In accordance with Section 148 of the Income Tax Act, 1961, the Assessing Officer is authorized to reassess tax returns if there is evidence of underreported income. A notice under Section 148 or 148A will be issued to initiate the reassessment process.
This section maintains the overall integrity of the taxation system by ensuring that any income that has escaped assessment does not go untaxed. Let’s understand section 148 of the Income Tax Act in detail, learn its key provisions, and see how you can give a reply to the notice received.
What is Section 148 of the Income Tax Act?
The Income Tax Department reserves the authority to issue a notice under Section 148 of the Income Tax Act to taxpayers whose income is deemed to have been underreported or inaccurately assessed. This provision serves as a safeguard against tax evasion and ensures that taxpayers contribute their fair share to the national exchequer.
When an assessing officer has reasonable grounds to believe that a taxpayer's income has been understated or omitted from their tax returns, they can initiate a reassessment proceeding by issuing a Section 148 notice. This notice compels the taxpayer to furnish additional information or documentation related to the suspected underassessment. Upon thorough examination of the evidence, the assessing officer may determine that the initial assessment was indeed erroneous and proceed to reassess the taxpayer's income for the relevant assessment year.
It is important to note that the issuance of a Section 148 notice is subject to specific conditions and time limitations. The department must establish a credible reason for the reassessment, and the notice must be issued within a prescribed period from the end of the relevant assessment year or within four years of the relevant assessment order, whichever is later. Failure to comply with the notice or provide satisfactory explanations may lead to penalties or interest charges.
Reasons to issue a notice under Section 148
A notice under section 148 of the Income Tax Act can be issued when:
- The Assessing Officer (AO) has substantial evidence indicating that the taxpayer has evaded income assessment for a particular year. However, the issuance of the notice cannot be based on mere suspicion.
- The information provided to the AO must justify the suspicion that the taxpayer intended to escape income assessment, and the evidence must be directly relevant to the case.
- Before issuing the notice, the AO must document the reasons in writing. They must clearly state why they believe the taxpayer has evaded income assessment.
- The notice must adhere to established provisions and guidelines to ensure its validity and appropriateness.
Also read about: What is section 192 of the Income Tax Act
Time limit to issue a notice under section 148
The Income Tax Act mandates certain timeframes for the issuance of notices under Section 148. Generally, the Assessing Officer cannot issue such a notice after three years from the end of the relevant assessment year. However, if the Assessing Officer has evidence of undisclosed income exceeding Rs. 50 lakhs, they can issue the notice within ten years of the assessment year's end.
Issuance of a Section 148 notice is contingent upon certain conditions. Firstly, the taxpayer must have filed their income tax returns under Section 139. Secondly, if a notice under Section 142 or Section 148(1) was previously issued but the taxpayer failed to file their returns, a Section 148 notice may follow. Lastly, the taxpayer's submitted information must be complete and accurate to enable a proper assessment for the relevant year.
Provisions for issuance of a notice under Section 148
Section 151(1) of the Income Tax Act lays out specific provisions for issuing a notice under section 148. Let’s check them out:
- Time limit of 3 years
- If more than 3 years have passed since the end of the relevant assessment year, the Assessing Officer (AO) cannot issue a notice under section 148.
- However, an exception exists if a higher authority is convinced by the AO's reasons for issuing the notice.
- The term “higher authority” represents the following:
- The Chief Commissioner
- The Principal Commissioner
- The Principal Chief Commissioner
- Rank requirement
- The AO must hold a rank of at least a Joint Commissioner to issue a notice under section 148 of the Income Tax Act.
- If the AO is of a lower rank, an exception can be made if a Joint Commissioner is satisfied with the reasons documented by the AO.
Furthermore, it is essential to state that even if any higher authority (as explained above) is satisfied with the reasons provided by the AO, they cannot issue a notice on their own.
When can a notice be issued under Sec 148?
As per the provisions of Section 149, a notice under Section 148 can be issued within 3 years from the end of the relevant assessment year. However, as an exception to this rule, if the assessing officer finds that undeclared income amounts to Rs. 50 lakhs or more, then the notice can be issued beyond the initial three-year period but not later than ten years from the end of the relevant assessment year.
