2025 (5) TMI 754 - HC - Income Tax

Reopening of assessment u/s 147 order passed u/s 148A(d) - period of limitation - sanction in respect of notices that were issued during the period of limitation as extended by TOLA - reassessment proceedings in cases where the income alleged to have escaped assessment was Rs. 50, 00, 000/- or less - HELD THAT - It is material to note that the original notice u/s 148 of the Act deemed to be a show cause notice u/s 148A (b) of the Act in terms of the decision in the case of Union of India Ors. v. Ashish Agarwal 2022 (5) TMI 240 - SUPREME COURT was issued on 28.06.2021 that is two days prior to the expiry of the limitation period as extended by virtue of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act 2020 TOLA . Thus the AO had two days to issue the notice under Section 148 of the Act after receiving the reply dated 08.06.2022 filed by the petitioner. Since the said period was less than seven days the AO had by virtue of the fourth proviso to Section 149 (1) of the Act seven days to pass an order under Section 148A (d) of the Act (which was necessarily required to accompany a notice under Section 148 of the Act). The said period expired on 16.06.2022. Therefore the order passed under Section 148A (d) of the Act was beyond the period of limitation. The impugned notice is also liable to be set aside on the ground that it was issued without the approval of the authority specified under Section 151 of the Act. Since the impugned notice was issued beyond the period of three years from the end of the relevant assessment year thus in terms of Section 151(ii) of the Act the same was required to be approved by the Principal Chief Commissioner or Principal Director General or where there is no such authority by Chief Commissioner or Director General. The determination of the specified authority for grant of approval under Section 151 of the Act depends on whether the notice under Section 148 of the Act has been issued after the expiry of three years from the end of the relevant assessment year or within the said period. The question whether the sanction in respect of notices that were issued during the period of limitation as extended by TOLA required the prior sanction in terms of Section 151 of the Act as in force after 31.03.2021 or as in force prior to the said date has fell for consideration of this court in several cases including Twylight Infrastructure Pvt. Ltd. 2024 (1) TMI 759 - DELHI HIGH COURT had held that TOLA would have no relevance for determining the specified authority whose approval was mandatory under Section 151 of the Act for issuance of a notice under Section 148 of the Act. In J M Financial Investments Consultancy Services Private Limited 2022 (4) TMI 1446 - BOMBAY HIGH COURT the Bombay High Court had made observations to the effect that even if the time to issue notice may have been extended by TOLA the same would not amend the provisions of Section 151 of the Act. Thus the impugned order passed under Section 148A (d) of the Act the notice issued under Section 148 of the Act as well as the assessment order and the demand raised pursuant thereto are hereby set aside. Decided in favour of assessee.

Summary

The core legal questions considered in this judgment include:

1. Whether the notices issued under Section 148 of the Income Tax Act, 1961 (the Act), after 31.03.2021, but without following the amended procedure under Section 148A, are sustainable.

2. Whether the order passed under Section 148A(d) of the Act and the subsequent notice under Section 148 were issued within the prescribed limitation period.

3. Whether the approval for issuance of the notice under Section 148 was obtained from the correct specified authority as mandated by Section 151 of the Act, especially in light of amendments effective from 01.04.2021.

4. The impact of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) on limitation and sanction requirements under the Income Tax Act.

5. The applicability and interpretation of the amended provisions of Sections 147, 148, 148A, 149, and 151 of the Act, particularly regarding the hierarchy of authorities for sanction and the timelines for issuance of notices and orders.

6. The consequences of non-compliance with the procedural and approval requirements under the amended Income Tax Act provisions on the validity of reassessment proceedings and demand notices.

Issue-wise detailed analysis:

1. Validity of notices issued under Section 148 after 31.03.2021 without following Section 148A procedure:

The court referred to prior decisions, including the judgment in Mon Mohan Kohli, where notices issued post 31.03.2021 under the pre-amendment regime were struck down for non-compliance with the amended Section 148A procedure. The Supreme Court in Union of India v. Ashish Agarwal upheld the applicability of the amended provisions for notices issued after 01.04.2021 and directed that notices issued in the interim period be treated as show cause notices under Section 148A(b). The Assessing Officer was directed to furnish information relied upon for issuance of such notices to enable the assessee to respond.

In the present case, the initial notice under Section 148 was issued on 28.06.2021, after the amendment date, but without following the amended procedure. The AO provided the information on 30.05.2022 as per Supreme Court directions, and the petitioner responded on 08.06.2022, explaining inadvertent non-disclosure of a bank account but asserting that income was accounted for. The AO was not convinced and passed an order under Section 148A(d) on 29.07.2022 to reopen the assessment.

The court held that the initial notice was unsustainable as it did not comply with the amended Section 148A requirements. The Supreme Court's directions mandated that such notices be treated as show cause notices, and proper procedure must be followed before reopening assessment.

