A Introduction

Prior to Finance Act, 2021, the scheme of reassessment was governed by provision of section 147-151 of the Act. Further, scheme of assessment/reassessment based on search was governed by the provision of section 153A/153C of the Act. The Finance Act, 2021 replaced the erstwhile scheme of reassessment by bringing in place a new scheme of reassessment under section 147-151 w.e.f 01.04.2021 as well as subsumed the procedure of assessment/reassessment under section 153A/153C in respect of searches conducted on or after 01.04.2021. For any search conducted on or after 01.04.2021, it is the new scheme of reassessment under section 147/148 that is applicable and the provision of section 153A/153C are not applicable.

This article focuses on the controversy regarding the initiation of reassessment proceedings under section 148 against a searched person and a person other than the person who has been searched, when search has been carried out on or after 01.04.2021.

B Position prior to 01.04.2021: Assessment procedure under section 153A/153C in respect of search carried out prior to 01.04.2021

For searched person – section 153A

As per the scheme applicable in respect of search conducted up to 31.03.2021, in the case of searched person, there was automatic reopening under section 153A for 6 years preceding the search assessment year. Further, in terms of Explanation 1 of section 153A (as interpreted by Courts[1]), 3 more assessment years preceding the six years could be assessed/reassessed under section 153A in case the income escaping assessment is represented by an asset and is of Rs. 50 lakhs or more. Accordingly, the assessing officer is entitled to make assessment for 10 years i.e. 1 assessment year of search + 9 assessment years preceding the assessment year relevant to previous year of search.

Even though the initiation of proceedings for 6 assessment years under section 153A was automatic, however, it was judicially settled by Hon’ble Supreme Court in the case of Pr. CIT versus Abhisar Buildwell P. Ltd, [TS-5113-SC-2023-O] that in respect of completed/unabated assessment years (i.e. cases for which assessment proceedings were not pending on date of search nor could the assessment have been initiated under section 143(2) by virtue of expiry of period of limitation), no addition could be made in absence of any incriminating material found qua the assessee qua the year under consideration.

For person, other than the person searched, referred to in section 153C

In the case of person other than the searched person, reopening under section 153C was not automatic. Such reopening could take place only when firstly, the AO of searched person was satisfied that the seized assets/documents belong/pertain/relate to a person other than the searched person and hands over the seized assets/documents to the AO of other person, and secondly, thereafter, the AO of such other person should also be satisfied that seized assets/ documents forwarded to him have bearing on the determination of total income of the other person for the year under consideration. Notice under section 153C could be issued for only such years in respect of which there was incriminating material in possession of the AO having bearing on the determination of total income for such years. This position of law is settled by the Hon’ble Supreme Court in CIT v. Sinhgad Technical Education Society [TS-5145-SC-2017-O] and has been recently endorsed by Hon’ble Delhi High Court in the case of Saksham Commodities Limited in [TS-5160-HC-2024(Delhi)-O]. 

Further, as per the interpretation laid down in CIT-14 vs Jasjit Singh [TS-5199-SC-2023-O] and Pr. CIT, Central-1 vs Ojjus Medicare Pvt. Ltd. [TS-5183-HC-2024(Delhi)-O], in case of other person referred in section 153C, the deemed year of search is considered to be previous year in which the seized assets/ documents are handed over by the AO of searched person to the AO of other person and consequently, the assessment years for which these notices under section 153C could be issued are six years preceding the assessment year relevant to the such deemed year of search being the year in which the seized assets/ documents are handed over by the AO of searched person to the AO of other person. Further, in case the income having bearing on determination of total income is Rs. 50 lakh or more and represented by an asset, then analogous to section 153A, the AO of other person is authorised to issue notice under section 153C for 3 more years also. Thus, the assessing officer is entitled to make assessment for 10 years i.e. 1 assessment year of deemed search (assessment year relevant to previous year in which the seized assets/documents were handed over by the AO of searched person to the AO of such other person) + 9 assessment years preceding the said assessment year of deemed search.

C. Position after 01.04.2021: Assessment procedure in respect of search carried out on or after 01.04.2021

Post amendment by Finance Act, 2021, the above scheme of reopening and issuing of notice under section 153A/153C is not applicable in respect of search carried out on or after 01.04.2021. Now as per the amended provisions, in respect of search conducted on or after 01.04.2021, the reassessment consequent to search will be under section 147/148 only.

The scheme of reassessment under section 147/148 has also been completely revamped vide Finance Act, 2021. As per the first proviso to section 148, two conditions are required to be satisfied before a notice under section 148 can be issued for the purposes of reassessment. The first condition is that no notice under section 148 shall be issued unless the AO has information which suggests that income chargeable to tax has escaped assessment for the relevant assessment year. For this purpose, information which suggests that income has escaped assessment has been elucidated in Explanation 1 and Explanation 2 below section 148. The second condition is that the AO shall obtain prior approval of the specified authority before issuance of notice under section 148. Specified authority has been stated in section 151 to be PCIT/CIT, if such notice is to be issued within three years from the end of relevant assessment year, and PCCIT/CCIT, in case notice is to be issued after a period of three years from the end of relevant assessment year

Further, a new procedure before issuance of 148 notice has been provided by way of introduction of section 148A of the Act. In cases falling within the scope of Explanation 1 to section 148, the AO is required to confront the information to the assessee through a show cause notice under section 148A(b) and then, after considering the reply of assessee, pass an order under section 148A(d) and then issue notice under section 148.

