ISSUES:

Whether the service charges received under the Strategic Oversight Services Agreement (SOSA) constitute taxable royalty under the applicable tax laws and DTAA.Whether the appellant has a Permanent Establishment (PE) in India within the meaning of Article 5 of the India-UAE Double Taxation Avoidance Agreement (DTAA).Whether the findings of the Tribunal regarding the existence of a PE are perverse and contrary to the terms of the SOSA.Whether Article 7(1) of the DTAA applies to the appellant considering the appellant incurred losses during the relevant financial years.

RULINGS / HOLDINGS:

The Court held that the service charges under the SOSA were not taxable as royalty, answering that question in favor of the appellant.The Court affirmed that the appellant has a Permanent Establishment (PE) in India under Article 5(1) of the India-UAE DTAA, as the appellant had a "fixed place of business through which the business of an enterprise is wholly or partly carried on."The Court found the Tribunal's findings on the existence of PE to be neither perverse nor contrary to the SOSA, emphasizing the appellant's pervasive and enforceable control over hotel operations.The Court referred the question regarding applicability of Article 7(1) of the DTAA in the context of appellant's losses to a Larger Bench, noting that taxability is based on business presence and not global profitability.

RATIONALE:

The Court applied the definition of Permanent Establishment under Article 5 of the India-UAE DTAA, consistent with Section 92F(iii-a) of the Income Tax Act, 1961, and international models such as the OECD and UN Model Tax Conventions.The Court relied heavily on the precedent set in Formula One World Championship Limited v. Commissioner of Income Tax, which established the "disposal test" requiring that the place be "at the disposal" of the enterprise and that business is carried on through that place, with key attributes being stability, productivity, and a degree of independence.The Court rejected the appellant's contention that absence of exclusive physical space or formal right to use premises negates PE, holding that exclusive possession is not essential and temporary or shared use suffices if business is carried on through the place.The Court emphasized that the appellant's role under the SOSA went beyond advisory functions to include strategic, operational, and financial control, including appointment and supervision of key personnel, formulation and enforcement of policies, and assignment of employees to India without owner approval.The Court distinguished the facts from E-Funds IT Solutions Inc., where back-office support was held insufficient for PE, noting that the appellant's involvement was core and continuous, not merely auxiliary.The Court noted that the aggregate presence and activities of employees in India, even if individual stays were under nine months, satisfied the continuity requirement under Article 5(2)(i) of the DTAA.The Court invoked the principle that legal form does not override economic substance in determining PE status, rejecting the separation of the appellant's and Hyatt India Pvt. Ltd.'s operations for PE determination.The Court referred to authoritative commentary by Philip Baker and Klaus Vogel on the interpretation of "place" and "fixed place of business," highlighting the importance of control and the nature of the business activity in assessing PE.The Court noted prior decisions clarifying that activities of a preparatory or auxiliary character are excluded from PE under Article 5(3)(e), but found the appellant's activities to be core and substantive.The Court affirmed that under Article 7(1) of the DTAA, profits attributable to the PE may be taxed in India, independent of the overall profitability of the enterprise, as supported by the Larger Bench decision cited.

• Whether Sub-section (9) of Section 80-IA restricts the computation or only the allowability of deductions under other provisions of Chapter VI-A, heading 'C' when a deduction under Section 80-IA has been claimed and allowed;
• Whether the gross total income for computing deduction under Section 80-HHC should be reduced by the amount of deduction already allowed under Section 80-IA;
• The proper interpretation of the interplay between deductions under Section 80-IA, Section 80-HHC, and other provisions under heading 'C' of Chapter VI-A;
• The validity and correctness of various High Court and Tribunal decisions on this issue, including the decisions of the Bombay High Court, Delhi High Court, Kerala High Court, and the Special Bench of the ITAT;
• The extent to which the legislative intent behind Section 80-IA(9) prevents double or repeated deductions on the same profits and gains.