2. Limitation period for issuance of the order under Section 148A(d) and notice under Section 148:

The original notice was issued on 28.06.2021, two days before the limitation period expired as extended by TOLA. The petitioner responded on 08.06.2022. The AO had less than seven days after receiving the reply to pass the order under Section 148A(d) and issue a notice under Section 148, but the order was passed on 29.07.2022, beyond the prescribed period.

The court analyzed the fourth proviso to Section 149(1), which provides a seven-day window to pass the order under Section 148A(d) after receiving the reply. Since this period expired on 16.06.2022, the order dated 29.07.2022 was held to be beyond limitation and thus invalid.

3. Requirement and correctness of approval by specified authority under Section 151:

Section 151, as amended by the Finance Act, 2021, specifies two categories of authorities empowered to grant sanction for issuance of notices under Sections 148 and 148A:

(i) Principal Commissioner or Principal Director or Commissioner or Director, if the notice is issued within three years from the end of the relevant assessment year;

(ii) Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General, if more than three years have elapsed.

Since the notice in question was issued beyond three years from the end of the relevant AY, approval was required from the authorities under clause (ii). However, the AO obtained approval from the Commissioner of Income Tax (Exemption), which falls under clause (i), and thus was not the correct specified authority.

The court extensively referred to precedents, including Twylight Infrastructure Pvt. Ltd. and Abhinav Jindal HUF, which held that the TOLA extension does not affect the categorization of specified authorities under Section 151. The approval must be obtained from the authority specified for the relevant time period, regardless of any extension in limitation period.

Further reliance was placed on decisions from Bombay High Court (J M Financial & Investments Consultancy Services and Siemens Financial Services) and Madras High Court (Ramachandran Shivan), which consistently held that the amended Section 151 applies and the approval must be from the correct specified authority. The Orissa High Court's similar stance in Ambika Iron and Steel Pvt. Ltd. was also noted.

The court concluded that the approval obtained from the Commissioner instead of the Principal Chief Commissioner or equivalent was invalid, rendering the notices and subsequent proceedings unlawful.

4. Impact of TOLA on limitation and sanction requirements:

The court clarified that TOLA, which extended time limits for issuance of notices and completion of proceedings, does not amend or override the provisions of Section 151 relating to the hierarchy of authorities for sanction. The extended limitation period under TOLA is separate from the statutory requirement of approval by the specified authority.

Thus, while TOLA extends the time within which notices may be issued, it does not alter the distribution of power or the categorization of authorities under Section 151. The sanction must be obtained from the correct authority as per the amended Section 151, irrespective of TOLA extensions.

5. Application of law to facts and treatment of competing arguments:

The petitioner argued that the notices and orders were barred by limitation and lacked valid approval. The Revenue contended that the TOLA extension allowed issuance of notices beyond the usual limitation and that the approval obtained was valid under the pre-amended regime.

The court rejected the Revenue's arguments, emphasizing that the amended provisions post 31.03.2021 govern the proceedings and that TOLA cannot be read as amending Section 151. The court held that the approval must be obtained from the specified authority as per the amended Section 151, and failure to do so invalidates the notices and orders.

The court also noted that the order under Section 148A(d) was passed beyond the prescribed time limit, further invalidating the reassessment proceedings.

6. Consequences and conclusions:

Since the order under Section 148A(d), the notice under Section 148, and the assessment order dated 23.05.2023 were all found to be invalid due to procedural and limitation defects, the court set aside all these orders and the demand raised pursuant thereto.

The court granted liberty to the Revenue to initiate reassessment proceedings afresh in accordance with law, ensuring compliance with the amended provisions and correct sanctioning authority.

Significant holdings and core principles established:

"The issue of approval would still be liable to be answered based on whether the reassessment was commenced after or within a period of four years from the end of the relevant AY or as per the amended regime dependent upon whether action was being proposed within three years of the end of the relevant AY or thereafter. The bifurcation of those powers would continue unaltered and unaffected by TOLA."

"The sanction of the specified authority has to be obtained in accordance with the law existing when the sanction is obtained and, therefore, the sanction is required to be obtained by applying the amended section 151(ii) of the Act and since the sanction has been obtained in terms of section 151(i) of the Act, the impugned order and impugned notice are bad in law and should be quashed and set aside."

"The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act only seeks to extend the period of limitation and does not affect the scope of section 151."

"The order passed under Section 148A(d) of the Act beyond the prescribed time limit is not sustainable."

"The impugned notices and orders are quashed on the ground that there is no approval of the specified authority as indicated in section 151(ii) of the Act."

Final determinations:

- Notices issued under Section 148 after 31.03.2021 without following amended Section 148A procedure are invalid.

- Orders under Section 148A(d) must be passed within the prescribed time limit; delay renders them invalid.

- Approval for issuance of notices beyond three years from the end of the relevant AY must be obtained from the authorities specified under Section 151(ii); failure to do so invalidates the proceedings.

- TOLA extensions do not alter the hierarchy of sanctioning authorities under Section 151.

- The impugned reassessment proceedings and demand notices are set aside, but the Revenue is granted liberty to initiate proceedings afresh in compliance with the law.