Section 147 of the Income Tax Act: Income Escaping Assessment
Updated: May 24
Section 147 empowers the tax authorities to make reassessments on filed returns if they have a reason to believe that certain income has not been assessed. This section has been designed to correct errors and not compromise government tax revenues on account of income not reported or under-reported. Understanding Section 147 is important not only to taxpayers who may face reassessments but also to professionals advising on tax compliance and planning.
Table of content
In this article we will understand what leads to invocation of Section 147 and some procedural aspects associated with it, the rights and remedies available to taxpayers, and some key legal aspects that have shaped its application.
Section 147 of the Income Tax Act: An Overview on Income Escaping Assessment
Section 147 allows the Income Tax Department to address situations where income has not been assessed at all, has been under-assessed, has been assessed at a rate, or has been the subject of excessive relief under the Act. It essentially provides a mechanism to correct any oversight or errors in the initial assessment.
Meaning of Income Escaping Assessment
The term "income escaping assessment" in the context of income tax laws refers to those receipts of income that have not been reported in the Income Tax Return (ITR) or assessed during the regular assessment carried out by the tax authorities. It may occur under a number of scenarios in which income that is liable to tax was not put in the tax calculation for an assessment year.
Following are the possible forms of income escaping assessment:
Non-Reported Income: This is the most direct scenario in which the taxpayer has simply failed to declare some part of their income in their tax returns. Income can be missed because of oversight, misunderstanding of the tax rules, or intentionally not disclosed.
Underreported Income: Income could have been underreported, meaning income was reported but not in its entirety. This can occur for a variety of reasons, such as an error in calculation or failure to disclose income sources.
Incorrectly Assessed Income: Sometimes, the income would have been reported right but, because of an error in the processing of the tax return or misinterpretation of the tax laws, it was not assessed correctly. This may result in less tax being imposed than what is actually due.
Excessive Relief or Deductions: This is about situations in which a taxpayer claims deductions or relief higher than what they are eligible for, thereby bringing down taxable income.
Meaning of Assessment or Reassessment
In the Income Tax Act in India, the terms "assessment" and "reassessment" refer to the respective methods by which the income tax department evaluates and calculates the tax liability of a taxpayer. These processes are crucial for the assurance of compliance with tax laws and the proper reporting of income, expenses, and deductions. Here's a closer look at each:
Assessment
Assessment is the examination and processing of a taxpayer's return by the Income Tax Department to determine the correct amount of tax liability. This process can involve several types of assessments:
Regular Assessment (Section 143): This is carried out after the taxpayer has filed his return. The tax officer examines the return and supporting documents to ensure that the income has been correctly disclosed and the correct amount of tax has been calculated and paid.
Summary Assessment (Section 143(1)): Also called "intimation," this is an automated preliminary assessment where the returns are processed without human intervention, primarily to check for arithmetical accuracy, internal consistency, tax calculation, and tax payment.
Scrutiny Assessment (Section 143(3)): This is a detailed scrutiny of the tax return to confirm its accuracy. During this process, the tax officer may require the taxpayer to produce additional documents or evidence.
Reassessment
Reassessment under Sections 147 and 148 of the Income Tax Act is a process initiated when the Income Tax Department has reason to believe that certain income of the taxpayer has escaped assessment. This process may be initiated in cases where:
The taxpayer has omitted or failed to report some income.
There is a substantial error or mistake in the assessment.
The taxpayer has not filed a return and it is believed that the taxpayer's income is liable to tax.
Procedure for Reassessment:
Reason to Believe: The assessing officer must have concrete reasons for believing that some income has escaped assessment. This belief should be based on evidence or clear indications of omitted income.
Issuance of Notice: If the officer believes that there is income that has escaped assessment, a notice under Section 148 is issued to the taxpayer, asking them to file a return or revalidate their income.
Filing of Return: The taxpayer is supposed to file the return within the stipulated time in the said notice.
Assessment of the Return: The assessing officer assesses the return and may do further scrutiny, if he so desires.
Instances where Income Deemed to have Escaped Assessment
Following are the instances where income is deemed to have escaped assessment under the Income Tax Act:
Omission or Failure to File a Return: If a taxpayer fails to file an income tax return at all, and the assessing officer of the Income Tax Department is of the opinion that the taxpayer had taxable income, then the income for that year is considered to have escaped assessment.
Underreporting of Income: This is when a taxpayer has filed a return but has not disclosed some income sources or has reported less income than what was actually earned. For example, failure to disclose income from house rent or income from freelancing.
