Reassessments under the Income Tax Act of 1961 in light of Bombay High Court’s ruling in the case of Hexaware Technologies Ltd.
1. Introduction:
1.1 The issue in the case of Hexaware Technologies Ltd is whether the Jurisdictional Assessing Officer (JAO) can issue a reassessment notice to assess the taxpayer’s income that has escaped assessment. Before proceeding further, let us understand the organizational structure of the revenue department.
2. Organisation of the Income Tax Department before October 1, 2020:
2.1 The Income Tax Department operated based on the territorial jurisdiction of taxpayers. Assessing officers were assigned jurisdictions via notifications from the relevant Chief/Commissioner of Income Tax under section 120(1)(b) of the Income Tax Act. These officers, including Income Tax Officers and Assistant/Deputy Commissioners, were allocated specific PIN code-wise jurisdictions to enforce the Income Tax Act. One of their core responsibilities was to assess taxpayer income through detailed scrutiny of the income tax returns filed for the relevant financial year. This scrutiny assessment serves as a deterrent and encourages compliance with the Income Tax Act. This process was previously conducted offline, allowing taxpayers to appear in person or through authorized representatives.
3. Organisation of the Income Tax Department after October 1, 2020:
3.1 The Faceless Assessment Scheme was implemented on August 13, 2020, and starting October 1, 2020, the government replaced physical hearings with this scheme, leveraging technological advancements to minimize direct interaction between taxpayers and jurisdictional officers. Subsequently, the revenue authorities issued guidelines outlining the procedures for conducting scrutiny assessments. The Faceless Scheme of 2019 (the scheme) was incorporated into the Act via the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act 2020 (TOLA) Consequently, section 144B of the Income Tax Act, pertaining to faceless assessments, was inserted by the said amendment with effect from April 1, 2021.
3.2 After the notification of the faceless assessment scheme, the revenue administration underwent significant changes at the administrative level. The department was split into two halves: Faceless Assessing Officers (FAOs) and Jurisdictional Assessing Officers (JAOs). The FAOs were tasked solely with completing the scrutiny assessments of taxpayers, while the JAOs were responsible for recovery of demand and other functions, such as addressing taxpayer grievances, issuance of notices etc. FAOs have no jurisdiction over the taxpayer; they are assigned cases for completion of assessment through computerized allocation across the country. Once they complete their tasks, the cases revert to the original jurisdiction for recovery of demand. Essentially, FAOs have concurrent jurisdiction solely for the purpose of completing assessments.
4. COVID Pandemic Period during the Financial Year 2020-21:
4.1 During the financial year 2020-21, the COVID pandemic hindered the department’s ability to complete core functions within the deadlines set by the Income Tax Act. To address this, the government enacted the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (commonly referred to as TOLA) on September 29, 2020, through an ordinance, which later received presidential assent. TOLA extended various deadlines until June 30, 2021. One such extension was for the issuance of notices under section 148 of the Income Tax Act through various notifications.As mentioned earlier, in cases where timelines could not be met due to lockdowns or partial lockdowns related to COVID-19, the revenue authorities extended the deadline for issuing notices under Section 148 for the assessment years 2013-14 to 2017-18 until June 30, 2021, through the enactment of TOLA by using a travel back theory with reference to unamended sections of 149/151 of the I.T Act. Otherwise, there was a risk of losing substantial revenue in cases where income that had escaped taxation could not be brought to tax at all.
4.2 In order to take up the remedial action and considering the significant backlog related to the issuance of notices under section 148 for AYs 2013-14 to 2017-18, the department divided the work among JAOs and FAOs. The JAOs were tasked with pre-assessment work of issue of notice under section 148 after recoding reasons to believe and also to obtain necessary sanction from the higher authorities in accordance with provisions section 151 wherever applicable. After the issuance of a notice under section 148, the case would be forwarded to the FAOs to complete the reopened assessment in a faceless manner, ensuring necessary opportunities are provided to the taxpayer.
5. Based on the above division of work, assessments were reopened for AYs 2013-14 to 2017-18 by issuance of notices under section 148 of the Income Tax Act as per time limits prescribed prior to April 1, 2021, based on variance notifications.