In cases of search initiated on or after 01.04.2021, a deeming fiction has been created under Explanation 2(i) below section 148, to the effect that the AO of searched person shall be deemed to have information which suggests that income chargeable to tax has escaped assessment.

In respect of person other than the searched person, a similar deeming fiction has been created under Explanation 2(iii) and (iv) below section 148, where any money, bullion, jewellery or any other document belonging/pertaining to such other person is found during the course of search, but with a rider that in such cases, the AO of such other person should be satisfied with the prior approval of PCIT/CIT that such money, bullion, jewelry or document belongs/ pertains to or are related to such other person. Thus, in the case of person other than the searched person, the AO has to:

i. Obtain prior approval of PCIT for recording satisfaction upon the receipt of seized assets/ document;

ii. Record satisfaction to the effect that seized assets/documents belongs/pertains to the other person;

iii. Obtain approval of specified authority under section 151 on the basis of above satisfaction

iv. Issue 148 notice to the other person.

Further, a proviso has been inserted in section 148A, to the effect that issuance of show cause notice under section 148A(b) and passing of order under section 148A(d) shall not be required in search based cases covered under aforesaid Explanation 2. However, no deeming fiction or proviso has been created to dispense with the condition of obtaining approval from Specified Authority under section 151.

D. Issues:

Now, in the above context, the following issues arise in respect of 148 proceedings being initiated consequent to the search action on or after 01.04.2021 in the case of searched person and person other than the searched person:

a. Whether in the case of searched person, can 148 notice be issued under deemed escapement of income, without there being any material or information found during search to indicate that income has escaped assessment?

b. If answer to the above is yes, then for how many assessment years 148 notice can be issued?

c. The supplementary question to the above is, whether 148 notice can be issued under this deeming fiction under Explanation 2, even for the assessment years beyond three assessment years preceding the assessment year relevant to the previous year in which search is carried out?

d. If answer to the above is yes, whether the AO has to apply his mind and record any satisfaction before issuing 148 notice beyond three years, to the effect that seized assets/ document has bearing on determination of income which is likely to be Rs. 50 Lakh or more?

e. In the case of person other than the searched person, as per Explanation 2(iii) and (iv), the AO has to be satisfied with the prior approval of PCIT that the money, bullion, jewelry or document pertains/relates to such other person. Thus, the question will be whether the AO is required to obtain approval of the PCIT before recording the satisfaction?

f. If the answer to the above is yes, whether the AO is required to obtain another approval from PCIT or PCCIT as required by first proviso to section 148 in terms of section 151.

g. Unlike section 153A/153C where there was specific provision of abatement of ongoing assessment, there is no such provision for abatement under the new scheme of reassessment. Thus, the question will be whether there will be 1 assessment or two parallel assessment proceedings or will AO have the power to reopen assessment order passed after the date of the search.

E. Relevant extract of section 148

To answer the above questions, it will be relevant to refer to section 148 which reads as under:

“148. Before making the assessment, reassessment or re-computation under section 147, and subject to the provisions of section 148A, the Assessing Officer shall serve on the assessee a notice, along with a copy of the order passed, if required, under clause (d) of section 148A, requiring him to furnish within a period of three months from the end of the month in which such notice is issued, or such further period as may be allowed by the Assessing Officer on the basis of an application made in this regard by the assessee, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed; and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139:

Provided that no notice under this section 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 Assessing Officer has obtained prior approval of the specified authority to issue such notice.

Explanation 1.—For the purposes of this section and section 148A, the information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment means,—

(i) any information in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time; or

(ii) 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; or

(iii) any information received under an agreement referred to in section 90 or section 90A of the Act; or

(iv) any information made available to the Assessing Officer under the scheme notified under section 135A; or

(v) any information which requires action in consequence of the order of a Tribunal or a Court.

Explanation 2.-For the purposes of this section, where,-

(i) a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A, on or after the 1st day of April, 2021, in the case of the assessee; or

(ii) a survey is conducted under section 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) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner, that any money, bullion, jewelry or other valuable article or thing, seized or requisitioned under section 132 or under section 132A in case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or

(iv) the Assessing Officer is satisfied, with the prior approval of Principal Commissioner or Commissioner, that any books of account or documents, seized or requisitioned under section 132 or 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, the Assessing Officer 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, jewelry or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person.”

F. Re: issue (a) - Reopening dehors any material indicating escapement

The first issue is that whether in the case of searched person, can 148 notice be issued under deemed escapement of income, without there being any material or information to indicate that income has escaped assessment?

Importance of ‘relevant assessment year’ in first proviso

To find out a plausible answer to the above issue, it may be relevant to take note of first proviso to section 148. As noted above, under first proviso to section 148, there is a bar on the AO to issue notice under section 148, unless there is information which suggests that income chargeable to tax has escaped assessment for the relevant assessment year. On a strict reading of the said proviso, it may be discerned that the words therein are not deployed in a manner, where information which suggests that income has escaped assessment is without reference to any assessment year; rather such information should suggest that income is escaping assessment for the relevant assessment year for which 148 notice is proposed to be issued. 