Failure to Disclose Fully and Truly All Material Facts: If during the original assessment, the taxpayer did not make a full disclosure of all the necessary facts required for assessment, and this omission led to incorrect or incomplete assessment, then the income in respect of such undisclosed facts is deemed to have escaped assessment.
Wrong Claim of Deductions and Exemptions: If the taxpayer has claimed deductions or exemptions to which they were not entitled, and these were mistakenly allowed by the assessing officer, then the excess relief granted results in income having escaped assessment.
Income not Considered by the Officer During Assessment: Sometimes, an assessing officer may overlook some pieces of information provided by the taxpayer, which should have been considered. If later found, the income pertaining to this oversight is deemed to have escaped assessment.
Assessment Made at a Lower Rate: If the income was assessed but, due to an error, it was taxed at a lower rate than was applicable, the difference in tax is also considered to be income that has escaped assessment.
Discovery of new facts or information: If the Income Tax Department comes into possession of any new information indicating income not properly reported after the assessment is complete, then such income is deemed to have escaped assessment.
Suppression of investment or assets: Discovery of investments not reported or undisclosed assets that indicate the likelihood of unreported income that could be associated with such investments or assets.
Procedure for Reassessment under Section 147
Section 147 of the Income Tax Act provides that the reassessment procedure shall be followed so that there may not be any income that might have escaped assessment in a tax return previously filed. This procedure allows the tax authorities to ensure that all taxable income is properly assessed and taxed. Here is a step-by-step guide to the reassessment procedure under Section 147:
Identification of Income Escaping Assessment: The process begins when the Assessing Officer has a reason to believe that any income chargeable to tax has escaped assessment. This belief must be based on concrete evidence or information that comes to the notice of the AO after the original assessment.
Recording of Reasons: Before issuing a notice under Section 148, the AO is required to record reasons in writing for initiating the reassessment proceedings. This documentation is crucial and must be robust enough to justify the reopening of the assessment.
Sanction from Higher Authority: In cases where the reassessment is for a tax period older than 4 years, the AO needs to obtain approval from a senior official (usually the Commissioner of Income Tax) before issuing the notice under Section 148.
Issue of Notice: Once the reasons are recorded and the necessary approvals are obtained, the AO issues a notice to the taxpayer under Section 148. This notice serves as an intimation to the taxpayer that their case is being reopened for reassessment. The taxpayer is required to file a return within the time specified in the notice, which is typically 30 days but can be extended at the AO's discretion.
Filing of Return by Taxpayer: The taxpayer must file a return within the specified time. This return should address any discrepancies noted by the AO and include any income that was omitted in the original assessment.
Assessment: After the return is filed, the AO examines the return and the evidence that has been submitted by the taxpayer. He can ask for further documentary evidence, details, or clarification required.
Draft Assessment Order: If the AO decides that additional tax is payable after making such examination of the return and the supporting documents, a draft assessment order is drawn. This draft is usually sent to an internal team or the senior officer for review.
Show Cause Notice: Before finalizing the reassessment, a show cause notice is issued to the taxpayer and gives him the right to clarify why, according to the taxpayer, the assessment should not be adjusted as proposed by the AO.
Hearing: A hearing is granted to the taxpayer so that he can present his case, offer his explanations, and also provide any extra evidence to prove that the findings of the AO are wrong.
Final Assessment Order: Based on the taxpayer's response and hearing, the AO passes a final assessment order. This order details the income that is deemed to have escaped assessment and resultant tax liabilities, along with interest and penalty.
Appeal: The taxpayer shall have the right to appeal against the order of reassessment. The appeal shall be filed within the prescribed time limits, usually within 30 days of receipt of the reassessment order.
Rights and Remedies for Taxpayers
In cases of a reassessment under Section 147 of the Income Tax Act, several legal remedies are available to the taxpayers, and there are quite a number of rights that enable the taxpayers to challenge the decisions made by the tax authorities. The details of the options available for objections and appeals, and of the importance of legal precedents in guiding these procedures, are as follows:
Filing of Objections:
Against the Issuance of Notice: The taxpayer is allowed to object to the issuance of a notice under Section 148 if he believes that the same is not justified. The ground of such objection should be that the prerequisites for the issuance of the notice have not been satisfied, meaning no proper "reason to believe" on the part of the AO.
Against the Assessment Order: After the reassessment order is issued, taxpayers have the right to file objections in case of any disagreeable findings. This is done when responding to the show cause notice, where the case is presented during the hearing.
Appeal to the Commissioner of Income Tax (Appeals):
Taxpayers can file an appeal to the Commissioner of Income Tax (Appeals) within 30 days from the date of the final reassessment order. The appeal is supposed to specify the grounds against the reassessment and give the basis for the same, along with relevant documents and evidence.
