Introduction

The Hon’ble Union Finance Minister Nirmala Sitharaman has presented the Union Budget 2022-23 on 1st February, 2022 with an aim to boost growth amid continued disruption from Covid-19 and rising inflation. In the Finance Bill 2022, significant changes have been proposed relating to Income Tax. We are dealing with amendments relating to Survey, Search and Seizure, in this article.

1. Insertion of New Section 79A: No set off of losses consequent to Survey, Search, and Requisition

   1. Sections 70 to 80 contain specific provisions relating to set off or carry forward of losses and set off of unabsorbed depreciation while computing the income under various heads and with respect to different classes of persons.

   2. The Memorandum explaining the provisions of Finance Bill, 2022 states that in some cases, assessees claim set off of losses or unabsorbed depreciation, against undisclosed income corresponding to difference in stock, undervaluation of stock, unaccounted cash payment etc. which is detected during the course of search or survey proceedings. At present there is no provision in the Act to disallow such set-off and no distinction is made between undisclosed income which was detected owing to Survey, Search & Seizure or Requisition proceedings and income assessed in scrutiny assessment in the regular course of assessment, though for incomes falling in section 68, section 69, section 69B etc. such restriction is there.

   3. The Memorandum has also stated that allowing the adjustment of undisclosed income detected as a result of search or requisition or survey against the loss or unabsorbed depreciation is resulting in short levy of tax. The proposed provision of non-adjustment of loss or unabsorbed depreciation against undisclosed income detected as a result of search or requisition or survey would help in ensuring that proper tax is paid on income detected due to a search or survey and also result in increased deterrence against tax evasion.

   4. With this backdrop, the Finance Minister has proposed to insert a new section 79A to provide that notwithstanding anything contained in the Income tax Act, where consequent to a Search initiated under section 132 or a Requisition made under section 132A or a Survey conducted under section 133A, [other than under section 133A(2A)], the total income of any previous year of an assessee includes any undisclosed income, NO set off, against such undisclosed income, of any loss, whether brought forward or otherwise, or unabsorbed depreciation under section 32(2) shall be allowed to the assessee under any provision of the Income tax Act in computing his total income for such previous year.

   5. Definition of the term “undisclosed income” as proposed for the above purpose:

      1. Any income of the previous year represented, either wholly or partly, by any money, bullion, jewellery or other valuable article or thing or any entry in the books of account or other documents or transactions found in the course of a Search under section 132 or a Requisition made under section 132A or a Survey conducted under section 133A, other than that conducted under section 133A(2A), which has—

         1. not been recorded on or before the date of search or requisition or survey, in the books of account or other documents maintained in the normal course relating to such previous year; or

         2. not been disclosed to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner before the date of search or requisition or survey, or

      2. any income of the previous year represented, either wholly or partly, by any entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the previous year which is found to be false and would not have been found to be so, had the search not been initiated or the survey not been conducted or the requisition not been made.

   The proposed amendment will take effect from 1st April, 2022 and will accordingly apply in relation to the assessment year 2022-23 and subsequent assessment years.

2. Prior Approval of superior authority proposed to be reinstated again before passing of the assessment order consequent to search, survey and requisition

   Under the new schema of Search assessments which was inserted by the Finance Act 2021 in Section 147 to Section 151, there was no provision of prior approval of superior authority before passing of such assessment order(s). Therefore, an Assessing Officer in search and seizure case can pass the order without seeking any prior approval of the superior authorities. This was in strange contrast to the erstwhile law on search and seizure assessments wherein Section 153D mandated that a prior approval is necessary for a valid assessment under Section 153A.

   The Finance Bill 2022, has proposed to insert a new section 148B to provide that NO order of assessment or reassessment or recomputation shall be passed by an Assessing Officer below the rank of Joint Commissioner, except with the prior approval of the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director, in respect of assessments consequent to search, survey and requisition to reduce avoidable inaccuracies.

   It has been proposed that this amendment will take effect from 1st April, 2022.

