexure 3 (Copy of approval required to be provided to the assessee).  The mandate of sharing the copy of approval is also made compulsory as per the CBDT Instruction No. 1 dated 11.05.2022. The same preposition has been held by following courts10: –

10 Tia Enterprises Pvt. Ltd. v. ITO, New Delhi – 2023 (10) TMI 1201

10 Gudwala And Sons v. ACIT – 2023 (10) TMI 139 – DELHI HIGH COURT

d) Two different approvals granted by same authority qua assessment year cannot be considered valid.

After issuing a notice under section 148A(b) for the assessment year 2014-15, an order under section 148A(d) was initially passed on 26.07.2022, deeming it unsuitable for reassessment. Subsequently, another order under section 148A(d) was issued by the Assessing Officer, indicating that the income represented in the form of an asset had indeed escaped assessment.

In both these orders dated 26.7.2022 and 31.7.2022, the said person has also stated that order under section 148A(d) is being passed in the case of assessee for assessment year 2014-15 after obtaining necessary approval from competent authority. Therefore, there is non-application of mind by the sanctioning authority. The Principal Chief Commissioner of Income Tax, Mumbai (PCCIT) is instructed to investigate the matter and take appropriate measures against the individual responsible for passing contradictory orders within a short span of five days.

11 Siemens Ltd. v. Deputy Commissioner of Income Tax [160 taxmann.com 243] (Bombay High Court)

d) The order passed u/s 148A(d) can be quashed where the approval given is mechanical Complete non-application of mind while preparing ANNEXURE – 2 Performa for approval  

The approval is prerequisite from the specified authority before passing an order under Section 148A(d) as envisaged in section 151. That if reopening is made within three years from the end of relevant assessment year the approval required is from the Principal Commissioner of Income Tax (PCIT). However, for cases where reopening is made after three years, but not more than ten years, the approval is required of the Principal Chief Commissioner of Income Tax (PCCIT). That in various instances filing of Annexure 2 (Proforma for approval by the Specified Authority) is being approached mechanically,

For Instance – “In regard to rows 9 and 22 of annexure 2, it is apparent that there has been a complete lack of application of mind by the specified authorities. The assessing officer, while sending the approval through the proper channel to PCIT via Add. CIT, has selected the option under section 149(1)(b) for reopening cases within three years. The provisions of section 149(1)(b) are only applicable in cases where more than three years have elapsed, and the approval required is that of the Principal Chief Commissioner of Income Tax (PCCIT).” The various courts have addressed this issue and pointed out that the order u/s 148A(d) is required to be quashed as the approval was given in the mechanical manner.  It has been held in the case of 10 Nikhil Chandrakant Dharia v. ITO – 2023(11)TMI 343 [Bombay High Court] that if both the Additional Commissioner of Income Tax (AddCIT), who recommended it as a fit case, and the Principal Commissioner of Income Tax (PCIT), who granted approval, had not acted in a mechanical manner, then such error could be avoided. The form inaccurately mentions in row 9, ‘under Section 149(1)(b) – for more than 3 years but not more than 10 years,’ where the PCIT granted approval. Had all the concerned officers carefully reviewed the form for approval and the order under Section 148A(d) of the Act, the notice would not have been issued. The ACIT would not have recommended, and the PCIT would not have granted approval. If Section 149(1)(b) of the Act is applicable, then the approval could only be granted by the Principal Chief Commissioner and not the Principal Commissioner, as in this case.”

VIII. THE PROVISIONS OF SECTION 148A SHALL NOT APPLY IN CASE WHERE –

  1. a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of the assessee on or after the 1st day of April, 2021; or
  2. the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any money, bullion, jewellery or other valuable article or thing, seized in a search under section 132 or requisitioned under section 132A, in the case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or
  3. the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any books of account or documents, seized in a search under section 132 or requisitioned under section 132A, in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, [relate to, the assessee; or
  4. the Assessing Officer has received any information under the scheme notified under section 135A pertaining to income chargeable to tax escaping assessment for any assessment year in the case of the assessee.

