Articles

Executive Summary: In this Article, the author Shri Mayank Mohanka, FCA has tried to address all crucial yet lesser talked about issues in respect of the substituted new reassessment regime, like what is the meaning of the expression, "Information in possession, as per the Risk Managment Strategy of CBDT", the current litigative trends in the new reassessment regime, present day tendency of circumvention of the reduced limitation period of three years, by the revenue authorities and the Legislative Intent vs. Ground Level Implementation of the substituted provisions of the new reassessment regime. 

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The Finance Act 2021, has substituted the old re-assessment regime with a new re-assessment regime, w.e.f. 1.4.2021, by substituting the then existing sections 147-151, containing the legislative provisions for income-escaping assessments, with the corresponding new sections.

The Memorandum explaining the provisions of the Finance Bill 2021, provides the undermentioned rationale and objective of such substitution:

“The Bill proposes a completely new procedure of assessment of such cases. It is expected that the new system would result in less litigation and would provide ease of doing business to taxpayers as there is a reduction in time limit by which a notice for assessment or reassessment or re-computation can be issued.”

Incidentally, the hon’ble Supreme Court in its recent judgement in the case of ‘Union of India vs. Ashish Agarwal’ [2022] 138 taxmann.com 64, dated 4.5.2022, while adjudicating upon the validity of reassessment notices, issued under pre-amended section 148 of the Income Tax Act, has also observed, as under:

“However, for several reasons, the same gave rise to numerous litigations and the reopening were challenged inter alia, on the grounds such as (1) no valid “reason to believe” (2) no tangible/reliable material/information in possession of the assessing officer leading to formation of belief that income has escaped assessment, (3) no enquiry being conducted by the assessing officer prior to the issuance of notice; and reopening is based on change of opinion of the assessing officer and (4) lastly the mandatory procedure laid down by this Court in the case of GKN Driveshafts (India) Ltd. Vs. Income Tax Officer and ors; (2003) 1 SCC 72, has not been followed.”

Further pre­Finance Act, 2021, the reopening was permissible for a maximum period up to six years and in some cases beyond even six years leading to uncertainty for a considerable time. Therefore, Parliament thought it fit to amend the Income Tax Act to simplify the tax administration, ease compliances and reduce litigation. Therefore, with a view to achieve the said object, by the Finance Act, 2021, sections 147 to 149 and section 151 have been substituted.”

Substitution of “Reason to Believe” by “Information in Possession”

It is imperative to mention here that in the pre-amended re-assessment regime, applicable uptill 31.3.2021, the formation of reason to believe by the jurisdictional assessing officer that any income of the assessee, has escaped assessment, was a compulsory condition, in order to render legality to the assumption of jurisdiction by such jurisdictional assessing officer u/s 147/148 of the Income Tax Act.

Further, the well settled legal position, emerging out of time-tested legal jurisprudence of almost six decades, arising out of numerous judgments of the hon’ble Supreme Court and the hon’ble High Courts, was that the jurisdictional assessing authority, must itself form such a reason to believe and must itself be satisfied about escapement of income. Reopening, solely on the basis of some borrowed information and some borrowed satisfaction without conducting any independent enquiry by the assessing authority itself, was a complete nullity in the eyes of law and was void ab initio.

Some of such binding judicial pronouncements of the Hon’ble Supreme Court and the Hon’ble High Courts are cited as under:

(i)        Johri Lal (HUF) vs. CIT, 88 ITR 439 (SC).

(ii)       Sheo Nath Singh vs. AAC, 82 ITR 147 (SC).

(iii)      Ganga Saran & Sons (P) Ltd. vs. ITO, 130 ITR 1 (SC).

(iv)      ITO vs. Lakhmani Mewal Das, 103 ITR 437(SC).

(v)       Commissioner of Income Tax v. G&G Pharma (2015) 384 ITR 147 (Del.)

(vi)      CIT vs Insecticides India Ltd 357 ITR 330, Delhi High Court;

(vii)     CIT vs SFIL Stock Broking Ltd 325 ITR 285, Delhi High Court;

(viii)    Sarthak Securities Co. (P) Ltd vs ITO, 329 ITR 110, Delhi High Court;

(ix)      PCIT vs RMG PolyVinyl (I) Ltd Delhi High Court;

(x)       Oriental Insurance Company Limited v. Commissioner of Income Tax 378 ITR 421 (Del)

In this new re-assessment regime, applicable w.e.f. 1.4.2021, as per Finance Act, 2021, this well-settled and established legal position in respect of mandatory condition of formation of an independent reason to believe, of escapement of income, by the jurisdictional assessing officer, has been replaced with the possession of a 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, with a perceived view and objective of reducing litigations and tussles in the reassessment regime.

