Escaped Income Under Section 148A – Reassessment Process Explained

Escaped income under Section 148A refers to income that has not been assessed or has been under-reported by the assessee, which comes to the notice of the Assessing Officer (AO) through various sources, such as third-party information, documents seized during investigations, or other verifications. Section 148A outlines the procedure that the AO must follow before issuing a notice for reassessment, ensuring the assessee is informed about the material indicating escapement of income and given an opportunity to explain or respond. This procedural safeguard helps verify whether the income has indeed escaped assessment before initiating reassessment proceedings.

Table of Contents

1. Introduction
2. Pre-notice Procedure Followed by the Department
3. Evaluation of Notice u/s 148A(b) by the Assessee
4. Further Checking by the Assessee Before Furnishing Reply
5. Contents of the Reply u/s 148A(b)

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1. Introduction

The department may obtain information from different sources about escapement of income. The information about various transactions coming to the knowledge of Department is checked and verified through return of income filed by the assessee for the relevant assessment year. Wherever further required such as in those cases where return of income is not filed, the AO may carry out inquiries to ascertain the correctness of the transactions coming to its knowledge and amount of assessable income arising from such transactions. The AO may also receive information including documents recovered and seized/impounded/requisitioned which may also indicate escapement of income. After such inquiries and verification, the AO may issue, to the assessee, a notice u/s 148A(b) enclosing therewith material in his possession, asking him to furnish his reply/objections or explanations in respect of charge of escapement of income. The assessee has to respond to such notices enclosing with the reply, the material and document supporting his stand. In this chapter, various sources through which Department obtains information and carries out verification and inquiries, kind of response assessee is supposed to give and various defences under law available to him are briefly described.

2. Pre-notice Procedure Followed by the Department

2.1 Source of information/data

• SFT/TDS/TCS/Foreign Remittances/Export-Import Data.
• Third party information – sale and purchase of immovable property, cash/time deposit or withdrawal from the bank, information from Investigation Wing.
• Data from share brokers, stock exchange, third party.
• In case of transactions in immovable property, information from Form No. 61A, AIS, or 26AS or from deductor or deducted.
• Where information is received from Investigation Wing-to gather entire uploaded data.
  690
• Equity shares – In case of sale of equity shares- whether settled by actual delivery or by transfer on a recognised stock exchange.

2.2 Further inquiries

• Whether return of income is filed for the relevant assessment year, how it is assessed, u/s 143(1) or 143(3), source of income, returned and assessed income.
• Whether escaped income is reflected in the return and if yes in what manner.
• The independent verification specially from institutions such as banks or from other Departments or from officers of the department, or from the portals.
• To collect documents as under:

1. 1. Bank statement(s).
   2. Sale Deed/Purchase Deed, Form 26AS of other party.
   3. Form 16 (Salary case) or Form 16A (TDS case).
   4. Ledger a/c, contract/agreement/terms of appointment/Demat account.
   5. Broker’s bank statement reflecting assessee’s payments against margin or purchase of scrip).

• In search/seizure cases, documents relating to the assessee, relevant statements.
• In case of circular transactions who is the end beneficiary.

2.3 Cases which may fall under exceptions

• Case of restructuring of companies which involve actions such as Merger, Amalgamation/Demerger, or restructuring.
• Cases involving deceased taxpayers where the assessment must be done after bringing the legal heirs/representatives on record and the same is not done.
• Cases having Stuck Off Companies where there is a detailed procedure mandated by CBDT to revive the company.
• Companies under Liquidation – NCLT cases.
• Cases involving the duplication of PAN.

2.4 Common cases to be picked up for reopening

• Cases of penny stock.
• Cases of TDS but no return filed.
• Transactions in immovable properties.
• Survey, search, seizure and requisition cases.
• Bogus purchases.
• Cases of deposit and withdrawal in bank, particularly relating to demonetisation.
• Claim of wrong deductions and exemptions.
• Audit based cases.
• Cases involving accommodation entries.
• Bogus Purchases booked
• Client Code Modification for LTCG/LTCL
• Capital Introduction through bogus Unsecured Loans/Share Premium.
• Cash on-money payment for purchase of immovable property detected during Search/Survey at Third Party premises.
• Entry providers’ own cases.