Issues

  1. It is important to note that when information arises from survey proceedings, it is obligatory for the assessing officer to adhere to the procedures outlined in Section 148A.
  2. The assessee should promptly respond to the notices issued under section 135A, as non-compliance may result in the issuance of a notice under section 148 without adherence to the procedure outlined in section 148A.
  3. “It is pertinent to mention that the person searched and the premises searched are distinct entities. For instance, if a search is conducted on Mr. A, but the premises of Mr. B are also searched due to the suspicion that books of accounts or assets pertaining to A will be available in Mr. B’s premises. In this case, the search is on Mr. A and not on Mr. B. Therefore, while framing an assessment in the case of Mr. B, the satisfaction of the Principal Commissioner or Commissioner (PCIT) of Mr. B is required when some assets/ documents relating to Mr. B were found during the search on Mr. A from the premises of Mr. B.”

IX. MEANING OF INFORMATION

The word “information” carries two meaning –

‘i. Actual Information’ – Explanation 1 of Sec 148

(i) any information in accordance with the risk management strategy formulated by the Board from time to time;
(ii) audit objection that the assessment has not been made in accordance with the provisions of this Act; or
(iii) any information received u/s 90 or 90A

or
(iv) Information made available with the A.O. as per Section 135A or
(v) any information in consequence of the

order of a Tribunal or a Court.

ii. ‘Deemed Information’ – Explanation 2 of Sec 148

(i) search u/s 132 or BOA, other documents or any assets are requisitioned u/s 132A, on or after the 1st day of April, 2021, or
(ii) a survey u/s 133A, other than under sub-section (2A) of that section, on or after the 1st day of April, 2021, in the case of the assessee; or
(iii) AO is satisfied, with the prior approval of PCIT or CIT, that any money, bullion, jewellery or other valuable article or thing, seized or requisitioned u/s 132 or 132A in case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or
(iv) AO is satisfied, with the prior approval of PCIT or CIT, that any BOA or documents, seized or requisitioned u/s 132 or 132A in case of any other person on or after 1 April, 2021, pertains or pertain to, or any information contained therein, relate to, the assessee
AO shall be deemed to have information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee [where] the search is initiated or books of account, other documents or any assets are requisitioned or survey is conducted in the case of the assessee or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person

X. OTHER MISCELLANEOUS ISSUES

a) THERE MUST BE ESCAPEMENT OF INCOME FOR REOPENING OF CASE U/S 148 

Income chargeable to tax cannot be entire sale consideration and can only be profit element embedded in it. If the revenue has arrived at correct figure, in that case the amount of escapement of income can be below ₹ 50 lakhs.  

It is observed in many cases the reopening has been done after three years by taking into consideration the entire sale proceeds or entire bank deposits as income. That no reopening can be made where escapement was less than 50 lakhs for period exceeding three years. Therefore, the escapement of income in such cases has to be considered in real sense and in accordance with law. The scheme of the IT Act specially the provisions which deal with computation of business income make it abundantly clear that definition of expression ‘income’ and ‘income chargeable to tax’ are at variance to each other. The expression ‘income’ is inclusively defined under Section 2(24) of IT Act whereas ‘income chargeable to tax’ obviously denotes an amount which is less than ‘income’. The ‘income chargeable to tax’ is arrived at after deducting the permissible deductions under IT Act from ‘income’. As such quantum of ‘income’ is invariably more than the income chargeable to tax. The same issue has been discussed by courts in following case laws12: –

12 NITIN NEMA V. PCCIT – 2023 (8) TMI 1027 – MADHYA PRADESH HIGH COURT

b) Income chargeable to tax is the net income derived from buy and sell transactions is liable to taxation, and not the total amount of transaction made in shares </em >

Additionally, it is essential to consider that only the net income arising from buy and sell transactions should be subject to taxation in the hands of the assessee, and not the entire sum. The Assessing Officer (AO) has failed to demonstrate a thorough examination of the matter, neglecting to address how, in the presence of opposing entries for buy and sell, both amounts can be added to allege an escape of income. Consequently, it is crucial to emphasize that only the net income derived from buy and sell transactions is liable to taxation, and not the total amount. This perspective finds support in various judicial precedents, including the following cases13: –

13 RAM NEBHNANI v. ITO – 2023(11) TMI 544

c) Income chargeable to tax in case of capital gains is to be required to be calculated by taking into consideration the provisions of section 48 and not entire sales.

