2025 (5) TMI 449 - HC - Income Tax

Reopening of assessment u/s 147 as barred by limitation u/s 149 - whether the conditions as specified under Section 149 (1) (b) of the Act are satisfied? - reasons to believe - HELD THAT - As is apparent from the plain language of the said clause that essentially three conditions are required to be satisfied. First that the AO has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax has escaped assessment. Second that the said evidence is to the effect that the income chargeable to tax that has escaped assessment is represented in the form of an asset. And third that the amount of income that has escaped assessment is or is likely to amount to Rs. 50 lakhs or more. Explanation to Section 149 (1) of the Act further explains that for the purposes of Clause (b) of Sub-section (1) of Section 149 of the Act the expression asset would include immovable property being land or building or both shares and securities loans and advances and deposits in bank. If we now examine the reasons for re-opening of the assessment as set out in the order passed under Section 148A (d) of the Act we find that there is no evidence to support that the income which has allegedly escaped assessment is represented in the form of an asset. The suggestion that the petitioner s income had escaped assessment is founded on the premise that the petitioner has booked expenses under the head wages and salaries which are in excess of the expenses incurred during the relevant previous year (FY 2012-13). Note 21 to the Financial Statement for the said period furnished by the petitioner expressly indicates that an expenditure of Rs. 9.14 crores which was debited to the account under the head Salaries and Wages included Rs. 2.85 crores relating to the current year and Rs. 6.29 crores for the earlier years based on a debit note issued from NTPC. There is no cavil that the petitioner had incurred expenditure of Rs. 9.14 crores. The only ground on which the AO believes that the petitioner s income chargeable to tax for the relevant assessment year has escaped assessment is that the said expenditure includes expenditure which is allocable to financial years prior to FY 2012-13. The account of salaries and wages is a nominal account. It is thus apparent that any expenditure incurred for the salaries and wages irrespective of the years in which the same is incurred would not be represented by any asset. Since the conditions as specified under Section 149 (1) (b) of the Act are not satisfied no notice u/s 148 of the Act could be issued after expiry of three years from the end of AY 2013-14 that is after 31.03.2017. In view of the above it is not necessary to address the question whether reopening of assessment for AY 2013-14 is barred under the proviso to Section 149 (1) of the Act. However we consider it apposite to address the said question as well. In the present case the petitioner had expressly disclosed in its accounts which were furnished in support of its return that the expenses booked under the head wages and salaries included Rs. 6.29 crores on account of salaries and wages which pertain to prior financial years. Thus no proceedings for initiation of reassessment could have been initiated under the provisions relating to reassessment that were in force prior to 01.04.2021 after expiry of four years from the end of the relevant assessment year. In the facts of the present case the initiation of reassessment proceedings is not premised on any search conducted u/s 132 of the Act or requisitioned made u/s 132A of the Act. Thus it would be relevant to examine whether a notice u/s 148 of the Act could have been issued for the reasons as communicated to the petitioner on 30.05.2022 pursuant to the directions issued in Union of India Ors. v. Ashish Agarwal 2022 (5) TMI 240 - SUPREME COURT . As stated earlier the reason to believe that the petitioner s income had escaped assessment is premised on the basis that prior period expenses had been booked by the petitioner in its account for the previous year for the financial year 2012-13. Even if reopening of assessment by issuance of notice under Section 148 of the Act is permissible under the main enactment of Section 149 (1) of the Act no such notice could be issued in the present case by virtue of the first proviso to Section 147(1) of the Act. Reasons for the petitioner to have booked the said expenditure for the FY 2012-13. The petitioner is a joint venture company formed by two public sector undertakings GAIL and NTPC Limited. It has been explained that NTPC Ltd. had seconded certain employees to the petitioner and the expenses of their salaries and wages were incurred by the petitioner. It was explained that NTPC Ltd. had issued a circular revising the salaries of its employees retrospectively. The said circular was communicated to the petitioner during the financial year relevant to assessment year in question AY 2013-14 . Thus although liability for payment of enhanced remuneration to the employees of NTPC who were seconded to the petitioner pertaining to prior years had crystalized during the previous year relevant to AY 2013-14 we find no infirmity with the petitioner debiting its profit and loss account with the said expenditure. Thus reassessment proceedings initiated pursuant to the impugned notice are set aside. Decided in favour of assessee.

Summary

The core legal questions considered by the Court in this matter are:

1. Whether the reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961 (the Act) for Assessment Year (AY) 2013-14 are barred by limitation under the provisions of Section 149(1) of the Act as they stood prior to the amendments effected by the Finance Act, 2021.

2. Whether the reassessment proceedings could be initiated during the pendency of rectification proceedings under Sections 154/155 of the Act.

3. Whether the expenditure booked by the petitioner relating to prior years, but crystalized during the relevant previous year, constitutes escapement of income chargeable to tax under the Act, thus justifying reopening of assessment.

4. Whether the procedural requirements under Section 148A of the Act were complied with in issuing the reassessment notice, especially in light of the Supreme Court's directions in Union of India & Ors. v. Ashish Aggarwal.