5.1 Notices issued up to March 31, 2021, as per the old provisions could have survived the test of appeal as they were within the statutory time limits of unamended provisions of section 149 and 151 of the I.T Act.
5.2 However, notices issued between April 1, 2021, and June 30, 2021, based on the old provisions using the travel-back concept were challenged on the grounds that new procedures, time limits, sanctions for issuing notices, and the faceless procedure for reopened assessments were introduced in the Act effective April 1, 2021, under sections 148A, 149, 151, and 151A, respectively. In such scenario, the notices issued during this period should have adhered to the amended provisions of these sections of the Income Tax Act. Taxpayers contended that the notices issued during this time were invalid.
6. Hexaware Technologies Limited vs Assistant Commissioner of Income Tax[1]
6.1 A notice under Section 148 issued on May 25, 2022, (post Ashsish Agarwal decision[2]) in the case of Hexaware Technologies Limited for the assessment year 2015-16 was challenged. This matter recently came before the Bombay High Court through a writ petition.
6.2 The petitioner company challenged the validity of the notice issued under Section 148 by the JAO, among other grounds. It is argued by the petitioner company that the reopening notice dated 27th August, 2022 is invalid and bad in law being issued by the JAO which is not in accordance with Section 151A of the Act which gives power to CBDT to notify the Scheme for the purpose of assessment, reassessment or recompilation under Section 147 for issuance of notice under Section 148 of the Act or for conducting of inquiry or issuance of show cause notice or passing of order under Section148A of the Act or sanction for issuance of notice under Section 151 of the Act. For sake of clarity, the section 151A is given below:-
[Faceless assessment of income escaping assessment.
151A. (1) The Central Government may make a scheme, by notification in the Official Gazette, for the purposes of assessment, reassessment or re-computation under section 147 or issuance of notice under section 148 5[or conducting of enquiries or issuance of show-cause notice or passing of order under section 148A ] or sanction for issue of such notice under section 151, so as to impart greater efficiency, transparency and accountability by—
(a) eliminating the interface between the income-tax authority and the assessee or any other person to the extent technologically feasible;
(b) optimising utilisation of the resources through economies of scale and functional specialisation;
(c) introducing a team-based assessment, reassessment, re-computation or issuance or sanction of notice with dynamic jurisdiction.
(2) The Central Government may, for the purpose of giving effect to the scheme made under sub-section (1), by notification in the Official Gazette, direct that any of the provisions of this Act shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in the notification:
Provided that no direction shall be issued after the 31st day of March, 2022.
(3) Every notification issued under sub-section (1) and sub-section (2) shall, as soon as may be after the notification is issued, be laid before each House of Parliament.]
6.3 The petitioner contended that, since the faceless scheme for issuing notices /completing reopened assessments under Section 151A of the IT Act has been in effect since 01.11.2020 ( inserted by the Act 38 of 2020), the notice issued by the JAO, by passing the provisions of section 151A for the assessment year 2015-16 was invalid and the JAO has no jurisdiction to issue a notice under section 148 of the I.T Act and only the FAO has power to issue the notice.
6.4 The Income Tax Department argued that both the Jurisdictional Assessing Officer (JAO) and the Faceless Assessing Officer (FAO) had the authority to issue such notices concurrently. It was also argued that, according to Section 151A(1)(a), the elimination of interface between the authorities and taxpayers is only to the extent that it is technologically feasible.
6.5 However, the Bombay High Court disagreed, concluding that the JAO did not have the authority to issue the reassessment notice in this particular case. The relevant portion of judgment is reproduced below for clarity:-
“35 Further, in our view, there is no question of concurrent jurisdiction of the JAO and the FAO for issuance of notice under Section 148 of the Act or even for passing assessment or reassessment order. When specific jurisdiction has been assigned to either the JAO or the FAO in the Scheme dated 29th March, 2022, then it is to the exclusion of the other. Totake any other view in the matter, would not only result in chaos but also render the whole faceless proceedings redundant. If the argument of Revenue is to be accepted, then even when notices are issued by the FAO, it would be open to an assessee to make submission before the JAO and vice versa, which is clearly not contemplated in the Act. Therefore, there is no question of concurrent jurisdiction of both FAO or the JAO with respect to the issuance of notice under Section 148 of the Act. The Scheme dated 29th March 2022 in paragraph 3 clearly provides that the issuance of notice “shall be through automated allocation” which means that the same is mandatory and is required to be followed by the Department and does not, give any discretion to the Department to choose whether to follow it or not. That automated allocation is defined in paragraph 2(b) of the Scheme to mean an algorithm for randomised allocation of cases by using suitable technological tools including artificial intelligence and machine learning with a view to optimise the use of resources. Therefore, it means that the case can be allocated randomly to any officer who would then have jurisdiction to issue the notice under Section 148 of the Act. It is not the case of respondent no.1 that respondent no.1 was the random officer who had been allocated jurisdiction.
