Section 148A of the Income Tax Act- A Comprehensive Overview
Updated: Aug 20
Section 148A of the Income Tax Act was introduced in the Budget of 2021. It has brought about a significant transformation in the field of taxation in India. When an Income Tax officer suspects that a taxpayer may have disguised income during any assessment year, they are authorised by this provision to start the reassessment process. Although Section 148A permits the tax authorities to reopen cases, it also highlights how crucial it is to give taxpayers a chance to tell their side of the story. We explore the nuances of Section 148A of the Income Tax Act and its consequences for taxpayers in this tutorial.
Table of Contents
Budget 2024 Update!
The latest Budget 2024 introduced certain substantial changes under Section 148A, modifying the time limits for reopening assessments. Prior to this, tax authorities were authorized to reassess income in excess of Rs 50 lakhs up to a period of 10 years. Now, it has been changed to 5 years. Such a change in the reassessment time limit is aimed to smoothen the process and give faster resolution to the taxpayers. In the case of income below Rs 50 lakhs, the time limit is still retained at 3 years. Additionally, assessments for the Assessment Year (AY) 2018-19 will be time-barred after August 31, 2024, for income above Rs 50 lakh, marking a crucial deadline. Section 148 notices issued consequent to an issued notice under Section 148A have to follow the new 5-year time limit beginning September 1, 2024. These modifications showcase the commitment of the government toward an efficient and friendly system for the taxpayer.
What is Section 148A of the Income Tax Act?
In Budget 2021, a new section called Section 148A was inserted. If an income tax officer believes that a taxpayer attempted to avoid paying taxes for any assessment year, the officer may notify the taxpayer that there will be a reassessment. According to Section 148A, the income tax officer must give the taxpayer a chance to present their case before sending them the notice. Stated differently, it gives the taxpayer an opportunity to be heard. The taxpayer may be given a minimum of seven days and a maximum of thirty days by the assessing officer to provide an explanation. The income tax department may notify the taxpayer of the reopening of the case by means of a notification under section 148 if it continues to suspect tax evasion.
Reopening of an Assessment under Section 148A
If the Income Tax Department has cause to suspect that income subject to tax has eluded assessment, it may reopen an assessment under Section 148a. These beliefs may have been driven by:
The taxpayer neglected to submit an income return.
Information from the Income Tax Department indicates that the taxpayer's income may not have been assessed.
A third party has provided evidence to the Income Tax Department suggesting that the taxpayer's income has eluded assessment.
According to the time limitation rule, if the relevant assessment year ended more than three years ago, a notification cannot be given under normal circumstances. However, if there is proof that the taxpayer has avoided an assessment of taxable income of at least Rs 50 lakh, notice beyond three years may only be pursued. Notification may be given, nevertheless, after three years but not after ten years following the conclusion of the pertinent assessment year. Before making any such inquiries, giving the taxpayer a chance to respond, or issuing any such orders, the income tax officer must get the approval of a designated authority. All of the aforementioned, however, does not apply in situations involving searches or requisitions.
Process for Reopening of an Assessment
A new amendment to the Income Tax Act attempts to increase accountability and openness in the process of identifying income that evades assessment. Before reopening a case, the Assessing Officer (AO) must follow a defined procedure outlined in Section 148A. The actions in accordance with Clause (b) are as follows:
If there is information indicating that taxable income has been underreported or not reported at all, the AO may choose to undertake an inquiry before issuing a notice. An official nod from a designated authority is required before conducting an inquiry. This indicates that due diligence is followed before the procedure starts, supporting the authenticity of the investigation.
The main idea of Section 148A is that the assessee is issued with a notice in the event of a probable income escape (b). Between seven and thirty days are given to the assessee to submit a justification for why legal action shouldn't be taken against them. Taxpayers would have a fair opportunity to make their case during this time, which may be extended upon request. The AO is required to disclose to the assessee any material or report of the inquiry that forms the basis of the notice.
After getting the assessee's response, the AO has the responsibility to carefully review the response before moving to the next step. This suggests that a substantial amount of weight is placed on the assessee’s response when it comes to making a decision.
The AO must determine within a given time frame whether to proceed with issuing a notice under Section 148, with the prior permission of the relevant authority. To ensure that no judgement is rendered hastily, this choice is based only on the information provided, including the assessee's response.
Difference Between Notice Issuance Under Section 148 and Section 148A
If the income tax officer has "reason to believe" that the taxpayer has failed to disclose any income during the relevant assessment year, they are required by Section 148 to provide the taxpayer a notice. Under Section 147 of the Income Tax Act, the income tax officer may, upon the issuance of the notice, assess, reassess, or recompute the total income for such a year.
But starting on April 1, 2021, the income tax officer will need to follow the steps outlined in the recently implemented Section 148A to issue a notification of this kind. According to the new clause, if there is information indicating that income that is subject to tax has eluded assessment, the income tax officer must investigate the matter or provide the taxpayer a chance to be heard. Before sending out such a warning, the income tax officer must first receive the approval of a designated authority.
