New Scheme of Reassessment – Good Intent, Faulty Implementation

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new scheme of reassessment

Sachin Garg & Sidharth Sipani – [2022] 139 taxmann.com 181 (Article)

The Government introduced the new scheme of reassessment vide Finance Act, 2021 by amending sections 147 to 151 of the Income Tax Act, 1961 (‘the Act’) with effect from 01 April 2021.

The scheme was introduced by the Government with an intent to remove the difficulties and ambiguities in the existing scheme thereby resulting in reduced disputes and litigation. The scheme was supposed to provide ease of doing business to taxpayers in India. However, considering the recent implementation of the scheme by the Revenue and litigation arising there from, it seems that the intention of the Government has not been achieved.

To set right the context, some of the key features of the scheme have been highlighted below:

    • The scheme provides that no notice under section 148 of the Act should be issued without following the procedure laid down in section 148A of the Act.
    • Introduction of Section 148A can be considered as a historical step by the Government as its object is to simplify tax administration, ease compliance and reduce litigation. Section 148A casts an obligation on the Assessing Officer with the approval of the specified authority to conduct an enquiry and issue show cause notice to the taxpayer as to why notice under section 148 of the Act should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment.
    • The taxpayer is supposed to file its response within the stipulated time limit provided in the notice which cannot be less than 7 days and more than 30 days from the date on which notice is issued. Also, in case, an extension is required, the Assessing Officer has been authorized by the provisions to grant such extension on an application by taxpayer.
    • On receiving the written response from the taxpayer, the Assessing Officer is supposed to pass a reasoned and speaking order considering such response and the material available on record whether the case is fit for issuance of notice under section 148 of the Act.

Although, the scheme was introduced to provide ease of business and peace of mind for taxpayers, its implementation by the Revenue has resulted in the contrary. The same is evident from the recent judgments of High Courts in writ petitions filed by the taxpayers against the orders passed under section 148A of the Act. The taxpayers have alleged that the notice and orders passed under section 148A of the Act by the Assessing Officers are in complete violation of principle of natural justice and against the objective and intent of the new scheme. The taxpayers also alleged that the process of taking approval from the specified authorities is mechanical in nature wherein the approval is being granted without verification of details and application of mind.

The division bench of the Hon’ble Delhi High Court recently in the case of Divya Capital One (P.) Ltd. v. Asstt. CIT [W.P.(C) 7406 of 2022, dated 12-5-2022] pronounced its judgment on the new scheme. Some of the key observations of the High Court which may act as guiding principles for the Revenue are as under:

i. New reassessment scheme was introduced with the intent of reducing litigation and promoting ease of doing business. In fact, the legislature brought in safeguards in accordance with the judgment of the Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19 (SC) before any exercise of jurisdiction to initiate reassessment proceedings under section 148 of the Act.
ii. The term ‘information’ in Explanation 1 to section 148 cannot be lightly resorted to so as to re-open assessment. This information cannot be aground to give unbridled powers to the Revenue.
iii. 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 classifies a fact already on record as “information” may vest it with the power to issue a show cause notice under Section 148A but would certainly not vest it with the power to issue a reassessment notice under Section 148 post an order under Section 148A.
iv. The Assessing Officer is required to conduct an enquiry under section 148A and thoroughly scrutinize the information, contentions and submissions advanced by the taxpayer before passing an order under the said section.
v. The Assessing Officer is required to share the information on record forming basis of issuance of notice under section 148A of the Act with the taxpayer. The non-sharing of information is violative of the rationale behind the judgment of the Delhi High Court in Sabh Infrastructure Ltd. v. Asst. CIT [2018] 99 taxmann.com 409/398 ITR 198.
vi. The Assessing Officer is required to provide adequate time to the taxpayer to file the reply. Section 148A permits the Assessing Officer to suo-moto provide upto 30 days to a taxpayer to respond to the show cause notice which may be further extended upon an application made by the taxpayer in this behalf. The order should not be passed in haste and complete violation of natural justice.
vii. The Assessing Officer must consider the reply filed by the taxpayer before passing order under section148A of the Act. Section 148A casts a duty on the Assessing Officer to consider the reply of the taxpayer by using the expression ‘shall’. Further, the Delhi High Court in the case of Fena (P.) Ltd. v. ACIT, Circle 7(1) & Anr In W.P.(C) 6553/2022 had also quashed the order passed under section 148A of the Act where Assessing Officer had not taken into consideration the replies along with the documents/evidences filed by the taxpayer before passing the order under section 148A of the Act.

Most important observation made by the Delhi High Court on revenue’s template-based approach for rejecting taxpayer’s reply and passing orders under section 148A of the Act

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