2025 (5) TMI 216 - HC - Income Tax

Reopening of assessment u/s 147 as barred by limitation u/s 149(1) - Applicability of extended limitation period of ten years u/s 149(1)(b) and Section 153A of the Act - HELD THAT - A plain reading of the first proviso to Section 149 (1) of the Act indicates that the issuance of a notice under Section 148 of the Act is proscribed if a notice under Sections 148 153A or 153C of the Act could not have been issued at that time on account of the time limit specified under Clause (b) of Section 149 (1) of the Act or under Section 153A or Section 153C as in force at that time. AO believed that the petitioner s income had escaped assessment for AY 2016-17 on essentially three grounds. First that the petitioner had deducted expenses relating to amounts paid to certain persons who had not filed their income tax returns and the AO thus doubted the genuineness of the said transactions. Second that the petitioner had booked expenses which according to the AO were personal expenses of its directors and had not been incurred wholly and exclusively for the purpose of the petitioner s business. And third that the petitioner had paid certain amounts as expenses for availing contractual manpower services and the AO doubted the genuineness of the said payments. It is clear from the above that there is no allegation that the income which has escaped assessment was represented in the form of an asset. Therefore the conditions as stipulated in Clause (a) of the fourth proviso to Section 153A (1) are not satisfied. The AO does not have the possession any books of account other documents or evidence which reveals that the petitioner s income that is represented in the form of an asset has escaped assessment. In terms of Explanation 2 to Section 153A (1) of the Act the term asset is defined to include immovable property being land or building or both shares and securities loans and advances deposits in bank accounts. AO seeks to disallow expenses on account of doubting the genuineness for the reason that the same were not incurred wholly or exclusively for the purpose of the petitioner s business. Absent any further material to establish that such expenses had resulted in the acquisition of any asset the conditions stipulated in the fourth proviso to Section 153A (1) of the Act would remain unsatisfied. Period of limitation for issuing a notice u/s 153A of the Act in the given facts of this case would necessarily have to be confined to a period of six assessment years immediately preceding the assessment year relevant to the previous year in which the search u/s 132 of the Act was conducted. The search in question was conducted in financial year 2022-23; thus the relevant block of six assessment years would be the six assessment years preceding AY 2023-24 being the assessment year relevant to the previous year in which the search was conducted. Accordingly AY 2016-17 falls beyond the block of six years. The impugned notice as well as the proceedings initiated pursuant thereto are set aside. The petition is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

- Whether the notice issued under Section 148 of the Income Tax Act, 1961 (the Act) for reassessment of income relating to Assessment Year (AY) 2016-17 was barred by limitation under Section 149(1) of the Act.

- Whether the extended limitation period of ten years under Section 149(1)(b) of the Act and Section 153A of the Act applies in the present case, given that a search under Section 132 was conducted in the previous year 2022-23.

- Whether the conditions stipulated under the fourth proviso to Section 153A(1) of the Act, requiring possession of books of account or other evidence revealing escaped income represented in the form of an asset, were satisfied to justify reopening beyond six years.

- Whether the reassessment notice issued pursuant to the search and seizure proceedings was valid and sustainable in law.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Limitation for issuance of notice under Section 148 of the Act

Relevant legal framework and precedents: Section 149(1) of the Act prescribes time limits for issuance of notices under Section 148. Sub-clause (a) limits reassessment to three years from the end of the relevant AY, except where clause (b) applies. Clause (b) allows reassessment up to ten years if the AO has evidence that escaped income represented in the form of an asset, expenditure, or entries exceeding Rs. 50 lakh has escaped assessment. The first proviso to Section 149(1) restricts issuance of notices for AYs beginning on or before 1 April 2021 if notices could not have been issued under the earlier regime's time limits.

The Supreme Court in Union of India & Anr. v. Rajeev Bansal clarified that the extended ten-year period under the new regime applies prospectively, and reassessment notices cannot be issued retrospectively beyond the time limits applicable before the Finance Act, 2021.

Court's interpretation and reasoning: The Court observed that the impugned notice dated 21.03.2024 was issued for AY 2016-17, which predates the AY 2023-24 relevant to the previous year in which the search was conducted (FY 2022-23). The petitioner argued that the limitation period for reassessment should be reckoned from AY 2023-24, and since AY 2016-17 falls beyond six years preceding AY 2023-24, the notice is barred by limitation.

The Revenue contended that the extended ten-year limitation under Section 149(1)(b) and Section 153A applies, allowing reopening beyond six years if incriminating material is found during search. The Court noted that the proviso to Section 149(1) prohibits issuance of notices if such notices could not have been issued under Sections 148, 153A, or 153C at the relevant time under the earlier regime.

Application of law to facts: The Court held that the limitation for issuing the reassessment notice must be analyzed in the context of Section 153A, which governs reopening after search. Section 153A(1) allows reassessment for six years preceding the AY relevant to the previous year in which search was conducted, and for relevant assessment years beyond six years but not exceeding ten years, subject to conditions.

Treatment of competing arguments: The petitioner emphasized that the extended ten-year limitation applies only if the escaped income is represented by an asset, as per the fourth proviso to Section 153A(1). The Revenue argued that the extended period applies generally for reassessment after search. The Court found the petitioner's argument persuasive, noting that the extended limitation applies only when the AO has evidence that escaped income represented in the form of an asset exceeds Rs. 50 lakh.

Conclusion: The Court concluded that the limitation period for issuing the notice under Section 148 read with Section 153A is confined to six years preceding the AY relevant to the previous year in which the search was conducted, unless the conditions for the extended ten-year period are satisfied.

