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.
Further, assessments are of various types, self-assessment, preliminary assessment, regular assessment, and special assessment.
Self Assessment : Self-assessment refers to the process by which a taxpayer determines their tax liability based on the income earned in a financial year. The taxpayer then submits an Income Tax Return (ITR) during the following assessment year (AY).
For instance, anything you earned in the financial year (FY) 2024-25 is assessed in the assessment year (AY) 2025-26. 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.
Preliminary Assessment: Once a taxpayer files their ITR through self-assessment, the Income Tax Department performs basic checks and validations. This initial review focuses on identifying calculation mistakes or incorrect claims, without going into a detailed examination. It acts as a preliminary screening to ensure the return appears accurate at a surface level.
Regular Assessment: Now, regular assessment has been sub-divided into scrutiny assessment, under Section 143(3) and best judgement assessment, under Section 144.
Scrutiny Assessment : Scrutiny Assessment is a type of assessment where a detailed examination of the return will be conducted in order to verify the accuracy of the reported income and claims.
Best judgement assessment: If the taxpayer does not furnish the necessary information, the assessing officer proceeds to make an assessment using the best information available.
Special assessment: Also, special assessment had two categories: income escaping assessment, under Section 147 and assessment in consequence of search, under Sections 153A to 153C.
Assessment in consequence of search: Such an assessment is conducted following a search or seizure operation, with the objective of reassessing income and uncovering any undisclosed assets or earnings.
Income escaping assessment: 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 if other conditions laid down in Section 147 have been satisfied.
Explanation related to section 147
Section 147 of the Income Tax Act empowers the Assessing Officer (AO) to reassess or re compute income that may have not disclosed due to certain reasons. It acts as a corrective tool to address omissions or inaccuracies in income disclosure. The section also defines the AO’s authority and the procedures to be followed during such reassessments. Importantly, Section 147 is linked to several other provisions of the Act, which the AO must take into account while carrying out proceedings under this section.
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.
Also the taxpayer might claim lower deductions or reliefs than the allowable limits, due to misunderstanding the tax law or with an intention to avoid taxes.
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. 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.
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.
Introduction of Section 148A: 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.
Removal of the procedure of Reassessment: 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:
Assessment Year
| Time limit for completion of the assessment |
Assessment Year 2021-22 and onwards | Within 9 months from the end of the Assessment Year in which income was first assessable |
Assessment Year 2020-21 | Within 18 months from the end of the Assessment Year in which income was first assessable |
Assessment Year 2019-20 | Within 12 months from the end of the Assessment Year in which income was first assessable |
For Assessment Year 2018-19 | Within 18 months from the end of the Assessment Year in which income was first assessable |
Up to Assessment Year 2017-18 | Within 21 months from the end of the Assessment Year in which income was first assessable |
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.
Procedure of Reassessment under Section 147
As per Section 147 of the Income Tax Act, the following steps provide the procedure that the Assessing Officer (AO) must follow when conducting the reassessment of a taxpayer's income:
Identification of Income that escaped the process of assessment: The reassessment process begins with the identification of income of tax payer by the assessing officer that was not disclosed in the taxpayer’s Income Tax Return (ITR) and has therefore escaped assessment. To proceed, the AO must have a “reason to believe” that such income has gone unassessed. This belief must have sufficient evidence, often arising from inconsistencies or discrepancies identified during the original assessment.
Recording of Evidence: The Assessing Officer (AO) is required to documentmaterial facts, taxpayer representations, responses, and any supporting evidence provided. Regardless of the AO's initial view on income escaping assessment, the documentation must show sufficient evidence to justify the reopening of the reassessment process.
Seeking Approval from Higher Authority: Based on the taxpayer’s responses and the recorded evidence, the Assessing Officer (AO) concludes that income has escaped assessment, they are required to obtain prior approval from a higher authority before proceeding. Upon receiving the necessary approval, the AO may issue a notice under Section 148 to the taxpayer, thereby commencing the reassessment process.
Issuance of Notice: Once the required approvals are obtained and relevant material facts have been documented, the Assessing Officer (AO) issues a notice to the taxpayer under Section 148. This notice serves to inform the taxpayer that their case is being reopened for reassessment. Generally, the taxpayer is granted a period of 30 days to submit a revised return in response to the notice.
Filing of Revised Return: After receiving of the notice, the taxpayer is required to file a revised return that addresses the concerns raised by the Assessing Officer (AO). This includes disclosing any income that was previously unreported or inaccurately reported. The revised return should rectify the differences found in the original submission.
Assessment by the AO: After receiving the revised return, the Assessing Officer (AO) conducts a detailed review. If necessary, the AO may ask further clarification or request additional information from the taxpayer to ensure that all identified issues have been properly resolved.
Draft Assessment Order: After evaluating the revised return and supporting documents, the Assessing Officer (AO) concludes that additional tax is payable, a draft assessment order is prepared. This draft is then submitted for internal review and must be approved by a higher authority before it can proceed further.
Issuance of Show Cause Notice: The Assessing Officer (AO) issues a show cause notice to the taxpayer, providing them an opportunity to explain why the proposed additional tax liability should not be levied. This step is a crucial part of the reassessment process, as it upholds the taxpayer’s right to be heard before any final decision is made.
Hearing: A hearing is conducted to provide the taxpayer with an opportunity to present their case before the tax authorities. During this stage, the taxpayer can submit explanations and relevant documents to challenge the revised tax liability proposed by the Assessing Officer (AO).
Final Assessment Order: Based on the outcome of the hearing and a thorough review of all submissions, the AO issues the Final Assessment Order. This document details the income that was previously unassessed and outlines the revised tax liability, including any applicable interest and penalties.
Appeal by the Taxpayer: After the Final Assessment Order is issued, the taxpayer has the right to appeal the decision. This appeal must typically be filed within 30 days of receiving the order. The appeal process allows the taxpayer to contest the reassessment if they believe it to be incorrect or unjust.