Curious Case of Missing First Proviso to Section 149 & Miscounting of 3 Years, in CBDT Instruction on SC Judgment

Curious Case of Missing First Proviso to Section 149 & Miscounting of 3 Years, in CBDT Instruction on SC Judgment

CBDT has issued Instruction No. 01/2022, dated 11.5.2022, containing Guidelines for Implementation of SC Judgement in the case of ‘Union of India vs Ashish Agarwal (2022 SCC Online SC 543), dated 4.5.2022.

In the said Instruction, CBDT has prescribed a uniform procedure to be adopted for implementing the SC judgement, where extended reassessment notices have been issued, irrespective of the fact, whether such notices have been challenged or not.

Para 6.2 of the said CBDT Instruction, perhaps, constitutes the core of this Instruction, as it specifies the manner, in which, the impugned re-assessment notices, are to be dealt with by the respective assessing authorities, and it provides that:

(i) AY 2013-14, AY 2014-15 and AY 2015-16: Fresh Notice u/s 148 can be issued in these cases, with the approval of the specified authority, only if the assessing officer 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 an asset, which has escaped assessment, amounts to or is likely to amount to fifty lakh rupees or more, for that year.

(ii) AY 2016-17, AY 2017-18: Fresh Notice u/s 148 can be issued in these cases, with the approval of the specified authority, since they are within a period of three years from the end of the relevant assessment years.

Wide Gap in CBDT’s Instruction’s Interpretation of Limitation Period specified in section 149:   

Interestingly, in justification of prescribing the above timelines, the said CBDT Instruction, self servingly interprets that the decision of the hon’ble SC, read with the time extension provided by TOLA, will allow such impugned reassessment notices to travel back in time to their original date, when such notices, were to be issued, and then new section 149 of the Act, is to be applied at that point.

However, it is a matter of fact, that no such mention or even whisper of such reassessment notices travelling back in time, with TOLA extensions, has been made in the hon’ble SC judgement. In fact, the very basis or edifice of this presumptuous interpretation that TOLA Extensions will hold good simultaneously with the amended provisions of section 149 as per the Finance Act, has no factual and legal basis or merit.

A bare perusal of the above directions, given in para 6.2 of the CBDT Instruction, makes it amply clear, that the underlying inference and the consequential manner of dealing with the impugned reassessment notices, is evidently in contravention and violation of the applicable time barring limitation periods of issuance of reassessment notices, on or after 1.4.2021, categorically and expressly mandated in section 149 of the Income Tax Act, as per the Finance Act, 2021.

For ready reference, the express legislative provisions of section 149 of the Income Tax Act, as per the Finance Act 2021, are being reproduced, as under:

“[Time limit for notice.

149. (1) No notice under section 148shall be issued for the relevant assessment year,—

(a)  if three years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b);

(b)  if three years, but not more than ten years, have elapsed from the end of the relevant assessment year unless the Assessing Officer has in his possession books of account 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 fifty lakh rupees or more for that year:

Provided that no notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of this section, as they stood immediately before the commencement of the Finance Act, 2021.”

Therefore, it is duly evident and crystal clear from the above legislative provisions as contained in section 149 of the Income Tax Act, 1961, that w.e.f. 1.4.2021:

i) notice u/s 148 is to be issued, on or after 1.4.2021, within a period of three years, from the end of the relevant assessment year, if the amount of alleged escape income is less than or equal to Rs. 50 lakhs, in an assessment year. [section 149(1)(a)]

ii) notice for reassessment u/s 148 could be issued after three years and uptill ten years if the Assessing Officer has in possession, books of accounts/documents/evidence which reveal that income chargeable to tax, exceeding fifty lakh rupees, in an assessment year, represented in the form of an asset, has escaped assessment. [section 149(1)(b)]

However, First Proviso to Section 149 of the Income Tax Act, as per the Finance Act, 2021, clearly, categorically and expressly mandates that:

No notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of this section, as they stood immediately before the commencement of the Finance Act, 2021.

Thus, in effect, as per the Grandfathering provisions of First Proviso to section 149 of the Income Tax Act, as per the Finance Act, 2021, no Notice u/s 148 can be issued, for the assessment years 2013-14 and 2014-15, on or after 1.4.2021, even if the amount of alleged escaped income, in any of such assessment years is in excess of Rs. 50 lakhs.

Interestingly, the CBDT Instruction is completely silent on the applicability of the First Proviso to Section 149 of the Income Tax Act, and as such its interpretation for AYs 2013-14 and AY 2014-15, definitely needs reconsideration and correction.

Further, as per clear provisions as contained in Section 149(1)(a) of the Act, notice u/s 148 has to be issued within a period of three years, from the end of the relevant assessment year.

This clearly implies, that any Notice u/s 148, if it is being issued, on or after 1.4.2021, then it can’t be issued for AY 2017-18 and prior assessment years, if the amount of alleged escaped income is less than or equal to Rs. 50 lakhs, in that year.

To understand it in simple manner, let us suppose that a Notice u/s 148 has to be issued for AY 2017-18, within a time period of three years, from the end of the relevant assessment year, i.e. AY 2017-18. So, clearly, these three years would be Year 2018-19, Year 2019-20 and Year 20120-21. So, notice u/s 148 has to be issued on or before 31.3.2021, for AY 2017-18. However, all such impugned Notices under unamended section 148 have been issued on or after 1.4.2021, i.e., after the mandated limitation period of 31.3.2021, in our present example.

This simple mathematical calculation of counting of three years, seems to be miscalculated in the said CBDT Instruction, as it has been directed that AY 2016-17 and AY 2017-18, falls within a period of three years, as on 1.4.2021.

Interestingly, as per the said CBDT Instruction, AY 2016-17 + 3 Years = 2021-22 and not Year 2019-20 and AY 2017-18 + 3 Years = Year 2021-22 and not Year 2020-21.

Contrary to what has been interpreted in the said CBDT Instruction, the undisputed and clear picture, which emerges is as under:

1.Reassessment Notices for AYs 2013-14 and 2014-15 shall be considered as invalid by virtue of First Proviso to Section 149.

2. Notices for AYs 2015-16, 2016-17 & 2017-18 shall survive only if the alleged escaped income represented in the form of an asset, exceeds Rs 50 lakhs, in each of such assessment year, and the assessing authority is having in its possession, books of accounts or other documents or evidence, which reveal that such income in the form of an asset, has escaped assessment.

Concluding Remarks

Therefore, in view of this wide gap of interpretation of the time barring limitation period of issuance of reassessment notices in section 149 of the Income Tax Act, in the said CBDT Instruction No. 01/2022, dated 11.5.2022 and the clear, unambiguous and undisputed time limits explained and discussed supra, the pandora box of unnecessary litigations has again been opened up, as such a faulty interpretation of the applicable limitation period, is amenable to be again challenged before the appropriate appellate forums.

Summing up with a poetic spirit:

Interestingly, to Reduce Litigations, these Legislative Amendments, were Strived, Ironically, increased Litigations, are now to be Contrived.