Meaning of the term “Information” As per Finance Act 2021

The information with the Assessing Officer is defined under Explanation 1 to section 148 as under:

 i.   any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time;

 ii.   any final objection raised by the Comptroller and Auditor General of India to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act.

Expansion in Scope of the term “Information” by Finance Act 2022

It is pertinent to mention here that the Finance Act 2022 has expanded the meaning and scope of the term ‘Information’, w.e.f. 1.4.2022.

As per amended Explanation 1 to Section 148, “Information” means:

• any information in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time;

• any audit objection to the effect assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act; or

• any information received under an agreement referred to in section 90 or section 90A of the Act; or

• any information made available to the Assessing Officer under the scheme notified under section 135A; or

• any information which requires action in consequence of the order of a Tribunal or a Court.

Thus, w.e.f. 1.4.2021, any Notice u/s 148 of the Act, for reopening the already concluded assessments can be issued, if the assessing authority has any information, within the above defined meaning as per Explanation 1 to section 148, in its possession, suggesting that any income of the assessee has escaped assessment.

Therefore, prima-facie, it appears, that what was impermissible in the pre-amended reassessment regime uptill 31.3.2021, i.e., reopening on the basis of borrowed information and borrowed satisfaction, has in fact, now been made the pre-condition for such reopening.

This is because, the condition of presence of any information as per the risk management strategy of CBDT, is nothing but a borrowed information, in the hands of the assessing authority.

However, in all its fairness to the law-makers, in the amended re-assessment regime, also, after having any such information as per the risk management strategy of CBDT, in its possession, suggesting any escapement of income, the assessing authority is mandatorily required to comply with the requirements of a newly inserted section 148A of the Income Tax Act, applicable w.e.f. 1.4.2021.

Conducting enquiry, providing opportunity before issue of Notice u/s 148 [Section 148A, applicable w.e.f. 1.4.2021]

In the new reassessment regime, the procedure to be completed by the assessing authority, before issuing Notice u/s 148, as mandated in the landmark decision of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO 259 ITR  19 (SC), has been included in the statute, itself, by way of insertion of a new section 148A, w.e.f. 1.4.20201.

In new reassessment regime, the procedure of recording of reasons for reopening, getting approval of the competent income tax authority and supply of the said reasons to the assessee, has been incorporated in section 148A of the Income Tax Act.

Under section 148A, before issuing Notice u/s 148, the AO is required to carry out enquiries, after taking the prior approval of the competent income tax authority, and issue a show cause notice to the assessee u/s 148A(b), that it is a fit case to issue Notice u/s 148. The AO is then required to pass a speaking order, taking into consideration the replies and submissions of the respective assessees, within one month, with the approval of the competent income tax authority, u/s 148A(d), before issuing Notice u/s 148 of the Act.

Limitation Period for Issuance of Notice u/s 148 [Section 149 as amended by Finance Act 2021]

The amended limitation periods for issuance of Reassessment Notice u/s 148 as per the Finance Act 2021, applicable w.e.f. 1.4.2021, are discussed as under:

Section 149(1)(a): Notice u/s 148 is to be issued within 3 years from the end of the relevant assessment year, if the alleged escaped income is less than Rs. 50 lakhs in an assessment year. However, there is an exception to this limitation period of 3 years as contained in section 149(1)(b).

Section 149(1)(b): Notice for reassessment u/s 148 can be issued after three years and uptill ten years, if the assessing authority, has in its possession, books of accounts/documents/evidence which reveal that income chargeable to tax, exceeding fifty lakh rupees, in an assessment year, represented in form of an asset, has escaped assessment.

The First Proviso to Section 149 of the Income Tax Act, also carves out an exception to the above specified limitation periods u/s 149 as under:

It reads as under:

“Provided that no notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of this section, as they stood immediately before the commencement of the Finance Act, 2021.”

Legislative Intent vs. Ground Level Implementation

Though, the legislative intent for bringing in these amendments in the re-assessment regime, by the Finance Act, 2021, was to reduce litigations, and to provide certainty to the finality and conclusiveness of the already concluded assessments, but, at the ground-level, the recent litigative trends, in respect of this new-reassessment regime, are conveying an altogether different and opposite story.

At this juncture, it is essential to discuss a very recent judgement of the Hon’ble Delhi High Court, in the case of ‘Divya Capital One Private Limited vs. ACIT Circle 7(1) Delhi’, in W.P.(C) 7406/2022 dated 12th May 2022.

