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2025 (5) TMI 1338 - HC - Income TaxValidity of assessment orders - Period of limitation u/s 153B - Exchange of Information - Indo-Switzerland Double Taxation Avoidance Agreement Indo-Swiss DTAA - whether the period of one year is required to be excluded for the purpose of computing the period of limitation for passing the assessment order? HELD THAT - There is no dispute that if the said period is excluded from the time available u/s 153B for making the assessment / reassessment order on account of the Revenue making a reference in terms of the Agreement u/s 90 assessment orders were passed within the period of limitation. AO had passed the assessment order on 04.03.2015 and the time period of passing the assessment order was available till 31.03.2015. Decision of Supreme Court In Sahara India (Firm) Lucknow v. CIT Anr. (2016) 12 SCC 32 considered. 2008 (4) TMI 4 - SUPREME COURT - It is apparent from the above that but for the specific directions issued by the Supreme Court to treat this decision as settling the law prospectively the effect of which was to save the orders issued under Section 142(2A) of the Act that were issued prior to the court handing down its ruling the assessments made would have to be set aside as fresh assessments would be barred by limitation. It is in the aforesaid view that the learned ASG had made a request for prospective ruling which was acceded to by the Supreme Court. It is implicit that if the directions issued under Section 142 (2A) of the Act were held to be invalid the benefit of exclusion of the period under Clause (ii) of the Explanation to Section 153B of the Act would not be available. On a plain reading of Clause (ix) of the Explanation to Section 153B of the Act the exclusion of time taken for obtaining the information (or one year) for completion of the assessment under Section 153A of the Act is applicable only if a reference for exchange of information has to be made as per the Agreement under Section 90/90A of the Act. It is necessary that reference be made in terms of the agreement. In this case the benefit of exclusion of time by virtue of Explanation (ix) of Section 153B of the Act would thus be available only if the reference was made in terms of Indo-Swiss DTAA. However as noted above the request as made was not in terms of the Indo-Swiss DTAA. It was contrary to the limitations as expressly specified under Article 14 of the Amending Protocol. Questions to law as framed are answered against the Revenue and in the negative; that is against the Revenue and in favour of the Assesses.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court in this batch of appeals are as follows: (i) Whether the Income Tax Appellate Tribunal (ITAT) was correct in quashing the assessment orders as barred by limitation without adjudicating the merits of the case; (ii) Whether the ITAT erred in not allowing an extension of the limitation period for passing assessment orders, when a valid reference for exchange of information was made by the competent Indian authority to the Swiss tax authorities under the provisions of the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland; (iii) Whether the reference made by the Indian Revenue authorities to the Swiss authorities for information relating to the period prior to 01.04.2011 was valid under the Indo-Swiss DTAA, particularly in light of amendments made to the DTAA and the applicable notifications; (iv) Whether the exclusion of the period for limitation under Clause (ix) of the Explanation to Section 153B of the Income Tax Act is applicable when the reference for information is invalid; (v) The applicability and effect of legislative amendments and judicial precedents on the computation of limitation period for assessment orders, including the effect of directions for special audit under Section 142(2A) of the Act; (vi) Whether the penalty orders imposed under Section 271(1)(c) of the Act should stand deleted on account of the assessment orders being time-barred. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i) & (ii): Validity of ITAT's decision to quash assessment orders as barred by limitation and non-extension of limitation period despite reference to Swiss authorities Legal Framework and Precedents: The limitation period for passing assessment or reassessment orders following search and seizure operations under Section 153B of the Income Tax Act is prescribed, with certain periods excluded under the Explanation clauses. Clause (ix) of the Explanation to Section 153B excludes the period commencing from the date on which a reference for exchange of information is made under an agreement referred to in Section 90 or 90A of the Act, until the information is last received or one year, whichever is less. Court's Interpretation and Reasoning: The ITAT allowed the appeals on the ground that the assessment orders were passed beyond the prescribed period under Section 153B, holding that the limitation period was not extended as the reference made to the Swiss authorities was invalid. The Court examined whether the ITAT was justified in quashing