What is Section 147 of the Income Tax Act?

Section 147 of the Income Tax Act plays a vital role in ensuring that every income that is subject to taxation is accurately reported and assessed. It describes the responsibilities of the Assessing Officer (AO) in finding discrepancies, issuing notices, and conducting reassessments, thus preserving the integrity of the tax system. The Finance Act of 2021 has entirely replaced the assessment and reassessment provisions under Section 147 of the Income Tax Act (ITA). In this blog, we will learn about Section 147 of the Income Tax Act in detail. However, before that, let's understand the key terms under Section 147.

Understanding the Key Terms in Section 147

To have good knowledge of Section 147, it is vital to understand the key concepts involved in Section 197, like "income escaping assessment", "assessment", and "reassessment".

Income Escaping Assessment (IEA)

Income escaping assessment refers to the income that was either not included in the Income Tax Return (ITR) or was missed by the tax authorities during a specific assessment year. Some factors that can lead to this situation include:

• Undisclosed Income: It occurs when income is not declared in the ITR, which may occur due to intentional non-disclosure, misunderstanding of tax laws, or oversight.
• Incorrect Assessment: Even if income is accurately reported, mistakes during the assessment can attract a lower tax liability than owed.
• Misreported Income: Income underreported due to calculation errors or intentional misreporting, potentially leading to specific income sources being excluded from the ITR.
• Excessive Deductions and Reliefs: Deduction or relief claims beyond the permissible limits due to a misunderstanding of tax regulations or malafide intent.

These scenarios primarily concern the taxpayer; however, errors made by tax officials can also result in income escaping assessment, leading to the need for reassessment under Section 147.

Assessment

Each person earning taxable income is required to file a return to the income tax department. The tax authorities will review your income tax return (ITR), and they may request further clarification if needed. This examination process of the return of income is known as assessment. The process involves a detailed examination of reported income, deductions, and claims to ensure accurate tax liability according to the tax laws. Additionally, there are several types of assessments, each playing a certain role in the tax assessment process.

Reassessment

This refers to the recalculation of the tax liability initiated by the Income Tax Department, where specific income sources are believed to be excluded from the original assessment. Reassessment can occur due to undisclosed income, errors in assessment, or failure to file tax returns, ensuring that any income that is overlooked in the initial assessment process is accurately taxed.

What are the Types of Assessment?

Assessment can be of various types, including self-assessment, preliminary assessment, regular assessment, and special assessment.

Self-Assessment

Here, taxpayers can calculate their own tax liability depending on their income for a specific financial year. They must then file an ITR (Income Tax Return) during the subsequent assessment year (AY).

For example, earnings in the financial year 2024-2025 will be assessed in the assessment year 2025-2026. After self-assessment, taxpayers will calculate their tax liability, pay it, and submit their ITR. After that, the income tax department (ITD) will perform a check on the returns for any arithmetic mistakes, incorrect claims, etc., usually in a computerised manner, without a detailed review of the ITR filed at this stage.

Preliminary Assessment

Once the ITR is filed following self-assessment, the Income Tax Department conducts a basic check and validation. This initial check is done to identify any calculation errors or incorrect claims, without a thorough examination. This initial assessment serves as a surface-level check to ensure accuracy.

Regular Assessment

Following the preliminary assessment, a regular assessment is performed. It includes a comprehensive review of the tax return and documents by tax officials to ensure accurate income reporting and tax payment. This type of assessment is further divided into two categories:

• Scrutiny Assessment: Scrutiny assessment is a type of assessment that involves a detailed examination of the return to verify the accuracy of the reported income and claims.
• Best Judgement Assessment: If the taxpayer fails to provide the information that is necessary, the assessing officer (AO) will determine the assessment by utilizing the best information available.

Special Assessment

Previously classified under various sections, special assessment has been combined under Section 147 to cover income escaping assessment, and assessment following a search operation under Section 153A to 153C.

