Let’s Reassess the Efficacy of New Reassessment Scheme

Finance Act, 2021 has brought out sea-changes in the scheme of reassessment. Justice Shah termed the new scheme of reassessment in the famous case of Ashish Agrawal as ‘game changer’. Position of law in the matter of reopening which more or less came to be settled over the years by the law expounded & enunciated by Hon’ble Supreme Court, has come back once again in fluid situation because of these whole-sale changes made in the scheme of reassessment. Our legislature is known for such kind of ‘adventures’.

One of the most notable changes made by the Finance Act, 2021 in the scheme of reassessment is by way of omission of an important phrase ‘reason to believe’ which used to act as a check & bulwark against the arbitrary use & exercise of the vast powers of the reassessment enjoyed by the assessing officer. Law has always attached great sanctity to the finality of an assessment and therefore, the legislature had ensured that such finality of an assessment should not be allowed to be disturbed by mere whim and fancy of the Assessing Officer. Pursuant to this basic jurisprudential philosophy, the expression ‘reason to believe’ in section 147 had always controlled the powers of the Assessing Officer in the matter of reopening of the concluded assessment. This phrase though has not been defined under the Act but came to be interpreted by Hon’ble Courts to mean that there must be material before the assessing officer before forming the belief of escapement of income and further that, material must have live nexus with the belief of escapement of income. Hon’ble Courts have held that though such material may not be required to be conclusive but, in any case, such material must be more than mere gossip, rumor or hunch. Therefore, whenever the belief of the Assessing Officer based upon which the finality of an assessment was sought to be disturbed by reopening the assessment, Hon’ble Courts, when called upon, used to see based upon the ‘reason’ recorded as to whether there was any material or not and in case there was absence of material, Hon’ble Courts would quash such reopening of the assessment. Even in those cases where material was there, Hon’ble Courts used to examine whether such material had live nexus with the belief of escapement of income. Hon’ble Courts held consistently that the though belief is subjective, but such belief was to be based on objective considerations. To that extent Hon’ble Courts found that the ‘reason to believe’ formed by the Assessing Officer was justiciable to this limited extent.

It was also settled law that the issue as to whether reopening of an assessment was justified or not, was to be seen and tested strictly with reference to the ‘reason’ recorded & the ‘reason’ recorded alone and no other material which is not forming part of the ‘reason to believe’ could be looked into to find as to whether the reopening was justified in law or not. That being the position of the law, in good number of cases where the ‘reason’ recorded by the Assessing Officer was when tested before Hon’ble Courts on the established legal parameters, was found wanting, attempt of the revenue to reopen the concluded assessment used to meet failure after failure.

Therefore, it appears that the legislature in its wisdom thought to omit this important expression ‘reason to believe’ from the wordings of section 147 and introduced a somewhat ‘objective’ criteria by introducing the concept of ‘information suggesting escapement of income’. Legislature by providing five exhaustive situations under Explanation – 1 to section 148 has tried to introduce somewhat ‘objective’ criteria in this regard.

After the introduction of the new provisions of reassessment, it has to be seen as to whether information with the Assessing Officer is one or more out of the given five situations under Explanation – 1 to section 148. In this way, the legislature tried to kill two birds with one stone i.e. to eliminate the possibility of faulty and inept recording of ‘reason to believe’ by the Assessing Officers in their own respective ways and often, such ‘reason to believe’ not meeting the legal standards set up/interpreted by Hon’ble Courts and reassessments after reassessments thus getting quashed, and on the other hand, tried to bring some element of certainty to the tax-payers and revenue alike. Moreover, by providing enquiry and opportunity under section 148A before the issue of notice u/s 148, the legislature has tried to legislate the judge made law as enunciated by Hon’ble Supreme Court in the case of GKN Driveshaft (India) Limited v. CIT [2002] 125 Taxman 963/[2003] 259 ITR 19 and thus, removing a long drawn grievance of the taxpayers that had an opportunity been provided before reopening of an assessment, the he (taxpayers) may have well satisfied the Assessing Officers at that stage itself that it did not call for reopening of the concluded assessment.

But even the new scheme of the reassessment by providing five instances of information suggesting that income chargeable to tax has escaped assessment has its own weaknesses and deficiencies. ‘Risk management strategy’ formulated by the Board from time to time which is one of the sources of information is not in the public domain and in any case the way replies of the taxpayer in response to the initial notice u/s 148A are dealt with, sorry to say, in perfunctory manner at times by the Assessing Officers puts everything in this ‘game changer’ back to square one. Moreover, when the instances mentioned in the risk management strategy are taken by the Assessing Officers as the gospel truth even without adverting to the replies furnished by the taxpayers objectively, makes the entire scheme of reassessment to a naught.

Therefore, it is essential that the higher authority before grating approval at various stages in the new scheme of assessment must closely monitor the actions of the Assessing Officers and giving approval should not end in merely ritualistic & eye-wash compliances.