Explanation 2 creates a deeming fiction that the AO shall be deemed to have information suggesting that income has escaped assessment in the case of search. However, there is no mention that for how many assessment years and for which assessment years this deeming fiction shall apply. Thus, one of the possible views that may arise may be that the moment search is carried out, the AO automatically is deemed to have information which suggests that income has escaped assessment in terms of this Explanation 2, and accordingly, the first condition of first proviso to section 148 gets satisfied, and thereafter, on taking prior approval of the specified authority under section 151, the AO can issue 148 notice even in absence of any material having bearing on determination of total income of the assessee.

However, the above interpretation will not meet the adjoining condition of first proviso to section 148 i.e. the information should be for the relevant assessment year. It is important to point out that the deeming fiction in case of search has been created by way of an ‘Explanation’, not by way of another ‘proviso’. While proviso is intended to deviate from the main clause and provide for any relaxation/further restriction, an Explanation is intended to support the main provision.

Difference in language of Explanation 2 inserted by Finance Act, 2021 vis-à-vis language as on date

It may be further relevant to point out that when this Explanation 2 was introduced initially by Finance Act 2021, the deeming provision was inserted only for three assessment years immediately preceding the assessment year relevant to previous year in which search is conducted. Thus, it was deemed that there would be deemed escapement of income for 3 years. However, the Finance Act, 2022 deleted the words ‘three assessment years’ with retrospective effect from 1^st April, 2021. The Memorandum to such Finance Act specifies that the intention of amendment was to align the provisions with the intent of this section. Thus, one may infer that originally, the deemed information under Explanation 2 was for 3 years, but after the retrospective amendment, the deemed information will have to satisfy the test for each and every relevant assessment year.

In the absence of any definition of relevant assessment year in case of search, one may infer that the information should be relevant for the assessment year for which notice under section 148 is proposed to be issued. Hence, the other view can be that Explanation 2 provides only a limited relaxation and the first proviso to section 148 puts a negative condition on the AO, with the rider that information which suggests that income chargeable to tax has escaped assessment should be for the relevant assessment year. 

Accordingly, the other plausible interpretation can be that the notice under section 148 cannot be issued automatically to the searched person, as was the case in respect of search carried out prior to 01.04.2021. The AO now needs to apply his mind, and while seeking approval under section 151 from the specified authority, demonstrate that the information obtained/discovered during search suggest that income has escaped assessment under Explanation 2 is for the relevant assessment year for which notice under section 148 is proposed to be issued. Such demonstration can be possible only when the AO has examined the seized assets/documents, and records in writing that such seized assets/ documents are related to the relevant assessment year. Accordingly, despite the deeming fiction, even in the case of searched person, the AO may still be required to demonstrate that income of the relevant assessment year has escaped assessment consequent to the information obtained/discovered during the search before issue of notice under section 148. 

The harmonious interpretation of the deeming fiction created in respect of searched person under Explanation 2 and the proviso to section 148 may be that notice under section 148 can be issued only when there is material for the relevant assessment year found during the course of search which suggests that income chargeable to tax has escaped assessment. Mere factum of search itself cannot be a reason for issuing notice for reassessment. In the absence of any material to indicate that income has escaped assessment for the relevant assessment year, it may not be possible for the AO to obtain the approval from specified authority for such relevant assessment year for which the notice under section 148 is intended to be issued.

Income escaping assessment is jurisdictional condition for invoking powers under section 147/148

The interpretation stated hereinabove also gets support from wordings of section 147, whereby post introduction of the new scheme of reassessment w.e.f. 01.04.2021, the words ‘reasons to believe’ have been deleted and the jurisdiction to make assessment comes to the assessing officer only if there is ‘income escaping assessment’. Reference may be made to the judgment of Hon’ble Delhi High Court in the case of Divya Capital One Pvt. Ltd. vs ACIT, Circle-7(1) [TS-5518-HC-2022(DELHI)-O], wherein the Hon’ble Court has held “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’.

The above judgment has been reiterated and relied upon by the Delhi High Court in the case of Angelantoni Test Technologies S.R.l. vs ACIT, Circle Intl. Tax-[TS-6002-HC-2023(DELHI)-O].

It may also be relevant to point out that a similar issue has come up before Karnataka High Court in Smt. Vasanthi Ramdas Pai vs ITO, Mangalore [TS-5059-HC-2024(Karnataka)-O], and in fact, Karnataka High Court has held that ‘to say that assessing officer can invoke section 147 without any reason, could apart from contrary to law, also falls foul of Article 14’. The Court has further held that on conjoint reading of provisions of section 147 and 148 of the Act, escapement of income is a sine qua non for initiating proceedings under section 147.

Further, this issue has also been considered by the Madras High Court in BHK Trading LLP vs ACIT, Non-Corporate Circle-3(1), Chennai [TS-6215-HC-2023(Madras)-O], where it has been held that it is not all information in the possession of assessing officer that can qualify for initiation of proceedings for reassessment, but it is only such information which is actionable i.e. based upon material in possession of the assessing officer which suggests escapement, and on the basis of that, the assessing officer decides to trigger reassessment. The Court has further held that information must prima facie satisfy the requirements of escapement of income from tax.

