The Finance Act, 2021 significantly overhauled the reassessment framework under Section 147 of the Income-tax Act, 1961, replacing the earlier provisions relating to income escaping assessment.
Before understanding Section 147, it is important to clarify two key concepts: assessment and income escaping assessment.
What Is an Assessment?
Every individual whose income is chargeable to tax must file an Income Tax Return (ITR). The Income Tax Department examines the return and may seek clarifications where required. This process of examining the return is called assessment.
Types of Assessment Under the Income-tax Act
Assessments are broadly categorized into the following types:
1. Self-Assessment
Self-assessment refers to the process where the taxpayer:
- Calculates total income for a Financial Year (FY)
- Computes tax liability
- Pays the tax due
- Files the ITR in the subsequent Assessment Year (AY)
For example:
Income earned in FY 2024–25 is assessed in AY 2025–26.
After filing, the Income Tax Department performs preliminary checks through a fully computerized system to identify arithmetical errors or incorrect claims. No detailed scrutiny happens at this stage.
2. Preliminary Assessment
After filing the ITR, the Income Tax Department conducts basic validation checks to:
- Detect calculation errors
- Identify incorrect claims
- Verify apparent inconsistencies
This is only a surface-level review and does not involve detailed examination of the return.
3. Regular Assessment
Regular assessment is divided into two categories:
(a) Scrutiny Assessment – Section 143(3)
Under Section 143(3) of the Income-tax Act, 1961, the Assessing Officer (AO) conducts a detailed examination of:
- Reported income
- Deductions claimed
- Exemptions
- Supporting documents
The purpose is to verify correctness and completeness of the return.
(b) Best Judgment Assessment – Section 144
Under Section 144 of the Income-tax Act, 1961, if the taxpayer:
- Fails to file the return
- Does not respond to notices
- Does not furnish required details
The AO makes an assessment based on available information using best judgment.
4. Special Assessment
Special assessments include:
(a) Income Escaping Assessment – Section 147
If the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment, the case may be reopened under Section 147 of the Income-tax Act, 1961.
This can happen when:
- Certain income was not disclosed
- Income was underreported
- Incorrect claims led to lower tax liability
- New information comes to the AO’s knowledge
In such cases, reassessment is carried out in accordance with Sections 148 to 153 of the Act.
The AO may:
- Reassess income
- Recompute losses
- Recalculate depreciation
- Re-evaluate deductions and allowances
Reassessment may be conducted multiple times, provided statutory conditions under Section 147 are satisfied.
(b) Assessment in Consequence of Search – Sections 153A to 153C
Under Sections 153A to 153C of the Income-tax Act, 1961, assessment is conducted following a search or seizure operation to uncover:
- Undisclosed income
- Hidden assets
- Unreported financial transactions
Income Escaping Assessment Explained
Income escaping assessment occurs when taxable income was not assessed during the original proceedings, either:
- Knowingly
- Due to oversight
- Due to concealment
- Because of fresh tangible material found later
If the AO forms a valid “reason to believe” that income has escaped assessment, proceedings can be initiated under Section 147.
The revised framework introduced by the Finance Act, 2021 emphasizes procedural safeguards and time-bound actions to ensure fairness and transparency in reopening cases.
Explanation Related to Section 147 of the Income-tax Act
Section 147 of the Income-tax Act, 1961 empowers the Assessing Officer (AO) to reassess or recompute income that has escaped assessment. It serves as a corrective mechanism to address omissions, underreporting, or inaccuracies in income disclosure. The provision also outlines the AO’s authority and must be read in conjunction with related sections governing reassessment procedures.
What Is Income Escaping Assessment?
Income is said to have escaped assessment when it has not been subjected to tax, either wholly or partially. This may happen if:
- Income is underreported
- The return is not filed
- Losses are overreported
- Incorrect deductions or reliefs are claimed
Example 1:
If a taxpayer earns ₹24 lakh in AY 2024–25 but declares only ₹20 lakh in the return, ₹4 lakh is considered to have escaped assessment.
Example 2:
If a businessman earns ₹40 lakh but fails to file an ITR, the entire ₹40 lakh is treated as income escaping assessment.
Legal Framework for Reassessment
Sections 147 and 148 allow the AO to reopen completed assessments to tax escaped income. However, these powers are subject to safeguards and procedural requirements to ensure fairness.
Recent amendments through the Finance Act, 2021 and subsequent proposals have significantly restructured the reassessment regime to enhance transparency and reduce litigation.
Key Amendments Introduced by the Finance Act, 2021
The Finance Act, 2021 substituted the earlier provisions (Sections 147–149) and introduced a new framework including:
- Section 148A of the Income-tax Act, 1961 (Pre-notice inquiry procedure)
- Revised Section 147
- Amended Section 148
- Modified Section 149
It also streamlined reassessment provisions that previously operated under separate sections.