the assessment orders purely on limitation grounds without delving into merits, and whether the limitation period should have been extended due to the reference made under the Indo-Swiss DTAA. Key Evidence and Findings: The Revenue had made a reference to the Swiss tax authorities on 11.06.2013 seeking administrative assistance under the Exchange of Information Article of the Indo-Swiss DTAA. The Swiss authorities responded on 02.07.2019 denying the request for information relating to periods prior to 01.04.2011, citing the DTAA provisions. The assessment order was passed on 04.03.2015, within the prescribed period if the exclusion of the one-year period under Clause (ix) was allowed. Application of Law to Facts: The Court noted that the ITAT's decision rested on the invalidity of the reference made for information relating to periods prior to 01.04.2011, which was outside the scope of the amended Article 26 of the Indo-Swiss DTAA. Since the reference was invalid, the exclusion under Clause (ix) of Explanation to Section 153B could not be invoked, and thus the assessment orders were time-barred. Treatment of Competing Arguments: The Revenue argued that although the Indo-Swiss DTAA was amended and notified in 2011, the earlier version of the DTAA containing exchange of information provisions remained applicable for periods prior to 01.04.2011. The Court rejected this contention, holding that the Amending Protocol of 2010 deleted and replaced Article 26 of the DTAA, and the amended provisions applied prospectively only for fiscal years beginning on or after 01.04.2011. The Court relied on the express non-obstante clause in the Amending Protocol and principles of novation and substitution of treaties and legislative provisions to conclude that the earlier provisions ceased to exist after the amendment. Conclusions: The ITAT was correct in quashing the assessment orders as barred by limitation, and the limitation period was not extended by the period of reference to Swiss authorities because the reference was invalid under the terms of the amended Indo-Swiss DTAA. Issue (iii): Validity of reference made to Swiss authorities for information relating to periods prior to 01.04.2011 Legal Framework and Precedents: The Indo-Swiss DTAA was originally signed in 1994 and notified in 1995, containing Article 24 on exchange of information. It was amended by a Supplementary Protocol in 2000 (renumbering Article 24 as Article 26) and subsequently by an Amending Protocol signed on 30.08.2010, notified in India on 27.12.2011. The Amending Protocol replaced Article 26 with a new provision effective for fiscal years beginning on or after 01.04.2011. Court's Interpretation and Reasoning: The Court analyzed the effect of the Amending Protocol which expressly provided that the exchange of information provisions would apply only to fiscal years beginning on or after 01.04.2011. The Court held that the earlier Article 26 was deleted and replaced, and there was no saving clause preserving the earlier provisions for information exchange relating to prior periods. Key Evidence and Findings: The Court referred to the relevant notifications issued by the Government of India under Section 90 of the Act, the text of the Amending Protocol, and the decision of the Tribunal Administratif F'ed'eral, Switzerland, which held that requests for information relating to periods before 01.04.2011 were not admissible under the amended Article 26. Application of Law to Facts: Since the request for information was made after the Amending Protocol came into force, and sought information for periods prior to 01.04.2011, it was invalid under the DTAA provisions. Consequently, the Revenue's reliance on the earlier version of Article 26 was misplaced. Treatment of Competing Arguments: The Revenue's argument that the earlier DTAA provisions continued to apply was rejected based on settled principles of treaty interpretation and legislative substitution, supported by Supreme Court precedents on substitution and novation of laws and rules. Conclusions: The reference made by the Revenue to the Swiss authorities for information relating to periods prior to 01.04.2011 was invalid and not maintainable under the Indo-Swiss DTAA. Issue (iv): Applicability of exclusion of limitation period under Clause (ix) of Explanation to Section 153B when the reference is invalid Legal Framework and Precedents: Clause (ix) excludes from limitation the period from the date of reference for exchange of information under an agreement under Section 90/90A until the information is received or one year, whichever is less. The exclusion applies only if the reference is valid under the agreement. Court's Interpretation and Reasoning: The Court held that the exclusion of time is contingent upon a valid reference being made under the DTAA. An invalid reference cannot operate to extend the limitation period. The Court relied on ITAT decisions and High Court precedents which denied exclusion of time where directions for special audit or references were invalid. Key Evidence and Findings: The Court noted that the ITAT had relied on decisions where invalid