Thus, one may argue that income escaping assessment is the jurisdictional condition in order to invoke the provision of section 147/148. If such aspect is borne in mind, then it should follow that as against the earlier scheme of provisions of section 153A which provided automatic reassessment for six assessment years, Explanation 2 only provides deeming fiction to the effect that assessing officer has information that suggests that income chargeable to tax has escaped assessment, but still before issue of notice under section 148, it has to pass the test of escapement of income under section 147 for the relevant assessment year.

Fulfilment of conditions of first proviso is a condition precedent

As mentioned above, proviso to section 148 provides a negative condition that no notice under section 148 shall be issued unless there is information which suggests that income chargeable to tax has escaped assessment. It is important to point out that this proviso to section 147 is not an enabling provision that notice under section 148 has to be issued once there is information within the meaning of Explanation 1/Explanation 2. The proviso on the other hand is a negative condition and thus is a condition precedent and only the starting point. The jurisdictional condition of section 147 i.e. that there should be income escaping assessment for the relevant assessment year, has to still be satisfied before invoking the provision of section 147 / 148. 

Same test to be applied for person other than searched person

Similarly, for person other than searched person, as noted above, a deeming fiction has been created under Explanation 2(iii) and (iv) below section 148, where any money, bullion, jewellery or any other document belonging/pertaining to such other person is found during the course of search and the AO of such other person is satisfied with the prior approval of PCIT/CIT that such money, bullion, jewelry or document belongs/ pertains to or are related to such other person. Although, the provision does not provide that for which year the income shall be deemed to have escaped assessment, however, in terms of above analysis of the scope of first proviso to section 148 which provides that there should be information for ‘relevant assessment year’ and on the scope of section 147 being applicable only in cases where there is income escaping assessment, the notice under section 148 should be sustainable only for such assessment years for which the AO of other person has material in his possession indicating escapement of income.

Accordingly, under the new scheme, in the case of search on or after 01.04.2021, for issue of notice under section 148 for any assessment year, the assessing officer should have material on the basis of which he can trigger reassessment for that particular year. This trigger of reassessment should be only in respect of those assessment years for which he has the actionable material indicating escapement of income and not for any block of assessment years.

G. Re: Issues b, c & d - Period for which notice can be issued

Now, the next question is if the assessing officer has information which suggests that income has escaped assessment, can AO initiate proceedings for any number of assessment years, or whether there is a cap on the relevant assessment years also? In other words, for how many relevant assessment years the 148 notice can be issued in the case of searched person. Further, whether 148 notice can be issued under this deeming fiction under Explanation 2, even for the assessment years beyond three assessment years from the end of relevant assessment year pertaining to the search year, and if answer to the same is yes, whether the assessing officer has to apply his mind and record any satisfaction before issuing 148 notice beyond the three years, to the effect that seized assets/document has bearing on determination of income which is likely to be Rs. 50 lakh or more?

Now, as analyzed hereinabove, it may be reiterated that for issuance of notice under section 148 for any assessment year, the assessing officer should have material indicating escapement of income in respect of that particular year on the basis of which he can trigger reassessment for that particular year. Further, the AO has to obtain approval for each of the relevant assessment years.However, the said notice can only be issued within the period of limitation prescribed under section 149(1) of the Act r.w first proviso thereto and fulfilment of other jurisdictional conditions as prescribed under this provision. Relevant extract of section 149(1) reads as under:

“Time limit for notice.

(1) No notice under section 148 shall be issued for the relevant assessment year,—

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

(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—

 (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,

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

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”

As per the above cited section 149(1)(a), ordinarily, no notice under section 148 can be issued beyond the period of 3 years from the end of the relevant assessment year. However, subject to fulfilment of certain condition prescribed in clause (b), a notice under section 148 can be issued beyond the period of 3 years but upto ten years from the end of relevant assessment year.

Test for reopening proceedings in extended period of limitation is more stringent

To reopen proceedings in this extended period of limitation under section 149(1)(b), the Assessing Officer must have in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of an asset or expenditure in respect of a transaction or in relation to an event or occasion; or an entry or entries in the books of account has escaped assessment which amounts to or is likely to amount to fifty lakh rupees or more.

It may be relevant to point out that section 149(1)(b) permits issuance of notice where the assessing officer has documents or evidence in his possession which reveals that income has escaped assessment. The word used here is ‘reveals’ as against the expression used in proviso to section 148 i.e. ‘information with the AO which suggests that income chargeable to tax has escaped assessment’. There is difference of having document or evidence in possession which reveals, as against information which suggests. Further, notice under section 148 cannot be issued to assess any form of escaped income but it is only income that is represented in form of asset/expenditure/entry that can be assessed by invoking jurisdiction under section 147/148 in the extended period of limitation under section 149(1)(b). Accordingly, the test to be passed for issuance of notice under section 149 beyond six years (in ordinary as well as search cases) is stricter and not simply having any information.

Limitation period to be governed based on date of issuance of 148 Notice

It may be relevant to mention that date of search as such has no relevance now with the limitation to reopen which shall be governed by section 149 only i.e. 3 years or 10 years from the end of the relevant assessment year as on the date when notice under section 148 is issued irrespective of the date of the search.Date of search shall be relevant only to the extent that if search is after 01.04.2021, then new scheme of reassessment will be applicable.

