Significant Direct Tax Proposals in The Finance Bill, 2021 - Towards Greater Transparency, Efficiency and Tax Certainty
“The Union Budget 2021-22 aims to provide strong impetus to an economy that is badly-hit by the novel coronavirus pandemic. The direct tax proposals in the Finance Bill, 2021 seeks to create an enabling framework for an all-inclusive economic growth. It aims to ensure greater efficiency, transparency and accountability in income-tax proceedings. Read on…”
A New Faceless Regime encompassing Faceless Assessment Scheme, Faceless Appeal Scheme and Faceless Penalty Scheme was introduced in the Income-tax Act, 1961 (referred as ‘Act’) last year, in order to ensure greater efficiency, transparency and accountability in the proceedings under the Act. In this direction, the Union Budget 2021-22, proposes to also bring the proceedings before the Tribunal under the gamut of Faceless regime. The Finance Bill, 2021 contains the provisions for Constitution of Dispute Resolution Committee (DRC) for small and medium taxpayers and constitution of Board for Advance Ruling for reducing litigations and disputes, the workings of which would also be faceless. An entirely new procedure is being put in place for bringing to tax income escaping assessments (including search assessments), for reducing litigations and for providing ease of doing business to taxpayers. Time limits for completion of assessment u/s 143/144 are proposed to be reduced on account of technological advancement in the processes of assessment. These proposals as well as their impact are discussed at length in this article:
I. Revamp of Procedure for Assessment of Escaped Income
In the current section 147 of the Act, dealing with income escaping assessment, it is provided, if the Assessing Officer (AO) has reason to believe that any income chargeable to tax has escaped assessment for any assessment year (A.Y.), he may assess or reassess or recompute the total income for such year by issuing a notice u/s 148. Notice u/s 148 can be issued for making assessment or reassessment subject to the time limits prescribed in section 149. Search assessment cases are currently dealt with under sections 153A, 153B, 153C and 153D, where search is initiated u/s 132 or books of account, other documents or any assets are requisitioned u/s 132A, in the case of the assessee, or any other person.
The provisions pertaining to search assessment i.e., section 153A/153B/153C/153D, were earlier incorporated in the year 2003 to replace the block assessment. In spite of the same, a spate of litigations emerged over a period of time on these provisions related to search assessments and income escaping assessments. There are plethora of judicial rulings on the provisions contained under section 147, 153A, 153B, 153C and 153D.
Accordingly, in order to curtail litigations, the Finance Bill, 2021 has proposed an entirely new procedure of assessment of such cases. Accordingly, sections 147, 148, 149 and 151 are proposed to be substituted. Further, new section 148A is proposed to be inserted to provide for conducting inquiry and giving an opportunity of being heard before issue of notice in certain cases.
Relevant provisions for Income Escaping Assessment (including Search Assessment)
Income Escaping Assessment [New Section 147]
If any income chargeable to tax has escaped assessment for any A.Y., the AO may assess or reassess such income or recompute the loss or the depreciation allowance or any other allowance or deduction for such assessment year.
The AO may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section. In such a case, compliance stipulated u/s 148A are not necessary.
Issue of notice where income has escaped assessment [Section 148, 148A, 149 & 151]
New section 148 lays down the cases where a notice can be issued u/s 148 for making assessment u/s 147. New section 148A specifies the requisite compliances, (with respect to the information suggesting that income chargeable to tax has escaped assessment), to be satisfied, before issuing notice u/s 148. The notice u/s 148 can be issued, within the time limits specified under new section 149 and with the prior approval of the Specified Authority (SA) as referred to in new section 151.
When can notice be issued for making assessment u/s 147?
The following flow chart provides an overview of the statutory procedure for making assessment u/s 147:
Case A: Information in Possession of AO
When AO is in possession of following “information” suggesting that income has escaped assessment for the purposes of section 148 & 148A [Explanation 1 to section 148]:
- Any information flagged for the RAY as per risk management strategy formulated by the Board from time to time.
- Any final objection raised by CAG that the assessment for RAY has not been made as per the provisions of the Act.
- Conducting an enquiry, if required, with respect to the information suggesting escapement of income.
- Providing an opportunity of being heard to the assessee by serving a show cause notice.
- Based on the material available on record including reply of the assessee, in response to show cause notice, decide, whether or not it is a fit case to issue notice u/s 148, by passing an order, with prior approval of SA.
Case B: AO Deemed to Have Information
When AO is “deemed to have information” suggesting that income has escaped assessment for the purposes of section 148 [Explanation 2 to section 148]:
- (1) a search is initiated u/s 132 or books of account, other documents or any assets are requisitioned u/s 132A, on or after 1.4.2021.