Issue-wise Detailed Analysis

1. Legal Framework and Relevant Provisions

The judgment extensively analyzed the relevant provisions of the IT Act, especially:

• Section 4: Charging section imposing tax on total income of the previous year;
• Chapter VI-A: Contains Sections 80-A to 80-U, providing for various deductions in computing total income;
• Section 80-A: General provision allowing deductions specified in Sections 80-C to 80-U from gross total income;
• Section 80-AB: Defines computation of deduction under heading 'C';
• Section 80-HHC: Allows deduction in respect of profits retained for export business, specifying percentages of profits allowable as deduction for certain assessment years;
• Section 80-IA: Provides deduction for profits and gains from industrial undertakings or enterprises engaged in infrastructure development;
• Section 80-IB: Provides deduction for profits and gains from certain industrial undertakings other than infrastructure development;
• Sub-section (9) of Section 80-IA: Crucially provides that where any amount of profits and gains of an undertaking or enterprise is claimed and allowed under Section 80-IA, deduction to that extent shall not be allowed under any other provision under heading 'C' and in no case shall the total deduction exceed the profits and gains of such eligible business.

2. Court's Interpretation and Reasoning

The Court emphasized that Section 80-IA(9) restricts the allowability of deductions under other provisions of heading 'C' to the extent of profits and gains already allowed as deduction under Section 80-IA. It does not restrict the computation of deductions under those provisions. In other words, the deductions under Sections 80-IA and 80-HHC (and others under heading 'C') are to be computed independently on the gross total income, but the aggregate deduction allowed cannot exceed the profits and gains of the eligible business.

The Court rejected the Revenue's contention that the gross total income for computing deduction under Section 80-HHC should be reduced by the amount already allowed under Section 80-IA. Such a reduction would distort the formula prescribed under Section 80-HHC(3) and lead to anomalous results, as illustrated in the judgment.

The Court relied heavily on the decision of the Bombay High Court in Associated Capsules (P) Ltd., which held that Section 80-IA(9) applies at the stage of allowance of deduction and not at the stage of computation, and that the aggregate deduction under Section 80-IA and other provisions under heading 'C' cannot exceed 100% of the profits of the business.

Further, the Court approved the reasoning of Dipak Misra, J (as he then was) in the case of Assistant Commissioner of Income Tax, Bangalore v. Micro Labs Limited, which supported the view taken by the Bombay High Court. The judgment clarified that the gross total income remains unchanged for the purpose of computing deductions under Section 80-HHC, even if a deduction under Section 80-IA has been allowed.

3. Key Evidence and Findings

The Court examined the factual matrix where the appellant claimed deductions under Sections 80-IA, 80-IB, and 80-HHC. The Revenue disallowed the deductions under Sections 80-IA and 80-HHC on the basis of Section 80-IA(9). The appellant contended that the deductions under these provisions should be computed independently and then aggregated subject to the overall limit.

The Court found that the appellant's submissions were consistent with the legislative scheme and the interpretation of the Bombay High Court and the Supreme Court bench in Micro Labs Limited. The Court also noted the circular issued by the Central Board of Direct Taxes (CBDT Circular No. 772 dated December 23, 1998) which explained that Section 80-IA(9) was introduced to prevent repeated deductions on the same eligible income and to ensure that aggregate deductions do not exceed profits and gains.

4. Application of Law to Facts

Applying the legal principles, the Court held that:

• The deductions under Sections 80-IA and 80-HHC must be computed separately on the gross total income;
• The gross total income for computing deduction under Section 80-HHC is not to be reduced by the amount of deduction allowed under Section 80-IA;
• The aggregate deduction allowed under heading 'C' of Chapter VI-A cannot exceed the profits and gains of the eligible business;
• Section 80-IA(9) acts as a cap on the total deduction allowed under heading 'C' but does not alter the method of computation under individual provisions;
• The Revenue's approach to reduce gross total income for computing deduction under Section 80-HHC leads to anomalous and impracticable results and is therefore incorrect.

5. Treatment of Competing Arguments

The Court considered and rejected the view taken by the Delhi High Court and Kerala High Court, which had held that Section 80-IA(9) affects computation of deduction under other provisions. The Court found these views inconsistent with the statutory language and legislative intent. The Court also distinguished the decision of the Bombay High Court in Associated Capsules as the correct interpretation.

The Court acknowledged the appellant's argument that the legislature intended to allow deductions under multiple provisions of Chapter VI-A, subject to the overall cap imposed by Section 80-IA(9). It found this interpretation aligned with the statutory scheme and the purpose of the provisions.

