Reassessment Under Section 148A: Legal Limits on Using Insight Portal & AIS Red Flags

1. Background: A New Reassessment Regime After the Finance Act, 2021

With effect from 1 April 2021, the reassessment code in the Income Tax Act 1961 underwent a complete overhaul. The Finance Act, 2021 substituted the earlier Sections 147 to 151, discarding the long-standing “reason to believe” formulation and anchoring the entire reopening machinery around Section 148A.

Under the earlier regime, most disputes revolved around:

  • Whether there was tangible material for “reason to believe”;
  • Allegations of “change of opinion”;
  • Use of borrowed satisfaction from Investigation Wing or other officers;
  • Mechanical sanction under Section 151; and
  • Breach of natural justice in not supplying material or not granting effective hearing.

Parliament consciously redesigned the law to minimise such controversies and to ensure that:

  • Reassessments are not triggered mechanically;
  • There is a clear, recorded decision-making process by the Assessing Officer (AO);
  • Assessee is given meaningful opportunity to respond; and
  • Jurisdiction is assumed only after a transparent, fair exercise in line with principles of natural justice.

In practice, however, many notices under Section 148A are still being issued solely on the basis of:

  • Insight Portal risk flags;
  • Annual Information Statement (AIS) or Statement of Financial Transactions (SFT) data;
  • Reports from GST authorities or Investigation Wing;
  • Automated risk parameters and algorithm-based alerts.

This raises a central legal issue:
Is it enough that the case is red-flagged by Insight/AIS/third-party intelligence to issue notice under Section 148? Or must the AO first verify such material, conduct inquiry where necessary and then independently reach satisfaction under Section 148A?

Recent pronouncements of the Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) offer crucial guidance, particularly in:

  • Gopallal Mathurdas Vaishnav v. ITO, Ward-3(3)(5), Ahmedabad (ITA Nos. 733 & 728/Ahd/2026, order dated 07.07.2026); and
  • Rupinder Singh Duggal v. ITO, Ward-5(3)(2), Ahmedabad, 2026 (3) TMI 953 (ITAT Ahmedabad).

2. Legislative Design of Section 148A and CBDT Instruction No. 1/2022

2.1 Objectives Recorded in the Finance Bill, 2021 Memorandum

The Memorandum explaining the Finance Bill, 2021 candidly acknowledged that reassessment provisions were a major source of litigation and needed rationalisation. The new framework was intended to:

  • Simplify and modernise reassessment;
  • Make it more transparent and procedure-driven;
  • Protect assessee’s rights through pre-notice safeguards; and
  • Still effectively tackle genuine escapement of income.

Accordingly, before issuing notice under Section 148, Parliament envisaged that the AO would:

  1. Undertake inquiry where required – with approval of the specified authority (Section 148A(a));
  2. Inform the assessee of:
    • The information suggesting escapement of income; and
    • The outcome of any inquiry (Section 148A(b));
  3. Give assessee an opportunity to respond and consider such reply objectively (Section 148A(c));
  4. Pass a reasoned order deciding whether it is a fit case to issue notice under Section 148, after obtaining prior approval (Section 148A(d)).

Thus, the fulcrum shifted from an unstructured “reason to believe” to a statutory sequence of actions bound by natural justice and speaking order requirements.

Notably, the phrase “reason to believe” is consciously omitted in the substituted provisions. Instead, the focus is on:

  • Existence of “information which suggests that the income chargeable to tax has escaped assessment”, and
  • Demonstrable compliance with the mandated process under Section 148A.

2.2 CBDT Instruction No. 1/2022 – Administrative Clarification

To bring uniformity in implementation, the Central Board of Direct Taxes issued Instruction No. 1/2022 dated 11 May 2022. Although administrative, it reflects the Department’s own reading of the new legal framework.

Key features of the Instruction include:

  • Information from Insight Portal, AIS, SFT, Investigation Wing, GST Intelligence, etc. is only a starting point, not conclusive evidence.
  • AO must:
    • Analyse the information;
    • Identify the specific issue indicating escapement of income;
    • Share the relevant material with the assessee under Section 148A(b);
    • Evaluate the assessee’s explanation; and
    • Record a reasoned conclusion under Section 148A(d).

Important: The Instruction recognises that automated data or third-party reports do not by themselves establish escapement of income. They simply trigger the need for verification and application of mind by the AO.

3. Dissecting Section 148A: Four Mandatory Stages

3.1 Text of Section 148A

Section 148A sets out four sequential steps that the AO shall undertake before a Section 148 notice can be issued:

1.