The income chargeable under the head of ‘capital gains’ which would arise in case of sale transaction is provided u/s 48, which provides that income chargeable under the head of ‘capital gains’ shall be computed by deducting from the full value of the consideration, the cost of acquisition and in the event where the property purchased has been held for a period beyond three years in terms of second proviso to Section 48, the words, ‘cost of acquisition’ is to be substituted by the words, ‘indexed cost of acquisition’. The same preposition has been held by following courts14: –

Section 48 – Income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely –

(i) expenditure incurred wholly and exclusively in connection with such transfer

(ii) the cost of acquisition of the asset and the cost of any improvement

14 MR. SANATH KUMAR MURALI v. ITO – 2023 (6) TMI 49 – KARNATAKA HIGH COURT 

WHETHER UNSIGNED NOTICE IS CONSIDERED TO BE VALID OR INVALID?

d) Unsigned notice is invalid when – The notice u/s 148 is unsigned both digitally and manually and does not contain name and designation of the respected authority. The AO shall not vest with any further jurisdiction to proceed to reassess the income of the assessee. Furthermore, it has been held that such defect cannot be cured by Section 292B. the same preposition has been held by following courts15: –

15 Prakash Krishnavtar Bhardwaj v. Income-tax Officer [2023] 150 taxmann.com 60 (Bombay)

15 CIT v. Aparna Agency (P.) Ltd . [2004] 139 Taxman 132

15 UmashankarMishra v. CIT – [1982] 11 Taxman 75 (MP)

15 Vikas Gupta v. Union of India [2022] 142 taxmann.com 253 (Allahabad) 

e) Unsigned notice when valid – Digitally Unsigned notice is valid if it contains name and office of the designated authority printed on it. A notice will be considered authenticated if the name and office of the designated income-tax authority is printed, stamped or otherwise written. It was also pleaded that the lack of DSC is merely a defect and would fall under section 282A(2) of the Act of 1961. The same preposition has been held by various courts16: –

16 Suman Jeet Agarwal v. Income-tax Officer – [2022] 143 taxmann.com 11 (Delhi)

f) COMMUNICATION OF NOTICE THROUGH E-mail

It is well established law that for communications delivered or transmitted electronically, email address available in the income-tax return furnished by the addressee to which the communication relates or the email address available in the last income-tax return furnished by the addressee shall be used by the AO (Rule 127). That the notice issued u/s 148 on the email id not in accordance with the rule 127 is bad in law. The use of secondary e-mail is only valid in the absence of primary e-mail address. The same view has been held in following cases17: –

17 Lok Developers v. DCIT – [2023] 149 taxmann.com 93 (Bombay)

17 GRS Hotel (P) Ltd. v. Union of India (Allahabad) [2024] [160 taxmann.com 125]</em >

17 Munjal BCU Centre of Innovation and Entrepreneurship (Punjab & Haryana) [160 taxmann. com 629]

g) ORDER IN THE NAME OF NON- EXISTENT ENTITY IS NULLITY

Notices issued in the name of non-existent entities are likely to be deemed null and void, carrying severe legal consequences. Courts and legal authorities typically recognize the importance of accurate and valid communication, and any deviation from this standard may result in the dismissal of the notice or the legal proceedings associated with it. To prevent the nullity of notices, legal practitioners and authorities must exercise diligence in verifying the accuracy of entity names before issuing communications. Legal practitioners, authorities, and individuals involved in legal processes must be vigilant in ensuring that notices are correctly addressed to valid and existing entities. The same view has been held in following cases18: –

18 Rajasthan Global Securities (P) Ltd. [146 Taxmann.com 512]

18 Vijay Garg v. Income-tax Officer [2023] 146 taxmann.com 231 (Delhi)

XI. SECTION 149: Time limit for notice

•  149(1)- No notice under section 148 shall be

issued for the relevant assessment year, —

149(1)(a) – if three years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b);

149(1)(b)- if three years, but not more than ten years, have elapsed from the end of the relevant assessment year unless the Assessing Officer has in his possession

books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of—

  1. An asset;
  2. expenditure in respect of a transaction or in relation to an event or occasion; or
  3. an entry or entries in the books of account,

which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more.

