New scheme of re-assessment u/s 147- is it really reducing litigation and promoting ease of doing business in the light of recent Delhi HC ruling in the case of Divya Capital One Private Limited Vs. ACIT?
Background:
The Parliament introduced reformative changes to Sections 147 to 151 of the Income Tax Act, 1961 governing reassessment proceedings by way of the Finance Act, 2021, which has amended Income Tax Act by introducing new provisions in respect of reassessment proceeding i.e. sections 147 to 151 w.e.f. 1st April, 2021.
As per the text of memorandum explaining the provisions of the Finance Bill, 2021 as was introduced in Union Parliament, it was expected by the lawmakers that the new system would result in less litigation and would provide ease of doing business to taxpayers.
However considering the recent reassessment procedure being followed by the revenue, it really needs to be seen whether the aim of law makers is being achieved or now.
Honorable Supreme Court’s observation on the new scheme of reassessment:
Honorable Supreme Court, vide its judgment dated 4th May 2022 in the case of Union of India Vs. Ashish Agrawal has given some significant observations as far as reassessment proceeding under the substituted section 147 to 151 is concerned, some of which are highlighted as under:
(i) by substitution of sections 147 to 151 of the Income Tax Act, 161 by the Finance Act, 2021, radical and reformative changes are made governing the procedure for reassessment proceedings;
(ii) Under the substituted provisions of the IT Act vide Finance Act, 2021, no notice u/s 148 can be issued without following the procedure prescribed u/s 148A of the IT Act;
(iii) Along with the notice u/s 148, the AO is required to serve the order passed under section 148A of the IT Act;
(iv) section 148A of the IT Act is a new provision which is in the nature of a condition precedent;
(v) Introduction of section 148A of the IT Act can thus be said to be a game changer with an aim to achieve the ultimate object of simplifying the tax administration, ease compliance and reduce litigation;
(vi) the new reassessment provisions substituted by the Finance Act, 2021 is remedial and benevolent in nature and has been substituted with a specific aim and object to protect the rights and interest of the assessee as well as and the same is in public interest.
Thus, as laid down by the apex court of the country, the new reassessment provisions under section 147 to section 151 is remedial and benevolent in nature and has been substituted with a specific aim and object to protect the rights and interest of the assesse with an aim to achieve the ultimate object of simplifying the tax administration, ease compliance and reduce litigation.
Delhi High Court’s recent ruling on new reassessment provisions holding the notice and order being cryptic, in violation of natural justice and against the objective of new procedure of reassessment introduced by Finance Act,2021 to reduce litigation-
The division bench of Honorable Delhi High Court recently in the case of Divya Capital One Private Limited Vs. Assistant Commissioner of Income Tax Circle 7(1) Delhi W.P.(C) 7406/2022 dated 12th May 2022 has pronounced its ruling on newly substituted reassessment provisions as under:
(i) New re-assessment scheme was introduced by the finance act, 2021 with the intent of reducing litigation and to promote ease of doing business:
The Delhi HC held that the new re-assessment scheme (vide amended Sections 147 to 151 of the Act) was introduced by the Finance Act, 2021 with the intent of reducing litigation and to promote ease of doing business.
(ii) The term “information” in Explanation 1 to Section 148 cannot be lightly resorted to so as to re-open assessment:
The Delhi HC held that under the amended provisions, the term “information” in Explanation 1 to Section 148 cannot be lightly resorted to so as to re-open assessment. This information cannot be a ground to give unbridled powers to the Revenue
(iii) The benchmark of “escapement of income chargeable to tax” still remains the primary condition to be satisfied before invoking powers u/s 147:
The Delhi HC further held that whether it is “information to suggest” under amended law or “reason to believe” under erstwhile law the benchmark of “escapement of income chargeable to tax” still remains the primary condition to be satisfied before invoking powers under Section 147 of the Act.
