Notice under Section 147 – Income Escaping Assessment The Finance Act of 2021 brought a complete overhaul to the reassessment and assessment provisions under Section 147 of the Income Tax Act (ITA). To fully grasp this section, it’ important to first understand what assessment and escaped assessment mean. Every individual whose income is taxable is obligated to file an income tax return (ITR) with the Income Tax Department. Upon receiving the return, the tax authorities may review it and request clarifications if needed.
This review process is what we refer to as an assessment. Different Types of AssessmentThere are several categories of income tax assessments:Self-assessmentPreliminary assessmentRegular assessmentSpecial assessmentUnderself-assessment, taxpayers themselves calculate their income and tax liability for a given financial year, and this is reported in the next year, called theassessment year.For example, income earned duringFY 2023–24is assessed inAY 2024–25. After determining their tax due, taxpayers must pay the amount and file their ITR accordingly.Next, the Income Tax Department performs apreliminary checkusing an automated system to identify calculation errors or invalid claims. This is a basic review, not a detailed evaluation.Regular assessmentsinclude more detailed checks and fall under:Scrutiny assessment (Section 143(3))Best judgement assessment (Section 144)Special assessmentscover:Income escaping assessment (Section 147)Assessments following a search (Sections 153A to 153C)What Happens When Income Escapes Assessment?In some cases, certain portions of a taxpayer’ income may not be evaluated during the initial assessment—either due to oversight or intentional misreporting.
When anAssessing Officer (AO)believes that any income chargeable to tax has not been accounted for, they can reopen the case forreassessmentunder 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 inSections 148 to 153and can be carried out more than once, provided all the necessary conditions under Section 147 are fulfilled.Examples of Income Escaping AssessmentIf someone earns₹24 lakhinAY 2024–25but only reports₹20 lakh, the unreported₹4 lakhis considered to haveescaped assessment.In another case, if a business owner earns₹40 lakhin a year but does not file a return at all, the entire amount is treated asescaped income.Authority of the Assessing OfficerThe Income Tax Act empowers the AO to re-evaluate any income that appears to haveescaped taxationunderSections 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, theFinance Act, 2021and the proposed changes in theFinance Bill, 2022aim to streamline the process and make it more transparent and efficient.Amendments Introduced by the Finance Act, 2021TheFinance Act, 2021brought significant structural changes to the reassessment framework under the Income-tax Act. It replaced the earlier Sections147 to 149with the newly formulatedSections 147, 148, 148A, and 149. Additionally, the previously existingSections 153A to 153Cwere removed and their provisions consolidated under the newSection 147.Introduction of Section 148A: Mandatory Preliminary InquiryOne of the key changes includes the insertion ofSection 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’ response and considering all relevant material, can the AO decide whether it is appropriate to proceed with the reassessment under Section 147.From “Reason to Believe” to “Information-Based” ActionEarlier, 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 beingsubjective to data-driven. The AO must now rely onspecific informationto reopen assessments—thereby eliminating personal discretion and increasing transparency.What Qualifies as Information Suggesting Escaped Income?For actions under Sections147 and 148, the AO must possess credibleinformationindicating that income chargeable to tax has escaped assessment.