   The intent of making it mandatory that the assessments of search cases should be made with the prior approval of superior authority, so that the superior authority apply their mind on the materials and other attending circumstances on the basis of which the officer is making the assessment and after due application of mind and on the basis of seized materials, the superior authority have to approve the Assessment order. Approval of assessment in search cases is to entrust the duty which the Addl. CIT/ Joint CIT, with his experience and maturity of understanding should scrutinize the seized documents and any other material forming the foundation of Assessment.

3. Enhancement of the period of limitation of framing search assessments

   For Searches initiated on or after 1st April, 2021, the period of limitation for framing assessments is as provided in Section
   153. It has been proposed to amend section 153, by inserting a new clause to provide for exclusion of the period of limitation for the purpose of assessment, reassessment or re-computation, (not exceeding 180 days) commencing from the date on which a search is initiated under section 132 or a requisition is made under section 132A and ending on the date on which the books of account or other documents, or any money, bullion, jewellery or other valuable article or thing seized under section 132 or requisitioned under section 132A, as the case may be, are handed over to the Assessing Officer having jurisdiction over the assessee, in whose case such search is initiated or such requisition is made or to whom any money, bullion, jewellery or other valuable article or thing seized or requisitioned, belongs to or to whom any books of account or documents seized or requisitioned, pertains or pertain to, or any information contained therein, relates to.

   It has been proposed that this amendment will take effect retrospectively from 1st April, 2021.

4. Certain proposed amendments/ insertions in order to align the scheme of search assessments with the intent of the Income tax Act

   The Finance Bill 2022 has proposed to amend section 132(8) to make the provisions of that section also applicable to assessment or reassessment or re- computation under section 143(3) or section 144 or section 147, as the case may be.

   The Finance Bill 2022 has also proposed to amend clause (i) of section 132B (1) as well as section 132B(4) to provide that these provisions shall also apply to assessment or reassessment or recomputation.

   These amendments will take effect from 1st April, 2022.

5. Some proposed amendments/ insertions to correct the inadvertent drafting errors

   1. Period of Deemed escapement of Income for preceding 3 Assessment Years removed : Finance Bill 2022 has proposed to omit Explanation 2 of section 148 – the reference to 3 assessment years preceding the assessment year relevant to the year of search.

      The Finance Act, 2021, had under the newly substituted Section 148 viz. “Issue of Notice where income has escaped assessment.” Explanation 2 has been brought into place to cover search, survey or requisition cases initiated or made or conducted, on or after 1st April, 2021, wherein it shall be deemed that the Assessing officer has information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated or requisition is made or any material is seized or requisitioned or survey is conducted. Further it is pertinent to mention that the newly inserted Section 148A provides that before issuance of notice under Section 148, the Assessing Officer shall conduct enquiries, if required, and provide an opportunity of being heard to the assessee. After considering his reply, the Assessing Office shall decide, by passing an order, whether it is a fit case for issue of notice under section 148 and serve a copy of such order along with such notice under section 148 on the assessee. The Assessing Officer shall before conducting any such enquiries or providing opportunity to the assessee or passing such order obtain the approval of specified authority. However, the proviso to section 148A states this procedure of enquiry, providing opportunity and passing order, before issuing notice under section 148 of the Act, shall not be applicable in search or requisition cases.

      Since there is an interplay between Section 148 and Section 148A, if an Assessing Officer desires to go beyond three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated, whether he or she is duty bound to follow the procedure laid down in Section 148A of conducting enquiries, providing opportunity and passing order before issuing notice(s) under section 148 of the Act for such assessment years beyond the three assessment years. The change proposed by the Finance Act, 2022 will remove the confusion.

   2. The first proviso to section 148 inserted w.e.f. 1st April, 2021 provides that “No notice under section 148 shall be issued 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 A.O. has obtained prior approval of the specified authority to issue such notice.”

   3. After the first proviso to section 148 a new proviso has been proposed to be inserted to provide further that “NO such approval shall be required where the A.O. with the prior approval of the Specified Authority has passed an Order under clause (b) of section 148A to the effect that it is a fit case to issue a notice under this section.” This amendment will take effect from 1st April, 2022.

   4. Proposed Amendment to First Proviso to Section 149(1) : The Finance Bill, 2022 has proposed to amend the First Proviso to section 149(1) so far as 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 section 149 or section 153A or section 153C, as the case may be, as they stood immediately before the commencement of the Finance Act, 2021. This amendment will take effect retrospectively from 1st April, 2021.

