Section 147 of the Income-tax Act, 1961 (ITA) Demystified

The Finance Act, 2021 has completely replaced the provisions of assessment and reassessment under Section 147 of the ITA. In order to set the context, let’s first gain clarity on the terms: assessment and escaping assessment. 

Every earning individual is required to file the return to the income tax department if the earning is chargeable to tax. The tax authorities examine your income tax return (ITR) and if necessary, they can seek additional clarifications. This process of examining the return of income is referred to as assessment.

Types of Assessment

Further, assessments are of various types, self-assessment, preliminary assessment, regular assessment, and special assessment. 

Any income or earnings during a particular year are assessed by the taxpayer (self-assessment) in the immediately following year referred to as the assessment year.

For instance, anything you earned in the financial year (FY) 2023-24 is assessed in the assessment year (AY) 2024-25. After self-assessment, the taxpayer will compute the tax liability and will have to pay that amount and file ITR. Thereafter, the income tax department (ITD) conducts preliminary checking of returns for any arithmetical errors, incorrect claims, etc., which is a fully computerised process. At this stage, there is no detailed scrutiny of ITR filed. 

Now, regular assessment has been sub-divided into scrutiny assessment, under Section 143(3) and best judgement assessment, under Section 144.

Also, special assessment had two categories: income escaping assessment, under Section 147 and assessment in consequence of search, under Sections 153A to 153C.

It may so happen that a few heads of income may escape assessment during initial assessment proceedings, knowingly or unknowingly. In such a scenario, and if the assessing officer (AO) finds that some income that is actually chargeable to tax has not been assessed, the AO can re-open the cases to reassess the individual’s ITRs under Section 147 of the ITA. 

The AO is likely to assess/reassess such income, recompute the loss/depreciation allowance or any other allowance/deduction for the assessment year (AY), as per the provisions of Sections 148 to 153. Re-assessment can be done multiple times provided other conditions laid down in Section 147 have been satisfied.

Now, any income in the hands of the assessee, which has not been subject to the income tax, shall mean that it has escaped assessment. The income can be said to be escaped assessment if the losses have been overreported by the taxpayer.

For example, an individual earned Rs 24 lakh in AY 2024-25, which is chargeable to tax. However, when the return of income was filed, the said individual had declared Rs 20 lakh. In this case, the income of Rs 4 lakh has escaped assessment.

Similarly, a businessman earned Rs 40 lakh in a particular financial year, but failed to file the income tax return. The complete amount of Rs 40 lakh has escaped assessment.

The Income Tax Act, 1961, empowers the Assessing Officer (AO) to reassess income that may have escaped assessment ("IEA") under Sections 147 and 148. While this aims to ensure tax fairness, it can also lead to litigation due to ambiguities and complexities in the provisions. Recent amendments in the Finance Bill 2021 and proposed changes in the Finance Bill 2022 seek to address these concerns and promote a more transparent and efficient IEA process.

Finance Act, 2021: Amendments Introduced 

The Finance Act, 2021 has substituted the existing Sections 147 to 149 with new Sections 147, 148, 148A and 149 of the ITA. Also, it has removed Sections 153A to 153C and merged all of them under Section 147. 

The Finance Act, 2021 has inserted Section 148A, wherein the AO must first conduct an inquiry and provide an opportunity to the taxpayer of being heard before issuing a notice. It is only after considering the reply of the assessee, the AO should then decide, based on the material facts available, whether reassessment provisions should be invoked or not.

Earlier, the AO could reopen reassessments if it had ‘reason to believe’ that the income had escaped assessment. Then subject to provisions of Sections 148 to 153, he/she may assess such income or any other income which comes to his notice, subsequent to the course of proceedings of Section 147. 

However, the AO while reopening reassessments will take into consideration information rather than relying on best judgement, the government has specified this now. Any subjectivity and discretion in the hands of an AO has been removed. 

For the purpose of Section 147 and Section 148, the information with the AO, which suggests that the income chargeable to tax has escaped assessment, means:

• Any information flagged in the case of an assessee for the relevant assessment year AY, in accordance with the rules (risk management strategy) formulated by the Central Board of Direct Tax (CBDT) from time to time
• Any final objection raised by the Comptroller and Auditor General of India (CAG of India) in case the assessment of the assessee for the relevant assessment year has not been conducted in accordance with the provisions of this Act
• In cases where the 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:
  • Search: A search is initiated under Section 132 or books of accounts, other documents or any assets are requisitioned under Section 132A on or after April 1, 2021 in the case of assessee 
  • Survey: A survey is conducted under Section 133A, other than under sub-section (2A) or sub-section (5) on or after April 1, 2021 in the case of the assessee 
  • Seizure:The AO is satisfied with the prior approval of the Principal Chief Commissioner of Income-tax (PCIT) if any money, bullion, jewellery or other valuable article or thing being seized or requisitioned under Section 132A in case of any person, on are after April 1, 2021, belongs to the assessee

Finance Act 2022 Amendments:

1. Modification in limitation period for completion of assessment, reassessment and recomputation
   1. Increased the time limit for completion of assessment of AY 2020-21 from 12 months to 18 months.
   2. AY 2021-22 and onwards, the time limit is fixed to complete the assessment within 9 months from the end of the AY

2. All the search and requisitions under sections 132, and 132A  initiated in FY 21-22 shall be made as per the new provisions of section 147 within the time limit mentioned in section 153.

Other Related Provisions

The AO will comply with the provisions of Section 148A before issuing a notice to the assessee under Section 148. Section 148A requires that the assessing officer shall give an opportunity to the assess to reply why notice for income escaping assessment under Section 147 should not be issued.

While Section 148 is concerned with issue of notice in cases where income has escaped assessment or audit, Section 151 is associated with sanction for issue of notice.

An AO may also assess or reassess the income in respect of any issues, which has escaped assessment, and such issue comes to his/her notice subsequently in the course of proceedings under Section 147. This is irrespective of the fact that the provisions of Section 148A have not been complied with.