Can the I-T department call for reassessment when the Income Tax Act, 1961 does not provide for it – Per Incuriam application of Article 142
INTRODUCTION
The recent judgement delivered by the Supreme Court of India (SC) has raised concerns regarding the application of Article 142 in case the where the Court sought to decree upon the issue of reassessment. The SC in the case of Union of India v. Ashish Agarwal exercising its power under Article 142 of the Constitution of India decreed upon the issue related to retrospective issuance of assessment notices under Section 148 of the Income Tax Act, 1961 (“I-T Act”) when the amended provision Section 148A for issuance of notice to assessee was already in place. The SC also set aside the judgements of the six High Courts, wherein they decided against the Income Tax Department and quashed all the notices issued to income tax assessee under Section 148 of the I-T Act from the period of 1/4/21 to 30/6/21. Accordingly, this article aims to evaluate the marred application of newly enacted Section 148A under I-T Act while also perusing the Supreme Court’s invocation of Article 142 arising from the multiple petitions thereunder.
PREVIOUSLY EXISTED LAW
The reassessment of income tax returns is one of the essential tools used by the Assessment Officer (“AO”) of the Central Board of Direct Taxes (“tax department”) for reopening completed assessments based on some enquiry information. Based on the information gathered by the AO, the reassessment proceedings are conducted to disclose any potential tax evasion or circumvention (by shifting transfer pricing of a permanent establishment to a lower tax jurisdiction, for example) by the income tax assessee. In order to facilitate this process further, a new legislation with new regime and procedure was brought about under section 148A with effect from 1/4/21. The intention for the same was to simplify, rationalize and put an end to incessant litigations and bring about certainty. At the outset, it must be mentioned that the legislature’s intention in bringing the amendment was to see that reassessment methods are streamlined throughout. However, in doing so, an array of issues have been created, leading to very serious round litigations after the advent of new Section 148A under the I-T Act.
Under Section 148 to 153 of the I-T Act, the previously existing law gave AO the power to reopen completed assessments over doubts that the part of the income or total income chargeable to tax has escaped assessment for any assessment year. It allowed I-T officers to reopen cases dating back to six years, while this period has now been halved to three years under newly introduced Section 148A. The power to reopen the completed assessments was broadly delegated to AO under Section 147-153 of the I-T Act. Before the introduction of Section 148A, the AO could simply reopen the previously completed assessment if he had the “reason to believe” that the income assessee had failed to disclose his income in its entirety. The phrase “reason to believe” has not been explained anywhere in the I-T Act, resulting in countless litigation filings.
The phrase “reasons to believe” can implicate various expressions such as gossip, rumor, or suspicion by the third parties as “reasons” but the same are not sufficient to constitute a reason to believe that will lead to the reopening of the assessment. Further, the only applies to AO. Any party or authority other than AO cannot influence the decision-making in the reopening of income assessment by the AO.
Tangible Material Test
Taking this inconsistency into account, the Delhi High Court in the case of PCIT-6 vs Meenakshi Overseas (P.) Ltd held that because there was no independent application of mind by the AO with regards to any tangible material and the conclusions drawn by the AO were reproductions of the reasonings in the investigation report, those reasons failed to demonstrate a link between tangible material and formation of reason to believe that income had escaped assessment and, as a result, reassessment was rendered unjustified.
GKN Procedure
Although the I-T Act does not lay down the procedure for obtaining the “reasons” to believe, the SC has laid down its essential conditions under Sections 147 and 148 in the case of GKN Driveshafts (India) Ltd. v. Income-tax Officer. The Supreme Court, in the case, accordingly laid down the procedure that when notice under Section 148 of the I-T Act is issued, the assessee is to file a return and, if he desires, seek the reasons from AO for issuance of notice. The AO is bound to furnish the reasons for issuing the notice within a reasonable time. On receipt of the reasons, the assessee has the right to file objections to the notice issued, and AO is bound to dispose of the same by passings a speaking order. With the introduction of the Finance Act, 2021 the procedure laid down by the Supreme Court in the case (GKN Procedure) seemed to have been codified with the introduction of Section 148A in the I-T Act. With effect form 1 April 2021, in order to reopen the assessment of the taxable income from the previous year(s), the AO is required to conduct a preliminary enquiry before issuing a notice for reopening, which includes furnishing reasons based on which the AO seeks to reopen the previous year(s) reassessment. Further, providing assessee fair chance to present its side, it asks him to issue show cause notice on why reopening of assessment should not be done.
Factual Background of the present matter
With the onset of the Covid-19 pandemic in March 2020, the Revenue department was rendered helpless as the process of issuing reopening notices was greatly vitiated by a complete lockdown. The limitation was not only limited to the Revenue department but also hampered obligations that both department and assessee ought to fulfill. To deal with the issue, the Union government enacted the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (“Relaxation Act”) on 29 September 2020. More specifically, Section 3 (1) of the Relaxation Act provided time-limit prescribed under the IT Act, for completion of any proceeding, passing any order, or completion/compliance of any executive action. Further, the Section provided that where the time limit for such actions fell between 20 March 2020 and 31 December 2020, the same shall be extended to 31 March 2021 or any other date as the Central Government may specify through notification. In pursuance of powers granted under the Relaxation Act.