Similarly, in the case of other person, the date of handing over of material by AO of searched person to the AO of other person shall also not be relevant for determination of limitation under section 149. Limitation shall solely be governed by section 149 i.e. the period of limitation shall be 3 years or 10 years as on the date when notice under section 148 is issued in case of search person as well as other person. Thus, the legislation has went even a step ahead of judgment of Jasjit Singh (supra) as limitation shall not be dependent on date of handover but shall be dependent on date of issuance of 148 notice.

Period of limitation further curtailed by first proviso to section 149

However, it may be relevant to point out that although section 149(1)(b) permits reopening of assessment up to 10 assessment years, there is a further limitation/restriction provided in first proviso to above section 149(1), to the effect that no notice under section 148 shall be issued in respect of assessment year AY 2021-22 or prior to that, where such notice could not have been issued in terms of the limitation period provided under erstwhile section 148(1)(b), i.e. six years from the end of relevant assessment year. Further, in the case of reopening of assessment consequent to search, notice under section 148 shall not be issued at any time, if at that time, notice under section 153A/153C could not have been issued as per those provisions standing before 01.04.2021.

Thus, the larger limitation period of 10 years is not applicable for assessment years prior to AY 2022-23 and the period of limitation for reopening of assessment in respect of assessment year AY 2021-22 or prior to that is restricted to 6 years from the end of relevant assessment year in ordinary cases and as per the limitation provided in section 153A/153C, in case of reopening consequent to search.

Thus, for reopening assessment proceedings consequent to search, in the case of searched person or other person:

(i) The AO should have information in his possession that income chargeable to tax has escaped for relevant year for which notice under section 148 is proposed to be issued; and

(ii) In case notice is proposed to be issued after expiry of 3 years from the end of the relevant assessment year, the additional conditions prescribed under section 149(1)(b) should also be fulfilled; and

(iii) In case notice is proposed to be issued after expiry of 3 years from the end of the relevant assessment year, the additional conditions/limitation prescribed under section 153A/153C should also be fulfilled

Thus, the next issue that arises is the effect of import of section 153A or section 153C, as the case may be, to first proviso of section 149 of the Act to ascertain limitation period for AY 2021-22 and prior assessment years. This is analyzed in subsequent paragraphs.

Import of limitation period of section 153A in section 149 in terms of first proviso to section 149

To recall, under the provisions of section 153A, notice can ordinarily be issued for 6 years prior to the assessment year relevant to previous year in which search is carried out. Further, in terms of Explanation 1 of section 153A, 3 more assessment years preceding the six years could be assessed/reassessed under section 153A in case the income escaping assessment is represented by an asset and is of Rs. 50 lakhs or more in aggregate during the said 3 assessment years. Accordingly, under section 153A, the assessing officer is entitled to issue notice for search year and 9 assessment years preceding the assessment year relevant to previous year of search.

In view of the above, although section 149(1)(b) permits issuance of notice under section 148 for up to 10 years from the end of the relevant assessment year (subject to satisfaction of jurisdictional conditions), in view of the first proviso to section 149 of the Act r.w.s 153A, the period of limitation would be restricted whereby notice cannot be issued for any assessment year falling prior to 9^th assessment year preceding assessment year relevant to search year.

Example: To explain the above way of example, take a case where search is carried out on 24.06.2022. Further, let us assume that notice under section 148 was issued on 31.03.2023. In such a case, in absence of the first proviso to section 149, a notice under section 148 could have been issued for AY 2012-13 and subsequent years subject to fulfilment of other jurisdictional conditions [including existence of material and conditions stipulated under section 149(1)(b)]. However, by virtue of first proviso to section 149, limitation period of section 153A would also have to be read in and accordingly, the 10 assessment years (including the assessment year of search) that could be reopened would be AY 2014-15 to AY 2023-24. Therefore, the assessment years prior to AY 2014-15 would be barred by limitation under the first proviso to section 149 of the Act.

Import of limitation period of section 153C in section 149 in terms of first proviso to section 149

Similarly, in respect of other person referred to in section 153C, as noted above, as per the interpretation laid down in Jasjit Singh (supra) and Ojjus Medicare (supra), the assessment years for which these notices under section 153C can be issued are 6 years preceding the assessment year relevant to the previous year in which the seized assets/ documents were handed over by the AO of searched person to the AO of other person. Further, in case the income having bearing on determination of total income is Rs. 50 lakh or more and represented by an asset, then analogous to section 153A, the AO of other person is authorised to issue notice under section 153C for 3 more years also. Thus, the assessing officer is entitled to make assessment for 10 years i.e. 1 assessment year of deemed search + 9 assessment years preceding the said assessment year of deemed search.

Now, an issue may arise that as section 153C ceases to apply in respect of searches carried out on or after 01.04.2021, the AO of the searched person may not be required to make a reference or transmit the material gathered in the course of the search to the AO of the other person. In such a case, in absence of date of handover being known, how to construe the limitation period of section 153C for the purpose of first proviso to section 149 of the Act. This issue came up recently before the Hon’ble Delhi High Court in the case of Dinesh Jindal vs ACIT, Central Circle  [TS-5278-HC-2024(DELHI)-O]. The Hon’ble Court has held that the computation of the six preceding AYs’ or the “relevant assessment year” cannot be the same for searched and non-searched entity and that computation of the six preceding AYs’ or the “relevant assessment year” in the case of the non-searched entity shall be reckoned with reference to the date when the AO decides to initiate action against under section 147/148 against the non-searched entity.

