Conducting Inquiry, Providing Opportunity before Issue of Notice under Section 148 – Section 148A

Topics covered in this article are as follows:

1. Introduction
2. The Provision
3. The Provision in Brief
4. Charge of Escapement of Income in a Notice u/s 148A(b) is Necessary
5. Whether Section 148A covers the Concept of Reasons Recorded and Procedure laid down by Hon’ble Apex Court in GKN Driveshafts (India) Ltd. v. ITO
6. Application of Procedure u/s 148A
7. Table to Show where the Procedure u/s 148A is Required to be Followed

For a comprehensive commentary on the Reassessment provisions under the Income-tax Act, as introduced by the Finance Act, 2021, refer to Taxmann's New Law Relating to Reassessment

1. Introduction

There has been experience in the past that notice u/s 148 used to be issued simply on any kind of information received by the AO, or on the recommendation of other authorities/agencies without applying his own mind as to whether material available before him had a live link with the escapement of income and consequently with formation of belief. It was also felt that objections raised by the assessee against reasons recorded or on formation of belief were used to be brushed aside by the AO on frivolous grounds or simply by passing a non-speaking order. As a result, the reopening used to be quashed by the appellate authorities on various grounds such as there is non-application of mind by the AO, notice u/s 148 is issued on borrowed satisfaction, there is no live link between material available on record and formation of belief, or there were issues on limitation not considered by the AO. Thus, to simplify and strengthen the reopening, the Finance Act, 2021 introduced a new section 148A after section 148, apparently for the purposes of ensuring opening of completed assessment on sound footings. To achieve this aim, the legislature has not only incorporated the principles laid down by Hon’ble Apex Court in GKN Driveshafts (India) Ltd. v. ITO¹ but also made it necessary for the AO to seek approval of senior authority before deciding to issue notice u/s 148 so that technical issues involved in reopening are taken care of. In this chapter the provisions of section 148A are described in brief with different kind of implications.

2. The Provision

Conducting inquiry, providing opportunity before issue of notice under section 148.

“148A. The Assessing Officer shall, before issuing any notice under section 148, —

(a) conduct any enquiry, if required, with the prior approval of specified authority, with respect to the information which suggests that the income chargeable to tax has escaped assessment;

(b) provide an opportunity of being heard to the assessee, with the prior approval of specified authority, by serving upon him a notice to show cause within such time, as may be specified in the notice, being not less than seven days and but not exceeding thirty days from the date on which such notice is issued, or such time, as may be extended by him on the basis of an application in this behalf, as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted, if any, as per clause (a);

(c) consider the reply of assessee furnished, if any, in response to the show-cause notice referred to in clause (b);

(d) decide, on the basis of material available on record including reply of the assessee, whether or not it is a fit case to issue a notice under section 148, by passing an order, with the prior approval of specified authority, within one month from the end of the month in which the reply referred to in clause (c) is received by him, or where no such reply is furnished, within one month from the end of the month in which time or extended time allowed to furnish a reply as per clause (b) expires:

Provided that the provisions of this section shall not apply in a case where,—

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

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

(c) the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any books of account or documents, seized in a search under section 132 or requisitioned under 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.

Explanation.—For the purposes of this section, specified authority means the specified authority referred to in section 151.”.

3. The Provision in Brief

Before issue of notice u/s 148, in certain cases, the AO has to take following steps:

(i) To examine the information as to whether it fulfils the conditions of section 148.

(ii) To conduct inquiries, wherever required, with prior approval of specified authority.

(iii) Such inquiry has to be in respect of information which suggests that income chargeable to tax has escaped assessment.

(iv) After carrying out inquiries, the AO has to provide opportunity of being heard to the assessee.

(v) For this purpose, he has to issue a show cause notice asking the assessee to explain as to why notice u/s 148 be not issued against him on the basis of information which suggest that income chargeable to tax has escaped assessment and (b) and on the basis of result of inquiries, if any conducted by him.

(vi) Such notice has to be issued with prior approval of specified authority.

(vii) He has to give time of not less than 7 days but not more than 30 days to the assessee for furnishing his explanation.

(viii) He may extend the time for furnishing the explanation on an application made by the assessee in this behalf.

(ix) To consider the reply, if any, submitted by the assessee in respect of show cause notice.

(x) To decide on the basis of material available on record, including the reply furnished by the assessee, whether it is a fit case for issue of notice u/s 148 or not.

(xi) Such decision has to be made by passing an order (in writing).

(xii) This order has to be passed within one month from the end of the month in which time or extended time allowed to the assessee to furnish reply expires.

(xiii) Prior approval of the specified authority has to be taken before passing such order.

(xiv) Above procedure of carrying out inquiries, issuing show cause notice and passing order u/s 148A(d) is not required to be followed in following cases:

i. In cases of searches carried out u/s 132(1) on or after 01-04-2021.

ii. In requisition cases u/s 132A, where books of accounts or other documents or assets are requisitioned on or after 01-04-2021.

iii. In search/requisition cases where the AO is satisfied with the prior approval of PCIT/CIT that money, bullion, jewellery or other valuable article or thing seized in the search/requisition (against person searched) carried out after 01-04-2021, or requisitioned u/s 132A after 01-04-2021 belongs to “other person”.

iv. In search/requisition cases where the AO is satisfied with the prior approval of PCIT/CIT that books of account or documents seized in the search/ requisition (against person searched) carried out on or after 01-04-2021 or requisitioned u/s 132A on or after 01-04-2021 pertains to or pertain to, or any information contained therein relate to the “other person”.

(xv) Specified authority for the purposes of this section is the authority referred to in section 151.