Explanation. —For the purposes of clause (b) of this sub¬section, “asset” shall include immovable property, being land or building or both, shares and securities, loans and advances, deposits in bank account.

That the reopening u/s 148 is permissible if three years have not elapsed from the end of relevant assessment year without any monetary limit or conditions but subject to provisions of section 148A. However, where more than three but not later than ten years have elapsed from the end of relevant assessment year, the reopening is permissible only after fulfilment of certain conditions as envisaged in section 149(1)(b) read with explanation of the Income Tax Act,1961. The reopening beyond three years from the end of relevant assessment year is not permissible in the absence of entry in the books of accounts, asset or expenditure in respect of a transaction and subject to monetary limit of ₹ 50 lakhs.

ISSUES-

•  The property was acquired jointly, yet the TDS was deducted in the name of only one owner. Whether reopening by considering consolidated amount of sale consideration in the hands of single co-owner is valid by invoking provisions of section 149(1)(b).

The co-owner and the assessee sold a property worth over ₹ 50 lakhs in AY 2016-17. Both were equal owners, as stated in the sales deed. Full TDS on entire sale consideration was deducted under the assessee’s PAN, but the consideration received was less than ₹ 50 lakhs. A notice under section 148A(b) was issued in Jan 2023. Whether the reopening is valid in the eyes of law.

Conclusion

It is very much evident that the case can be reopened beyond a period of 3 years and not later than 10 years if conditions as embedded in section 149(1)(b) are fulfilled. In the present case, the amount involved is less than ₹ 50 lakhs and as such the reopening made by considering the TDS amount is not valid in the eyes of law.

19 Pramila Mahadev Tadkase v. Income Tax Officer (Karnataka) [158 taxmann.com 246]

XII. SECTION 149: First proviso

Provided that no notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if [a notice under section 148 or section 153A or section 153C could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub- section (1) of this section or section 153A or section 153C, as the case may be], as they stood immediately before the commencement of the Finance Act, 2021.

Conclusion

If a case couldn’t be reopened in the old regime due to being time-barred, it cannot be reopened in new regime. This issue is divided into two parts: search cases and non-search cases. In non-search cases where the undisclosed income exceeds ₹ 50 lakhs as envisaged in section 149(1) (b) but the limitation period under the erstwhile Section 147, either 4 or 6 years as applicable, has expired, reopening under the new regime is not permitted.

For instance, in non-search cases for Assessment Year 2016-17 where the escapement was more than ₹ 50 lakhs, reopening can occur until March 31, 2023, and not beyond that date. The limitation period is calculated as 6 years from the end of the relevant assessment year since no assessment was conducted earlier.

However, in search cases, a period of 10 years can be reopened if the conditions outlined in the fourth proviso to section 153A, along with the explanation to section 153A, are met. Notably, the 10-year period under section 153A includes the year of search, equating to 1 year for the year of search, plus 6 years preceding the search, and 3 additional assessment years.

20 Delhi High Court in the case of PCIT v. Ojjjus Medicare (P) Ltd. [2024] [161 taxmann.com 161]

XIII. SECTION 149: Second proviso

Provided further that the provisions of this sub- section shall not apply in a case, where a notice under section 153A, or section 153C read with section 153A, is required to be issued in relation to a search initiated under section 132 or books of account, other documents or any assets requisitioned under section 132A, on or before the 31st day of March, 2021:

Conclusion

That the provisions of section 148 shall not be applicable where notice u/s 153A or 153C is required to be issued in relation to search/ requisition on or before 31.03.2021.

XIV. SECTION 149: Fifth and sixth proviso

Provided also that for the purposes of computing the period of limitation as per this section, the time or extended time allowed to the assessee, as per show- cause notice issued under clause (b) of section 148A or the period during which the proceeding under section 148A is stayed by an order or injunction of any court, shall be excluded:

Provided also that where immediately after the exclusion of the period referred to in the immediately preceding proviso, the period of limitation available to the Assessing Officer for passing an order under clause (d) of section 148A74b[does not exceed seven days], such remaining period shall be extended to seven days and the period of limitation under this sub-section shall be deemed to be extended accordingly.  