- (2) a survey is conducted u/s 133A on or after 01.04.2021.
- (3) any money, bullion, jewellery or other valuable article or thing, or any books of account or documents seized or requisitioned, in case of any other person on or after 01.04.2021 belongs to the assessee or any information contained therein, relate to the assessee.
Time limit for issue of notice u/s 148 for the RAY [Section 149]
Upto 3 years from end of the RAY [Section 149(1)(a)]
Notice can be issued within 3 years from the end of the relevant assessment year in normal cases.
Beyond 3 years up to 10 years [Section 149(1)(b)]
If the AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to INR 50 lakh or more for that year.
| What is the meaning of “Relevant Assessment Year (RAY)”? | |
|---|---|
| Explanation 1 to Section 148 | Explanation 2 to Section 148 |
|
I. Where the information with AO suggests that income has escaped assessment: In such a case, the RAY is the assessment year:
|
II. Where AO shall be deemed to have information suggesting that income has escaped assessment: The RAYs means the 3 A.Y.s immediately preceding the A.Y. relevant to the P.Y. in which the search is initiated u/s 132 or survey is conducted u/s 133A or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person. |
Let us understand with the help of the following examples, the contextual meaning of RAY and the time limit upto which a notice u/s 148 can be issued in cases mentioned in Explanation 1 & 2 below to section 148.
Example 1: In a case, where information is flagged in the system which suggests income has escaped assessment:
| Information flagged in the system for | RAY | Date of expiry of the 3 year time limit | Can notice be issued on or after 1.4.2021? |
|---|---|---|---|
| A.Y. 2016-17 | 2016-17 | 31.03.2020 | No, notice cannot be issued, since 3 years have elapsed from the end of the RAY. |
| A.Y. 2017-18 | 2017-18 | 31.03.2021 | |
| A.Y. 2018-19 | 2018-19 | 31.03.2022 | Yes, notice can be issued, since 3 years have not elapsed from the end of the RAY. |
| A.Y. 2019-20 | 2019-20 | 31.03.2023 | |
| A.Y. 2020-21 | 2020-21 | 31.03.2024 |
Example 2: Search initiated during P.Y. 2021-22:
In a case, where search is initiated u/s 132 during the P.Y. 2021-22, AO is deemed to have information suggesting income has escaped assessment for the 3 A.Y.’s immediately preceding the A.Y. relevant to the P.Y. in which the search is initiated u/s 132. Accordingly, the RAY’s would be A.Y. 2021-22, A.Y. 2020-21 and A.Y. 2019-20. Thus, notice can be issued for these A.Y.’s, since 3 years have not elapsed from the end of the RAY.
Applicability of extended time limit of 10 years from the end of RAY
As per section 149(1)(b), notice can be issued for the RAY:
- if 3 years but not more than 10 years have elapsed from the end of RAY,
- where AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment
- amounts to or is likely to amount to INR 50 lakh or more for that year.
However, the term “asset” has not been defined for applicability of this extended time limit. This needs to be incorporated at the time of enactment of Bill in order to provide clarity.
As per Explanation 2 to section 148, AO is deemed to have information for 3 A.Y.s immediately preceding the A.Y. relevant to the P.Y. in which the search is initiated u/s 132 or survey is conducted u/s 133A or money, bullion, jewellery or other valuable article or thing or books of account or documents are seized or requisitioned in case of any other person. Consequently, in these cases, notice can be issued only for these 3 A.Y.’s.
The moot point is whether the extended period of 10 years mentioned in section 149(1)(b) for issue of notice u/s 148 would apply in respect of cases covered in Explanation 2 to section 148 (i.e., search & seizure/survey/requisition of books, etc.) or is it intended only for cases covered in Explanation 1 to section 148. The intent is not clear from the language of these sections, since the requirement in section 149(1)(b) that the A.O. should be in possession of books of accounts or other documents (revealing escapement of income, represented in the form of asset, exceeding INR 50 lakhs) seems to indicate that the extended period of 10 years is in respect of search, survey cases etc. referred to in Explanation 2 to section 148; though the said explanation deems income escaping assessment only upto 3 AYs immediately preceding the A.Y. relevant to previous year of search/survey. However, the requirement that possession of “evidence” by AO of income escaping assessment exceeding INR 50 lakhs seems to indicate that it may also apply in respect of a case covered under Explanation 1 to section 148.