Let’s understand better through a hypothetical example:
- Say the relevant assessment year ended on March 31, 2021.
- If the income escaping assessment was less than Rs. 50,00,000, a notice can be issued up to March 31, 2024.
- However, if the income escaping assessment is Rs. 50 lakhs or more, a notice can be issued up to ten years from the end of the relevant assessment year, i.e., up to March 31, 2031.
Also read BOUT: Section 195 of Income Tax Act
Replying to notice under Section 148
It is imperative to treat a notice under Section 148 with utmost seriousness. If you receive such a notice, please adhere to the following guidelines:
- Review the notice: Carefully examine the notice for the specific reasons cited by the Assessing Officer for issuing it. If these reasons are not provided, request a copy from the officer.
- Timely response: Respond to the notice within the stipulated timeframe, typically 30 days. This can be done either by filing a return or by submitting a written reply along with supporting documents.
- Evaluation of reasons: If the reasons provided by the Assessing Officer are valid, file the return as soon as possible. If a return has already been filed, submit a copy to the officer.
- Diligent return filing: When filing a return in response to a Section 148 notice, ensure that all income and expenses are accurately declared. Failure to do so may result in penalties.
- Challenging the notice: If you believe the notice is invalid or the reasons for the reassessment are unfounded, you may contest its validity before the Assessing Officer or higher authorities. A successful challenge could halt the assessment proceedings. However, an unfavourable outcome may allow the Assessing Officer to proceed with the reassessment.
What happens if you do not respond to Section 148?
If you ignore or fail to respond to a notice under Section 148 of the Income Tax Act, the Assessing Officer (AO) will proceed with the assessment without your input. The AO will use the information available to them to:
- Estimate your income
and - Calculate your revised income tax liability (along with penalty and interest)
This process is called a "best judgment assessment". While making this kind of assessment, the AO relies on any information or evidence they have or can obtain to estimate your income. Usually, some common documents are:
- Bank statements
- Financial transactions
- Mutual agreements, if any
Furthermore, it should be stated that this estimation of income may not be accurate. It can result in a higher tax liability than what you would have reported if you had responded to the notice.
Now, once the best judgment assessment has been made and you disagree with it, the only option left to you is to challenge it by filing an appeal with higher authorities in the following sequence:
- Commissioner of Income Tax (Appeals)
- The Income Tax Appellate Tribunal (ITAT)
These higher authorities review the AO's assessment and your arguments against it. If satisfied, they can provide you with the requisite relief, wholly or partially.
Also read about: Section 43B of Income Tax Act
Duties and rights of the assessee after the receipt of notice under Section 148
After receiving a notice under Section 148 of the Income Tax Act, the assessee must file income tax returns (ITR) for the relevant assessment year. Post-filing of ITR, the assessee has the following rights:
- The assessee has the right to request a copy of the notice, which details the reasons why the Assessing Officer (AO) issued the notice under Section 148.
- If the assessee finds the reasons stated in the notice unsatisfactory, they can file an objection challenging its validity.
- The assessee must provide valid reasons when raising objections and questioning the legality of the notice issued under Section 148.
- If the AO dismisses the assessee's claims, the assessee has the right to request separate reasons for the dismissal.
- The assessee can file a writ petition with the relevant High Court to challenge the legality and validity of the notice issued under Section 148.
- Even after the assessment is completed and the matter is under appeal, the assessee can still file a writ petition to question the legality and validity of the notice under Section 148.
Who can issue a notice under Section 148?
A notice under Section 148 of the Income Tax Act can be issued by an Assessing Officer (AO) who is ranked above an Assistant Commissioner or a Deputy Commissioner. Officers below this rank cannot issue such notices.
Also, the AO must obtain approval from higher authorities for cases involving income escaping assessment when it involves:
- Significant sums
or - Periods beyond three years
For example:
- Say more than 3 years have passed since the end of the relevant assessment year.
- Now, the notice can only be issued with the approval of either of the following:
- Principal Chief Commissioner
- Principal Commissioner
- Chief Commissioner
Furthermore, the AO must have concrete evidence or reasons to believe that income has escaped assessment. This evidence must be documented and approved by the relevant higher authority before issuing the notice.