Issue 2: Applicability of the extended ten-year limitation under Section 153A(1) and conditions for reopening beyond six years

Relevant legal framework: Section 153A(1) allows reopening of assessments for six years preceding the AY relevant to the previous year in which search or requisition is made, and for relevant assessment years beyond six years but not exceeding ten years (Explanation 1), subject to possession of evidence revealing escaped income represented in the form of an asset (fourth proviso).

'Asset' is defined in Explanation 2 to include immovable property, shares, securities, loans, advances, and bank deposits.

Court's interpretation and reasoning: The Court examined the reasons recorded by the AO for reopening the assessment. The AO alleged that the petitioner's income escaped assessment due to disallowance of certain expenses: payments to non-filers, personal expenses of key managerial personnel, and payments to a related party (Vihaan Infrasystems Ltd.) purportedly without receipt of genuine services.

However, the AO did not allege that the escaped income was represented in the form of an asset. The Court noted that the AO lacked possession of any books of account or documents revealing escaped income represented by an asset as required under the fourth proviso to Section 153A(1).

Application of law to facts: Since the escaped income was alleged to arise from disallowed expenditures and entries, not assets, the extended ten-year limitation under Section 153A(1) was inapplicable. The limitation for reopening was therefore confined to six years preceding AY 2023-24, i.e., AYs 2017-18 to 2022-23. AY 2016-17 falls outside this block.

Treatment of competing arguments: The Revenue's contention that the extended period applies generally was rejected as inconsistent with the statutory requirement that the AO must have evidence of escaped income represented in the form of an asset. The petitioner's argument that the extended limitation does not apply absent such evidence was accepted.

Conclusion: The Court held that the conditions for extending the limitation period beyond six years under Section 153A(1) were not met. Therefore, the reassessment notice for AY 2016-17 was barred by limitation.

Issue 3: Validity of the reassessment notice issued post-search

Relevant legal framework: The issuance of notice under Section 148 post-search is governed by the interplay of Sections 148, 149, and 153A of the Act, along with provisos limiting retrospective reassessment beyond prescribed time limits.

Court's interpretation and reasoning: The Court analyzed the AO's reasons for reopening, which included alleged tax-avoiding arrangements, shifting of profits to associated enterprises, and booking of non-genuine expenses. The AO relied on incriminating evidence seized during search and post-search investigations.

However, the Court emphasized that the limitation period is a jurisdictional bar, and the absence of evidence that escaped income was represented by an asset precluded application of the extended limitation period.

Application of law to facts: Since the reassessment notice was issued beyond the six-year block and without satisfying conditions for extension, it was held to be without jurisdiction.

Treatment of competing arguments: The Revenue's reliance on search-related provisions to extend limitation was rejected due to non-fulfillment of statutory conditions. The petitioner's challenge on limitation grounds was upheld.

Conclusion: The reassessment notice dated 21.03.2024 and the proceedings initiated pursuant thereto were held to be barred by limitation and therefore unsustainable.

3. SIGNIFICANT HOLDINGS

The Court's crucial legal reasoning is encapsulated in the following observations:

"A plain reading of the first proviso to Section 149 (1) of the Act indicates that the issuance of a notice under Section 148 of the Act is proscribed if a notice under Sections 148, 153A or 153C of the Act could not have been issued at that time on account of the time limit specified under Clause (b) of Section 149 (1) of the Act, or under Section 153A or Section 153C, as in force at that time."

"Once, we accept that a notice under Section 148 of the Act cannot be issued if such a notice could not be issued under Section 153A of the Act; it would be necessary to determine the period of limitation for issuance of a notice under Section 153A of the Act."

"The expression 'relevant assessment year' is defined under Explanation 1 to sub-section (i) of Section 153A of the Act to mean a year that falls beyond the period of six assessment years preceding the assessment year relevant to the previous year in which search is conducted or requisition is made, but not later than ten assessment years from the end of the assessment year relevant to the previous year in which search is conducted or requisition is made."

"There is no allegation that the income which has escaped assessment was represented in the form of an asset. Therefore, the conditions as stipulated in Clause (a) of the fourth proviso to Section 153A (1) of the Act are not satisfied. The AO does not have the possession any books of account, other documents or evidence, which reveals that the petitioner's income that is represented in the form of an asset has escaped assessment."

"In the aforesaid view the period of limitation for issuing a notice under Section 153A of the Act, in the given facts of this case, would necessarily have to be confined to a period of six assessment years immediately preceding the assessment year relevant to the previous year in which the search under Section 132 of the Act was conducted."

Core principles established include:

• The limitation period for reassessment notices issued post-search under Section 148 read with Section 153A is confined to six years preceding the AY relevant to the previous year in which the search was conducted, unless the AO has evidence of escaped income represented by an asset, thereby justifying extension up to ten years.
• The extended ten-year limitation under Section 153A applies only when the AO possesses books of account or other evidence revealing escaped income represented in the form of an asset exceeding Rs. 50 lakh.
• The first proviso to Section 149(1) acts as a bar on retrospective reopening beyond the time limits applicable under the earlier regime, protecting the assessee's interests.
• Reassessment notices issued beyond the prescribed limitation period without satisfying statutory conditions are without jurisdiction and liable to be quashed.

Final determinations on each issue:

• The impugned notice dated 21.03.2024 issued under Section 148 for AY 2016-17 was barred by limitation.
• The extended ten-year limitation period under Section 153A(1) did not apply as the AO lacked evidence of escaped income represented by an asset.
• The reassessment proceedings initiated pursuant to the impugned notice were without jurisdiction and are set aside.