Introduction of Section 148A – Pre-Notice Safeguard
Before issuing a notice under Section 148, the AO must:
- Conduct a preliminary inquiry
- Provide the taxpayer an opportunity of being heard
- Consider the taxpayer’s reply
- Pass a speaking order deciding whether reassessment should proceed
This ensures procedural fairness and reduces arbitrary reopening.
Shift from “Reason to Believe” to “Information-Based” Reopening
Earlier, reassessment could be initiated based on the AO’s “reason to believe” that income had escaped assessment. The amended law now requires specific information suggesting escapement of income, reducing subjectivity and discretion.
Information Includes:
- Risk management flags as per rules framed by the Central Board of Direct Taxes (CBDT)
- Final audit objections raised by the Comptroller and Auditor General of India (CAG)
Deemed Information in Certain Cases
The AO is deemed to have information suggesting escapement of income where:
1. Search Cases
A search is initiated under Section 132 of the Income-tax Act, 1961 or requisition is made under Section 132A of the Income-tax Act, 1961 on or after April 1, 2021.
2. Survey Cases
A survey is conducted under Section 133A of the Income-tax Act, 1961 (other than specified sub-sections) on or after April 1, 2021.
3. Seizure of Assets
Where money, bullion, jewellery, or valuable articles seized under Section 132 or 132A are found to belong to the assessee, with prior approval of the Principal Chief Commissioner of Income-tax (PCIT).
Objective of the Amended Framework
The revised reassessment mechanism aims to:
- Reduce litigation
- Minimize arbitrary discretion
- Improve procedural transparency
- Ensure fair opportunity to taxpayers
- Strengthen data-driven tax administration
Finance Act 2022 – Amendments to Time Limits and Reassessment Procedure
The Finance Act, 2022 introduced key changes regarding the time limits for completion of assessment, reassessment, and recomputation under the Income-tax Act, 1961.
Revised Time Limits for Completion of Assessment
Assessment Year-Wise Time Limits
| Assessment Year | Time Limit for Completion of Assessment |
|---|---|
| AY 2021–22 onwards | Within 9 months from the end of the Assessment Year in which income was first assessable |
| AY 2020–21 | Within 18 months from the end of the Assessment Year in which income was first assessable |
| AY 2019–20 | Within 12 months from the end of the Assessment Year in which income was first assessable |
| AY 2018–19 | Within 18 months from the end of the Assessment Year in which income was first assessable |
| Up to AY 2017–18 | Within 21 months from the end of the Assessment Year in which income was first assessable |
The amendment increased the time limit for AY 2020–21 from 12 months to 18 months, while for AY 2021–22 and onwards, the time limit is reduced to 9 months, thereby accelerating the assessment process.
Applicability to Search and Requisition Cases
All searches and requisitions initiated under:
- Section 132 of the Income-tax Act, 1961
- Section 132A of the Income-tax Act, 1961
during FY 2021–22 shall be governed by the new provisions of Section 147 of the Income-tax Act, 1961 within the time limits prescribed under Section 153.
Other Related Provisions
Compliance with Section 148A
Before issuing a notice under Section 148 of the Income-tax Act, 1961, the Assessing Officer (AO) must comply with Section 148A of the Income-tax Act, 1961, which requires:
- Conducting preliminary inquiry (if required)
- Providing the assessee an opportunity to respond
- Considering the reply before issuing notice
This ensures procedural fairness before reopening an assessment.
Sanction for Issue of Notice
While Section 148 deals with issuing notice for income escaping assessment, Section 151 of the Income-tax Act, 1961 provides for mandatory sanction from the specified authority before issuing such notice.
Assessment of Additional Issues
During reassessment proceedings under Section 147, the AO may also assess or reassess any other income that comes to notice subsequently in the course of proceedings, even if the provisions of Section 148A were not separately complied with for such additional issues.
Procedure of Reassessment under Section 147
Under Section 147 of the Income-tax Act, the following step-by-step procedure must be followed by the Assessing Officer:
1. Identification of Income Escaping Assessment
The AO must identify income that was not disclosed or was underreported in the original Income Tax Return (ITR). The AO must have “reason to believe” (now based on information suggesting escapement) supported by material evidence.
2. Recording of Evidence
The AO must document material facts, taxpayer submissions, discrepancies, and supporting evidence to justify reopening the assessment.
3. Approval from Higher Authority
Before issuing notice, the AO must obtain prior approval from the prescribed authority as mandated under Section 151.
4. Issuance of Notice under Section 148
Upon approval, the AO issues a notice under Section 148 informing the taxpayer that the case is reopened for reassessment. Typically, the taxpayer is allowed 30 days to respond.