2.5 Contents of notice u/s 148A(b)

• Assessee and assessment year should be correct.
• Not to be a case of deceased assessee.
• To specify transactions leading to escapement of income.
• Quantify escaped income on the basis of information and documents.
• Identify, it is chargeable to tax.
• Identify documents leading to inference that income chargeable to tax has escaped assessment.
• To make it clear that the SCN does not violate First Proviso to section 149(1).
• Identify that escaped income satisfies the definition of asset applicable to relevant assessment year.
• Enclosed with the SCN all the documents/information leading to inference that income chargeable to tax has escaped assessment.
• Adequate time is given to reply and if required to extend the time to reply.
• If after the issue of SCN further material is received in respect of escaped income, another SCN may be issued but before passing of order u/s 148A(d).

2.6 Steps which may be taken by the AO before issue of notice u/s 148A(b)

By taking following steps the AO may decide to initiate reassessment proceedings and the assessee may decide whether reassessment proceedings are justified as per provisions of the law:

• Identification of Escaped Income Type – Whether the information containing or indicating escapement of income falls under Explanation 1 or under Explanation 2 to Section 148. If yes, one may proceed further to evaluate other conditions.
• Identifiability of Assessee and AY – Whether assessee and AY are identifiable from the information. If yes, to proceed further.
• Assessment Year Classification – Determine whether AY pertains to the limitation falling u/s 149(1)(a) or under the limitation of section 149(1)(b). Then to proceed further.
• Need for Procedure u/s 148A – Whether the information requires procedure u/s 148A (required in respect of information falling in clauses (i), (ii), (iii) and (v) of Explanation 1 and survey cases of Explanation 2 to section 148). If procedure u/s 148A is followed, then to proceed further.
• Accompanying Order u/s 148A(d) – Where procedure laid down u/s 148A required to be followed has been followed and order u/s 148A(d) has been passed, whether notice u/s 148 is accompanied with that order.
• Approval from Specified Authority – Where escapement of income arises under Explanation 2 to section 148 or falls u/s 135A, (whether falling in the AY within the limitation of section 149(1)(a) or within the limitation of section 149(1)(b)) whether approval from specified authority has been taken before issue of notice u/s 148.
• Possession of Books, Documents or Evidence – Where escapement of income falls in the AY within the limitation of section 149(1)(b), whether the AO has in his possession books of account, documents or evidence showing escapement of income. If yes, to proceed further.
• Escaped Income as an Asset – Where escapement of income falling in one AY within limitation of section 149(1)(b), is represented by an asset (or assets), whether total amount of escaped income is ` 50 lakhs or more, if yes, invoking of section 149(1)(b) for that year will be justified.
• Escaped Income as Expenditure – Where escapement of income falling in one AY within limitation of section 149(1)(b), is represented by expenditure in respect of a transaction (or transactions) or expenditure in relation to an event (or events) or occasion (or occasions) or in respect of entry or entries, whether total amount of escaped income in these forms is ` 50 lakhs or more, if yes, invoking of section 149(1) (b) for that year will be justified.
• Escaped Income Spread Over AYrs as Asset – Where escapement of income in the form of an asset is spread over in more than one AY and aggregate escaped income is ` 50 lakhs or more, invoking of section 149(1A) and reopening of all the concerned AYs would be justified.
• Escaped Income Spread Over AYrs as Expenditure – Where escapement of income in the form of expenditure on an event or occasion is spread over in more than one AY and aggregate escaped income is ` 50 lakhs or more, invoking of section 149(1A) and reopening of all the concerned AYs would be justified.
• Escaped Income in Transactions – Where escapement of income in the form of expenditure in respect of transactions is found in more than one AY, aggregation and consequently invoking of section 149(1A) and reopening of all the concerned AYs would NOT be justified as a transaction is complete in one year. In other year it will be a different transaction.
• Escaped Income in Entries – Where escapement of income in the form of expenditure in respect of entry or entries is found in more than one AY, aggregation and consequently invoking of section 149(1A) and reopening of all the concerned AYs would NOT be justified as an entry is complete in one year. In other years it will be a different entry.
• Multiple Assets with Aggregate Escaped Income – Where escaped income represented in the form of more than one asset acquired in different years (say, asset A1 in AY4, and asset A2 in AY5) out of unaccounted income, investment in individual asset does not exceed threshold limit but aggregate amount of escaped income invested in all these assets exceeds threshold limit, invoking of section 149(1A) for reopening the assessment for the concerned AYs will NOT be justified.
• Multiple Expenditures in Transactions – Where escaped income represented in the form of expenditure in more than one transactions carried out in different years (say, Ex.1 in AY6, and Ex.2 in AY7) out of unaccounted income, outflow in individual transaction does not exceed threshold limit but aggregate amount of escaped income invested in all these transactions exceeds threshold limit, invoking of section 149(1A) for reopening the assessment for the concerned AYs will NOT be justified.
• Multiple Entries with Aggregate Escaped Income – Where escaped income represented in the form of more than one entry falling in different years, (say, En.1 in AY8, and En.2 in AY9) outflow of escaped income in individual entry does not exceed threshold limit but aggregate amount of escaped income falling in all these entries exceeds threshold limit, invoking of section 149(1A) for reopening the assessment for the concerned AYs will NOT be justified.
• Non-Clubbing of Different Types of Escaped Income – Where escaped income represented in the form of more than one asset and expenditure in more than one transaction or expenditure in relation to more than one occasion or event or more than one entries, all falling in the same AY, then as explained in para 2.2 above, aggregation (or clubbing) of all these escaped income for considering threshold limit will not be justified. (All escaped income falling in clauses (i), (ii) & (iii) cannot be clubbed to determine threshold limit for that year) What can be clubbed for one year is escaped income invested in assets (falling in clause (i) of section 149(1)(b), it is one group), or escaped income being expenditure or entries (falling in clauses (ii) and (iii) of section 149(1)(b), it is another group). If such clubbed escaped income in each group exceeds threshold limit, reopening of the assessment for that year would be justified.
• Inclusion of Additional Escaped Income – Where assessment of an AY is reopened on conditions u/s 149(1)(b) having been satisfied, other escaped income which by themselves were not capable of invoking section 149(1)(b) can be included in the reassessment.