In view of the above, although section 149(1)(b) permits issuance of notice under section 148 for up to 10 years from the end of the relevant assessment year (subject to satisfaction of jurisdictional conditions), in view of the first proviso to section 149 of the Act r.w.s 153C r.w.s 153A, the period of limitation in case of a non-searched person would be restricted whereby notice cannot be issued for any assessment year falling prior to 9^th assessment year preceding assessment year relevant to previous year when the when the AO decides to initiate action against under section 147/148 against the non-searched entity.

Example: To explain the above way of example, take a case where search is carried out on premises of Mr. A on 09.02.2022 whereby material relating to Mr. B is gathered. Let us assume that the AO of Mr. B issues notice under section 148 on 31.03.2023. In such a case, in absence of the first proviso to section 149, a notice under section 148 could have been issued for AY 2012-13 and subsequent years subject to fulfilment of other jurisdictional conditions [including existence of material and conditions stipulated under section 149(1)(b)]. However, by virtue of first proviso to section 149, limitation period of section 153C would also have to be read in and accordingly, the 10 assessment years (including the deemed assessment year of search) that could be reopened would be AY 2014-15 to AY 2023-24. Therefore, the assessment years prior to AY 2014-15 should be barred by limitation under the first proviso to section 149 of the Act.

Thus, in view of first proviso to section 149(1), the test of limitation provided in section 153A/153C has to still be met and satisfied by the assessing officer in respect of search conducted on or after 01.04.2021.

Import of fourth proviso to section 153A while evaluating first proviso to section 149

As noted above, the condition of income having escaped assessment of Rs. 50 lakh or more under the amended law in terms of section 149(1)(b) is in respect of assessment years beyond the 3 years from the end of relevant assessment year. Further, in terms of section 149(1A), aggregation of escapement over different assessment years may be permissible to evaluate if the threshold of Rs. 50 lakh is crossed and consequently, a notice may be issued for all the said assessment years. Thus, in ordinary cases, while aggregating the income escaping assessment for the purpose of determining that income of Rs. 50 lakh or more has escaped assessment, the same may start beyond 3 years from the end of relevant assessment year and hence income escaping assessment in first 3 assessment years may not be included. Income may be aggregated from fourth year onwards i.e. 4^th to 6^th in ordinary cases and 4^th to 9^th in search cases.

However, in view of the first proviso to section 149(1) read with the conditions stipulated in section 153A/153C, in the case of searched person as well as person other than the searched person, the additional condition stipulated is that in case notice is to be issued beyond the period of 6 years, the AO is required to record that income likely to escape assessment is represented in the form of an asset and amounts to Rs. 50 lakh or more in aggregate between the 7^th to 9^th assessment years preceding the assessment year relevant to the previous year in which search is carried out. In this regard, it may be relevant to mention that in terms of fourth proviso to section 153A of the Act, notice for a relevant assessment year being assessment year falling within 7^th to 9^th assessment year preceding assessment year relevant to search year can be issued only if:

(a) the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more in the relevant assessment year or in aggregate in the relevant assessment years;

(b) the income referred to in clause (a) or part thereof has escaped assessment for such year or years; and

(c) the search under section 132 is initiated or requisition under section 132A is made on or after the 1st day of April, 2017.

As is evident from the above, in terms of the fourth proviso to section 153A, the amount of Rs. 50 lakh or more is to be seen in the relevant assessment year or in aggregate in the relevant assessment years i.e. between 7^th to 9^th assessment years preceding the assessment year of search. Accordingly, even in case where escapement between 4^th to 6^th assessment year is more than 50 lakh in aggregate, in case the escapement for assessment years falling within 7^th to 9^th assessment year preceding assessment year of search is less than Rs. 50 lakh, one of the possible interpretation can be that proceedings for the 7^th to 9^th year are barred by limitation.

Example: To explain the above by way of an example, take a case where search is carried out on 24.06.2022. As noted above, after considering the limitation period prescribed under section 153A, the 10 assessment years (including the assessment year of search) that could be reopened are AY 2014-15 to AY 2023-24. Now, AYs 2014-15 to AY 2016-17 would qualify as ‘relevant assessment years’ under Section 153A/153C. Now, let us assume that the AO has issued notice under section 148 on 31.03.2023 for AYs 2014-15 to AY 2022-23 alleging escapement as under:

Now, in the above case, the notice under section 148 for AY 2019-20 to AY 2022-23 should be bad in law as the same have been issued without any material indicating escapement of income. The notice for AY 2018-19 should be valid assuming that material in possession of AO indicates that income has escaped assessment in the form of asset/expenditure/entry. Although escapement amount for AY 2017-18 is below Rs. 50 lakh, the notice under section 148 for said year may still be valid in view of section 149(1A), assuming that material in possession of AO indicates that income has escaped assessment in the form of asset/expenditure/entry that pertain to the same event or occasion for which there is escapement of income in AY 2018-19.

As regards notices for AY 2014-15 to AY 2016-17 where the cumulative total of escapement for these AYs 2014-15 to AY 2016-17 is less than Rs. 50 lakh, though after taking into consideration the income escaping assessment in AY 2017-18 and AY 2018-19 is Rs. 75 lakh i.e more than Rs. 50 lakh, still, these notices may be contended to be barred by limitation in view of the first proviso to section 149(1) read with the restriction contained in forth proviso to section 153A.