The Commissioner may confirm, decrease, increase, or set aside the reassessment. The said decision is made on the basis of complete review of the submissions and the hearing.
Further Appeal to ITAT:
In the case of dissatisfaction with the Commissioner of Income Tax (Appeals) decision, a further appeal could be made by the taxpayer to the ITAT. This appeal would have to be made again within the fixed time limit from the date of receipt of the Commissioner's decision.
The ITAT is a quasi-judicial authority, which will examine the case in detail and issue an order that can be in favor of either the taxpayer or the Income Tax Department.
Other Legal Remedies:
Guidance from Higher Courts: Several high courts and Supreme Court judgments have been delivered explaining and interpreting the provisions of Section 147. These judgments set precedents that guide not only the taxpayers but also the tax authorities on the application of this section.
Notable Cases: Key cases that impinge on the meaning of "reason to believe" and the validity of reasons recorded for reassessment, or even relating to the procedural requirement, have been fundamental in determining the enforcement of Section 147.
Effect of Legal Case Laws: Legal case laws ensure protection for the rights of taxpayers against incorrect claims by the taxing authorities. The legal case law gives the framework in which the provisions of the Income Tax Act must operate, thus ensuring consistency and fairness in legal interpretation.
Compliance Tips for Taxpayers
Following are some practical compliance tips for taxpayers to help minimize the risk of complications and safeguard against potential reassessment:
Detailed Documentation: Keep comprehensive records of all income, deductions, and credits. This includes bank statements, invoices, receipts, books of account, and any documents related to income or expenses.
Separate Personal and Business Finances: For those who run a business or practice a profession, it's essential to maintain a clear distinction between personal and business transactions to simplify record-keeping and tax reporting.
Regular Updates: Update your books regularly. This habit ensures that all transactions are recorded timely and accurately, reducing the chance of errors or omissions.
Digitize Records: Utilize accounting software or cloud-based systems to keep digital records of all financial transactions. Digital records are easier to manage, search, and are less susceptible to physical damage.
Preserve Records for the Required Period: As per tax laws, you should keep all tax-related documents for at least 6 years after the relevant assessment year, as this is the period within which your return can be reassessed.
FAQ
Q1. What leads to a reassessment under Section 147?
Reassessment under Section 147 is often caused if the Assessing Officer has a reason to believe that some income chargeable to tax has escaped assessment. This belief should be based on tangible evidence or information that comes to their notice after the initial assessment.
Q2. Can the taxpayer get information on why their case is being reassessed under Section 147?
Yes, the taxpayer has the right to know the reasons for reassessment. The Assessing Officer is required to provide the reasons in writing in case a request is made by the taxpayer.
Q3. What is the time limit for issuing a notice under Section 147?
A notice under Section 147 can be issued within 4 years from the end of the relevant assessment year, unless there has been a failure on the part of the taxpayer to disclose fully and truly all material facts, in which case the time limit may extend up to 6 years.
Q4. What should I do upon receiving a notice under Section 148 for reassessment?
If the notice under Section 148 has been received, then you should file the return as required within the time specified, generally within a period of 30 days. However, it is advisable to consult with a tax professional to ensure the proper handling of the case.
Q5. Can I object to the reassessment under Section 147?
Yes, an objection to reassessment by the taxpayer can be raised if the reassessment is thought to be unjust. First, objections can be raised during the reassessment proceedings. Further appeals can be made to higher authorities in case of dissatisfaction with the results.
Q6. What happens if I do not comply with the notice under Section 148?
If the notice under Section 148 is not complied with, then the Assessing Officer will do the assessment based on the best judgment, which may increase the tax liability, adding penalties and interest.
Q7. How can I avoid my income being considered as having escaped assessment?
Disclose all your taxable income and material facts properly and truly during your original tax filings. Ensure maintaining and producing full and proper records and documents during assessments.
Q8. Is there any protection against arbitrary reassessment under Section 147?
Yes, reassessments under Section 147 are not arbitrary. The AO has to have a valid "reason to believe" based on evidence that income has escaped assessment. Taxpayers have a right to appeal against the reassessment.
Q9. Can reassessment under Section 147 result in a refund?
Yes, if reassessment shows that the initial tax paid is high, then a refund is allowed.
Q10. What legal recourse do I have in case I disagree with the reassessment order?
If you disagree with the reassessment order, you can file an appeal with the Commissioner of Income Tax (Appeals) and may further appeal to the Income Tax Appellate Tribunal if needed.