2.7 Rechecking in specific cases

• In cases of cash transactions being cash deposit in the bank the FAU may:

1. 1. Find out name of the account holder, address, email, mobile number of the person reported in Form No. 61A.
   2. Find out other bank accounts linked with that person and PAN.
   3. Find out whether the person concerned is account holder or authorised signatory, in that case to find out the real account holder.
   4. Find out whether account is open as joint account.
   5. Check the cash transactions with AIR and CIB information and to find out further cash transactions.

• In case of property transaction:

1. 1. Checking of account holder, address, email, mobile number and PAN of the person involved in property transaction.
   2. Checking of property transaction with SFT and TDS information.
   3. Checking whether same property transaction is reported by another person being joint seller or joint buyer.
   4. Collecting documents of sale agreement or conveyance deed.

• Checking information from GST – Checking of sales reported in GSTR-1, total sales reported GSTR-3B and comparison with sales reported in the ITR.
• Checking of export, import information and the value of shipping bill of entry, duty drawbacks and comparison with data declared in the return.
• Collection of the information from the banks.

3. Evaluation of Notice u/s 148A(b) by the Assessee

After the receipt, the notice u/s 148A(b) may be evaluated as under:

• Jurisdiction Verification – Whether AO issuing the notice has jurisdiction to make the assessment over the assessee. Thus, check jurisdiction of the AO.
• Limitation Check – Whether the notice is for the AY which is within
  3 years or is for 4th to 10th relevant assessment year. Thus, check limitation of three years or 4th to 10th years.
• Incorporation of Enquiry Results – Whether results of enquiries are incorporated in the notice and if such enquiries are carried out, whether approval from specified authority has been taken for carrying out enquiries. Thus, check approval required for carrying out inquiries u/s 148A(a).
• Relevance of Material in Notice – Whether material contained in the notice pertains to the assessee and to the relevant assessment year (or to a different assessment year). Thus, check the relevance of the material/ information contained in the notice to the assessee and to the assessment year.
• Nature of Income Check – Whether notice contains information in respect of income which is chargeable to tax or in respect of income which is exempt. Thus, check nature of income, whether exempt.
• Comparison with Return – Whether assessee has filed the return for that year and whether concerned income has been declared in that return or information thereof is declared claiming certain exemption or deduction. Thus, compare the information in the notice with the information/data declared in the original return.
• Source of Information – What is the source of information contained in the show cause notice? Check whether material forming the basis of notice u/s 148A(b) is enclosed with the notice.
• Time Allowed for Reply – What is the time allowed for furnishing reply whether it is less than 7 days being statutory time? Check time provided to reply.
• Request for Additional Time – To demand further time to reply on plausible ground.
• Composition of Escaped Income – Where notice is issued for 4th to 10th relevant assessment year, (that is the case covered u/s 149(1)(b)) what is the composition of income whether it is represented by asset, entry, or expenditure. Thus, check composition of escaped income as given in the notice.
