Section 147 of the Income Tax Act, 1961: Guidelines

Section 147 of the income tax act has been introduced in order to provide a scope for reassessment or recomputation of income that might not have been reported to the regulatory authorities for several reasons. Basically meant to provide a corrective mechanism for errors in reporting of income, the act defines the powers and the duties of the Assessing Officer (AO) in terms of assessment or reassessment of income and the subsequent proceedings to be followed. A key point to note here is that section 147 of income tax act mentions several other sections that are to be followed by the Assessing Officer in conjunction with the core framework laid out in sec 147 of income tax act.Let us demystify the jargons and technicalities of section 147 of the Income tax act.

Getting the key concepts in place such as income escaping assessment, assessment, and reassessment provides the basic groundwork required to understand further details of section 147 of income tax act.

• Income escaping assessment (IEA) The term ‘income escaping assessment’ refers to income that has not been reported in the Income Tax Return (ITR) or assessed by the tax officials during a particular assessment year. There are a variety of reasons why an income may have escaped the assessment process - undisclosed income, misreported income, claim of excess deductions and relief, and incorrect assessment. The scenario of undisclosed income occurs when a resident Indian taxpayer fails to report a part of his income in his Income Tax Returns. This may arise due to intentional non-disclosure, incorrect understanding of taxation laws, or oversight. The case of misreported income arises when income is underreported due to computation errors or due to intentional reasons resulting in some income sources not being reported. There could be circumstances in which the income tax assessee claims reliefs and deductions over and above the permissible limit due to malafide intentions or due to a lack of understanding of taxation rules. The above reasons primarily concern the taxpayer but there could be a case where the income was reported correctly but there was an error in the assessment process. As a result, a taxpayer is liable to pay a lesser income tax.
• Assessment and reassessment Both these terms refer to the methodology of calculation and recalculation for assessing the correct tax liability for a resident taxpayer. Specifically, ‘assessment’ means the validation of a taxpayer’s Income Tax Return by the tax officials for determining the appropriate tax due. Reassessment is the recomputation of a taxpayer’s tax liability and is initiated by the Income Tax Department when there is a reason to believe that certain sources of income have escaped the tax assessment process. This can be initiated under several circumstances - when the taxpayer has has not disclosed a source of an income in his income tax return, when there is an error or a mistake on the part of income tax authorities or taxpayer in the assessment process, or when a tax return has not been filed by a taxpayer but it is believed that income has been generated which will attract taxes and other penalties due to non-reporting.

Also Read: Tax Deducted At Source: Meaning, Returns, Filing And Due Dates

• Categories While mentioning ‘assessments’, income tax section 147 essentially refers to several buckets of assessments such as self-assessment, preliminary assessment, regular assessment, and special assessment. An income earned in a financial year is self-assessed by a taxpayer in the following year called assessment year (AY). For example, when Mr. A earns an income of ₹20 lakh in FY 2021-22, he assesses the appropriate income, calculates the tax liability in an Income Tax Return in AY 2022-23, and subsequently pays the tax due. This process is called self-assessment. After this income is reported through self-assessment and the tax return filed, the Income Tax Department conducts basic checks and validation for calculation errors and incorrect claims without any in-depth scrutiny. This is referred to as preliminary assessment. Regular assessment happens after the taxpayer has filed his tax return and preliminary assessment. Here, the tax returns and supporting documents are verified by the tax official for ensuring that the income is reported correctly and the tax has been paid accordingly. Regular assessment is further subdivided into scrutiny assessment and best judgement assessment. Special assessment subsequently branches out into income escaping assessment under section 147 and assessment in continuation of search under sections 153(A) - 153(C).
• Examples It is likely that the income may not get assessed correctly during the initial stages of tax assessments either intentionally or unintentionally. If it comes to the attention of the Assessing Officer (AO) that an income on which tax would be due is missing from the tax returns, the Assessing Officer can reopen the tax assessment case for reassessing the individual income tax returns under sec 147 of income tax act. This reassessment can be done any number of times subject to the provisions of the income tax section 147. Theoretically, income from any source earned by a resident Indian taxpayer that has not been reported and assessed for income tax is deemed to have escaped tax assessment. For instance, if Mrs. D earns an income of ₹17 lakh in FY 2019-20 but declares an income of ₹15 lakh in her tax return in AY 2020-21, an income of ₹2 lakh has escaped assessment. In a similar fashion, Mr. K, if a proprietor earns ₹11 lakh in FY 2021-22 but does not report any income in AY 2022-23, then the entire income of ₹11 lakh has escaped assessment.In view of the above cases, section 147 of income tax act confers upon the Assessing Officer to reassess any income that has escaped assessment with a view to bringing in regulatory fairness. However, such reassessments might result in lengthy courtroom battles and therefore, several amendments have been and changes have been introduced to income tax section 147 for addressing such regulatory convolutions and concerns.