5. Filing of Revised Return
The taxpayer must file a revised return addressing discrepancies and disclosing previously unreported income.
6. Assessment by the AO
The AO reviews the revised return and may request further clarification or documents to examine the case thoroughly.
7. Draft Assessment Order
If additional tax liability is proposed, a draft assessment order is prepared and subject to internal approval.
8. Issuance of Show Cause Notice
A show cause notice is issued, giving the taxpayer an opportunity to explain why the proposed additions should not be made.
9. Hearing
The taxpayer is granted an opportunity of being heard and may submit explanations and supporting documents.
10. Final Assessment Order
After considering all submissions, the AO passes the Final Assessment Order determining revised income, tax liability, interest, and penalties (if applicable).
11. Appeal by the Taxpayer
The taxpayer may file an appeal against the final order within the prescribed time limit (generally 30 days) if aggrieved by the reassessment order.
Conclusion
The amendments introduced by the Finance Act, 2022 aim to streamline assessment timelines while strengthening procedural safeguards in reassessment cases. The structured process under Sections 147, 148, 148A, and 151 ensures transparency, accountability, and protection of taxpayer rights while enabling authorities to tax income that has escaped assessment.
FAQs – Section 147 of the Income Tax Act (Reassessment Proceedings)
Q1. What is Section 147 of the Income Tax Act, 1961?
A: Section 147 empowers the Assessing Officer (AO) to reopen and reassess a taxpayer’s income if there is reason to believe that any income chargeable to tax has escaped assessment for a particular financial year. The AO can reassess and add such escaped income to the originally declared income.
Q2. Can an Assessing Officer reopen cases beyond three years?
A: Yes, but only in specific cases. If the AO possesses information suggesting that income escaping assessment is ₹50 lakh or more for the relevant assessment year, the case can be reopened beyond three years and up to 10 years from the end of the relevant assessment year, subject to conditions prescribed under law.
Q3. Can reassessment under Section 147 be done more than once?
A: Yes. Reassessment may be initiated multiple times if new tangible material or information comes to light and statutory conditions are satisfied each time.
Q4. What is the procedure before reopening an assessment?
A: Before issuing a notice under Section 148, the AO must:
- Conduct an inquiry (if required)
- Provide the taxpayer an opportunity of being heard (as per Section 148A)
- Pass an order deciding whether it is a fit case for reopening
Q5. What is the time limit for completing reassessment under Section 147?
The time limit for passing the reassessment order is generally:
- 9 months from the end of the financial year in which notice under Section 148 was served (for notices served before 01-04-2019).
- 12 months from the end of the financial year in which notice under Section 148 was served (for notices served on or after 01-04-2019).
(Recent amendments may further modify timelines depending on the case.)
Q6. What should I do if I disagree with a reassessment order under Section 147?
If you disagree with the reassessment order, you may:
- File an appeal before the Commissioner of Income Tax (Appeals) within 30 days of receiving the order.
- Further appeal to the Income Tax Appellate Tribunal (ITAT) if dissatisfied.
- Approach the High Court or Supreme Court on substantial questions of law.
Q7. Can I appeal against an order passed under Sections 147/150?
Yes. Under Section 246A of the Income Tax Act, an assessee can appeal before the Commissioner of Income Tax (Appeals) against reassessment orders if adversely affected.
Q8. Does reopening automatically mean penalty or prosecution?
No. Reopening of assessment does not automatically result in penalties. Penalty proceedings are separate and depend on whether concealment or misreporting of income is established.
Q9. Can the AO reopen an assessment without new evidence?
No. Reassessment must be based on “reason to believe” supported by new tangible material. A mere change of opinion is not sufficient ground for reopening.
Q10. What documents should I prepare if my case is reopened?
You should gather:
- Original ITR and computation
- Assessment orders (if any)
- Bank statements and financial records
- Supporting invoices and agreements
- Any correspondence with the tax department
Professional representation is strongly recommended.
Q11. What is the difference between reassessment and rectification?
- Reassessment (Section 147): Used when income has escaped assessment.
- Rectification (Section 154): Used to correct apparent mistakes on record.
Q12. Can reopening happen after scrutiny assessment?
Yes. Even if your return was previously scrutinized under Section 143(3), it can still be reopened if valid grounds and new information exist.
Q13. Is approval required before issuing a notice under Section 148?
Yes. Depending on the time elapsed, prior approval from higher authorities (such as Principal Commissioner or Commissioner) is required before issuing a notice.
Q14. What happens if I ignore a notice under Section 147?
Failure to respond may result in:
- Ex-parte reassessment
- Additional tax demand
- Interest and penalties
- Recovery proceedings