directions for special audit under Section 142(2A) led to denial of exclusion of time from limitation. By analogy, the invalid reference under the DTAA cannot extend the limitation period under Clause (ix). Application of Law to Facts: Since the reference to Swiss authorities was invalid, the period of one year could not be excluded from the limitation period for assessment under Section 153B. Conclusions: The exclusion of time under Clause (ix) of Explanation to Section 153B is not available when the reference for information exchange is invalid. Issue (v): Effect of legislative amendments and judicial precedents on computation of limitation period including special audit directions Legal Framework and Precedents: The Court examined the amendments to Clause (ii) of Explanation to Section 153B, which exclude from limitation the period during which assessment proceedings are stayed due to directions for special audit under Section 142(2A) and related judicial decisions including the Supreme Court's rulings in VLS Finance Limited, Sahara India, and others. Court's Interpretation and Reasoning: The Court emphasized that the legislature recognized the need to exclude periods where assessment proceedings are stayed due to directions for special audit or judicial intervention. However, such exclusion is only applicable if the direction or order is valid. If the direction is invalid, the exclusion does not apply, and the assessment may be time-barred. Key Evidence and Findings: The Court referred to Supreme Court decisions which held that the period during which a stay order is in force must be excluded, but the initial period before the stay is not excluded if the direction is invalid. The Court also noted that the law of limitation must be strictly construed to provide certainty and finality. Application of Law to Facts: By analogy, the Court reasoned that the exclusion under Clause (ix) for exchange of information references would similarly be unavailable if the reference is invalid. The Court also noted that the Revenue's case did not involve any stay or judicial intervention affecting the limitation period. Conclusions: The principles governing exclusion of time for special audit directions apply analogously to exclusion for exchange of information references: validity of the reference or direction is a prerequisite for exclusion of time from limitation. Issue (vi): Deletion of penalty orders imposed under Section 271(1)(c) due to time-barred assessments Legal Framework and Precedents: Penalty proceedings under Section 271(1)(c) are consequential to the assessment orders. If the assessment order is quashed as time-barred, penalty orders based on such assessments generally cannot be sustained. Court's Interpretation and Reasoning: The Court observed that ITAT deleted penalties imposed under Section 271(1)(c) since the underlying assessments were held to be barred by limitation. The Court framed questions of law on whether the ITAT was correct in deleting penalties on these grounds. Key Evidence and Findings: The Court noted that the penalty appeals were heard along with quantum appeals, and the ITAT's deletion of penalties was consistent with the quashing of assessment orders on limitation grounds. Application of Law to Facts: Since the assessments were time-barred and set aside, penalties based on such assessments could not stand. Conclusions: The deletion of penalty orders by the ITAT was justified as the assessment orders were barred by limitation. 3. SIGNIFICANT HOLDINGS "The entire controversy boils down to the issue whether the aforementioned reference is a valid reference and, if not, then can an invalid reference extend the period of limitation?" "By virtue of the Amending Protocol, the Indo-Swiss DTAA stood novated insofar as the provision regarding exchange of information is concerned. It is well settled that novation discharges the original contract. Thus, for all intents and purposes, Article 26 as it existed prior to 30.08.2010, ceased to exist." "The substitution of one text for the other pre-existing text is one of the known and well-recognised practices employed in legislative drafting. 'Substitution' has to be distinguished from 'supersession' or a mere repeal of an existing provision. Substitution of a provision results in repeal of the earlier provision and its replacement by the new provision." "On a plain reading of Clause (ix) of the Explanation to Section 153B of the Act, the exclusion of time taken for obtaining the information (or one year) for completion of the assessment under Section 153A of the Act is applicable only if a reference for exchange of information has to be made as per the Agreement under Section 90/90A of the Act. It is necessary that reference be made in terms of the agreement." "The law of limitation is intended to give certainty and finality to legal proceedings and to avoid exposure to risk of litigation to a litigant for an indefinite period of future unforeseen events." "The appeals are, accordingly, dismissed." Core Principles Established:
Final Determinations on Each Issue:
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