Background

Re-assessment provisions under the Income Tax Act, 1961 (the Act) were significantly modified by the Finance Act 2021, effective from 1 April 2001. However, these changes led to extensive litigation due to varying interpretations, the Supreme Court’s decision in Union of India v. Ashish Agarwal [TS-339-SC-2022] and the CBDT Instruction No. 1 of 2022 dated 11 May 2022 issued soon after the said SC decision. Hence, many representations were made to the Government to rationalise and simplify the reassessment provisions.

Budget 2024[1] has made an attempt to lend a ear to various representations made. Laudable amongst these attempts include reducing the maximum time limit for reassessment from 10 years to 5 years from the end of the relevant assessment year (AY) and separating the search assessment provisions from reassessment provisions.

Let’s understand the amendments in detail.

1. Separating Reassessment and Search Assessment Provisions

Before 1 April 2021, assessments initiated pursuant to a search or requisition were covered under block assessment provisions which required assessing the income of 6 preceding years under block assessment.

Effective from 1 April 2001, search/requisition cases were subsumed within the general re-assessment provisions (sections 147 to 151) and sunset clauses were introduced to the block assessment provisions. As per these new provisions, in case of search or requisition initiated on or after the 1 April 2021, it was deemed that AO had information suggesting that the income chargeable to tax had escaped assessment for 3 AYs immediately preceding the AY in which the search/requisition is initiated. The reassessment timelines of 3/10 years applied to cases of search/ requisition too. 

With the objective “to make the procedure of assessment of search cases cost- effective, efficient and meaningful” the Bill proposes to re-introduce the scheme of block assessment in cases of search or requisition by inserting a new Chapter XIV-B in the Act. Relevant changes have also been made to Section 148 to 151 to eliminate references to such cases.

The Bill now proposes to provide that block assessment will be conducted for 6 AYs preceding the previous year in which the search is conducted. Total income of the assessee will include any undisclosed money, bullion, jewellery, valuable articles, any expenditure, any income based on book entries etc. Such total income will be subject to 60% tax and 50% penalty thereon. Block assessment must be completed within 12 months from the end of the month in which last authorisation of search was made.

2. Effective date

The Bill proposes that the new reassessment provisions (including block assessment provisions) will be effective from 1 September 2024.

Thus, assessments and adjudications will now be conducted under 3 different reassessment regimes:

- Old Regime – Up to 31 March 2021;

- Current Regime – From 1 April 2021 but before 1 September 2024; and

- Proposed Regime – From 1 September 2024.

The Bill provides for transition provisions, i.e., the provisions of the Current Regime will apply in the following cases:

- where a search has been initiated or requisition is made, or a survey is conducted on or after 1 April 2021 but before 1 September 2024; and

- where a notice u/s 148 (Reassessment Notice) has been issued or an order u/s 148A(d) has been passed prior to 1 September 2024.

3. Fixed time limit for filing tax return

Re-assessment proceedings can be initiated u/s 148 when there is “information” with the AO which suggests that income chargeable to tax has escaped assessment for the relevant year.

The Bill proposes to simplify the section and make the following changes:

- Tax return must be furnished by the assessee pursuant to Reassessment Notice within the period specified in the notice which cannot exceed 3 months from the end of the month in which the notice was issued. The possibility of extending this 3-month period in the extant S. 148, pursuant to an application made by the assessee and being allowed by the AO, has been done away with.

- The definition of “information” which suggests that income has escaped assessment is amended to include any information arising from survey (other than u/s 133(2A)).

- Issue of Reassessment Notice will not require an approval of the specified authority, unless it pertains to a case where the AO has received information under the provisions of faceless collection of information.

4. Show cause notice to be accompanied by “information”

The extant S. 148A lays down 4 steps before issuing the Reassessment Notice, i.e., conducting inquiry, issuing the show cause (SCN), considering the reply of the assessee to SCN and then passing an order whether the case is fit for issuing Reassessment Notice with the prior approval of the specified authority. Currently, there is no time limit specified for issuing the SCN.

The Bill proposes to substitute S. 148A to simplify the provisions and provide that where the AO has information suggesting that income chargeable to tax has escaped assessment, he must issue a SCN before issuing a Reassessment Notice. Further, the SCN must be accompanied by the information which suggests that income chargeable to tax has escaped assessment.

It is pertinent to note that although the Budget proposes to remove the 4 steps the essence of the provision remains the same as (i) the AO must have information that suggests escapement, (ii) he must furnish this information to the assessee and (iii) he must obtain the approval of the specified authority for determining whether the case is fit for issuing Reassessment Notice

Further, the requirement that SCN must be accompanied by “information” which suggests that income has escaped assessment marks a positive development. Courts have consistently found that omitting this information from the SCN hinders the taxpayer's ability to give a proper response to the SCN. This amendment can possibly help to address this issue.

5. Reduced time limit for issue of notices

As per the extant S. 149, Reassessment Notice can be issued within 3 years from the end of the relevant AY. In cases where the escaped income amounts to INR 50 lakhs or more, the time limit was extended to 10 years from the end of the relevant AY. Further, there is no time limit specified for issuing the SCN.

It is now proposed to revise the time limit for issuing Reassessment Notice. For normal cases, it is proposed to be 3 years and 3 months from the end of the relevant AY. For cases involving income escaping assessment of INR 50 lakhs or more, the limit is reduced to 5 years and 3 months.

Further, it is also proposed to provide a time limit for issue of SCN. For normal cases, it is 3 years from the end of the relevant AY. For cases involving income escaping assessment of INR 50 lakhs or more, the time limit for issuing SCN is 5 years from the end of the relevant AY.

The amendment to substantially reduce the time limit for issue of Reassessment Notice from 10 years to 5 years is indeed a welcome step. It confirms the government’s commitment to promoting tax certainty and reducing litigation.

Introducing a time limit for issue of SCN is a welcome move. The time gap of 3 months between the issue of SCN and Reassessment Notice gives time to the AO and the assessee to complete other procedures before issuing the Reassessment Notice.

6. Approval of specified authority

The “specified authority” for the purpose of reassessment provisions means (i) Principal Commissioner/Director or Commissioner or Director if the period elapsed is up to 3 years from the end of the relevant AY and (ii) Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General if more than 3 years have elapsed from the end of the relevant AY.

The Bill proposes to shift the powers to lower authorities being the Additional Commissioner/Director or Joint Commissioner/Director removing the differentiation between the 2 time periods.

Once again, we welcome this move. It can be reasonably expected that the approval of the specified authority to issue a notice u/s 148 or not can be procured faster. 

7. Examples

7.1 Time limit under the Proposed Regime where escaped income is less than Rs. 50 lakhs

7.2 Time limit under the Proposed Regime where escaped income is 50 lakhs or more

8. Concluding thoughts

The Government introduced the new reassessment regime from 1 April 2021. From that date until now, there have been a number of amendments to the reassessment provisions. Besides, the language of the provisions has opened up the possibility of a number of interpretations and litigation. Having realised this, we believe the Government has taken the right step in simplifying the reassessment provisions and separating the provisions of search and seizure from reassessment provisions.

On the litigation front, many cases are currently pending before the courts under the Old Regime as well as the Existing Regime. It will take time until the reassessment provisions settle. Besides, the amendments in Budget 2024 do not change the basic elements of initiating reassessment proceedings, i.e., there should be income which has escaped assessment, a change of opinion cannot be a cause of reopening assessment etc. Past jurisprudence on these aspects would continue to apply under the Proposed Regime too.

[1] Finance Bill (No. 2), 2024