Conclusion

For instance, the notice issued under section 148A(b) on March 31, 2023, pertained to the assessment year 2019-20, with an escapement of income less than ₹ 50 lakhs. The order under section 148A(d) was passed on April 17, 2023. Additionally, a notice under section 148 was issued on April 17, 2023. The question at hand is the validity of the notice issued for the assessment year 2019-20 on April 17, 2023. The time period or extended time period granted to the assessee under section 148A(b) should be excluded when calculating the limitation under section 149, as per the fifth proviso to section 149. Similarly, the time period for passing the order under section 148A(d), after excluding the time period mentioned in the fourth proviso, should not be less than 7 days. Consequently, the notice issued on April 17, 2023, for assessment year 2019-20 is valid.

21 Raminder Singh v. Assistant Commissioner of Income-tax – [156 taxmann.com 148 (Delhi)]

XV. SECTION 149(1A):

Notwithstanding anything contained in sub-section (1), where the income chargeable to tax represented in the form of an asset or expenditure in relation to an event or occasion of the value referred to in clause (b) of sub-section (1), has escaped the assessment and the investment in such asset or expenditure in relation to such event or occasion has been made or incurred, in more than one previous years relevant to the assessment years within the period referred to in clause (b) of sub-section (1), a notice under section 148 shall be issued for every such assessment year for assessment, reassessment or precomputation, as the case may be.  

Conclusion

The assessee incurred expenses of ₹ 40,00,000/- for wedding event in the Financial Year (FY) 2017-18 and ₹ 25,00,000/- in the subsequent FY, i.e., FY 2018-19. To compute the sum of ₹ 50 lakhs, the amounts of ₹ 40,00,000/- and ₹ 25,00,000/- must be considered collectively, as per the provisions of section 149(1A) of the Income Tax Act, 1961. Consequently, the reassessment for both the years i.e. FY 2017-18 & 2018-19 can be reopened even though the income escaping assessment in each year is less than ₹ 50 lakhs.

XVI. SECTION 151: Sanction for issue of notice.

Specified authority for the purposes of section 148 and

section 148A shall be, –

(i) Principal Commissioner or Principal Director or Commissioner or Director, if three years or less than three years have elapsed from the end of the relevant assessment year;

(ii) Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General, if more than three years have elapsed from the end of the relevant assessment year.]

Provided that the period of three years for the purposes of clause (i) shall be computed after taking into account the period of limitation as excluded by the third or fourth or fifth provisos or extended by the sixth proviso to sub-section (1) of section 149.

Conclusion:

The assessing officer while passing the order u/s 148A(d) or issuing notice u/s 148, is required to obtain the approval of the authorities as envisaged in section 151 of the Income Tax Act,1961. That the assessing officer is required to obtain the approval of the authorities specified in section 151(i) i.e. Principal Commissioner or Principal Director or Commissioner or Director where the period of not more than three years have elapsed from the end of relevant assessment year and approval of specified authorities as per section 151(ii) i.e. Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General where a period of three years but not later than ten years have elapsed from the end of relevant assessment year.  

Issue

For instance, the notice under section 148A(b) was issued in March 2022 for the Assessment Year 2018-19, and the order under section 148A(d) was passed in April 2022. The assessing officer obtained approval from the Principal Commissioner. However, since the order under section 148A(d) was issued after the expiration of 3 years, the assessing officer was required to seek approval from the Principal Chief Commissioner of Income Tax as per the provisions of section 151(ii) of the Income Tax Act,1961. Consequently, the order under section 148A(d) and the notice under section 148, issued based on the approval granted by the Principal Commissioner, were deemed invalid and were set aside. That the proviso in section 151 has been inserted by Finance act, 2023 and cannot be applied retrospectively.

