Procedure before issuance of notice under section 280.

281(1)

Where the Assessing Officer has information which suggests that income chargeable to tax has escaped assessment in the case of an assessee for the relevant tax year, he shall, before issuing any notice under section 280 provide an opportunity of being heard to such assessee by serving upon him a show cause notice.

281(2)

The notice to show cause referred to in sub-section (1) shall be accompanied by the information which suggests that income chargeable to tax has escaped assessment in his case for the relevant tax year, and on receipt of such notice, the assessee may furnish his reply within such period, as specified in therein.

281(3)

The Assessing Officer shall, on the basis of material available on record and taking into account the reply of the assessee furnished under sub-section (2), if any, pass an order with the prior approval of the specified authority determining whether or not it is a fit case to issue notice under section 280.

281(4)

The provisions of this section shall not apply to income chargeable to tax escaping assessment for any tax year in the case of an assessee, where the Assessing Officer has received—

• (a) information under the scheme notified under section 260;
• (b) directions issued by the Approving Panel under section 274(6);
• (c) any finding or direction contained in an order passed by any
• authority, Tribunal or court in any proceeding under this Act by way of appeal, reference or revision, or by a Court in any proceeding under any other law.

Explanation

Section Summary:

Section 281 outlines the procedure that the Assessing Officer (AO) must follow before issuing a notice under Section 280 for cases where income chargeable to tax has escaped assessment. The section ensures that the taxpayer is given an opportunity to respond to the AO's findings before any formal notice is issued. This procedural safeguard aims to promote fairness and transparency in tax assessments.

Key Changes:

1. Pre-Notice Hearing Opportunity: The AO must now provide a "show cause notice" to the taxpayer before issuing a notice under Section 280. This is a new procedural requirement aimed at giving taxpayers a chance to explain their position.
2. Information Disclosure: The show cause notice must include the specific information or evidence that suggests income has escaped assessment. This ensures transparency and allows the taxpayer to respond effectively.
3. Prior Approval Requirement: The AO must obtain prior approval from a specified authority before deciding whether to issue a notice under Section 280. This adds an additional layer of oversight.
4. Exceptions: The section does not apply in cases where the AO has received specific information or directions from other authorities, tribunals, or courts.

Practical Implications:

• For Taxpayers: Taxpayers now have the right to respond to the AO's findings before a formal notice is issued. This can help resolve misunderstandings or errors at an early stage, potentially avoiding lengthy disputes.
• For Assessing Officers: The AO must follow a more structured process, including providing detailed information to the taxpayer and obtaining prior approval before proceeding. This may slow down the assessment process but ensures greater accountability.
• For Compliance Processes: Taxpayers must be vigilant in responding to show cause notices within the specified time frame. Failure to do so could result in the AO proceeding with the issuance of a notice under Section 280.

Critical Concepts:

• Show Cause Notice: A formal communication from the AO to the taxpayer, explaining the reasons why the AO believes income has escaped assessment and giving the taxpayer an opportunity to respond.
• Specified Authority: A higher authority within the tax department whose approval is required before the AO can issue a notice under Section 280.
• Escaped Assessment: Income that was not reported or assessed correctly in the original tax return, leading to potential underpayment of taxes.

Compliance Steps:

1. Receiving the Notice: If a taxpayer receives a show cause notice under Section 281(1), they should carefully review the information provided by the AO.
2. Filing a Response: The taxpayer must file a reply within the specified time frame, addressing the AO's concerns and providing any supporting documents.
3. Awaiting the AO's Decision: After considering the taxpayer's response, the AO will decide whether to issue a notice under Section 280, subject to prior approval from the specified authority.

Examples:

• Scenario 1: The AO discovers that a taxpayer did not report rental income from a property. Before issuing a notice under Section 280, the AO sends a show cause notice to the taxpayer, detailing the unreported income. The taxpayer responds, explaining that the property was sold before the tax year in question. The AO reviews the response and decides not to issue a notice.
• Scenario 2: The AO receives information from a third party about undisclosed foreign income. The AO sends a show cause notice to the taxpayer, who fails to respond within the specified time. The AO, after obtaining prior approval, issues a notice under Section 280 for further assessment.

This section ensures a fair and transparent process for addressing cases of escaped assessment, balancing the interests of both taxpayers and the tax authorities.