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CBDT Instruction Directs AOs to Form ‘Reason to Believe’

This Article penned down by our Founder Director Sh. Mayank Mohanka, FCA has been published in taxmann.com with the citation (2021) 125 taxmann.com 148 (Article). Knowledge multiplies manifold by sharing, so for the benefit of our Readers, this Article is being shared here also.

The Apex Regulatory Body for Direct Taxes in India i.e. CBDT has brought in an Instruction dated 4.3.2021 bearing F.No. 225/40/2021/ITA-II, regarding Selection of Cases for Issue of Notice u/s 148 of the Income Tax Act.

The said CBDT Instruction directs that the undermentioned categories of cases are to be considered as ‘potential cases’ for taking action u/s 148 of the Act by 31.3.2021 for the AY 2013-14 to AY 2017-18 by the Jurisdictional Assessing Officer (JAO):

i. Cases where there are Audit Objections (Revenue/Internal);

ii. Cases of information from any other Government Agency/Law Enforcement  

     Agency;

iii. Potential cases including:

(a) Reports of Directorate of Income-tax (Investigation),

(b) Reports of Directorate of Intelligence & Criminal Investigation,

(c) Cases from Non-Filer Management System (NMS) & other cases as flagged by the Directorate of Income-tax (Systems) as per risk profiling;

iv. Cases where information arising out of field survey action, requiring action u/s  

      148 of the Act.

v. Cases of information received from any Income-tax authority requiring action u/s 148 of the Act with the approval of Chief Commissioner of Income Tax concerned.

It has been further provided in the said CBDT Instruction that no other category of cases, except the above, shall be considered for taking action u/s 148 of the Act by the JAO.

It has also been clarified that these instructions shall not be applicable to the Central charges and International Taxation charges for which separate instructions are being issued.

Interestingly, the said CBDT Instruction also clarifies that action u/s 148 of the Act shall be taken by the Assessing Officer in respect of the above categories of cases after forming a reasonable belief that income chargeable to tax has escaped assessment and ‘reasons to believe’ shall be recorded and required sanction as per section 151 of the Act shall be obtained before issuing notice u/s 148 of the Act.

It is pertinent to mention here that amendments have been proposed in the Finance Bill 2021, to substitute the existing sections 147 and 148 of the Income Tax Act, to reduce the time period for reopening the already concluded assessments from existing 6 years to 3 years. However, where the escapement of income is suggested to be of Rs 50 lakhs or more in a financial year in the form of undisclosed asset, then the maximum time period for reopening the already concluded assessments is 10 years.

No doubt that the proposed reduction in time period for reopening of assessments from 6 years to 3 years is a welcome and appreciable initiative. However, the issue of concern is the fact that the existing mandatory condition of formation of an independent reason to believe by the assessing authority that income of the assessee has escaped assessment so as to assume lawful jurisdiction u/s 147, is proposed to be substituted with the presence of any flagged information as per the risk management strategy of CBDT or the final audit objection of C&AG, suggesting that income of the assessee has escaped assessment.

However, a further clarification is desirable from CBDT that whether all the present “information” generated in Annual Information Return (AIR) u/s 285BA of the Income tax Act like share transactions, mutual fund transactions, cash deposits, credit card transactions, foreign travel, purchase of immovable property etc. would be considered as the “flagged information” suggesting escapement of income, so as to warrant assumption of jurisdiction under the newly proposed sections 148 and 147. If that being so, then naturally these amendments are of a lot of concern and apprehension because in such cases, suspicion arising out of such flagged information will substitute the existing mandatory condition of formation of reason to believe by the assessing authority.

Also, the existing proviso to section 147 requiring the mandatory condition of failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessments for reopening the already concluded assessments beyond a period of 4 years and uptill 6 years, has found no place in the newly proposed section 147 and 148.

Further, the newly proposed section 148A, requiring the assessing authority to provide a suitable opportunity of being heard to the assessee and also mandating prior approval of the competent income tax authority before issuing notice u/s 148,  and as such being perceived by the Legislature as an adequate safeguard, authorises the assessing authority to proceed with the issuing of notice u/s 148 merely if he thinks it fit to do so and it nowhere requires the formation of an independent reason to believe by such assessing authority, of the escapement of income.

It has also been clarified in the Finance Bill 2021, that the notice under new section 148 can’t be issued at any time in a case for the relevant assessment year beginning on or before 1.4.2021, if such notice could not have been issued at that time, on account of being beyond the time limit of 6 years i.e. the time limit prescribed under the existing provisions of section 149(b), as it stood immediately before the proposed amendment.

In simple words, the time barring statutory deadline for issuing of notices under the old section 148 for the AYs 2013-14 to AY 2017-18 is 31.3.2021.

Concluding Remarks:

The Finance Bill 2021 has proposed to remove the existing mandatory requirement of formation of reason to believe, by the JAO, that the income of the assessee has escaped assessment, so as to assume lawful jurisdiction u/s 147/148 for undertaking income escaping assessments w.e.f. 1.4.2021.

The CBDT, for-seeing the possibility of non-formation of the mandatory ‘reason to believe’ by the JAO even for the Notices to be issued under old section 148 uptill 31.3.2021, have categorically stated and directed the JAOs to form the mandatory ‘reason to believe’ for the AYs 2013-14 to AY 2017-18, in its said Instruction.

Interestingly, CBDT, in the said Instruction, has first directed the JAOs to issue notice u/s 148 in all the above mentioned identifiable potential cases (covering almost all possible circumstances and cases), and having so directed, further directs the JAOs to form a ‘reason to believe’ that income has escaped assessment.

It is clearly evident that in order to ensure that such re-assessments are not being quashed subsequently in higher appellate forums, the JAOs are being reminded and spoon-fed to use this expression “I have reason to believe that income has escaped assessment”, while issuing notices u/s 148 for the AY 2013-14 to AY 2017-18, by the time barring deadline of 31.3.2021.

However, it needs to be appreciated that such ‘reason to believe’ by the JAO has to be formed independently by an independent application of his mind.  So, a direction to the JAO to form such ‘reason to believe’ in all the prescribed potential cases of income escaping assessments in the said Instruction, somehow contradicts the very basis of formation of an independent reason to believe by the JAO.

Lastly, it also needs to be appreciated that the proposed reduction in time period for reopening the assessments from the existing 6 years to 3 years has been projected and perceived as the tax-payer friendly measure, so, the current haste and eagerness of making the best use of this remaining limitation time period of issuing notices under the old section 148, uptill 31.3.2021, so as to be able to cover the six assessment years (and not just 3 assessment years), somehow again contradicts the legislative intent of reducing the time period for reopening the concluded assessments.

The said CBDT Instruction dated 4.3.2021 bearing F.No. 225/40/2021/ITA-II, regarding Selection of Cases for Issue of Notice u/s 148 of the Income Tax, for AY 2013-14 till AY 2017-18, can be readily accessed in the PDF file below.