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Section 147 of the Income Tax Act: Income Escaping Assessment and Reassessment

Updated: Oct 3

Section 147 of the Income Tax Act empowers the Income Tax Department to reassess and recompute a taxpayer’s income if it has “escaped assessment,” either through non-reporting or under-reporting of income. This provision ensures that any undisclosed or misreported income is taxed appropriately. It acts as a corrective mechanism for past assessments, allowing the tax authorities to revisit and rectify discrepancies while maintaining fairness in the tax system. Understanding this section is crucial for both taxpayers and tax professionals.

Table of content

Section 147 of the Income Tax Act

Key Terms in Section 147

Types of Assessments

Key Amendments to Section 147 (Finance Act 2021 & 2022)

Reassessment Procedure Under Section 147

Rights and Remedies for Taxpayers

Conclusion

Most Asked Questions

Section 147 of the Income Tax Act

Section 147 empowers the Assessing Officer (AO) to reassess or re-compute income that was not initially reported to the authorities. It acts as a corrective tool to address errors or omissions in prior assessments and ensures that all taxpayers declare the correct amount of income. The AO must follow procedures outlined in this section and consider other related sections while conducting reassessments, making the process structured and just.

Key Terms in Section 147

Understanding the terms "income escaping assessment," "assessment," and "reassessment" is key to comprehending the reassessment process under Section 147:

Income Escaping Assessment (IEA)

Income escaping assessment refers to instances where a taxpayer has not reported some income or has underreported it in their Income Tax Return (ITR). This can happen due to:

Undisclosed Income: When taxpayers fail to declare their full income, either intentionally or due to a misunderstanding of tax rules.

Misreported Income: Underreporting of income due to errors in calculation or intentional misreporting.

Excessive Deductions and Reliefs: Taxpayers claiming more deductions or reliefs than permitted under the law.

Incorrect Assessment: When the tax authorities make errors during the initial assessment.

Both taxpayer errors and incorrect assessments by tax officials can result in income escaping taxation, which is then rectified under Section 147.

Assessment and Reassessment
- Assessment: This is the process of determining a taxpayer’s tax liability based on their reported income. Tax authorities validate the information provided by taxpayers to ensure taxes are calculated and paid correctly.
- Reassessment: When the AO identifies unreported or underreported income, a reassessment is conducted. This happens when there are indications that the taxpayer has not disclosed all sources of income or when errors occur in the original assessment.

Types of Assessments

There are various types of assessments under the Income Tax Act, and Section 147 deals specifically with reassessments. However, understanding the overall assessment process is important:

Self-Assessment: Taxpayers calculate their tax liability and file their ITR. This process is referred to as self-assessment.
Preliminary Assessment: The Income Tax Department reviews the ITR for obvious errors or discrepancies after the taxpayer submits it.
Regular Assessment: A detailed examination of the return by the authorities to ensure all income has been reported.
Special Assessment: Conducted under specific circumstances, such as reassessment due to income escaping assessment or after a search operation.

Key Amendments to Section 147 (Finance Act 2021 & 2022)

Finance Act 2021 introduced significant changes to Section 147, including procedural updates to reassessments and the introduction of Section 148A. The amendments reduced the time limit for reopening assessments to four years in most cases, while allowing for reassessment up to 10 years if income exceeding INR 50 lakh has escaped assessment.

Section 148A: This section ensures that the AO must conduct an inquiry and give the taxpayer a chance to respond before issuing a notice for reassessment.

Removal of Discretion: Earlier, reassessment was based on the AO’s "reason to believe" that income had escaped assessment. Now, reassessments are based on concrete information, ensuring transparency and reducing subjectivity.

Finance Act 2022 further shortened the time limits for completing assessments and reassessments, aiming for quicker resolution and minimizing delays.

Reassessment Procedure Under Section 147

The reassessment process under Section 147 involves several key steps:

Identifying Escaped Income: The AO identifies unreported or underreported income in the taxpayer’s ITR.
Issuance of Notice (Section 148): A notice is issued to the taxpayer, informing them of the reassessment process.
Filing of Revised Return: The taxpayer responds by filing a revised return to address discrepancies or omissions.
Assessment by the AO: The AO examines the revised return, requests additional information if necessary, and prepares an assessment order.
Final Order and Appeal: If additional tax is due, a final assessment order is issued. The taxpayer has the right to appeal the decision.

Related Provisions: Sections 148 to 153

Section 148: Governs the issuance of notice for reassessment.
Section 148A: Ensures taxpayers are heard before reassessment is initiated.
Section 149: Specifies time limits for issuing notices.
Section 151: Lays down the approval process for reassessment.

Rights and Remedies for Taxpayers

Taxpayers have several rights during the reassessment process, including the right to:

Object to the Notice: If they believe the reassessment notice is unjustified, taxpayers can raise objections within 30 days.

Appeal to Higher Authorities: Taxpayers can appeal reassessment orders to the Commissioner of Income Tax (Appeals) or the Income Tax Appellate Tribunal (ITAT).

Legal Recourse: Taxpayers may approach courts if they believe reassessment orders are unfair or illegal.

Conclusion

Section 147 of the Income Tax Act is a vital tool for ensuring accurate tax reporting and addressing income that escapes assessment. With recent amendments making the reassessment process more transparent and streamlined, it balances the need for tax compliance with the taxpayer’s right to be heard. Understanding the reassessment process and related provisions is essential for both taxpayers and tax professionals, ensuring adherence to tax laws while protecting taxpayer rights.

FAQ

Q1. What is Section 147 of the Income Tax Act?

Section 147 allows the Income Tax Department to reassess a taxpayer’s income if it has escaped assessment due to non-reporting or misreporting.

Q2. What does "income escaping assessment" mean?

It refers to any taxable income that was not reported or was underreported in the original Income Tax Return (ITR).

Q3. Who can be reassessed under Section 147?

Any taxpayer, including individuals, businesses, and corporations, can be reassessed if the AO believes their income has escaped assessment.

Q4. What triggers a reassessment under Section 147?

A reassessment can be triggered by new information, errors in the original assessment, or instances of undisclosed income.

Q5. How is a taxpayer notified of reassessment under Section 147?

The Assessing Officer (AO) issues a notice under Section 148, informing the taxpayer that reassessment is initiated.

Q6. What is the time limit for reassessment under Section 147?

Generally, a reassessment can be initiated within four years from the end of the relevant assessment year. However, if income exceeding INR 50 lakh has escaped, this period extends to 10 years.

Q7. Can a taxpayer appeal a reassessment?

Yes, the taxpayer can appeal the reassessment order to the Commissioner of Income Tax (Appeals) and further to the Income Tax Appellate Tribunal (ITAT).