• Verification of Reflected Income – Whether there is mention in the notice that escapement of income is represented by any asset entry or expenditure and whether such asset/entry/expenditure are reflected from which books of account documents or evidence in possession of the AO, and whether photocopies of such books/documents/evidence are enclosed with the notice. Thus, check whether asset, entry or expenditure alleged to have escaped assessment are reflected from the books of account in possession of A.O.
• Fit into Concept of Asset, Entry or Expenditure – Check whether escaped income relating to asset, expenditure on event or occasion or entry/entries fit into the concept of asset, expenditure and entry and the basis of their identification by the AO. Thus, compare escaped income given in the notice with the concept and scope of asset, entry or expenditure.
• Demand for Verbatim Copy of Information – To demand a verbatim copy of information suggesting escapement of income.
• Demand for Copies of Adverse Material – To demand copies of adverse material and adverse statements.
• Demand for Material Gathered by AO – To demand the copy of material gathered by AO on the basis of enquiry.
• Request for Cross-Examination – To ask for the cross examination of the persons who may have given adverse depositions against assessee. (It may not be provided at 148A stage)
• Demand for Approval Note and Copy – To demand the copy of the note on the basis of which approval of specified authority was granted and demand copy of the approval.
• Submission of Facts and Evidence – To submit facts and evidence in repelling the information.
• Penalty and Adverse Consequence – There is no penalty or adverse consequence provided in law except order 148A(d) & 148 notice, for non-compliance or incomplete compliance of notice 148A.
• Consideration of Challenging Orders – Consider challenging the order u/s 148A(d) and issue of notice u/s 148 before High Court.
• Survey-Specific Information Check – In case of survey check whether notice u/s 148A(b) contains information specific to that year.
• Aggregation Compliance – Whether AO has resorted to Aggregation for determining threshold limit and if yes, whether it is in accordance with Section 149(1A). Thus, check whether AO has correctly resorted to aggregation.
• Inquiry and Verification Purpose – Whether reopening is sought to be done for inquiry and verification which is not permissible.
• Notice Issuance and Service Check – Check issue and service of notice, unsigned notice, wrong address.
• Questionnaire in Notice – Whether notice u/s 148A(b) in the questionnaire or information about escapement of income. The questionnaire cannot be replied u/s 148A(b).
• Capital Gains Escapement Check – In case where notice u/s 148A(b) contains allegation about escapement of capital gains, it is the amount of capital gains which will be the escaped income and not the gross sale consideration. If the amount of capital gains is less than ` 50 lakhs whereas sale consideration is more than ` 50 lakhs, then reopening cannot be done for fourth to tenth assessment year.

4. Further Checking by the Assessee Before Furnishing Reply

To check whether reopening is barred by limitation under new law.

• Whether the time period consumed in stay by a court and in furnishing reply by the assessee u/s 148A(c) save the limitation expiring on 31-03-2022 or 31-03-2023.
• Whether reopening of assessment for AYrs 2013-14 and 2014-15 are barred by limitation under new law because of first proviso to section 149(1), if notice u/s 148 is issued after 30-06-2021.
• Where assessment year which is reopened is 2015-16 and limitation expiring on 31-03-2022 is saved, by excluding the time period as provided in fifth proviso to section 149(1), the provisions of Finance Act, 2021 will be applicable. But if limitation expiring on 31-03-2022 is not saved, the reassessment is barred by limitation.

To check the nature of escaped income. In case of capital gains, it will be the amount of capital gains and not the sale consideration, which will be the escaped income.