36 With respect to the arguments of the Revenue, i.e., the notification dated 29th March 2022 provides that the Scheme so framed is applicable only ‘to the extent’ provided in Section 144B of the Act and Section 144B of the Act does not refer to issuance of notice under Section 148 of the Act and hence, the notice cannot be issued by the FAO as per the said Scheme, we express our view as follows:- Section 151A of the Act itself contemplates formulation of Scheme for both assessment, reassessment or recomputation under Section 147 as well as for issuance of notice under Section 148 of the Act. Therefore, the Scheme framed by the CBDT, which covers both the aforesaid aspect of the provisions of Section 151A of the Act cannot be said to be applicable only for one aspect, i.e., proceedings post the issue of notice under Section 148 of the Act being assessment, reassessment or recomputation under Section 147 of the Act and inapplicable to the issuance of notice under Section 148 of the Act. The Scheme is clearly applicable for issuance of notice under Section 148 of the Act and accordingly, it is only the FAO which can issue the notice under Section 148 of the Act and not the JAO……………..
39. With reference to the decision of the Hon’ble Calcutta High Court in Triton Overseas Private Limited (Supra), the Hon’ble Calcutta High Court has passed the order without considering the Scheme dated 29th March 2022 as the said Scheme is not referred to in the order. Therefore, the said judgment cannot be treated as a precedent or relied upon to decide the jurisdiction of the Assessing Officer to issue notice under Section 148 of the Act. The Hon’ble Calcutta High Court has referred to an Office Memorandum dated 20th February 2023 being F No.370153/7/2023 TPL which has been dealt with above. Therefore, no reliance can be placed on the said Office Memorandum to justify that the JAO has jurisdiction to issue notice under Section 148 of the Act. Further the Hon’ble Telangana High Court in the case of Kankanala Ravindra Reddy vs. Income Tax Officer14 has held that in view of the provisions of Section 151A of the Act read with the Scheme dated 29th March 2022 the notices issued by the JAOs are invalid and bad in law. We are also of the same view”
6.6 In nutshell, the decision was grounded in the newly implemented faceless assessment scheme established under Section 151A of the Act. This scheme requires reassessment notices to be issued through an automated allocation process, thereby eliminating direct interaction between taxpayers and tax authorities. The court interpreted this to mean that the power to issue reassessment notices under the faceless assessment scheme is exclusively vested in the FAO, not the JAO. It stressed that permitting concurrent jurisdiction would create confusion and defeat the purpose of the faceless assessment initiative. The court explained that the automated allocation process randomly assigns cases to assessing officers, and in this instance, the JAO was not the designated officer. The court also distinguished the Calcutta High Court Judgment in the case of Triton Overseas Private Limited[3]. Consequently, the reassessment notice issued by the JAO was ruled invalid and subsequently quashed.
9. Conclusions: It seems that the question of whether the JAO has the authority to issue notices under Section 148, given the newly introduced Section 151A of the Income Tax Act effective form 01.11.2020 (inserted by the Act 38 of 2020) , has become a matter of another round of litigation. The revenue may contend that both the JAO and FAO share concurrent jurisdiction in issuing these notices. We can only hope that this issue reaches the Supreme Court for a final decision.
[1] Hexaware Technologies Limited vs Assistant Commissioner of Income Tax in W.P No..1778 OF 2023 dated 03.05.2024
[2] Asish Agarwal vs. Union of India in Civil Appeal No. 3005/2022 dated 4.5.2022
Author’s Note :- This article is intended for tax awareness and for academic purposes only
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