• Income Escaping Assessment (IEA): There may be times when specific income heads are not included in the initial assessment process, either knowingly or unknowingly. In such cases, if the assessing officer (AO) determines that the taxable income was not assessed, they can reopen cases to reassess the taxpayer's ITR under Section 147 of the Income Tax Act (ITA). The AO will assess/reassess the income and adjust any deductions or allowances for the assessment year (AY), according to the provisions of Sections 148 to 153. Reassessment can occur multiple times if other conditions stated under Section 147 have been met.
• Assessment Following a Search Operation: Covered under sections 153 (A) - 153 (C), this assessment is conducted following a search or seizure operation to reassess income and review any undisclosed assets or earnings.

These assessment types ensure that income is reported accurately and taxed according to the legal requirements, with various levels of scrutiny as required.

Explanation of Section 147

Section 147 of the Income Tax Act authorizes the Assessing Officer (AO) to reassess or recalculate the income that was not disclosed for various reasons. This serves as a corrective mechanism to address errors or inaccuracies in income reporting. It also defines the AO's authority and outlines the procedures to be followed during such reassessments. Notably, Section 147 is interconnected with several other provisions of the Act, which the AO must consider while carrying out the proceedings under this section.

Now, income is classified as escaping assessment if it has not been subjected to income tax. For example, if an individual earns Rs. 24 lakh in AY 2024-2025 but reports only Rs. 20 lakh, then Rs. 4 lakh has escaped assessment. Similarly, if a business earns Rs. 40 lakhs in a financial year, but does not file a return, the entire Rs. 40 lakh is considered income escaping assessment.

Additionally, taxpayers may sometimes claim fewer deductions or benefits than the permissible limits, either from a misunderstanding of tax laws or with the intent of minimizing tax liabilities. The Income Tax Act, 1961, authorizes the Assessing Officer (AO) to reassess the income that may have escaped assessment ("IEA") under Sections 147 and 148. The Finance Act of 2021 introduced amendments aimed at ensuring tax fairness, refining the income reassessment process, handling ambiguities, and enhancing transparency.

Amendments of the Finance Act 2021

The Finance Act 2021 replaced the old Sections 146 to 149 with new Sections 147, 148, 148A, and 149, while Sections 153A to 153C were removed and merged under Section 147.

Introduction of Section 148A

The Finance Act, 2021, has inserted Section 148A, which mandates the AO to conduct an inquiry and give the taxpayer an opportunity to be heard before issuing any notice. After considering the taxpayer's response, the AO can decide, based on the material facts, whether to invoke the reassessment provisions or not.

Removal of the Reassessment Procedures

Previously, the AO would reopen an assessment if it had a "reason to believe" income had escaped assessment. According to Sections 148 to 153, they could assess that income or other incomes discovered later during Section 147 proceedings. However, the government has now specified that AOs must base their reassessments on consideration information rather than relying on best judgment. This change eliminated any subjectivity and discretion previously held by the AO (Assessing Officer).

Regarding Sections 147 and 148, the information with the AO indicates that the income eligible for taxation that has escaped assessment is defined as:

• Any information flagged in a taxpayer's case for the relevant assessment year (AY), according to the rules (risk management strategy) set by the Central Board of Direct Tax (CBDT) from time to time.
• Any final objection from the Comptroller and Auditor General of India (CAG of India) to the taxpayer's assessment for the relevant assessment year did not comply with the provisions of this Act.

Situations in which the AO shall be deemed to have information that suggests that the income subject to tax may have escaped assessment in the case of a taxpayer, including:

• Search A: A search is initiated under Section 132 or the books of accounts, other documents, or any asset requisition under Section 132A on or after April 1, 2021, in the case of the taxpayer.
• Survey: A survey conducted under Section 133A, excluding under sub-section (2A) or sub-section (5) on or after April 1, 2021.
• Seizure: The AO, with prior approval from the Principal Chief Commissioner of Income Tax (PCIT), determines that any seized items under Section 132A, in case of any person, on or after April 1, 2021, belong to the taxpayers. It includes any money, bullion, jewellery, or other valuable articles or things.