Specified Authority for the purpose of section 148 and section 148A [Section 151]
Upto 3 years from the end of the RAY
- Principal Commissioner or
- Principal Director or
- Commissioner or Director
Beyond 3 years from the end of the RAY
- Principal Chief Commissioner (PCC) or
- Principal Director General (PDG)
- where there is no PCC or PDG - Chief Commissioner or Director General
II. Reduction in time limits for completion of assessments
Existing time limits prescribed u/s 153(1) for completion of assessment u/s 143/144 are proposed to be reduced by three months, keeping in mind the elimination of person-to-person interface between the Taxpayer and the Department and introduction of completely faceless and jurisdiction-less manner of passing assessments orders. Accordingly, the following are the time limits from A.Y. 2017-18 for completing assessment u/s 143/144 :-
| Assessment Year | Statutory Time Limit u/s 153(1) for Assessment Completion |
|---|---|
| For A.Y. 2017-18 | 21 months from the end of the A.Y. |
| For A.Y. 2018-19 | 18 months from the end of the A.Y. |
| For A.Y. 2019-20 & A.Y. 2020-21 | 12 months from the end of the A.Y. |
| A.Y. 2021-22 onwards | 9 months from the end of the A.Y. |
This seems to be consequent to the proposed reduction in time limit for filing belated return u/s 139(4) and revised return u/s 139(5) by three months. In effect, the AOs would continue to have a period of 12 months for completing the assessment.
III. Constitution of Dispute Resolution Committee (DRC)
In order to prevent new disputes and settle issues at an initial stage, constitution of one or more Dispute Resolution Committee(s) (DRC) has been proposed in the Finance Bill, 2021. This is another welcome move towards providing tax certainty to the taxpayers.
At present, a dispute resolution mechanism exists in respect of transfer pricing cases and foreign companies to facilitate expeditious resolution of disputes on fast track basis. Section 144C of the Act lays down the provisions of Dispute Resolution Panel (DRP) in cases where variations are proposed in the assessment order in consequence of the order of TPO, which is prejudicial to the interest of assessee. In such cases, the eligible assessee can file an objection before DRP against the draft assessment order within 30 days of receipt of such order.
However, the dispute resolution introduced vide new section 245MA through the Finance Bill, 2021 is intended to provide tax certainty to the small and medium taxpayers and to minimise the disputes at preliminary stage by providing faceless resolution. The provisions pertaining to constitution of DRC are as follows:
- One or more DRCs to be constituted by the Central Government (CG).
- DRCs would resolve disputes of such persons or class of person which shall be specified by the Board.
- An assessee who fulfils the specified conditions can choose to opt for the dispute resolution through the DRC in respect of specified order.
Specified Order (SO)
- An order or draft order, as specified by CBDT, and -
- aggregate sum of variations proposed in SO does not exceed INR 10 lakhs.
- total income as per the return filed by the assessee for the A.Y relevant to such order does not exceed INR 50 lakhs.
- Such order is not based on a search initiated u/s 132 or requisition made u/s 132A or a survey initiated u/s 133A or information received under DTAA.
Specified conditions to be fulfilled in relation to a person
- No order of detention has been made against him under Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
- No prosecution for any offence punishable under the provisions of the Indian Penal Code, the Unlawful Activities (Prevention) Act, 1967, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Prohibition of Benami Transactions Act, 1988, the Prevention of Corruption Act, 1988 or the Prevention of Money Laundering Act, 2002 has been instituted and he is not convicted of any offence punishable under any of these Acts;
- No prosecution has been initiated by an Income-tax Authority for any offence punishable under the provisions of this Act or the Indian Penal Code or for the purpose of enforcement of any civil liability under any law for the time being in force, and he is not convicted of any such offence consequent upon the prosecution initiated by an Income-tax Authority;
- he is not a person who is notified u/s 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992;
CBDT may prescribe other conditions in due course which would also need to be satisfied for being eligible to opt for dispute resolution under this provision of the Act.
Powers of DRC
The above powers can be exercised by DRC subject to conditions to be prescribed. The scheme for faceless working of the DRC will be notified by the CG to impart greater efficiency, transparency and accountability by eliminating interface to the extent technologically feasible, by optimising utilisation of resources and introducing a dispute resolution mechanism with dynamic jurisdiction.
IV. Discontinuation of Income Tax Settlement Commission (ITSC)
Consequent to the constitution of DRC, Income-tax Settlement Commission (ITSC) proposed to be discontinued, w.e.f. 1st February 2021. Thus, no application can be made before ITSC on or after 1.2.2021.