Meanwhile, the new reassessment procedure was put in place with the introduction of Section 148A under the I-T Act through the enactment of the Finance Act, 2021 in an attempt to address the lacunas existed in previous law and streamline the reassessment process. The Revenue department, through its notification dated 27 April 2021, extended the timeline from 31 March 2021 to 30 June 2021 for any action referred to in clause (a) of sub-section (1) of Section 3 of Relaxation Act. It is important to note that this notification was issued by the Revenue department after the Finance Act, 2021, by Parliament, which laid down the new provision for reopening of assessment, which would take effect from 1 April 2021. Any action taken under Section 3(1) of the Relaxation Act where the time limit fell between 20 March 2021 and 31 December 2020 was mandated to be completed by 31 March 2021 or any other date as may be notified by the Central Government with further notification. After these mandates and notification, legislature introduced the changes in the reopening of assessments with introduction of Section 148A. Suppose legislature intended for Revenue department to issue notices under the former law. It could have added a proviso in the Act to validate the actions of the Revenue department. Not providing any proviso for extension of wiped-out Sections 148 to 153 for reopening of assessments makes it self-evident that only reassessment notices under Section 148A were intended to be issued after 1 April 2021 following the new procedure laid under the Section. Hence, the changes were already introduced in the legislation with Section 148A, when the Revenue department issued notification under the Relaxation Act for extension of the timeline.
In the wake of reassessment notices issued by the Revenue department under previous law, many income tax assessees across the country put their concerns before the relevant court of law. Arguing on the legal validity of the notification dated 27 April 2021 issued under the Relaxation Act and asking the Court for appropriate legal remedy. In response to the various petitions filed before the High Court, the CBDT was consistent in its response and defended the notices issued by the Revenue department. It claimed that notices issued post 1 April 2021 were valid despite the amendments brought in the IT Act, as the one-time relief viz a viz time-limit for issuing the notices was provided under Relaxation Act. Accepting this argument would mean that the Revenue department attempted to restore the previously repealed law with an executive notification. The substitution of the previous law brought by the executive has a twin effect. Firstly, it results in the deletion of the previously existing legal provision. Secondly, it replaces the new legal provision in place of the old one Ramkanali Colliery of BCCL v. Workmen. Consequently, the twin effect of the enactment of the Finance Act 2021 would render the notification issued by the executive redundant. Keeping in mind all the merits in the case, the High Courts before whom various petitions were pending held that notices were issued were ultra vires of the Constitution of India. Without the authority of law, it reasoned that any notice issued after 1 April 2021 has to be issued under new provisions, and the old notices lacked legal standing and had to be revoked for the same reason.
IMPLICATIONS OF ART 142 ON TAX REASSESSMENT NOTICES – UOI V ASHISH AGARWAL
Following the multiple appeals by income tax assesses throughout India, the Hon’ble Supreme Court decided to exercise the extraordinary powers granted under Article 142 of the Indian Constitution to hold that tax reassessment notices sent under a lapsed law were valid and intra vires. Before analyzing the judgment on merits and the exercise of extraordinary powers given to the SC under Article 142, it is pertinent to understand the primary constitutional color of the dispute in issue.
Taxation has long been recognized as a sovereign function and right of the state. India, being a constitutional democracy, allows its executive to exercise this power within a constitutional framework, particularly from Article 265 of the Constitution of India, which states that no tax shall be levied or collected except by authority of law.
The tax authority had been rather over-zealous in sending reassessment notices as it had sent nearly 90,000 notices in the impugned period. About 9,000 writ petitions had been filed by many aggrieved income assessors. Various High Courts had also accepted the contention of the petitioners that notifications had been passed ultra vires of the provisions under the Relaxation Act and the I-T Act. The High Courts involved with the matter passed orders quashing the notices sent out by the tax authorities.
Considering the urgency of the matter and the number of litigants involved, the bench consisting of hon’ble Justices M.R. Shah and B.V. Nagarathna, when faced with an appeal from a decision of the Allahabad HC. The SC decided to club the other similar appeals together and passed a verdict that would also resolve the matters that were either decided by the High Courts or were not in even in appeal before it. Interestingly, and perhaps surprisingly, given the gravity of the matter at hand, the SC reserved the matter for judgement immediately after hearing the counsels and did not provide any time for any intervention, which might have otherwise happened given the sheer number of litigants in the case.
The Supreme Court, while agreeing with the observations of the High Court in finding that the orders were passed ultra vires, decided to invoke its extraordinary powers under Article 142 as it held that the system of reassessments had to remain intact tax department could not be left remediless for a bona fide mistake that was made. Somewhat peculiarly, nowhere in its submissions either before High Courts or the Supreme Court had the tax department brought up the grounds of bona fide mistake or ignorance, although these defenses found their way into the judgement.
CONCLUSION
The amendments brought about to the procedure required to be followed by the tax department in sending out income reassessment notices under Sections 147-153 of the I-T Act is a welcome move. It incorporates the GKN Procedure. Under the new procedure, an AO is required to make an enquiry and send a show cause notice to the assessee based on that enquiry. A reassessment notice can only when the cause shown by the assesse is found to be unsatisfactory. This amended procedure is an improvement on the previous procedure as it introduced accountability in every step leading upto the reassessment process. It is an unfortunate event that the tax authority sent out reassessment notices under the old procedure leading to multiplicity of litigation, instead of opting for the excellent new procedure.
It is the view of the authors, the invocation of Article 142 in this matter is not justified as it militates against the checks and balances between the three pillars of the government envisaged under the constitution. The decision in this case runs the dangerous risk of emboldening the executive to institute action by way of reviving the dead letter of the law by way of a simple executive notification and expecting the judiciary to back them up in their claims. In any case, where there is a need for executive action that was ought to have taken place earlier and was not due to delay or inaction by the executive, it should look to the legislature to pass laws that provide retrospective powers, wherever appropriate. Either way, invocation of Article 142, even as a last resort is improper in cases where executive action is not backed by the authority of law; constitutional provisions cannot be used as a band-aid to executive mishaps.
Author Bio
Very good article but clarity is not given whetether AO can issue notices with old law r new amended law r both full clarity on procedure to be followed may be given
With thanks