Unfolding the ‘Defence’ in Section 149 of Income Tax Act

Brief Background

In context of the amended provisions on reassessment procedures, recently, the Hon’ble Apex Court has given a landmark ruling in the case of UOI v. Ashish Agarwal [2022] 138 taxmann.com 64 (SC)[04-05-2022] dated 4-5-2022; which have resulted into multiple views thereby likely to once again find its way to the doors of the Hon’ble High Courts specifically in light of the CBDT Instruction No. 1/2022 [F.NO. 279/MISC/M-51/2022-ITJ] dated 11-5-2022.

Reading a decision is one thing and interpreting the same is another, isn’t it? Many times, verdict of the decisions written itself per se do not give the correct meaning until the same is read in a proper context or perspective with the facts of each case. For example, Borivali area in Mumbai city cannot be seen in the map of India if seen in Google Map, but if we zoom it, we can very well locate the correct area of Borivali in Mumbai which we are searching for. Exactly, in same manner, we need to zoom the decision of the Hon’ble Apex Court and need to read the judgment thoroughly including “between the lines”.

An attempt is made hereunder, which may be useful for the readers for better understanding:

Reassessment Procedures reformed post 31.03.2021

The procedure governing the initiation of reassessment proceedings prior to the Finance Act 2021 were governed by section 147 to 149 and 151 of the Income Tax Act,1961. The Parliament introduced reformative changes to sections 147 to 149 & 151 of the Act by way of Finance Act, 2021 passed on 28.03.2021. The substituted sections 147 to 149 & 151 were to be made applicable w.e.f. 01.04.2021. Thereafter, the Central Government by exercising the powers vested u/s. 3 of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020(for short, TOLA) and various notifications issued thereunder from time to time extending the time limit prescribed u/s. 149 of the Act for issuance of reassessment notices u/s. 148 of the Act (unamended provisions as it stood before the Finance Act, 2021) upto 30.06.2021.  Despite the amended sections 147 to 149 & 151 of the Act coming into force w.e.f. 01.04.2021, the revenue issued approximately 90,000 reassessment notices to the respective assessees under the erstwhile sections by relying on extension notifications. The said reassessment notices were the subject matter of writ petitions before the various High Courts. Most of the Hon’ble High Courts held that the reassessment notices issued under the erstwhile sections 147 to 151 of the Act are bad in law as the same were issued after 01.04.2021 which ought to be governed by the relevant amended sections 147 to 151 of the Act. Consequently, the High Courts set aside the reassessment notices issued under the erstwhile section 148 of the Act post 31.03.2021.

Verdict of Hon’ble Supreme Court

Finally, the Hon’ble Supreme Court by exercising the powers conferred under Article 142 of the Constitution of India passed a judgement in the case of Union of India & Ors. vs. Ashish Agarwal [2022] 138 taxmann.com 64 (SC)[04-05-2022] and overruled the Orders passed by the various High Courts on the issue of the validity of the notices issued u/s. 148 of the Income Tax Act post 31.03.2021. The Hon’ble Supreme Court has held that these extended reassessment notices (notices issued between 01.04.2021 and 30.06.2021) issued under the old law shall be deemed to be the show cause notices issued under clause (b) of section 148A of the amended law and has directed Assessing Officers to follow the procedure with respect to such notices. It also held that all the defences which are available to the assesses u/s. 149 and under the Finance Act 2021 and whatever rights that are available to the Assessing Officer under the new law shall continue to be available.

However, the judgement passed by the Hon’ble Supreme Court raised certain questions and accordingly CBDT has issued Instruction No. 01/2022 dated 11.05.2022 regarding the implementation of the judgement of the Hon’ble Supreme Court dated 04.05.2022 which in my humble view further carries its own fallacies.

Unfolding the “Defence”

1. In depth reading of the above referred decision of the Hon’ble Apex Court in the case of Ashish Agarwal, we need to read “between the lines” or rather, read what is not told expressly but in a different manner or perspective. The Hon’ble Apex Court clearly speaks about the “Defence” available to the assessee under the amended law and also refers to striking of a balance in its decision. This itself suggests that there is a leeway to few of the assessees by virtue of the said decision. Therefore, let us zoom this decision and unfold the “Defence” available u/s. 149 and/or available under the Finance Act, 2021.

2. As per the Income Tax Act, 1961 (as amended by Finance Act 2021), the first Proviso to section 149(1) states that no notice u/s. 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1^st 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.

3. Old Section 149 of the Income Tax Act as it stood before the Finance Act, 2021 is reproduced as under:

“149 (1) No notice under section 148 shall be issued for the relevant assessment year-

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

(b) if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year;

(c) if four years, but not more than sixteen years, have elapsed from the end of the relevant assessment year unless the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment.

