Tax department reopening old tax assessments based on algorithm

tax

 The income tax department has begun the process of reopening old assessments, albeit with a difference this year. Tax officials across the country are busy tracking ‘INSIGHT’, the portal that spews out the names of tax dodgers following an algorithmic scanning of a mountain of data that has been fed in.

The new rule, which came into effect from 2021-22, is simple: till the machine throws up a name, the taxman’s hands are tied – unlike before when he could slap notice to reopen a past tax assessment as long as there was some information that a slice of income in a certain year had escaped tax.

“The system has a degree of randomness. So, it’s possible that if there is evasion for four years, the system may show for one year when we know there are grounds to reopen all the years. Also, it takes a while after all the information is uploaded before a name is thrown up,” said a tax officer, who is trying to beat the March 31, 2022 deadline, after which many cases will become time-barred.

Besides awaiting a go-ahead from INSIGHT, the IT department has to follow a more elaborate process. It has to send a preliminary letter under the newly introduced section 148A of the I-T Act that the assessee’s information has been flagged for a certain assessment year.

Experts See A Silver Lining
The assessee has to be told that his information has been picked out by the Directorate of Income Tax (Systems) as ‘high-risk VRU (variable report upload) under ‘risk management system’ in accordance with the ‘risk management strategy‘ formulated by the Central Board of Direct Taxes. The assessee is given a week to respond, failing which the case would be automatically reopened.”Of course, some would play a cat and mouse game. They would ld file an adjournment letter, give some ‘cogent’ reason to ask for more time…may be submit at the last moment or look for an excuse to delay beyond March 31,” said a source.

If the system throws up enough names on time, the department’s Mumbai region which accounts for over 30% of the I-T collections may end up issuing more than 50,000 initial letters under section 148A.

However, tax practitioners advising the high net worth individuals aren’t complaining. “We understand if a satisfactory reply is received from an assessee, the case may not be reopened. It is a welcome move towards reducing litigation and giving opportunity to an assessee before a case is reopened. Writ petitions based on the principle of natural justice will be history. Every assessee will have an opportunity to explain his case to the assessing officer. Earlier cases were reopened without opportunity,” said Rajesh P Shah who heads the international taxation committee of the chamber of tax consultants.

The number of cases that would be eventually reopened would depend on the names cleared by the portal and the time tax officers have for sending out notices before the financial year ends.

Writ Petitions

“Reassessment provisions are one of the highest litigated provisions with maximum writs filed against reassessment notices. One really hopes that the tax administration gives due consideration to the responses filed by taxpayers and where dropping of show-cause notices is justified, such proceedings are fairly dropped. This will not only reduce unwanted litigation but also go a long way in building trust between the taxpayers and administration and augmen ease of doing business,” said Said Ashish Mehta, partner, Khaitan & Co.

The amended law allows the department to go back 11 years (i.e. 10 years from the end of the assessment year in which the notice is received) if total income that has escaped tax is suspected to be more than Rs 50 lakh; it’s four years if escaped income is below Rs 50 lakh. The information uploaded on the portal is obtained from banks, overseas authorities, agencies like the Central Bureau of Investigation and Enforcement Directorate and other third parties.

Once a reopening notice is issued within the next fortnight, a full-blown reassessment would begin involving recording all responses and serving a show-cause notice within nine months from the end of this financial year (i.e. by December 2023). “One case leads to another. Suppose, there is an accommodation loan entry where irregular cash payment is finding its way back into a company. In such a case, all lenders to the company will be served notices,” said another tax officer.