Merely because the Revenue classifies a fact already on record as “information” may vest it with the power to issue a show-cause notice u/s 148A(b) but would certainly not vest it with the power to issue a re-assessment notice under Section 148 post an order under Section 148A(d).
(iv) The AO is required to conduct an enquiry u/s 148A(a) and thoroughly scrutinise the contentions and submissions advanced by the assessee before passing an order under Section 148A(d) of the Act:
The Delhi HC held that before issuing the show-cause notice u/s 148A(b), the AO is required to conduct an enquiry with respect to information in his possession in accordance with section 148A(a).
Further the AO is required to thoroughly scrutinise the contentions and submissions advanced by the assessee before passing an order under Section 148A(d) of the Act.
(v) The AO is required to share the information/ material in record with the assesse:
The Delhi HC held that before passing an order under Section 148A(d), the AO is required to share the information/ material relied on the by the AO with the assesse and effective opportunity to file a reply should not be denied by the AO.
The court further observed that the non-sharing of the information is violative of the rational behind the judgment of the Delhi High Court in Sabh Infrastructure Ltd. vs. Asst. CIT, 398 ITR 198 (Del).
(vi) The AO is required to provide reasonable time to the assesse to file its reply:
The Delhi Court observed that the assessee has a right to get adequate time in accordance with the Act to submit its reply. Section 148A(b) permits the AO to suo moto provide up to 30 days period to an assessee to respond to the show cause notice issued u/s 148A(b), which period may in fact be further extended upon an application made by the Assessee in this behalf, and such period given to the assessee is excluded in computing the period of limitation for issuance of notice u/s 148 in terms of the 3rd proviso to Section 149 of the Act.
(vii) The AO is required to consider the reply filed by the assesse before passing order u/s 148A(d):
It is held by the Delhi HC that by not considering the reply of the assesse, the mandate of Section 148A(c) has been violated as it casts a duty on the AO, by using the expression ‘shall’, to consider the reply of the assesse in response to notice u/s 148A(b) before making an order u/s 148A(d) of the Act.
Furthermore the Delhi High Court in Fena Pvt. Ltd. vs. ACIT Circle 7-1 & Anr. In W.P.(C) 6553/2022 had also quashed the order passed u/s 148A(d) where AO had not taken into consideration the replies along with the documents/evidences filed by the assessee before passing the order u/s 148A(d).
Important observation made by Delhi HC-
Implementation of new reassessment provisions not only been rendered nugatory but has also had an unintended opposite result-
The Delhi High Court in the case of Divya Capital One Private Limited Vs. Assistant Commissioner of Income Tax Circle 7(1) Delhi W.P.(C) 7406/2022 dated 12th May 2022 is of the opinion that significance of issuance of a show cause notice at a stage prior to issuance of a reassessment notice under Section 148 of the Act has been lost.
The Delhi High Court in the case referred above has also taken judicial notice that in a majority of reassessment cases post 1st April, 2021, the orders under Section 148A(d) of the Act used a template / general reason to reject the defence of the assessee on merits, namely, “found devoid of any merit because the assessee company has failed to produce the relevant documents in respect of transactions mentioned in show cause notice……..it is established that the assessee has no proper explanation……”
Consequently, the Delhi Court was of the opinion that a progressive as well as futuristic scheme of re-assessment whose intent is laudatory has in its implementation not only been rendered nugatory but has also had an unintended opposite result.
Conclusion:
There is no doubt that the provisions relating to reassessment has been completely reformed and entire new provisions have been introduced. However in the light of recent notices issued by the revenue in respect of 147 proceedings and the above judgment laid by Honorable Delhi High Court, it really need to be seen whether the lawmaker’s aim of reducing litigation and promoting ease of doing business actually achieves or not.
The Delhi High Court has come hard on the revenue in regard to reassessment cases post 1st April 2021 for their bad implementation and defeat of purpose of introduction of new regime of assessment.
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