Amendments from the Finance Act 2022

The timeline for completing assessment, reassessment, and recalculation has been modified. Specifically, for the Assessment Year (AY) 2020-2021, the completion period has been extended from 12 months to 18 months. From AY 2021-2022 onwards, the completion time is set at 9 months following the end of the assessment year.

All searches and requisitions under Sections 132 and 132A introduced in FY 2021-2022 must follow the new provisions of Section 147 within the timeframes specified in Section 153.

Other Related Provisions

Before issuing a notice under Section 148, the AO must comply with Section 148A, which requires them to give the taxpayer a chance to explain why a notice regarding income escaping assessment should not be issued. While Section 148 pertains to the issuance of notices in cases of income escape or audit, Section 151 deals with the required sanction for the issuance of notices. The AO may also address any other income issue that comes to light during the Section 147 proceedings, regardless of the fact whether the provisions of Section 148A were followed.

Reassessment Procedure Under Section 147

The process under Section 147 involves several steps that the AO must follow for reassessing a taxpayer's income:

1. Identification of Escaped Income: The reassessment begins with the AO identifying unreported income in the taxpayer's income tax return (ITR). The AO must have a "reason to believe", supported by evidence, that such income went unassessed, due to inconsistencies or discrepancies found during the original assessment.

2. Recording Evidence: The AO must document relevant facts, representations, and any evidence provided by the taxpayer. Despite the AO's initial view that income escaping assessment, documentation is essential for supporting the reopening of the reassessment process.

3. Approval from Higher Authority: If the AO believes that the income has escaped assessment based on the taxpayer's response and gathered evidence, they must seek prior approval from a higher authority before proceeding. Once approved, the AO may issue a notice under Section 148 to the taxpayer, thereby starting the reassessment process.

4. Issuance of Notice: Upon obtaining all the necessary approvals and documenting all the relevant facts, the AO issues a notice under Section 148, notifying the taxpayer that their case is being reopened for reassessment. The taxpayer is generally given 30 days to respond with a revised return.

5. Filing of Revised Return: After receiving the notice, the taxpayer must submit a revised return that addresses the AO's concern. You need to disclose any previously unreported or inaccurately reported income. The revised return must correct the discrepancies found in the original submission.

6. Assessment by the AO: Upon receiving the revised return, the AO (Assessing Officer) reviews the revised return and may request additional information or clarification from the taxpayer to resolve any outstanding issues.

7. Draft Assessment Order: Following the evaluation of the revised return and supporting documents, if the AO (Assessing Officer) determines that additional tax is due, a draft assessment order is prepared. Then, it is submitted for internal review and approval by a higher authority before proceeding further.

8. Issuance of Show Cause Notice: The AO issues a show cause notice, allowing the taxpayer to explain why the proposed additional tax should not be imposed. This is a vital aspect of the reassessment process, ensuring the taxpayer's right to be heard before any final decision is made.

9. Hearing: A hearing is held, allowing the taxpayer to present their case before the tax authorities. Here, the taxpayer can provide further documentation and explanations to challenge the revised tax liability proposed by the Assessing Officer (AO).

10. Final Assessment Order: The AO issues the final assessment order based on the hearing outcome and detailed review of submissions. This order details the previously unassessed income and the new tax liability, including applicable interest and penalties.

11. Appeal by the Taxpayer: After the final assessment order, the taxpayer retains the right to appeal the decision, typically within 30 days of receiving the order, allowing them to challenge the reassessment if they believe it to be incorrect or unfair.

To Conclude

Having some knowledge about Section 147 and its related provisions is important for taxpayers, as it controls the entire reassessment process and ensures that every income that is subject to taxation is accurately accounted for. Staying compliant with the rules can help you avoid penalties. This can get easier when you seek assistance from the experts at Savetaxs. We have a professional team of experts who can ensure your income tax returns are accurate. You can ensure 100% compliance when you connect with the team of SaveTaxs.