Steps to Respond to Notice under Section 148A(b)
For any taxpayer, receiving a notification under Section 148A(b) can be an uncomfortable experience. However, this is a scenario that may be methodically handled with the correct attitude. Here's how to respond to such a notice effectively:
Step 1: Understand the notice
Examine carefully and never just glance at the notice. Recognise the reasons why the revenue is thought to have eluded assessment. Identify the tax year in dispute as well as the details that the AO has drawn attention to.
Step 2: Compile information
Gather the necessary paperwork, such as tax returns, financial statements that support your submissions, and any other supporting material. Arrange the material in a rational manner to effectively address each concern highlighted by the AO.
Step 3: Be aware of the Law
Learn about your rights under the new provision, such as the ability to request an extension and the right to be heard. Speak with tax experts; they may provide priceless counsel and assistance when required.
Step 4: Write your answer to address questions
You should address every issue brought up in the notification in your thorough response. Be prompt and respond within the allotted time; any delays may be taken adversely.
Step 5: Make a submission
Use the official Income Tax e-filing system to submit your response, or use any other way the notice specifies. For your records, keep a copy of the notice, your answer, and all of the documentation you sent.
Step 6: Follow-up
Observe the changes occurring in your situation. If necessary, correspond with the tax department once again. Be prepared to either accept the ruling or file an appeal in light of the AO's assessment. At this point, being familiar with the specifics of income-tax litigation may be essential.
Potential Impact of Section 148A on Taxpayers
Even after reviewing your response to the notification, if the income tax agency determines to reevaluate your case, you may need to:
Pay interest, penalties, and additional tax on income that was not previously assessed.
It may be necessary for you to go through a drawn-out, time-consuming assessment process, which can be very inconvenient.
If the assessing officer determines that you have intentionally avoided paying taxes, you may also be subject to harsh penalties and even jail time.
Conclusion
One important provision of the Income Tax Act, Section 148A, gives taxpayers the ability to explain to the income tax department any income that eluded assessment. It protects taxpayers' rights but also gives the assessing officer the power to reopen cases. The ramifications of Section 148A should be understood by taxpayers, as it may result in further tax obligations, fines, and possibly legal repercussions in cases where deliberate tax avoidance is suspected. It emphasises how crucial it is to disclose revenue in an accurate and transparent manner. If you require assistance filing a response to an income tax notice that you have also received, you should consult experts.
FAQ
Q1. What is Section 148A of income tax?
The government amended the Income Tax Act by adding Section 148A to the 2021 budget. According to this clause, before sending a notification, the income tax officer must allow the taxpayer a chance to clarify if they think the taxpayer has unreported income for a certain assessment year.
Q2. What is the difference between section 148 and 148A?
Section 148 addresses the notice that the income tax department may send regarding any income that may have escaped assessment in prior assessment years. On the other hand, section 148A requires the income tax department to provide the taxpayer an opportunity to explain why the income may have escaped assessment.
Q3. What is a 148A order?
According to an order under section 148A, the assessing officer determines whether or not it is appropriate to issue a notice for the beginning of an income-escaping assessment under section 148 based on the evidence that is available, including the assessee's reply.
Q4. When was section 148A introduced?
The Income Tax Act's Section 148A was first introduced by Finance Act 2022 after being first announced in Budget 2021.
Q5. What is the time limit to provide an explanation to a notice under Section 148A?
Section 148A allows the assessing officer to give the assessee a minimum of seven days and a maximum of thirty days to offer an explanation.
Q6. How do you respond to a notice under section 148A?
You can respond to the notice in one of two ways: either file a tax return or write an answer letter to the Assessing Officer that includes all relevant information and supporting documentation. Please file your tax return as soon as possible if you concur with the assessment officer's justifications.
Q7. What is the time limit for reopening assessment under Section 148A?
Under section 148A, the income tax department may revisit the assessment after the relevant assessment year has ended, provided that four years have passed. Within six years of the pertinent assessment year, the case may be reopened for assessment if the income that escaped assessment exceeds Rs. 1 lakh.
Q8. What happens if I fail to respond to a notice under Section 148A within the specified time?
The AO may proceed with the delivery of notice under Section 148, assuming an income escape assessment, if no answer is received within the allotted period.
Q9. Is there a minimum amount of income for reopening an assessment under Section 148A?
Yes, there is a minimum income requirement that must be met to avoid assessment under Section 148A. The Income Tax Department is not allowed to revisit the assessment if the amount of income that escaped assessment is less than Rs. 1 lakh.
Q10. What is the meaning of the “reason to believe” requirement under Section 148A?
The Income Tax Department needs to have some hard data or proof to back up its suspicions that income has eluded assessment to comply with the "reason to believe" criteria. An assessment cannot be reopened based only on speculation or suspicion.
Q11. What can taxpayers do if they disagree with the decision to reopen an assessment?
Taxpayers may file an appeal with the relevant forum to contest the Income Tax Department's decision to reopen an assessment. This may entail bringing an appeal before the Income Tax Appellate Tribunal or the Commissioner (Appeals).
Q12. How can I avoid issues leading to the reopening of an assessment under Section 148A?
Taxpayers who make sure that their income returns are filed on time and with accuracy can avoid problems with revisiting assessments under Section 148a. They must also provide all of their income sources to the Income Tax Department and not withhold any information from them.
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