In this case, the assessing authority has contended that it was having information in its possession, as per the risk management strategy of CBDT, that income amounting to more than Rs. 1 lakh crore, has escaped assessment in the hands of the petitioner assessee. In the show cause notice u/s 148A(b) of the Act, a table was provided, which captured the list of transactions entered into by the petitioner such as purchase of shares, sale of futures, sale of shares, purchase of mutual funds, sale of options, etc. The total of such table was Rs.10,07,05,88,04,543

In response, the petitioner assessee has contended that the petitioner was a member of National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) and these transactions were routine transactions carried out in the ordinary course of business of the petitioner considering the fact that the petitioner was carrying business of share brokers, depository participant and investment in securities and trade in derivatives. Further, all these transactions were duly accounted for in the profit and loss account and return filed by the petitioner.

Thus, in this case, this so-called information, in the possession of the assessing authority, as per the risk management strategy of CBDT, was actually pertaining to the gross turnover of the assessee, in securities and derivative market transactions, duly and fully, disclosed and accounted for by the assessee in its return of income, and was fully supported by the corresponding documentary evidences, and the disclosure and KYC requirements of the respective recognised stock exchange. The assessee further contended that in such kind of derivative transactions, what was taxable was the net profit on such gross turnover and which has already been accounted in full by the assessee in its return of income.

However, the assessing authority somehow, ignored and disregarded, all such factual submissions of the assessee and proceeded with issuing an order under section 148A(d) of the Act, followed by the corresponding Reassessment Notice u/s 148 of the Act, on exactly the same lines of escapement of income of Rs. 1 lakh crore, and thereby reducing the so-called ‘adequate safeguard checks’ in section 148A of the Act, to merely an empty formality and a ritual.

It was at this juncture that the assessee has filed a writ petition before the hon’ble Delhi High Court, to prevent such kind of high-handed approach of the revenue authorities, and the hon’ble Delhi High Court, after comprehensively examining all the factual aspects of the case, has in clear, unambiguous and categorical manner, observed and held as under:

“8. This Court is further of the view that under the amended provisions, the term “information” in Explanation 1 to Section 148 cannot be lightly resorted to so as to re-open assessment. This information cannot be a ground to give unbridled powers to the Revenue. Whether it is “information to suggest” under amended law or “reason to believe” under erstwhile law the benchmark of “escapement of income chargeable to tax” still remains the primary condition to be satisfied before invoking powers under Section 147 of the Act. Merely because the Revenue-respondent classifies a fact already on record as “information” may vest it with the power to issue a notice of re-assessment under Section 148A(b) but would certainly not vest it with the power to issue a re-assessment notice under Section 148 post an order under Section 148A(d)."

……

16. This Court is of the opinion that significance of issuance of a show cause notice at a stage prior to issuance of a reassessment notice under Section 148 of the Act has been lost on the Respondents. This Court takes judicial notice that in a majority of reassessment cases post 1st April, 2021, the orders under Section 148A(d) of the Act use a template/general reason to reject the defence of the assessee on merits, namely, “found devoid of any merit because the assessee company has failed to produce the relevant documents in respect of transactions mentioned in show cause notice it is established that the assessee has no proper explanation……” Consequently, this Court is of the opinion that a progressive as well as futuristic scheme of re-assessment whose intent is laudatory, has in its implementation, not only been rendered nugatory but has also had an unintended opposite result. [Emphasis Supplied].

Finally, the hon’ble Delhi High Court quashed the impugned Order u/s 148A(d) and the corresponding Reassessment Notice u/s 148 of the Act, and remanded the matter back to the AO, to pass a fresh reasoned order u/s 148A(d) of the Act, after taking full cognizance of the assessee’s submissions.

The Hon’ble Delhi High Court has also directed to forward a copy of this Order to CBDT for necessary information and action.

In similar recent judgement in the case of ‘Fena Pvt Ltd vs ACIT Delhi’, in W.P.(C) No. 6553/2022, the hon’ble Delhi High Court has quashed the preliminary order u/s 148A(d) on similar circumstances and facts.

Circumvention of the Reduced Limitation Period of 3 Years

It can easily be recollected that at the time of making the budget announcements concerning the amendments in the re-assessment regime, as per the Finance Bill 2021, the entire projection and hype, was focussed on the taxpayer friendly initiative of reduction of time period of reopening of assessments, from the earlier longer period of six years to a much-reduced period of three years.

However, only one year has gone by, since the said budget announcements, and we are seeing this widely prevailing tendency at the ground-level implementation, wherein the amount of alleged escaped income is deliberately show caused as in excess of Rs. 50 lakhs, even if the amount of actual transaction value is less than Rs. 50 lakhs, by the revenue authorities.