Significant Holdings

The Court held:

"Section 80-IA(9) does not affect the computability of deduction under various provisions under heading C of Chapter VI-A, but it affects the allowability of deductions computed under various provisions under heading C of Chapter VI-A, so that the aggregate deduction under section 80-IA and other provisions under heading C of Chapter VI-A do not exceed 100 per cent. of the profits of the business of the assessee."

"Sub-section (9) of Section 80-IA does not bar or prohibit the deduction allowed under Section 80-IA from being included in the gross total income, when deduction under Section 80-HHC of the Act is computed."

"The formula prescribed in sub-section (3) of Section 80-HHC is a complete code for the purpose of the said computation of eligible profits and gains of business from exports of mercantiles and goods. In case the gross total income is reduced or modified taking into account the deduction allowed under Section 80-IA, it would lead to absurd and unintended consequences."

The Court concluded that the correct approach is to compute deductions under Sections 80-IA and 80-HHC independently on the gross total income, and then allow deductions ensuring that the total deduction under heading 'C' does not exceed the profits and gains of the eligible business.

This interpretation preserves the legislative intent to avoid double deductions on the same profits while allowing eligible deductions under multiple provisions.

The core legal questions considered in this judgment include:

• Whether the income tax demands for assessment years 2012-13 and 2013-14, raised by the Income Tax Department after the approval of the Resolution Plan, are valid and enforceable.
• Whether the dismissal of the application by the NCLT and the subsequent appeal dismissal by the NCLAT were justified.
• The applicability of Section 31 of the Insolvency and Bankruptcy Code, 2016, concerning the binding nature of an approved Resolution Plan on statutory dues.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of Income Tax Demands Post-Resolution Plan Approval

Relevant legal framework and precedents: The judgment revolves around Section 31 of the Insolvency and Bankruptcy Code, 2016, which stipulates the binding nature of an approved Resolution Plan on all stakeholders, including government authorities. The Court referenced the decision in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd., which clarified that statutory dues not included in the Resolution Plan are extinguished upon its approval.

Court's interpretation and reasoning: The Court noted that the Income Tax Department did not submit claims for the assessment years 2012-13 and 2013-14 before the Resolution Professional. As per Section 31, claims not part of the approved Resolution Plan are extinguished, and no proceedings can be initiated for such dues. The Court emphasized that the demands raised post-approval were invalid.

Key evidence and findings: The Resolution Plan included a provision for contingent liabilities, but the specific income tax liabilities for the years in question were not listed. The Court highlighted that the Resolution Plan was binding on all stakeholders, including the Income Tax Department.

Application of law to facts: The Court applied the legal principle from Ghanashyam Mishra, concluding that the demands for the assessment years 2012-13 and 2013-14 were extinguished as they were not part of the Resolution Plan.

Treatment of competing arguments: The Court dismissed the argument that the NCLAT's decision was justified because the appellants did not challenge the Resolution Plan. It deemed the NCLAT's reasoning as ignoring binding precedents.

Conclusions: The Court concluded that the demands for the assessment years 2012-13 and 2013-14 were invalid and unenforceable.

2. Justification of NCLT and NCLAT Decisions

Relevant legal framework and precedents: The Court examined the procedural approach of the NCLT and NCLAT in dismissing the application and appeal, respectively, without considering the merits or providing sufficient reasoning.

Court's interpretation and reasoning: The Court criticized the NCLT for dismissing the application as frivolous without adequate reasoning and for imposing costs. It found the NCLAT's dismissal based on procedural grounds to be perverse, especially when a binding Supreme Court precedent was ignored.

Key evidence and findings: The NCLT's order did not address the substantive legal issues, and the NCLAT failed to consider the Supreme Court's ruling in Ghanashyam Mishra.

Application of law to facts: The Court applied the principle of binding precedent, emphasizing that lower tribunals must adhere to Supreme Court rulings.

Treatment of competing arguments: The Court rejected the NCLAT's rationale that the decision in Ghanashyam Mishra was not applicable because it was not cited before the NCLT.

Conclusions: The Court set aside the orders of the NCLT and NCLAT, finding them unjustified and procedurally flawed.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: The Court reiterated the principle from Ghanashyam Mishra: "Once a resolution plan is duly approved by the adjudicating authority... all such claims, which are not a part of resolution plan, shall stand extinguished."

Core principles established: The judgment reinforced that an approved Resolution Plan under Section 31 of the IB Code is binding on all stakeholders, including government authorities, and extinguishes any claims not included in the plan.