4. Charge of Escapement of Income in a Notice u/s 148A(b) is Necessary

The notice issued u/s 148A must contain information that income chargeable to tax has escaped assessment. There must be some material supporting allegation of escapement of income. A bald assertion about escapement of income is not sufficient to validate issuance of notice u/s 148A. Therefore, wherever AO receives information about a transaction such as cash deposited in bank, mere fact of deposit of cash will not lead to inference that cash so deposited was of income character and that it was chargeable to tax in the hands of the assessee in the relevant assessment year. The inference of the AO that an income equal to deposit in bank has escaped assessment of income, proceeds on the fallacious assumption that the bank deposits constitute undisclosed income and overlooks the fact that the sources of deposit need not necessarily be income of the assessee. The AO has to put up some more material after carrying out inquiries that cash deposits may be undisclosed income of the assessee and hence income chargeable to tax has escaped assessment².

Thus, no reopening is permissible merely for verifying the source of cash deposited in the bank particularly when AO did not contend that said cash deposits were not reflected in the return of income³. The verification part must be done before issuing SCN u/s 148A.

So also, reopening only on the basis that there are huge cash withdrawals towards purchases and the SCN (reasons recorded earlier) did not indicate that any income chargeable to tax has escaped assessment cannot be sustained⁴.

When information about cash deposited in bank is received by the AO, it is his duty to examine whether said cash deposit is reflected in return or not. Without examining the information about cash deposit as to whether it reflects income chargeable to tax or not, reopening will not be justified⁵. Now even issue of notice u/s 148A(b) may not be justified.

Issuing notice u/s 148 cannot be sustained when explanation of the assessee that source of cash deposit post demonetisation was withdrawal of cash from the same bank and the withdrawals and deposits closely matched was not considered by the AO⁶.

Even in cases where recomputation is required on account of grant of excessive depreciation allowance, loss, deduction or relief, charge of escapement of income would be necessary for acquiring jurisdiction u/s 147.

5. Whether Section 148A covers the Concept of Reasons Recorded and Procedure laid down by Hon’ble Apex Court in GKN Driveshafts (India) Ltd. v. ITO⁷

Under new law there is no requirement anymore for recording reasons, supplying to them to the assessee, inviting objections from him and passing an order disposing of such objections before proceeding to make reassessment. Such procedure has been practically incorporated in section 148A which provides that, before issue of notice u/s 148, the AO is required to carry out inquiries u/s 148A, if required , with prior approval of specified authority, provide an opportunity of being heard, consider the reply furnished by the assessee to the show cause notice issued by the AO and pass an order u/s 148A(d) with prior approval of specified authority within the time limitation provided thereunder. Thus, if an assessee has objection as to whether (i) there is an income chargeable to tax (ii) such income has escaped assessment or (iii) any recomputation of loss, depreciation allowance or any other allowance or deduction is required (iv) AO has correctly assumed jurisdiction to issue notice u/s 148, (v) a particular issue on which ld. AO intends to issue notice u/s 148 is covered in appeal, reference or revision, he can raise such objections in the reply to be furnished in response to show cause notice issued u/s 148A(b). Thus, order u/s 148A(d) would have all the trappings of reasons recorded, objections raised by the assessee and disposal of such objections through speaking order which is required to be enclosed with the notice u/s 148.

6. Application of Procedure u/s 148A

Procedure laid down u/s 148A is applicable in following two circumstances. They are-

(i) When AO receives information, which falls within Explanation 1 to section 148. It is mentioned in the Explanation 1 that for the purposes of issuance of notice u/ss 148 and 148A, the information with the AO which suggest that income chargeable to tax has escaped assessment means (i) the information which is flagged in the case of the assessee for the relevant assessment year as per Risk Management Strategy formulated by the CBDT from time to time and (ii) any final objection raised by C&AG to the effect that assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of the Act. This procedure is to be followed for all ten relevant assessment years.

(ii) Where survey operation is carried out u/s 133A, in case of the ­assessee on or after 01-04-2021. Even though, carrying out survey is treated as deemed information with the AO which suggest that income chargeable to tax has escaped assessment in the case of the assessee for three assessment years immediately preceding the assessment year relevant to the previous year in which search, or requisition is made, but procedure laid down u/s 148A has to be followed for all the ten years including three initial relevant assessment years.

It may be noted that the procedure laid down u/s 148A will not be applicable in cases of search and requisitions carried out on or after 01-04-2021 in the cases of “person searched” and in the cases of “other person” as covered in clauses (a), (b) and (c) of Proviso to section 148A.

7. Table to Show where the Procedure u/s 148A is Required to be Followed

Following table shows in which cases procedure u/s 148A is required to be followed:

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1.[2002] 125 Taxman 963/259 ITR 19 (SC).

2.Based on Bir Bahadur Singh Sijwali v. ITO [2015] 53 taxmann.com 366/68 SOT 197 (Delhi – Trib.)(URO); Amrik Singh v. ITO [2016] 70 taxmann.com 26/159 ITD 329 (Asr. – Trib.); Gurpal Singh v. ITO [2016] 71 taxmann.com 108/159 ITD 797 (Asr. – Trib.).

3.Sunrise Education Trust v. ITO [2018] 92 taxmann.com 74 (Guj.).

4.ITO v. Amit K. Shah [2016] 71 taxmann.com 256/159 ITD 767 (Ahd. – Trib.).

5.CIT v. Indo Arab Air Services [2015] 64 taxmann.com 257 (Delhi).

6.Based on Swati Malove Divetia v. ITO [2018] 98 taxmann.com 447 (Guj.).

7.[2002] 125 Taxman 963/259 ITR 19 (SC).