Assessment and Reassessment u/s 148 and Block Assessment u/s 132 & 132A: Reforms Under the Finance (No. 2) Bill, 2024

The Finance Act, 2021 introduced significant amendments to sections 153A and 153C of the Income Tax Act. These provisions, effective for search and seizure proceedings initiated on or before March 31, 2021, have now been modified. The amendments eliminate the separate regime for search assessments, integrating them into the broader reassessment provisions. This article provides a detailed overview of these changes, focusing on their implications for search and seizure operations.

Changes Introduced by the Finance Act, 2021

The primary change is that sections 147, 148, 149, 151, and 151A now stipulate that for searches, surveys, or requisitions initiated on or after April 1, 2021, it will be assumed that the Assessing Officer (AO) has information suggesting that the income chargeable to tax has escaped assessment for the three assessment years preceding the year of the search or requisition. Additionally, if the AO identifies income represented as assets amounting to fifty lakh rupees or more, a notice under section 148 can be issued within ten years from the relevant assessment year.

Issues with the Current Scheme

Search operations by the Income-tax Department are crucial for uncovering black money. However, the current assessment scheme under section 148 has led to several complications:

• Absence of Consolidated Assessments: The lack of a requirement for consolidated assessments results in reopening only the time-barring year, leading to staggered assessments that can extend over ten years.

• Increased Litigation and Costs: The prolonged process escalates litigation costs for both taxpayers and the department, with changing legal positions potentially leading to inconsistent additions over different years.

• Challenges in Coordinated Investigation: Staggered assessments hinder coordinated investigations, affecting the efficiency of search operations.

Proposed Scheme of Block Assessment

To address these issues, a new scheme of block assessment is proposed for searches initiated under section 132 or requisitions under section 132A. The objectives are to finalize search assessments early, enable coordinated investigations, and reduce the multiplicity of proceedings.

Key Provisions of the Proposed Block Assessment Scheme

1. Scope: Effective from September 1, 2024, block assessment applies to searches initiated or requisitioned under sections 132 or 132A.

2. Block Period: This period includes the previous years relevant to the six assessment years preceding the search year and extends up to the date of the last authorization for the search.

3. Abatement of Regular Assessments: Regular assessments for the block period will abate, and a consolidated assessment will be conducted for the block period. No further assessments/reassessments will occur until the block assessment is complete.

4. Assessment of Total Income: The AO will assess the total income, including undisclosed income identified during the search, which encompasses money, bullion, jewelry, valuable articles, or transactions not previously disclosed.

5. Undisclosed Income: This will be computed based on evidence from the search or requisition, along with any other material or information available to the AO during the proceedings.

6. Assessment of Other Persons: Provisions under section 158BD will govern assessments of other persons linked to the undisclosed income, ensuring coordinated proceedings.

7. Tax and Penalty: A sixty percent tax rate applies to the block period, with a surcharge as per section 113. No interest or penalty under sections 234A, 234B, or 234C will be imposed. A penalty of fifty percent of the tax payable on undisclosed income will be levied, but this is waived if the income is disclosed in the return filed in response to the search.

8. Time Limit: The block assessment must be completed within twelve months from the end of the month in which the last search authorization or requisition was made. For other persons, the time limit is twelve months from the issuance of the notice under section 158BC.

9. International and Domestic Transactions: Evidence from a search or requisition relating to international or specified domestic transactions (under section 92CA) from the start of April in the previous year of the last authorization to the date of the last authorization will not be included in the block period`s total income but will be assessed under other provisions of the Act.

10. Approval Requirements: Notices and assessment orders require prior approval from senior officers (Additional Commissioner, Additional Director, Joint Commissioner, or Joint Director).

11. Exclusion from Section 144C: Provisions of section 144C will not apply to block assessment proceedings.

Rationalization of Assessment and Reassessment Provisions

The Finance Act, 2021 also amended procedures for assessment and reassessment effective from April 1, 2021, impacting sections 148, 149, and introducing section 148A. These changes aim to streamline the reassessment process and reduce litigation.

Key Amendments

Section 148: Issuance of Notice for Assessment/Reassessment

Overview: Before the Assessing Officer (AO) can initiate an assessment or reassessment, they must issue a notice along with an order under section 148A(3). This order must determine that the income chargeable to tax has escaped assessment.

Details:

• The notice issued must include the information that suggests income has escaped assessment.

• From September 1, 2024, information from surveys conducted under section 133A (excluding subsection 2A) is also considered `information` that can trigger such notices.

• This ensures that the AO has a concrete basis for believing that income has escaped assessment before proceeding.

Section 148A: Pre-Issuance Requirements

Overview: Section 148A outlines the steps the AO must take before issuing a notice under section 148. This section ensures due process and fairness by providing the assessee an opportunity to respond.

Details:

• The AO must serve a notice to the assessee to show cause why a notice under section 148 should not be issued.

• This notice must be accompanied by the information that suggests income has escaped assessment.

• The assessee can furnish their reply within the specified time.

• After considering the assessee`s response and any available material, the AO must pass an order under section 148A(3) with the prior approval of the specified authority. This order will determine whether it is a fit case to issue a notice under section 148.

Section 149: Time Limits for Issuing Notices

Overview: Section 149 defines the time limits within which notices under sections 148 and 148A can be issued.

Details:

• in normal cases, no notice under sections 148A shall be issued if three years have elapsed from the end of the relevant assessment year. Notice beyond the period of three years from the end of the relevant assessment year can be taken only in a few specific cases;

• in normal cases, no notice under section 148 shall be issued if three years and three months have elapsed from the end of the relevant assessment year. Notice beyond the period of three years and three months from the end of the relevant assessment year can be taken only in a few specific cases;

• in specific cases, where as per the information with the Assessing Officer, the income escaping assessment amounts to or is likely to amount to fifty lakh rupees or more, notice under section 148A can be issued beyond the period of three years but not beyond the period of five years from the end of the relevant assessment year;

• in specific cases, where the Assessing Officer has in his possession books of account or other documents or evidence related to any asset or expenditure or transaction or entry (or entries) which reveal that the income chargeable to tax, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more, notice under section 148 can be issued beyond the period of three years and three months but not beyond the period of five years and three months from the end of the relevant assessment year.

Section 151: Authority for Sanctioning Notices

Overview: Section 151 specifies the authorities responsible for sanctioning the issuance of notices under sections 148 and 148A.

Details:

• The specified authority for these purposes includes the Additional Commissioner, Additional Director, Joint Commissioner, or Joint Director.

• This hierarchical structure ensures that notices are issued only after appropriate scrutiny and approval.

Section 152: Transitional Provisions

Overview: Section 152 provides transitional provisions for searches and surveys initiated before the new amendments come into effect.

Details:

• For searches initiated between April 1, 2021, and September 1, 2024, the provisions of sections 147 to 151 will apply as they stood before the Finance (No. 2) Act, 2024.

• This ensures a smooth transition and consistency in handling cases initiated before the new rules were implemented.

Conclusion

The amendments introduced by the Finance Act, 2021, and the proposed block assessment scheme represent significant changes in the handling of search and seizure cases under the Income Tax Act. These changes aim to streamline the assessment process, reduce litigation, and enhance the efficiency of investigations, ultimately contributing to a more robust and effective tax administration system.