Final determinations on each issue: The Court determined that the income tax demands for the assessment years 2012-13 and 2013-14 were invalid. It set aside the NCLT and NCLAT decisions, allowing the appeal and affirming the binding nature of the approved Resolution Plan.

The core legal issues considered in this judgment include:

• Whether compliance with all three conditions mentioned in Subsection (2) of Section 271AAA of the Income Tax Act, 1961 is mandatory for avoiding penalty.
• Whether the penalty prescribed at 10% of undisclosed income under Section 271AAA can be reduced if the tax and interest on the undisclosed income are paid, albeit with delay.
• The interpretation of the terms "undisclosed income" and "specified previous year" as defined under Section 271AAA.
• Whether the penalty under Section 271AAA(1) is automatic or subject to discretion.
• Whether the penalty could be imposed on the entire returned income or only on the undisclosed income admitted during the search.

2. ISSUE-WISE DETAILED ANALYSIS

Compliance with Section 271AAA(2)

• Legal Framework and Precedents: Section 271AAA(2) provides conditions under which penalty under Section 271AAA(1) is not applicable. These conditions include admission of undisclosed income during the search, specifying and substantiating the manner of derivation, and payment of tax with interest.
• Court's Interpretation and Reasoning: The Court held that all three conditions in Section 271AAA(2) are mandatory for avoiding penalty. The appellant failed to meet the third condition of timely payment of tax and interest.
• Application of Law to Facts: The appellant did not pay the tax and interest on the undisclosed income until three years after the assessment order, failing the condition of Section 271AAA(2).
• Conclusion: Compliance with all conditions is mandatory to avoid penalty under Section 271AAA(1).

Discretion in Imposing Penalty under Section 271AAA(1)

• Legal Framework and Precedents: Section 271AAA(1) allows the Assessing Officer to impose a penalty at 10% of the undisclosed income. The use of "may" suggests discretion.
• Court's Interpretation and Reasoning: The Court emphasized that the discretion to impose penalty is not unfettered and must be exercised judiciously, guided by law.
• Conclusion: The imposition of penalty is discretionary, not automatic, but must be based on a sound legal basis.

Interpretation of "Undisclosed Income" and "Specified Previous Year"

• Legal Framework and Precedents: The terms are defined in the Explanation to Section 271AAA. "Undisclosed income" refers to income not recorded or disclosed before the search, and "specified previous year" relates to the year of search or the year before if returns were not filed.
• Court's Interpretation and Reasoning: The Court held that the onus is on the Assessing Officer to prove the existence of undisclosed income during the search. AY 2011-12 was determined as the specified previous year.
• Conclusion: The definitions must be strictly construed, and the burden of proof lies with the Assessing Officer.

Penalty Imposition on Undisclosed Income

• Key Evidence and Findings: The appellant admitted Rs.2,27,65,580/- as undisclosed income during the search and paid the tax with interest, albeit late. However, Rs.2,49,90,000/- was not admitted during the search but only during assessment proceedings.
• Application of Law to Facts: Penalty is not attracted on the admitted amount since conditions of Section 271AAA(2) were met, albeit with delay. However, penalty is leviable on the amount not admitted during the search.
• Conclusion: Penalty is applicable only on the amount not disclosed during the search, emphasizing the importance of timely disclosure and payment.

3. SIGNIFICANT HOLDINGS

• Core Principles Established: Compliance with all conditions of Section 271AAA(2) is mandatory to avoid penalty. The discretion to impose penalty under Section 271AAA(1) is not automatic and must be exercised judiciously.
• Final Determinations on Each Issue: The Court directed the appellant to pay a penalty at 10% on Rs.2,49,90,000/-, not on the entire returned income, underscoring the need for strict adherence to statutory conditions for penalty exemption.
• Verbatim Quote: "Since income of Rs.2,49,90,000/- constitutes undisclosed income found during the search, penalty under Section 271AAA(1) of the Act 1961 is leviable on the said amount."

a. Whether an offence under Section 276CC of the Income Tax Act, 1961 could be said to have been committed on the actual date of filing of return of income or on the day immediately after the due date for filing of returns as per Section 139(1) of the ActRs.

b. What is the meaning of the expression "first offence" appearing in Clause 8 of the 2014 guidelinesRs.

c. What amounts to voluntary disclosure for the purpose of Clause 8 of the 2014 guidelinesRs.

d. Whether the 2014 guidelines are mandatory or directory in natureRs.