- For the disposal of such pending applications before ITSC, one or more Interim Boards of Settlement (IBS) would be constituted by the CG.
- However, the application in respect of which no order was issued on or before 31.1.2021, would be treated as pending applications, irrespective of the fact that in respect of such applications an order was required to be passed to declare it as invalid.
- Every Interim Board shall consist of three members, each being an officer of the rank of Chief Commissioner.
- All the powers exercised by ITSC or functions performed by it, namely, provisional attachment, exclusive jurisdiction over the case, inspection of reports and power to grant immunity shall apply mutatis mutandis to the Interim Board for the disposal of pending applications.
V. Constitution of Board for Advance Ruling
Another step in the direction of providing certainty to the taxpayers is proposal for constitution of Board for Advance Ruling.
The working of AAR has been affected due to the posts of Chairman and Vice Chairman remaining vacant for a long period of time on account of non-availability of eligible persons. This has lead to pendency of large number of applications over the years. There is, therefore, a need to look for an alternative method of providing advance ruling which can give rulings to the taxpayers in timely manner. Therefore, a workable constitution of one or more Boards for Advance Rulings (BAR) has been proposed in the Bill for pronouncing advance rulings under the Act. For this purpose, new section 245-OB is to be inserted providing for the constitution of BAR. As per new section 245W, an advance ruling pronounced by the BAR is appealable before the High Court. Other consequential amendments are also proposed in various sections relating to Advance Ruling in the Finance Bill.
Composition of Board for Advance Ruling (Section 245-OB)
As per section 245-OB, BAR would consist of Two members who are officers not below the rank of Chief Commissioner.
| Significant differences between AAR and BAR | |
|---|---|
| Authority for Advance Ruling (AAR) | Board for Advance Ruling (BAR) |
| I. Binding nature of advance ruling | |
Advance ruling pronounced by the Authority is binding-
|
Ruling or order passed by the Board for Advance Ruling neither binding on the applicant nor on the Department. Accordingly, section 245S is proposed to be amended to provide that advance ruling pronounced on or after the date as may be notified by the CG would not be binding. |
| II. Appellate/writ remedy | |
| Writ petition before the High Court can be filed against such ruling. | Appeal against the order or ruling can be filed before the High Court within 60 days from the date of communication of the ruling or order. |
Authority for Advance Ruling shall cease to operate and BAR will be effective from the date notified by the CG. Consequently, application filed before the AAR on or before such date as may be notified by the CG would be transferred to the BAR along with all the relevant records, documents or material.
The working of BAR would be faceless, and the CG may notify a scheme for eliminating interface between the BAR and the applicant. Making the working of BAR faceless is expected to resolve the disputes in timely manner.
VI. Appellate Proceedings - Faceless Sans Jurisdiction
The Finance Bill, 2021 has also proposed to make ITAT proceedings faceless on the same lines as proceedings before the CIT(Appeals). It is clarified in the memorandum that the aim of introducing faceless working of the Tribunal will not only reduce cost of compliance for taxpayers, but it would also increase transparency in disposal of appeals. It will also help in achieving even work distribution amongst different benches resulting in best utilisation of resources.
Section 255 is proposed to be amended to empower the CG to notify a faceless scheme for the purpose of disposal of appeal by the ITAT. Accordingly, all the communication with the taxpayers would take place electronically. It is clarified in the annexures to the Budget Speech that wherever personal hearing is required, the proceeding can take place through video conferencing. It is expected that the faceless scheme so formulated would incorporate provisions for providing opportunity of being heard through video conferencing. To implement the faceless scheme for Tribunals, National Faceless Income Tax Appellate Tribunal Centre would be established.
Endnote – Towards giving effect to Taxpayers’ Charter
The Taxpayers’ Charter released last year spells out the commitments on the part of the Income Tax Department as well as the expectations from taxpayers. As per the Charter, the Income Tax Department is committed to inter alia provide a mechanism for appeal and review, provide timely decisions and respect privacy of taxpayers. In line with these commitments, the Finance Bill, 2021 seeks to reduce the time limit for completing assessments u/s 143/144 and time limits for issue of notice for reassessment (including search assessments), make the appeal process before the Tribunal faceless, constitute Board for Advance Ruling to provide tax certainty and constitute DRC for resolution of disputes of small and medium taxpayers. While fulfilling its commitment as per the Charter, the Department expects the taxpayers to disclose their income honestly, pay taxes and file returns timely. The Finance Bill, 2021, reflecting the commitment of the Department, would go a long way in instilling the necessary element of confidence in the taxpayers and encouraging them to disclose full information and fulfil their compliance obligations.