As noted above, as per the proviso to section 149(1), no notice under section 148 shall be issued at any time for any assessment year beginning on or before AY 2021-22 if such notice could not have been issued at that time being the time limit specified under the provisions of section 153A(1)(b) [or section 153C]. Thus, in search cases, for getting extended period beyond 6 years for issuance of notice under section 148, the condition of the fourth proviso to section 153A(1)(b) also need to be complied with. As per this proviso, no notice shall be issued for 3 assessment years preceding the 6 assessment years preceding assessment year relevant to year of search i.e. years 7^th to 9^th preceding assessment year relevant to search year unless the AO has in his possession documents or evidence which reveal that the income, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to Rs. 50 lakh or more in the relevant assessment year or in aggregate in the relevant assessment years. For the purpose of this proviso, the relevant assessment year shall be 3 assessment years preceding the 6 assessment years preceding assessment year relevant to year of search i.e. years 7^th to 9^th preceding assessment year relevant to search year.

Accordingly, the threshold of Rs. 50 lakh has to be met independently for such 3 assessment years (i.e. 7^th to 9^th year being AY 2014-15 to AY 2016-17 in the above example) so as to avail the extended period of limitation. In the absence of meeting such condition, the notice may be contended to be barred by limitation under first proviso to section 149. 

Expanded criteria of reopening on the basis of entry/expenditure not applicable for years beyond 6^th year

It is also important to point out that the condition of income being represented in the form of asset for relevant assessment years has not been amended in section 153A/153C, and accordingly, in respect of search cases beyond 6 years i.e. 7^th to 9^th assessment years preceding assessment year of search/deemed search, the enlarged criteria of reopening under section 149(1)(b) which covers expenditure in respect of transaction or in relation to an event/occasion or entries in books of accounts would not be applicable.

Example: To explain the above by way of an example, take a case where search is carried out on 24.06.2022. As noted above, after considering the limitation period prescribed under section 153A, the 10 assessment years (including the assessment year of search) that could be reopened would be AY 2014-15 to AY 2023-24. Now, AYs 2014-15 to AY 2016-17 would qualify as ‘relevant assessment years’ under Section 153A/153C. Now, take a case where the AO issues notice for only AY 2014-15 on the ground that there is escapement of income of Rs. 60 lakh on account of entry in the books of account. In such a case, although the escapement amount is above the threshold of Rs. 50 lakh and within the scope of section 149(1)(b), however, as the income is not represented in the form of an asset, it may be contended that the notice is invalid on account of first proviso to section 149(1) read with fourth proviso to section 153A as the condition stipulated under fourth proviso to section 153A (which permits issuance of notice for relevant assessment year only if income escaping assessment is represented in the form of asset) is not fulfilled.

Difference in manner of aggregation under section 149(1A) and section 153A/153C

Further, it is important to point out that section 149(1A) provides that aggregate of Rs. 50 lakh or more income escaping assessment is to be tested with reference to a particular event or occasion or an asset. Thus, in case income escaping assessment is in relation to different events or occasions or assets, then the threshold of income escaping assessment of Rs. 50 lakh or more has to be met in respect of each such event or occasion or asset. This condition in section 149(1A) is different than the condition in fourth proviso to section 153A whereby the aggregate of all the income represented in the form of asset in seventh to ninth assessment year preceding the search year is to be considered while testing the threshold of Rs. 50 lakh or more.

Example: To explain the above by way of an example, take a case where search is carried out on 24.06.2022 and notice under section 148 is issued on 31.03.2023 for AY 2019-20 and AY 2018-19. Let us assume that escapement in AY 2019-20 is of Rs. 30 lakh which is represented in the form of an asset and escapement in AY 2018-19 is of Rs. 30 lakh which is represented in the form of an entry in the books of account. In such a case, in view of the language of section 149(1A), aggregation may not be possible and the notice for the said years may be bad in law. Had the escapement of Rs. 30 lakh each in AY 2018-19 and AY 2019-20 been on account of same asset, then the notice would have been valid. However, as the escapement is on account of different assets/ events in AY 2019-20 and in AY 2018-19, section 149(1A) may not be applicable and the notices may be barred by limitation in view of non-fulfilment of jurisdictional threshold of Rs. 50 lakh prescribed under section 149(1)(b).

H. Re: Issues e and f – Approval prior to recording of satisfaction in case of non-searched person

Now coming to the issues specific to the person other than the searched person, in the case of person other than the searched person, as per Explanation 2(iii) and (iv), the AO has to be satisfied with the prior approval of PCIT that the money, bullion, jewelry or document pertains/relates to such other person. Accordingly, the question will be whether the AO is required to obtain approval of the PCIT before recording the satisfaction? Further, if the answer to the above is yes, whether the AO is required to obtain another approval from PCIT or PCCIT as required by first proviso to section 148 in terms of section 151.

As per clause (iii) and (iv) of Explanation 2, the AO has to record a satisfaction with the prior approval of PCIT/CIT. Accordingly, the AO has to obtain the approval of PCIT before recording the satisfaction. It is not as if the AO first records a satisfaction and then he obtains approval from PCIT. The words used in these clauses (iii) and (iv) are ‘prior approval’, so the satisfaction has to follow the approval and not the vice versa. The words ‘prior approval’ are also there in the first proviso to section 148, whereby it has been stated that no notice under section 148 shall be issued unless the prior approval of specified authority has been obtained. The assessing officer, before issue of notice under section 148, has to first obtain the approval of specified authority, and only thereafter, he can issue notice under section 148.