2. ISSUE-WISE DETAILED ANALYSIS

i. Section 276CC of the Income Tax Act, 1961

The Court examined the scope of Section 276CC, which penalizes the failure to furnish income tax returns in due time. The Court referred to the precedent set in Prakash Nath Khanna v. CIT, which clarified that the offence is committed immediately after the due date for filing returns as per Section 139(1), not the actual date of filing a belated return. Therefore, the offence for AY 2013-14 was committed on 01.11.2013, the day after the due date.

ii. Provisions pertaining to compounding of offences

Section 279(2) of the Act allows the Principal Chief Commissioner or Chief Commissioner to compound offences either before or after proceedings are initiated. The Court noted that this power is discretionary and not a matter of right for the assessee, as previously held in Union of India v. Banwari Lal Agarwal. The Court also emphasized that the exercise of this discretion must adhere to instructions issued by the Central Board of Direct Taxes (CBDT), as clarified in Y.P. Chawla v. M.P. Tiwari.

iii. Guidelines for Compounding of Offences under Direct Tax Laws, 2014

The 2014 guidelines categorize offences under two categories: A and B, with Section 276CC falling under Category B. The guidelines specify that Category B offences are generally not compounded except when it is the first offence. The definition of "first offence" includes offences committed before a show cause notice is issued or voluntarily disclosed before detection by the Department.

The Court found that both offences for AY 2011-12 and AY 2013-14 were committed before the issuance of any show cause notice, thus qualifying as "first offences." The Court rejected the respondents' argument that filing a belated return constitutes voluntary disclosure, clarifying that voluntary disclosure should occur before the Department detects the offence.

The Court also discussed the discretionary nature of the guidelines, emphasizing that while eligibility conditions must be met, the competent authority should consider the specific facts and circumstances of each case. The Court referred to the Delhi High Court's decision in Sports Infratech P. Ltd. & Anr. v. Deputy Commissioner of Income-tax, which highlighted the need for authorities to consider objective facts rather than rigidly applying guidelines.

3. SIGNIFICANT HOLDINGS

The Court held that the offence under Section 276CC for AY 2013-14 was committed on 01.11.2013, immediately after the due date, and before any show cause notice was issued, thus qualifying as a "first offence" under the 2014 guidelines. The Court emphasized that the guidelines are directory, not mandatory, and authorities must consider the facts and circumstances of each case when deciding on compounding applications.

The Court set aside the High Court's judgment and the order of the Chief Commissioner of Income Tax, Vadodara, rejecting the appellant's compounding application. The Court directed the appellant to file a fresh compounding application, which the competent authority must adjudicate considering the appellant's conduct and the nature of the offence.

1. ISSUES PRESENTED and CONSIDERED

The core legal issue presented in this judgment is:

• Whether the reduction in share capital of a company, leading to a proportional reduction in the number of shares held by an assessee, constitutes a "transfer" of a capital asset under Section 2(47) of the Income Tax Act, 1961, thereby allowing the assessee to claim a capital loss.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework revolves around the interpretation of "transfer" under Section 2(47) of the Income Tax Act, 1961, which includes the sale, exchange, or relinquishment of an asset, or the extinguishment of any rights therein. Section 45 of the Act deals with capital gains arising from the transfer of a capital asset. The case of Kartikeya V. Sarabhai v. Commissioner of Income Tax is pivotal, wherein the Supreme Court elaborated on the concept of transfer and capital gains.

Court's Interpretation and Reasoning

The Supreme Court reaffirmed that the reduction of share capital leading to the extinguishment of rights in shares constitutes a "transfer" under Section 2(47). The Court reasoned that even if the face value of shares remains unchanged, the reduction in the number of shares and the consequent extinguishment of rights amount to a transfer. The Court relied heavily on its previous decision in Kartikeya V. Sarabhai, which established that extinguishment of rights in a capital asset is sufficient to constitute a transfer.

Key Evidence and Findings

The key evidence was the reduction in the number of shares from 15,33,40,900 to 9,988, while the face value remained Rs. 10. The assessee received a consideration of Rs. 3,17,83,474. The Court found that this reduction and the receipt of consideration amounted to an extinguishment of rights, thus constituting a transfer.