Also read about: What is Section 56 of the Income Tax Act
Duties and rights of the assesse after the receipt of notice under Section 148
- Duty to file returns for income escaping assessment
The assesse is obligated to submit tax returns for any income deemed "Income Escaping" during the relevant assessment year. - Right to request notice copy
Upon filing returns, the assessee may request a copy of the notice issued under Section 148, which details the rationale behind the Assessing Officer's decision. - Right to object to notice
If the assessee finds the reasons provided in the notice copy unsatisfactory or unfounded, they may file an objection contesting the notice's validity. - Requirement for valid objections
When raising objections and challenging the lawfulness of the notice under Section 148, the assessee must provide cogent and justifiable reasons. - Right to separate reasons for dismissal
Should the Assessing Officer reject the assessee's claims, they may request separate reasons for the dismissal. - Option to file writ petition
The assessee may file a writ petition with the appropriate High Court, challenging the legality and validity of the notice under Section 148, even before the assessment or reassessment is finalized. - Right to file writ petition post-assessment
Even after the assessment is completed and the matter is under appeal, the assessee retains the right to file a writ petition with the relevant High Court, questioning the notice's legality and validity. - Evidence requirements
*The assessee must provide evidence of the following actions: * Requesting a copy of the Assessing Officer's reasons for issuing the notice under Section 148. * Filing an objection to the reasons presented by the Assessing Officer. * Requesting separate reasons for the dismissal of their claims. * Challenging the lawfulness of the notice's issuance.
Reopening of income tax assessment cases
It is crucial to understand that, previously, income tax assessment cases could be reopened up to six years after the end of the relevant assessment year. However, with the new budget, this time limit has been reduced to three years, meaning the tax authorities can generally reopen cases within three years from the end of the relevant assessment year.
However, if the concealed income (income that was not disclosed to tax authorities) exceeds Rs. 50 lakh, the cases can be re-opened up to 10 years from the end of the relevant assessment year.
Things to consider while replying to a notice under Section 148
Upon receipt of a notice issued under Section 148 of the Income Tax Act, 1961, it is imperative to adopt a proactive and informed approach.
- Understand the notice: Carefully review the notice to comprehend the reasons cited by the Assessing Officer (AO) for issuing the notice. If the reasons are unclear, individuals have the right to request a copy of the relevant assessment proceedings.
- Timely compliance: If the reasons provided are deemed justifiable, promptly file the requisite tax returns to avoid potential legal repercussions. Individuals who have already filed returns under Section 148 should submit a copy to the AO.
- Accurate reporting: Exercise meticulous care when filing income tax returns. Omissions or inaccuracies in reporting income or expenses can lead to significant legal penalties. Ensure that all relevant information is accurately disclosed.
- Proactive tax compliance: Familiarise oneself with the provisions of Section 148 to prevent potential legal complications. While understanding the law is essential, it is strongly recommended that individuals undergo regular tax assessments each year to maintain compliance and avoid unnecessary inconveniences.
By following these guidelines, individuals can effectively respond to Section 148 notices and navigate the income tax assessment process with confidence.
Conclusion
Section 148 of the Income Tax Act is related to the issuance of a notice, which initiates the process of detailed scrutiny. Usually, taxpayers receive this notice when certain income has escaped assessment for a particular assessment year.
A notice u/s 148 is valid if it is issued within 3 years from the end of the relevant assessment year in which income escaped assessment. However, this time limit is increased to 10 years if the escaped income exceeds Rs. 50,00,000.
Also, responding to a notice under Section 148 of the Income Tax Act is crucial. Upon receiving such a notice, carefully review the reasons provided by the Assessing Officer (AO) for issuing it. If satisfied, promptly file your Income Tax Return (ITR) for the relevant assessment year and make an accurate income declaration. Always remember that a failure to respond can lead to a “best judgment assessment” by the AO, which can result in higher tax liabilities and penalties.
Furthermore, if you disagree with the AO's assessment, you can appeal first to the Commissioner of Income Tax (Appeals) and then you can move on to the Income Tax Appellate Tribunal (ITAT).
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