In a recent judgement in the case of ‘Sanjiwan Sahni vs. ITO’ in W.P.(C) 7119/2022, dated 10.5.2022, the hon’ble Delhi High Court has stayed the operation of the preliminary order u/s 148A(d) of the Act, on the plea of the petitioner that the entire reasoning and basis of information, has been assigned by the assessing authority, with the objective of somehow circumventing the bar of limitation of three years prescribed under section 149(1)(a) of the Act, and to bring the case of the petitioner within the extended time limit of 10 years emanating from section 149(1)(b) thereunder.

It is a widely known fact that in AIS/TIS of the taxpayers, the same transaction gets repeated a number of times. Uptill now, this was causing no practical problems to the taxpayers. But, currently this glitch in AIS/TIS or the wrong entries by the respective entities in their AIR Returns u/s 285BA are giving an easy leeway to the revenue authorities to invoke the 10 year period of reopening u/s 149(1)(b) as such repeat entries are quite often resulting in crossing the threshold limit of 50 lakhs. There are so many real-time instances where inspite of establishing the fact of actual transaction value of less than Rs. 50 lakhs and the wrong or repeated entries in AIS/TIS, Notices u/s 148A(b) are being issued and Orders are being passed u/s 148A(d), completely ignoring the factual replies of the assessees. So, the so-called ‘adequate safeguard provisions’ as contained in section 148A of the Act are currently appearing to be merely an eyewash and an empty ritual.

What is the Meaning of ‘Risk Management Strategy of CBDT?

Currently, no information or details are available in the public domain, in respect of the meaning and scope of the expression, “as per the risk management strategy of CBDT”.

In order to ensure transparency, in the manner of invoking of the power of reopening of the cases, an objective, clearly defined and a judicious criteria should be laid out by CBDT, so as to define in clear and unambiguous terms, as to which information can be covered within the meaning of risk-management strategy, and which can’t be covered. Clearly, in view of the legislative intent of reducing litigation and providing more certainty to the finality of already concluded assessments, the scope should not be left wide and ambiguous, to include each and every information, in the possession of the assessing authority, as an eligible criteria, as that would defeat the very basis and purpose of these legislative amendments.

It is pertinent to mention here that the recent Query Letter sent by the Income Tax Gazetted Officers Association to the CBDT, in the matter of implementation guidelines of the hon’ble Supreme Court judgement, in the case of Union of India vs. Ashish Agarwal, does throw some light on the scope and coverage of this expression of ‘risk management strategy of CBDT’.

In the said query letter, a specific and pinpointed query, concerning the limitations in the scope and coverage of the term’ information in possession as per the risk management strategy of CBDT’ have been highlighted as under:

“During the period from 01-04-2021 to 30-06-2021, notices were issued based on information from 4 sources, viz.: (i) from other AOs, (ii) from other agencies, (iii) from investigation wing and (iv) insight portal. Other than the information received from insight portal no other source qualify for the criterion of flagged in accordance with the risk management strategy. Will the AO proceed in these cases where information is not flagged in accordance with the risk management strategy?”

Thus, the said query being raised by the revenue officers from CBDT, itself makes it quite clear that out of the four sources of information, (i) from other AOs; (ii) from other agencies; (iii) from investigation wing and (iv) insight portal, only the fourth source of information, i.e. information as per insight portal qualifies for the criterion of flagged information as per the risk management strategy of CBDT.

Concluding Remarks:

Summing up the above analysis and discussion by requoting from the judgement of the Hon’ble Delhi High Court, in the case of ‘Divya Capital One Private Limited vs. ACIT’, that,

“This information cannot be a ground to give unbridled powers to the Revenue. Whether it is “information to suggest” under amended law or “reason to believe” under erstwhile law the benchmark of “escapement of income chargeable to tax” still remains the primary condition to be satisfied before invoking powers under Section 147 of the Act. Merely because the Revenue-respondent classifies a fact already on record as “information” may vest it with the power to issue a notice of re-assessment under Section 148A(b) but would certainly not vest it with the power to issue a re-assessment notice under Section 148 post an order under Section 148A(d). A progressive as well as futuristic scheme of re-assessment whose intent is laudatory, has in its implementation, not only been rendered nugatory but has also had an unintended opposite result.”

It needs to be understood and appreciated that not all taxpayers can approach the hon’ble High Courts and file their Writ Petitions, and the responsibility of the proper and lawful implementation of the amended provisions of sections 147-151, and especially section 148A and 148, of the Act, as per the Finance Act, 2021, can’t be left to the adjudication by the hon’ble High Courts, and it is the duty and responsibility of the concerned revenue authorities, to ensure complete adherence and compliance of the same, in order to reduce litigations and bring about ease of doing business in real and effective terms.

Note: This Article has been authored by our Founder Director, Shri Mayank Mohanka, FCA and has also been published in Taxmann with the citation [2022] 138 taxmann.com 361 (Article). For any related queries, the author can be reached at mayankmohanka@gmail.com