22 Holiday Developers (P.) Ltd. v. ITO, Ward 5(1)(1) [2024] 159 taxmann.com 178 (Bombay)(HC)

XVII. SECTION 151A: Faceless assessment of income escaping assessment

(1) The Central Government may make a scheme, by notification in the Official Gazette, for the purposes of assessment, reassessment or re-computation under section 147 or issuance of notice under section 148 or conducting of enquiries or issuance of show-cause notice or passing of order under section 148A or sanction for issue of such notice under section 151, so as to impart greater efficiency, transparency and accountability by-

(a) eliminating the interface between the income-tax authority and the assessee or any other person to the extent technologically feasible;

(b) optimising utilisation of the resources through economies of scale and functional specialisation;

(c) introducing a team-based assessment, reassessment, re-computation or issuance or sanction of notice with dynamic jurisdiction.

Issue

That the issue evolved is whether the notice u/s 148 can be issued by the jurisdictional AO or it has to be issued by the AO-National Faceless Assessment Scheme. The said issue has been addressed by various courts and in the case of Kankanala Ravindra Reddy V. Income-tax Officer, it has been held that it is mandatory for the revenue to initiate proceedings u/s 148 in a faceless manner. The said observation has been given by relying upon section 151A of the Income Tax Act, 1961 and notification S.O. 1466(E) [NO. 18/2022/F. NO. 370142/16/2022-TPL(PART1], dated 29.03.2022. However, in the case of Triton Overseas (P.) Ltd. V. Union of India, it has been held that Jurisdictional AO is not bereft of jurisdiction to issue notice u/s 148. The issue is yet to be tested before the courts but it is advised to raise the objection that the notice issued by the jurisdictional AO is not valid.

23 Triton Overseas (P.) Ltd. v. Union of India – [2023] 156 taxmann.com 318 (Calcutta)

23 Kankanala Ravindra Reddy v. Income-tax Officer – [2023] 156 taxmann.com 178 (Telangana) 

23 Hexaware Technologies Ltd. v. ACIT, Circle 15(1) [2024] 162 taxmann.com 225 (Bombay) 

XVIII. Electronic Evidence

In the digital age, the use of electronic evidence has become ubiquitous in legal proceedings, including income tax cases. The admissibility of electronic evidence poses unique challenges and considerations for tax authorities, taxpayers, and legal practitioners. This article delves into the intricacies of electronic evidence admissibility in income tax proceedings, exploring its implications and offering insights into the evolving landscape of tax litigation.

The assessment proceedings under the Income Tax Act, 1961 (hereinafter referred to as the ‘IT Act’) culminate in an order that raises a demand, and the issues are framed by the Assessing Officer (AO) based on evidence. It is essential to recognize that the Income Tax proceedings are quasi-judicial in nature. The AO, exercising quasi-judicial powers, is not constrained by the technical rules of evidence and pleadings.

Assessments framed pursuant to search operations under Section 132 and survey operations under Section 133A of the Income Tax Act, 1961 by the Income Tax Department primarily rely on electronic records such as CDs, pen drives, hard disks, etc., seized or found during the search. This evidence is typically corroborated with sworn statements recorded under Section 132(4) of the IT Act during the search.

Although there has been a significant change in search assessments since April 1, 2021, with the cessation of search assessments under Sections 153A and 153C, the admissibility of evidence in electronic form remains unsettled. In the earlier regime, search assessments could only be conducted if incriminating material was discovered during the search. This principle has been affirmed by the Hon’ble Supreme Court in the case of Abishar Buildwell [TS-5113- SC-2023-O], where the Supreme Court held that incriminating material is a prerequisite for search assessments under Sections 153A and 153C. When there are no incriminating materials, the Department is free to resort to reopening assessments if the law permits. However, with the amendment effective from April 1, 2021, Sections 153A/153C were omitted, and Explanation 2 to Section 148 of the IT Act grants the Assessing Officer the power to be deemed to have information when a search under Section 132 is initiated. The AO can issue a notice under Section 148 based on such information, subject to satisfying other conditions as stipulated under Section 149 of the Act.

Whether electronic record seized during search can be qualified as document or evidence for the purpose of Section 149(1)(b)?

It is essential to highlight that the reopening of cases beyond three years but not exceeding ten years from the end of the relevant assessment year is permissible under Section 148, subject to compliance with the conditions outlined in Section 149(1)(b). Accordingly, the initiation of reopening beyond the three-year limit is contingent upon the Assessing Officer possessing books of account, documents, or evidence indicating that the income chargeable to tax, represented in the form of assets, expenditures, or entries in the books of account, has escaped assessment and amounts to 50 lakhs or more.