To check whether the provisions of Finance Act, 2021 or of Finance Act, 2022 is applicable.

• Applicability of Finance Act Based on Limitation provided u/s 149(1) – If limitation is saved by third proviso to section 149(1) the provisions of Finance Act, 2021 will be applicable and if not, the provisions of Finance Act, 2022 will be applicable.
• Impact on AYrs 2016-17 and 2017-18 when Limitation is Not Saved – Where assessment years which are reopened are 2016-17 and 2017-18 and limitation expiring on 31-03-2022 is not saved, by excluding the time period as provided in fifth proviso to section 149(1), notice u/s 148 will be deemed to be issued in FY 2022-23 and therefore, the provisions of Finance Act, 2022 will be applicable.
• Applicability for AYrs 2016-17 and 2017-18 When Limitation is Saved – Where assessment years which are reopened are 2016-17 and 2017-18 and limitation expiring on 31-03-2022 is saved, by excluding the time period as provided in fifth proviso to section 149(1), notice u/s 148 will be deemed to be issued in FY 2021-22 and therefore, the provisions of Finance Act, 2021 will be applicable.
• Treatment of Ayr 2018-19 with Unsaved Limitation – Where assessment years which is reopened is 2018-19 and limitation expiring on 31-03-2022 is not saved, by excluding the time period as provided in fifth proviso to section 149(1), notice u/s 148 will be deemed to be issued in FY 2022-23 and therefore, the provisions of Finance Act, 2022 will be applicable.
• Finance Act Provisions for Assessment Year 2018-19 with Saved Limitation – Where assessment years which is reopened is 2018-19 and limitation expiring on 31-03-2022 is saved, by excluding the time period as provided in fifth proviso to section 149(1), notice u/s 148 will be deemed to be issued in FY 2021- 22 and therefore, the provisions of Finance Act, 2021 will be applicable.

To check whether Explanation 1 or Explanation 2 to section 148 is applicable:

• In general, Explanation 2 to section 148 under new law will not be applicable in respect of the notices issued u/s 148 under old law, if such notices relate to search, survey or requisition initiated on or before 31-03-2021.
• Almost all the AYs in respect of which notice u/s 148 under old law has been issued during 01-04-2021 to 30-06-2021 will fall under Explanation 1 to section 148 under new law.
• Explanation 1 to section 148 as per Finance Act, 2021 will be applicable if limitation expiring on 31-03-2022 is saved as per fifth proviso to section 149(1).
• Explanation 1 to section 148 as per Finance Act, 2022 will be applicable if limitation expiring on 31-03-2022 is NOT saved even after invoking fifth proviso to section 149(1).

To check whether provisions of section 149(1)(b) or that of section 149(1)(a) are applicable:

• Where notice u/s 148 under new law is deemed to be issued in FY 2021-22, the assessment years falling under the limitation of section 149(1)(b) will be, 2015-16, 2016-17 and 2017-18. Accordingly, AY 2018-19 and onwards will fall within the limitation of section 149(1)(a).
• Where notice u/s 148 under new law is deemed to be issued in FY 2022-23, the assessment years falling under the limitation of section 149(1)(b) will be, 2016-17, 2017-18 and 2018-19. Accordingly, AY 2019-20 and onwards will fall within the limitation of section 149(1)(a).

To check what is the escaped income and in which form it is:

• Where provisions of Finance Act, 2021 are applicable and assessment year falls within the limitation u/s 149(1)(b), the escaped income should be ` 50 lakh or more and has to be in the form of asset.
• Where provisions of Finance Act, 2022 are applicable and assessment year falls within the limitation of section 149(1)(b), the escaped income should be ` 50 lakh or more and has to be in the form of an asset, entry, or expenditure in a transaction or in relation to an event or occasion.

To check whether provisions of section 149(1A) are correctly invoked.

5. Contents of the Reply u/s 148A(b)

• Details of the return for the relevant assessment year, audit report, scrutiny assessment orders, computation of income.
• Queries and reply in respect of original assessment proceedings, if scrutiny assessment is carried out.
• Bank statements to support the transactions.
• Various technical deficiencies in the notice.
• Explanation and submissions in separate paragraphs and documents for each item of escaped income pointed out in the notice u/s 148A(b).