Sections 147 - 149 have been replaced with new sections 147, 148, 148(A), and 149 of the Income tax Act by the Finance Act 2021. Also, sections 153(A) - 153(C) have been subsumed under income tax section 147. A new section 148A stipulates that the Assessing Officer must conduct an inquiry and give the taxpayer an opportunity of being heard before issuing a notice. This is a significant step because it provides the Assessing Officer concrete and material facts through the reply of the taxpayer based on which the officer can decide whether to pursue reassessment procedures. Before this amendment, the Assessing Officer could recheck any assessment case if he had a reason to believe that the reported income had escaped assessment. After this amendment, the Assessing Officer needs to consider material facts and information instead of relying on judgement which removes any discretion and bias available to the Assessing Officer.

These amendments were specifically with regards to changing the time limits available for assessment, recomputation, and reassessment of taxes reported to the Income Tax Department. Up to AY 2017-18, the changed time limit for completion of assessment is within 21 months from the end of the Assessment Year in which income was first assessable. For AY 2018-19, AY 2019-20, AY 2020-21, AY 2021-22 onwards, the deadline for wrapping up the assessment procedure has been stipulated with 18 months, 12 months, 18 months, and 9 months respectively from the end of the Assessment Year in which income was first assessable.

As per section 147 of income tax act, the following process is to be followed by the Assessing Officer in the case of reassessment of income:

• Determining the income that has escaped assessment This process begins, when, during the regular assessment, the Assessing Officer comes to know of income that has not been reported in the income tax return, and therefore has escaped assessment. The reason to believe must be based on identifiable evidence recorded in a taxpayer’s income tax return. Generally, such reasons to believe would be discrepancies in the tax returns.
• Recording of evidence Material facts, representations, responses, and additional supporting evidence furnished by the taxpayer is to be recorded accurately by the Assessing Officer whether or not he has a reason to believe that the taxpayer’s income has escaped assessment. The written records must point towards the fact that there is sufficient evidence necessary for reopening the reassessment case.
• Approval from higher authority If the Assessing Officer has a reason to believe that an income has escaped assessment based on the responses of the taxpayer, he can proceed with the further investigation via issuing a notice to the taxpayer under section 148 by passing an order with prior approval from a higher authority.
• Issuance of notice After the necessary approvals are in place and material facts recorded, the Assessing Officer can issue a notice to the taxpayer under section 148. This notice serves the purpose of an intimation to a resident taxpayer that their case of reassessment is being reopened. Usually, a timeframe of 30 days is granted to the taxpayer to file a revised tax return.
• Filing of return In the revised return filed by the individual, specific concerns raised by the Assessing Officer must be addressed and unreported or misreported income in the original return should be included or rectified.
• Assessment by the Assessing Officer The Assessing Officer checks the revised return filed by the taxpayer. He can ask the taxpayer to furnish additional supporting evidence or clarification wherever necessary.
• Draft Assessment Order After examining the revised return and supporting materials provided by the taxpayer, if the Assessing Officer is of the view that there is an additional tax liability, then he creates a draft assessment order which is reviewed and approved internally by a higher official.
• Issuance of show cause notice The taxpayer is issued a show cause notice that gives him the right to clarify why the additional tax liability, as assessed by the Assessing Officer, should not be imposed on the taxpayer.
• Hearing A hearing is organised for the taxpayer before the tax officials so that he can present his case and offer his explanation along with supporting documents for buttressing his argument of why the revised tax liability assessed by the Assessing Officer is incorrect.
• Final Assessment Order After hearing out the taxpayer’s case, the Assessing Officer passes a final judgement of sorts known as the Final Assessment Order. The Final Assessment Order lists out the income that escaped assessment in the original return and the revised tax liability along with penalties (if any).
• Appeal by the taxpayer After the final assessment order is passed and received by the taxpayer, he has the right to appeal against the order before the tax authorities usually within a time limit of 30 days.

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Section 148 - 153 are closely related to section 147 of the Income tax act and together with section 147, they provide a detailed set of guidelines for implementing the reassessment of income tax. Section 148 mentions several points regarding the issuance of notice whenever the income has escaped assessment while section 148(A) protects the rights of the taxpayer by offering him the opportunity to be heard by the tax authorities. Section 148(B) and 151 establishes the appropriate approval matrix for passing reassessment and recomputation orders. Under section 149, a specific time limit of maximum three years after the relevant assessment year has been mandated post which no notice can be issued under section 148. An exception to the above rule is that a notice can be issued under section 148 up to 10 years after the relevant assessment year if the Assessing Officer has documentary evidence of an asset, expenditures, or books of accounts in his possession that point to income chargeable to tax. The scope of technological efficiency has been kept in mind while designing the guidelines and this reflects under section 151(A) which states that the Central Government may issues further directions regarding assessment, reassessment, computation, show cause notices, conducting inquiries, or passing of orders that reduce the face to face interaction between the tax authorities and the taxpayer, promote the optimisation of resources, and establish team-based assessments with a flexible jurisdiction. Section 152 clarifies that the tax liability will be computed on rates at which it would have been originally computed had the income not escaped assessment.Reassessment of income is a complex process involving several rounds of clarification sought from a taxpayer. In order to understand income tax section 147, the taxpayer can visit the website of the Income Tax Department as well as consult a tax professional for better advice.Ready to make the most of your money? Start your tax planning journey now!