Income tax rules can be perplexing, sometimes requiring court interventions to align even Assessing Officers’ (AO) conduct. In a recent Court order, the Delhi High clarified that the extended 10-year review period for Income-Tax (I-T) assessments applies only when the estimated undisclosed income exceeds Rs 50 lakh.
Justices Rajiv Shakdher and Girish Kathpalia emphasised that, in “normal cases”, no notice should be issued if income concealment is below Rs 50 lakh and three years have passed from the end of the relevant assessment year. Accordingly, the court quashed about 50 such reassessment notices issued by the AO related to AY 2016-17 and 2017-18, with an income concealment below Rs 50 lakh.
Tax experts and practitioners have applauded the court's decision and anticipate that this clarification will serve as a valuable tool to challenge and dismiss unwarranted notices issued by the Income Tax department in future. “With this judgement, this jurisprudence, as laid down by law, should now slowly settle down as aberrations will continue to be quashed by courts,” said Vivek Jalan, Partner, Tax Connect Advisory, a multi-disciplinary tax consultancy firm.
As far as already-issued notices and ongoing proceedings based on such notices are concerned, Yeeshu Sehgal, Head of Tax Market, AKM Global, a tax and consulting firm, states that, “Old notices issued under section 148 and ongoing proceedings will be dropped where income escaped is less than Rs 50 lakh.”
The High Court’s order does not seek to change an existing rule or propose any new rule. “However it clarifies in clear terms the important position of law on time limits applicable to the tax notices, supported with exhaustive analysis of provisions of the old and new regime for re-assessment, notifications, and the Supreme court’s judgement in the Ashish Agrawal case. The High Court has granted substantial relief by quashing the notices in all such cases, where notices under section 148 issued under the old regime [pertaining to AY 2016-17 and AY 2017-18], were regularised after the Supreme Court judgement in Ashish Agrawal,” said Sehgal. “However, they supposedly fall beyond the threshold of three years and income escaped is less than Rs 50 lakh. All in all, it is a welcome ruling for the taxpayer.”
Let’s read more about section 48 of the income tax act, under which notice for reassessment of income can be issued.
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What is Section 148 of the I-T Act?
Under Section 148 of the Income Tax Act, 1961, a notice can be issued by the Assessing officer to reassess a taxpayer's income tax return (ITR) if he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. Or in other words, the AO is of the view that the income tax payer has underreported or missed disclosing income in his return.
In such a situation, Section 148 gives authority to the AO to send a notice to a taxpayer for reassessment of income. However, normally, a notice cannot be issued if three years have passed since the end of the relevant assessment year. If there is evidence of concealment of income of at least Rs 50 lakh, a notice can be issued beyond three years but within 10 years from the end of the relevant assessment year.
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Amendment in Section 148
In the Finance Act 2022, a novel sub-section 148A was incorporated, mandating the assessing officer to conduct an inquiry and afford the taxpayer an opportunity to present his/her case before issuing a notice under Section 148. The assessing officer is obligated to serve a notice to the taxpayer under Section 148A(b), furnishing relevant information and adverse material indicating potential income tax escape.
“It is important to note that the time limit of ten years can be invoked only in “serious tax evasion cases”, and that too, where evidence is found. A mere allegation that an evasion was more than Rs 50 lakh would not suffice. The AO has to have in his possession, evidence that escaped income amounted to Rs 50 lakh or more,” said Jalan.
While this law point was already enacted, “the field officers were issuing notices where suspected evasion was there and that too less than Rs 50 lakh. Sometimes the value of evasion was inflated to more than Rs 50 lakh without any evidence in the hands of the AOs,” alleged Jalan.
Upon receiving a notice under Section 148(b), the taxpayer has the opportunity to submit their own clarification and justifying documents within the specified timeframe. Usually, the time limit for responding to a notice under Section 148 is 30 days, unless a shorter period is specified in the notice.
After reviewing the taxpayer's response, the income tax officer will determine whether to issue a reassessment notice or not. In the event of deciding to reopen the case, the officer is obligated to furnish the taxpayer with a copy of the order and a notice under Section 148.
When you receive a notice under Section 148 for reassessment, firstly check for the recorded reasons. If the reasons provided in the notice are deemed unsatisfactory or baseless as per the assessee, they possess the right to file an objection, challenging the notice's validity. If the Assessing Officer rejects the objection, the assessee can alternatively file a writ petition with the High Court, even before the assessment or reassessment concludes.
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