4. Therefore, considering the first proviso mentioned above, it can be said that no case can be reopened for any assessment year beginning on or before 1^st April 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified under old Section 149(1)(b).

5. To put it comprehensively, considering the 1^st proviso discussed above, the possible cases of only the below mentioned assessment years can be reopened by issuing notices u/s. 148 as per the clause (b) of Section 149(1) as it stood before Finance Act, 2021:

A.Y.	2021-22	2020-21	2019-20	2018-19	2017-18	2016-17	2015-16	2014-15	2013-14	2012-13
Issue of Notice by:
31.03.2022	Yes	Yes	Yes	Yes	Yes	Yes	Yes	No	No	No
31.03.2023	Yes	Yes	Yes	Yes	Yes	Yes	No	No	No	No
31.03.2024	Yes	Yes	Yes	Yes	Yes	No	No	No	No	No
31.03.2025	Yes	Yes	Yes	Yes	No	No	No	No	No	No
31.03.2026	Yes	Yes	Yes	No	No	No	No	No	No	No
31.03.2027	Yes	Yes	No	No	No	No	No	No	No	No
31.03.2028	Yes	No	No	No	No	No	No	No	No	No

The above chart implies that cases for assessment year 2012-13, 2013-14 and 2014-15 cannot be reopened after 31.03.2021 by issuing notices under clause (b) of Section 149(1) as they have already become time barred on 31.03.2019, 31.03.2020 [31.03.2021 if Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) is considered] & 31.03.2021 respectively under the erstwhile provisions of section 148 as it stood before the Finance Act, 2021.

Note: The above chart is not factoring possibility of notices which could have been issued u/s. 153A or 153C as per law prior to Finance Act, 2021. It may be noted that as per the provisions of section 153A or 153C which stood prior to Finance Act, 2021, 10 years could have been reopened subject to the condition that there is some evidence which reveal that income represented in the form of asset has escaped assessment.

Anomalies in the CBDT Instruction issued

The CBDT in the instruction dated 11-5-2022 referred above vide Point No. 5 therein explained the scope of judgement and stated that the judgement applies to all cases where extended reassessment notices have been issued irrespective of the fact whether such notices have been challenged or not. The Instruction No 01/2022 vide Point No 6 stated the “Operation of the new section 149 of the Act to identify cases where fresh notice under section 148 of the Act can be issued”. With due respect, the anomalies in the said CBDT Instruction are discussed as under: –

1. Extension under TOLA taken into consideration

At Point No 6.1, it is stated “with respect of operation of new section 149 of the Act, the following may be seen:

“………..Decision of the Hon’ble Supreme Court read with the time extension provided by TOLA will allow extended 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.”

Interestingly, the Hon’ble Supreme Court has nowhere in its decision accepted the extension of time provided by TOLA post 31.03.2021 and therefore the interpretation of the CBDT, in my humble view suffers from fundamental anomaly in treating such notices issued u/s. 148 after 31.03.20212 to be travelling back in time to their original date. Hence, with due respect, the said Instruction increases ambiguity and confusion.

2. Relevant years of reopening

At Para 6.2, the said instruction states that:

 “6.2 Based on above, the extended reassessment notices are to be dealt with as under:

(i) AY 2013-14, AY 2014-15 and AY 2015- 1.6: Fresh notice under section 148 of the Act can be issued in these cases, with the approval of the specified authority, only if the case falls under clause (b) of sub-section (1) of section 149 as amended by the Finance Act, 2021 and reproduced in paragraph 6.1 above. Specified authority under section 151 of the new law in this case shall be the authority prescribed under clause (ii) of that section.

(ii) AY 16-17, AY 17-18: Fresh notice under section 148 can be issued in these cases, with the approval of the specified authority, under clause (a) of sub-section (1) of new section 149 of the Act, since they are within the period of three years from the end of the relevant assessment year. Specified authority under section 151 of the new law in this case shall be the authority prescribed under clause (i) of that section.”

The said Instruction states that post 31.03.2021; fresh notices for A.Y 2013-14, A.Y 2014-15 and A.Y 2015-16 can be issued with the approval of the specified authority if the case falls under clause (b) of sub-section (1) of section 149 as amended by the Finance Act, 2021. Whereas, as per 1^st proviso to section 149(1) of the Act, the proceeding for A.Y 2013-14 and 2014-15 cannot be reopened at all by issuing notices under clause (b) of Section 149(1) as no notice could have been issued under the erstwhile section 148 of the Act within the time limit prescribed u/s. 149 as they have already become time barred on 31.03.2020 & 31.03.2021 respectively under the erstwhile provisions of section 148 r.w.s. 149 as it stood before the Finance Act, 2021.