The word “document” has been defined in Section 3 of the Indian Evidence Act, 1872 and does not explicitly include or refer to electronic records. However, Section 65B(1) deems such computer output to be a “document” if the conditions specified in sub-section (2) of Section 65B are satisfied along with Sec 65B(4). The deeming fiction takes effect only when the mentioned conditions for both the information and the computer in question are met.

Section 65B(1) establishes that information contained in an electronic record, whether printed on paper or stored, recorded, or copied in optical or magnetic media produced by a computer, is considered a “computer output.”

Section 65B(2): The conditions for a computer output, as per subsection (1), are as follows:

  1. The output was generated during the period when the computer was regularly used to store or process information for activities conducted by the person lawfully controlling the computer.
  2. During this period, information similar to that in the electronic record was regularly inputted into the computer as part of normal activities.
  3. The computer operated properly for the majority of this period, and any malfunction did not affect the electronic record’s accuracy.
  4. The information in the electronic record replicates or is derived from the information regularly fed into the computer during these activities.

Section 65B(4) states that certificate is mandatory in all cases where the original electronic record (as stored on a computer device) cannot be produced before the Court.

Conclusion

In other words, computer output, in the form of printouts, or devices on which the data is copied/reproduced, can be considered as a document, under the Evidence Act, with the prerequisite that the conditions, as prescribed under sub-section (2) of Section 65B, are mandatorily fulfilled.

ORIGINAL DEVICE IS PRODUCED AS AN EVIDENCE

If the computer or any other similar device in which the information is first stored is itself produced as evidence, then one may not have to satisfy the conditions of Section 65B(4).

DATA CLONED ON THE HARD DISC IS PRODUCED AS AN EVIDENCE

On the other hand, if the information contained in the computer is subsequently copied into another device, such as a hard disk or a pen drive, either by the owner of the computer or by any other person relying on the information, then strict compliance with the conditions prescribed under Section 65B is required. Without fulfilling these conditions at the threshold, the information/data, whether in electronic format, on a hard disk or pen drive, or in the form of printouts, cannot be considered as evidence admissible in accordance with the Evidence Act. The purpose of these provisions is to validate the “computer output” in electronic form or in the form of printouts generated by a computer or laptop in which the information is first stored.

Supreme Court’s verdict on admissibility of electronic records –

In this regard special attention is drawn towards Sec 65B(4), which states the mandate of producing certificate along with the admissibility of secondary evidence. Various courts have given different opinions on this issue over a period of time. It was earlier stated that certificate as mentioned in Sec 65-B(4) is not a mandate. It was later decided by bench that secondary electronic evidence can also be governed by Sec 65B(4).

In the case of Shafhi Mohamad v. State of Himachal Pradesh (2018) 2 SCC 801, a two-Judge Bench of the Supreme Court concluded that Sections 65-A and 65-B of the Indian Evidence Act cannot be considered a complete code, and the requirement of a certificate can be relaxed by the Court whenever the interest of justice justifies such relaxation.

However, a subsequent decision by a 3-judge Bench in Arjun Panditrao Khotkar v. Kailash Khushanrao Gorantyal and ors., (2020) 7 SCC 1, settled the matter. The court explicitly held that Tomaso Bruno is per incuriam (erroneously decided), and it also overruled the decision in Shafhi Mohamad. The Supreme Court clarified that Section 65-A and Section 65-B entirely govern the admissibility of electronic evidence under the Act, excluding the regular procedures provided in other parts of the Act. It was further emphasized that a 65-B (4) certificate is mandatory in all cases where the original electronic record, as stored on a computer device, cannot be produced before the Court.

Similar decision has been made in Ravinder Singh alias Kaku v. State of Punjab reported in (2022) 7 SCC 581 in which it was concluded that the admissibility of a secondary evidence is subject to obtaining a certificate from the competent authority as contemplated u/s.65B(4) of the Indian Evidence Act, 1872 if the original document cannot be produced.