Notice under Section 147 – Income Escaping Assessment

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Different Types of Assessment

There are several categories of income tax assessments:

• Self-assessment
  
  

• Preliminary assessment
  
  

• Regular assessment
  
  

• Special assessment
  
  

Under self-assessment, taxpayers themselves calculate their income and tax liability for a given financial year, and this is reported in the next year, called the assessment year.

For example, income earned during FY 2023–24 is assessed in AY 2024–25. After determining their tax due, taxpayers must pay the amount and file their ITR accordingly.

Next, the Income Tax Department performs a preliminary check using an automated system to identify calculation errors or invalid claims. This is a basic review, not a detailed evaluation.

Regular assessments include more detailed checks and fall under:

• Scrutiny assessment (Section 143(3))
  
  

• Best judgement assessment (Section 144)
  
  

Special assessments cover:

• Income escaping assessment (Section 147)
  
  

• Assessments following a search (Sections 153A to 153C)
  
  

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What Happens When Income Escapes Assessment?

In some cases, certain portions of a taxpayer’s income may not be evaluated during the initial assessment—either due to oversight or intentional misreporting. When an Assessing Officer (AO) believes that any income chargeable to tax has not been accounted for, they can reopen the case for reassessment under Section 147.

This allows the AO to:

• Assess or reassess the unaccounted income,
  
  

• Recalculate losses, depreciation, or deductions for that particular assessment year.
  
  

This reassessment follows the procedures outlined in Sections 148 to 153 and can be carried out more than once, provided all the necessary conditions under Section 147 are fulfilled.

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Examples of Income Escaping Assessment

• If someone earns ₹24 lakh in AY 2024–25 but only reports ₹20 lakh, the unreported ₹4 lakh is considered to have escaped assessment.
  
  

• In another case, if a business owner earns ₹40 lakh in a year but does not file a return at all, the entire amount is treated as escaped income.
  
  

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Authority of the Assessing Officer

The Income Tax Act empowers the AO to re-evaluate any income that appears to have escaped taxation under Sections 147 and 148. While these provisions are designed to ensure that every taxpayer pays their fair share, they have often led to legal disputes due to interpretational issues.

To address such complexities, the Finance Act, 2021 and the proposed changes in the Finance Bill, 2022 aim to streamline the process and make it more transparent and efficient.

Amendments Introduced by the Finance Act, 2021

The Finance Act, 2021 brought significant structural changes to the reassessment framework under the Income-tax Act. It replaced the earlier Sections 147 to 149 with the newly formulated Sections 147, 148, 148A, and 149. Additionally, the previously existing Sections 153A to 153C were removed and their provisions consolidated under the new Section 147.

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Introduction of Section 148A: Mandatory Preliminary Inquiry

One of the key changes includes the insertion of Section 148A, which makes it mandatory for the Assessing Officer (AO) to first carry out an inquiry and give the taxpayer an opportunity to be heard before issuing any reassessment notice.

Only after evaluating the taxpayer’s response and considering all relevant material, can the AO decide whether it is appropriate to proceed with the reassessment under Section 147.

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From “Reason to Believe” to “Information-Based” Action

Earlier, reassessment proceedings could be initiated if the AO had “reason to believe” that income had escaped assessment. The AO could then, under Sections 148 to 153, assess such income or any other income that came to notice during the course of reassessment.

However, with the amendments, the process has shifted from being subjective to data-driven. The AO must now rely on specific information to reopen assessments—thereby eliminating personal discretion and increasing transparency.

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What Qualifies as Information Suggesting Escaped Income?

For actions under Sections 147 and 148, the AO must possess credible information indicating that income chargeable to tax has escaped assessment. This includes:

• Flagged Information: Any detail flagged for a specific assessment year under the risk management strategy formulated by the Central Board of Direct Taxes (CBDT).
  
  

• Audit Objections: Any final objection raised by the Comptroller and Auditor General of India (CAG) suggesting that the original assessment did not comply with the provisions of the Act.
  
  

• Presumed Information: Certain conditions automatically deem the AO to have information of escaped income:
  
  

• Search Cases: If a search under Section 132 is conducted, or assets, books, or documents are requisitioned under Section 132A, on or after April 1, 2021.
  
  

• Survey Cases: If a survey is carried out under Section 133A, except for subsections (2A) and (5), after the same date.
  
  

• Asset Seizure Cases: If the AO, with prior approval from the Principal Chief Commissioner of Income Tax (PCIT), concludes that any money, bullion, jewellery, or valuables seized under Section 132A belongs to the assessee.
  
  

Finance Act 2022 Updates:

Changes in the Time Limits for Completion of Assessment, Reassessment, and Recalculation

The Finance Act, 2022, revised the deadlines for finalizing assessments:

• For Assessment Year (AY) 2020-21, the time allowed to complete the assessment has been extended from 12 months to 18 months.
  
  

• Starting from AY 2021-22, assessments must be concluded within 9 months from the end of the relevant Assessment Year.
  
  

Revised Time Limits for Assessment Completion:

Assessment Year	Deadline for Completion of Assessment
AY 2021-22 and onwards	Within 9 months after the end of the respective Assessment Year
AY 2020-21	Within 18 months after the end of the respective Assessment Year
AY 2019-20	Within 12 months after the end of the respective Assessment Year
AY 2018-19	Within 18 months after the end of the respective Assessment Year
Up to AY 2017-18	Within 21 months after the end of the respective Assessment Year

Additionally, any searches or requisitions initiated under Sections 132 or 132A during the financial year 2021-22 will follow the new guidelines under Section 147 and must adhere to the time limits specified in Section 153.

Other Relevant Provisions

Before issuing a notice under Section 148, the Assessing Officer (AO) must first comply with the requirements of Section 148A. This section mandates that the AO must provide the assessee with a chance to explain why a notice for reassessment under Section 147 should not be initiated.

While Section 148 deals with issuing notices in cases where income has potentially escaped assessment, Section 151 governs the approval process required for such notices to be issued.

Moreover, if during the reassessment proceedings under Section 147, the AO identifies any additional issues where income has also escaped assessment, they are permitted to assess or reassess those as well—even if the steps outlined in Section 148A were not followed specifically for those additional issues.