As regards A.Y. 2015-16, the time limit as seen above to issue notice u/s. 148 was 31.03.2022 and hence, if the erstwhile notice is to be treated as issued u/s. 148A(b) of the Act as per the verdict of the Hon’ble Supreme Court, then the same stands valid. However, argument has been taken for the said year to the effect that the subject matter of notices before the Hon’ble Apex Court were only which related to extensions under the TOLA and no further. In so far as A.Y. 2015-16, there was no extension under the TOLA for this year as the due date for issuing notice u/s. 148 of the Act was 31.03.2022 which never got barred by limitation upto 31.03.2021. Thus, such notices issued for A.Y. 2015-16 not being the subject matter before the Hon’ble Apex Court, these notices cannot be deemed to be issued u/s. 148A(b) of the Act and for that reason, since no notice under the new / amended law is issued upto 31.03.2022 for A.Y. 2015-16, there are valid reasons to challenge the notice for A.Y. 2015-16 also. However, this proposition or argument would be certainly tested in the Courts. In this connection, reference may also be made to the observation of the Hon’ble Bombay High Court in the case of Tata Communications Transformation Services Ltd. v. ACIT [2022] 137 taxmann.com 2 as under:

“49 Some more reasons why the reopening notices must go are :

……..

……..

(c) In any case, Relaxation Act is not applicable for Assessment Years 2015-2016 or any subsequent year and, hence, the question of applicability of the Notification Nos.20 and 38 of 2021 does not arise. The time limit to issue notice under section 148 of the Act for the Assessment Years 2015-2016 onwards was not expiring within the period for which section 3(1) of Relaxation Act was applicable and, hence, Relaxation Act could never apply for these assessment years. As a consequence, there can be no question of extending the period of limitation for such assessment years.”

Further, the Instruction categorically states that for A.Y 2016-17, 2017-18; fresh notices u/s. 148 can be issued under clause (a) of sub-section (1) of the new section 149 with the approval of the specified authority as these years are within the period of three years from the end of the relevant assessment year. There is evident miscalculation in the said instruction as the limitation time for A.Y 2017-18 is considered to be 31.03.2022 considering TOLA instead of 31.03.2021 as per the 1^st proviso to section 149(1) of the Act. There is clear contradiction between the Instruction and the relevant provisions of the Income Tax Act if TOLA is taken into consideration. It needs to be borne in mind that the acquisition of jurisdiction u/s 148 of the Act is different for assessment years falling within 3 years and those falling beyond 3 years and therefore, the reasons to believe that income has escaped assessment needs to pass through the relevant tests of the provisions of section 148 of the Act. For the assessment years falling within 3 years, information suggesting escapement of income is enough; whereas, for the years falling beyond 3 years except search/ survey cases; books of accounts, other documents or evidence revealing escapement of income represented in the form of asset is required.

3. Relevant Sanctioning Authority

Further, this just does not stop here, but even the sanctioning authority for assessment years falling within 3 years i.e. A.Y. 2016-17 and 2017-18 in present context as per CBDT will be Principal Commissioner of Income Tax; whereas if TOLA is not considered, the assessment years being A.Y. 2016-17 and 2017-18 would fall beyond 3 years and therefore, the sanctioning authority for reopening the cases for these 2 assessment years will be Principal Chief Commissioner of Income Tax as per section 151 of the Act. In nutshell, reopening of A.Y. 2016-17 and 2017-18 too will lead to unwarranted litigations.

Conclusion

In my considered view and understanding, notices issued u/s. 148 for A.Y. 2013-14 and 2014-15 after 31.03.2021 are barred by limitation by virtue of section 149(1) of the Act. For the notices issued u/s. 148 in F.Y 2021-22 or thereafter, the cases for A.Y 2015-16 (subject to discussion above), A.Y 2016-17 & A.Y 2017-18 being cases falling beyond 3 years, these can be reopened 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 or proves or shows in no uncertain terms that such income represented in the form of an asset, has escaped assessment. This requires that the revenue should possess positive and cogent evidence to raise such allegations and mere surmises and conjectures would not be sufficient. Hence, the argument that reopening cannot be made on mere ‘reason to suspect’ still holds good and what is required is the ‘reason to believe’ based on concrete evidences. In light of above discussion, it is equally very important to check whether appropriate sanction of the higher authorities u/s. 151 of the Act has been taken or not while challenging the jurisdictional validity of reopening of these years.

Disclaimer

The above views are my personal views and with due respect to the concerned authorities. Readers are advised to seek professional advice in their respective cases.