It is also important to point out that when this new provision of section 148 was introduced, simultaneously, section 148A was also introduced. In section 148A, under clause (a) also, the assessing officer cannot conduct any enquiry without the prior approval of specified authority. So, for the purpose of conducting enquiry even for 148A, the assessing officer has to first obtain prior approval of the specified authority. On the same reasoning, clauses (iii) and clause (iv) of Explanation 2 have been worded ‘that the assessing officer is satisfied with the prior approval of the PCIT’. Accordingly, AO cannot record a satisfaction unless he has obtained a prior approval of PCIT to the effect that seized asset/document pertains/relates to the person other than the searched person.

Once the approval is obtained, the AO has to then record satisfaction, and thereafter, to meet the requirements of first proviso to section 148, he has to again obtain an approval from the specified authority under section 151, which can be PCIT/CIT, if it is within the period of three years from the end of relevant assessment year, and PCCIT/CCIT, if it is beyond the period of 3 years. 

It will be relevant to point out that no exception has been carved out under the first proviso to section 148 for seeking approval from the specified authority under section 151 in case of search. It is to be noted that wherever the legislature intended to do away with such approval, it has specifically provided so, as is the case where an order under section 148A(d) is passed with the prior approval of specified authority, then the requirement of such approval from the specified authority for the purposes of first proviso to section 148 has been dispensed with. In the absence of any such dispensation, the approval under section 151 from specified authority will be required and such approval is different than the approval required under clause (iii) or clause (iv) of Explanation 2 for recording satisfaction.

At the cost of repetition, it will be relevant to point out that approval under clause (iii) and (iv) of Explanation 2 from the PCIT/ CIT has to be before the satisfaction is recorded by the AO of other person. It is settled law that when the statute requires a thing to be done in a one particular way, it has to be strictly done in accordance to that and no other way.

Thus, the flow chart for issue of notice under section 148 in the case of person other than the searched person will be:

a. For obtaining approval from PCIT under clause (iii) and (iv) of Explanation 2 to section 148, to the effect that seized asset/document pertains to or relates to other person, AO shall give proposal for seeking approval for recording satisfaction.

b. PCIT to approve the proposal.

c. AO to record the satisfaction.

d. Such satisfaction to be forwarded to the specified authority under section 151 i.e. PCIT/ PCCIT, as the case may be, to meet the requirements of first proviso to section 148.

e. Such specified authority i.e. PCIT/PCCIT as the case may be, to consider the satisfaction recorded by AO and to give approval under section 151.

f. AO to issue notice under section 148.

I. Re: Issue (g) - No concept of abatement under the new scheme

It may be relevant to point out that as against the earlier provisions of section 153A/153C whereby consequent to the search, any ongoing assessment or reassessment proceedings for any assessment year used to get automatically abated, there is no such provision of abatement under the new scheme. Accordingly, even after search, the ongoing assessment/reassessment, if any, for any assessment year has to continue. In such a case, an issue may arise as to whether there will 1 assessment or whether there can be two parallel assessment proceedings at the same time i.e. (1) continuation of pending assessment and (2) fresh proceedings under section 148 by invoking Explanation 2. As regards the said issue, it may be relevant to mention that in various judicial pronouncements[2], it has been held that there cannot be two parallel assessments at the same time. Thus, as the proceedings that are pending for a particular assessment year shall continue, there should not be a parallel 2^nd proceeding under section 148. In fact, under section 153(3A), the AO has been allowed an extended period of 1 year for completion of such assessment or reassessment where such assessment/reassessment are pending as on the date of the search. This obviously means that such assessment will be completed after taking into consideration the information/material gathered during the search and there shall be no 2^nd parallel proceedings under section 148.

Another issue may arise as to whether post completion of pending assessment/reassessment after the date of the search, whether the AO can still issue 148 Notice by applying deeming provision of Explanation 2 below section 148. The AO having been specifically allowed an extended period of 1 year and having completed the assessment/reassessment post search, the reopening of the same assessment may tantamount to a review which may not be permissible under the law.

In respect of other years where no assessment or reassessment is pending as on the date of search, as stated hereinabove, the AO can issue notice under section 148 only on fulfilment of conditions of escapement of income as analyzed hereinabove.

J. Concluding Remarks

Though the objective of introducing the new scheme of reopening is laudable, but still, there are gray areas which need to be addressed so as to avoid unnecessary litigation which will help in improving ease of doing business by bringing clarity and certainty.

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[1] Refer: Madras High Court in A.R. Safiullah vs ACIT [TS-6045-HC-2021(MADRAS)-O] and Delhi High Court in Pr. CIT, Central-1 vs Ojjus Medicare Pvt. Ltd. [TS-5183-HC-2024(Delhi)-O]

[2] Aditya Medisales Ltd, [TS-5854-HC-2016(GUJARAT)-O]; Kamdhenu Enterprises Ltd. v. Income Tax Officer, [TS-6195-HC-2022(Delhi)-O]; Nilofer Hameed v. Income Tax Officer [TS-5791-HC-1998(Kerala)-O]