   5. Proposed Insertion in Section 153B: The Finance Bill, 2022 has proposed to insert sub- section (4) in section 153B to provide that nothing contained in the said section shall apply to any search initiated under section 132 or requisition made under section 132A on or after the 1st April, 2021. This amendments will take effect retrospectively from 1st April, 2021.

6. Clarity on application of provisions of Penalty under section 271AAB, where search has been initiated

   1. Anomaly prior to introduction of Finance Bill 2022: It is pertinent to mention here that after the introduction of new scheme of search assessment by virtue of Finance Act, 2021, Section 153A has been made inoperative for searches initiated on or after 1st April, 2021. For such searches initiated on or after 1st April, 2021, the return shall be filed under section 148 only and not under section 153A. However, an enabling necessary amendment to this effect has not been made in the definition of “Specified Date” under Section 271AAB so far as to also include a return filed under section 148 in Search and Seizure cases. Due to this, there was lack of clarity on application of penalty provisions of “Section 271AAB: “Penalty where search has been initiated” in case of searches initiated on or after 01st April, 2021.

   2. With a view to overcome this anomaly, the Finance Bill, 2022 has proposed to amend the definition of “specified date” in Explanation in clause (a) to section 271AAB to make it also applicable to a notice issued under section 148 or under section 153A in case where search is initiated on or after 1st April, 2021.

   This amendment will take effect from 1st April, 2022.

7. Rationalization of the provisions of sections 271AAB, 271AAC and 271AAD

   1. Sections 271AAB, 271AAC and 271AAD of the Income tax Act under Chapter XXI contain provisions which give powers to the Assessing Officer to levy penalty in cases involving undisclosed income in cases where search has been initiated u/s 132 or otherwise, or for false entry etc. in books of account.

   2. Under Chapter XXI of the Act which deals with penalties, Commissioner (Appeals) has concomitant powers with Assessing Officer to levy penalty in eligible cases under section 270A, section 271, section 271A, section 271AA, section 271G, section 271J which deal with deliberate concealment, non-disclosure and omission by an assessee to evade tax.

   3. Similarly, sections 271AAB, 271AAC, 271AAD penalise actions pertaining to undisclosed income, unexplained credits or expenditures, or deliberate falsification or omission in books of accounts. Therefore, in order to improve deterrence against non- compliance among tax payers, the Finance Bill, 2022 has proposed to amend the sections 271AAB, 271AAC and 271AAD by enabling the Commissioner (Appeals) also to levy penalty under these sections, like the Assessing Officer.

   These amendments will take effect from 1st April, 2022.

8. Income Tax authorities for the purposes of section 133A

   1. Section 133A enables an Income-tax authority to enter any place of business or profession or charitable activity within his jurisdiction to verify the books of account or other documents, cash, stock or other valuable article or thing, which may be useful for or relevant to any proceeding under the Income Tax Act. Explanation to section 133A provides the definition of an Income tax authority for the purposes of section 133A.

   2. Through Taxation and Other Laws (Amendment and Relaxation of Certain Provisions) Act, 2020, the Explanation was amended to provide that any the Income tax authority who is subordinate to the Principal Director General of Income-tax (Investigation) or the Director General of Income-tax (Investigation) or the Principal Chief Commissioner of Income-tax (TDS) or the Chief Commissioner of Income-tax (TDS), as the case may be shall only be considered as Income-tax authorities for the purposes of section 133A.

   3. The Finance Minister has now proposed to amend the said Explanation to section 133A to provide that Income tax authority shall be sub-ordinate to Principal Director General or Director General or Principal Chief Commissioner or Chief Commissioner, as the case may be, specified by the Board.

   This amendment will take effect from 1st April, 2022.

Suggestion: The widening of the meaning of Income tax authority for the purpose of section 133A will virtually empower A.O. and all officials which was restricted to officials sub-ordinate to concerned high authority in Investigation Wing and TDS Wing only. The Finance Minister should revisit the amendment and restrict the scope as was hitherto provided. It is well known that taxpayers are unnecessary likely to be harassed if all authorities are empowered to conduct survey under section 133A.