Issue 1: Limitation for Reassessment under Section 149(1) of the Act

The relevant statutory framework is Section 149(1) of the Act, which prescribes the time limits for issuance of a notice under Section 148 for reopening an assessment. Prior to the Finance Act, 2021, the limitation period was six years, extended to ten years in cases involving concealment of income of Rs. 50 lakh or more. The Finance Act, 2021 reduced the general limitation to three years, while retaining the ten-year period for serious tax evasion cases subject to certain conditions.

The Court examined the conditions under Section 149(1)(b), which require that the Assessing Officer (AO) must have in possession books of account or other evidence revealing that income chargeable to tax has escaped assessment, that such income is represented in the form of an asset (including immovable property, shares, loans, deposits, etc.), and that the amount of income escaped is Rs. 50 lakh or more.

In the present case, the AO's reason to believe was based on the petitioner having booked expenses under "wages and salaries" that included Rs. 6.29 crores pertaining to prior years. The Court noted that the expenditure was a nominal account entry and did not represent any asset. The petitioner's financial statements disclosed this prior period expenditure transparently, including a note explaining the nature of the Rs. 6.29 crores as relating to earlier years but crystalized in the relevant year.

Therefore, the Court concluded that the conditions under Section 149(1)(b) were not satisfied as there was no evidence of escaped income represented in the form of an asset, and consequently, no valid notice under Section 148 could be issued after the expiry of three years from the end of AY 2013-14, i.e., after 31.03.2017.

Further, the Court considered the first proviso to Section 149(1), which prohibits issuance of a notice under Section 148 for AYs beginning on or before 1st April 2021 if such notice could not have been issued at that time due to limitation under the pre-amendment law. Since the petitioner had fully disclosed the relevant facts, the reopening was barred by limitation.

Issue 2: Initiation of Reassessment Proceedings During Pendency of Rectification Proceedings

The petitioner contended that reassessment proceedings could not be initiated while rectification proceedings under Sections 154/155 of the Act were pending. The Court referred to the Supreme Court decision in S.M. Overseas (P.) Ltd. v. Commissioner of Income Tax, which supports this contention.

In this case, rectification proceedings were initiated in 2017 regarding the same issue of prior period expenditure, and no adverse order was passed. The reassessment notice under Section 148 was issued in 2021, during the pendency of these rectification proceedings. The Court found merit in the petitioner's argument that reassessment could not be initiated in such circumstances.

Issue 3: Whether Prior Period Expenditure Constitutes Escapement of Income

The petitioner explained that the prior period expenditure arose because NTPC Limited, which seconded employees to the petitioner, retrospectively revised remuneration packages effective from 01.01.2007. This liability crystallized during FY 2012-13 (relevant to AY 2013-14), justifying the booking of the expenditure in that year's accounts.

The Court accepted this explanation, noting that the petitioner had disclosed the nature of the expenditure in its financial statements, and thus there was no concealment or escapement of income chargeable to tax. The AO's premise that the expenditure was inadmissible prior period expense was not supported by evidence.

Issue 4: Compliance with Procedural Requirements under Section 148A of the Act

The reassessment notice dated 24.05.2021 was issued under the pre-amended Section 148 regime, which was challenged by the petitioner for non-compliance with Section 148A procedural safeguards introduced by the Finance Act, 2021. The Supreme Court in Union of India & Ors. v. Ashish Aggarwal held that such notices issued between 01.04.2021 and 04.05.2022 would be treated as show cause notices under Section 148A(b) and directed the AO to provide relevant material to the assessee and pass orders under Section 148A(d) before issuing a fresh notice under Section 148.

In compliance, the AO provided material on 30.05.2022, and the petitioner responded with objections, including limitation and merits. The AO passed an order under Section 148A(d) on 25.07.2022, which was set aside by the Court for failure to consider the petitioner's responses. Subsequently, a fresh order under Section 148A(d) was passed on 02.12.2022, approving issuance of notice under Section 148.

The Court found that even this fresh order and notice were unsustainable on limitation grounds and set aside the reassessment proceedings initiated pursuant thereto.

Significant Holdings:

"Since the conditions as specified under Section 149 (1) (b) of the Act are not satisfied, no notice under Section 148 of the Act could be issued after expiry of three years from the end of AY 2013-14, that is, after 31.03.2017."

"No proceedings for initiation of reassessment could have been initiated under the provisions relating to reassessment that were in force prior to 01.04.2021 after expiry of four years from the end of the relevant assessment year, as the petitioner had expressly disclosed in its accounts the prior period expenditure."

"The initiation of reassessment proceedings is barred by limitation."

"The petitioner's income chargeable to tax for AY 2013-14 had not escaped on account of booking an amount of Rs. 6.29 crores pertaining to earlier years under the head 'wages and salaries'."

"The impugned order dated 02.12.2022 passed under Section 148A(d) of the Act; the impugned notice dated 02.12.2022 issued under Section 148 of the Act; and the reassessment proceedings initiated pursuant to the impugned notice, are set aside."

The Court thus established the principle that reassessment proceedings initiated beyond the prescribed limitation period under Section 149(1) of the Act cannot be sustained unless the conditions for extended limitation are met, which include possession of evidence revealing escaped income represented as an asset of Rs. 50 lakh or more. Further, transparent disclosure of prior period expenditure in the original return negates the basis for reassessment on the ground of escapement of income. The Court also underscored the necessity of compliance with procedural safeguards introduced by the Finance Act, 2021 and reiterated that reassessment proceedings cannot be initiated during pending rectification proceedings.