Application of Law to Facts

The Court applied the legal principles from Kartikeya V. Sarabhai to the facts, concluding that the reduction in share capital and the extinguishment of rights in the shares held by the assessee amounted to a transfer. This allowed the assessee to claim a capital loss under Section 45 of the Income Tax Act.

Treatment of Competing Arguments

The Revenue argued that since the face value and the percentage of shareholding remained unchanged, there was no transfer. The Court dismissed this argument, emphasizing that the extinguishment of rights, not the percentage of shareholding, is the critical factor in determining a transfer under Section 2(47).

Conclusions

The Court concluded that the reduction in share capital and the consequent extinguishment of rights in shares held by the assessee constituted a transfer under Section 2(47) of the Income Tax Act, allowing the claim of a capital loss.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning

"Relinquishment of the asset or the extinguishment of any right in it, which may not amount to sale, can also be considered as a transfer and any profit or gain which arises from the transfer of a capital asset is liable to be taxed under Section 45 of the Act."

Core Principles Established

• The reduction in share capital leading to the extinguishment of rights in shares constitutes a transfer under Section 2(47) of the Income Tax Act.
• Extinguishment of rights, rather than the percentage of shareholding, is the determining factor for a transfer.
• Consideration received in lieu of extinguished rights supports the claim of capital loss.

Final Determinations on Each Issue

The Supreme Court dismissed the Revenue's appeal, affirming the High Court's decision that the reduction in share capital constituted a transfer, thus allowing the assessee's claim for capital loss.

a. Whether the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) and the notifications issued under it apply to reassessment notices issued after 1 April 2021, particularly in light of the substitution of Sections 147 to 151 of the Income Tax Act by the Finance Act 2021.

b. Whether the reassessment notices issued under Section 148 of the new regime (post 1 April 2021) between July and September 2022 are valid, especially considering the time limits prescribed under the Income Tax Act read with TOLA and the procedural requirements including prior sanction under Section 151.

2. ISSUE-WISE DETAILED ANALYSIS

a. Applicability of TOLA to reassessment notices issued after 1 April 2021

Relevant legal framework and precedents: The Income Tax Act originally prescribed time limits and procedural safeguards for reassessment notices under Sections 147 to 151. These provisions were substantially amended by the Finance Act 2021, effective from 1 April 2021, introducing a new regime with altered time limits and sanctioning authorities.

TOLA was enacted in 2020 to provide relief during the COVID-19 pandemic by extending time limits for completion or compliance of actions under specified Acts, including the Income Tax Act, for actions falling due between 20 March 2020 and 31 March 2021. The Central Government issued notifications extending these time limits further, up to 30 June 2021.

In Ashish Agarwal (supra), the Court held that reassessment notices issued under the old regime after 1 April 2021 should be deemed to be show cause notices under the new regime, balancing the interests of Revenue and assesses.

Court's interpretation and reasoning: The Court observed that the Income Tax Act post 1 April 2021 must be read with the substituted provisions introduced by the Finance Act 2021. However, TOLA, enacted prior to the Finance Act 2021, applies to any action or proceeding falling for completion between 20 March 2020 and 31 March 2021, irrespective of subsequent amendments, due to its non obstante clause.

The Court held that TOLA's extension of time limits applies to the Income Tax Act even after 1 April 2021, provided the action falls within the specified period. The time limits prescribed under Section 149 of the Income Tax Act are to be read in conjunction with the extensions under TOLA and its notifications.

Key evidence and findings: The Court examined the text of Section 3(1) of TOLA, the Finance Act 2021's substitution of Sections 147 to 151, and the notifications issued under TOLA extending deadlines. It also considered the legislative intent behind TOLA-to provide relief during the pandemic-and the procedural safeguards introduced by the Finance Act 2021.

Application of law to facts: The reassessment notices issued between 1 April 2021 and 30 June 2021, although under the old regime, fall within the extended time limits under TOLA. The Court reasoned that TOLA's non obstante clause overrides conflicting provisions in the Income Tax Act to the extent of time limit relaxation, thus allowing reassessment notices issued in this period to be valid if other conditions are met.

Treatment of competing arguments: The respondents argued that TOLA ceased to apply after 31 March 2021 and could not extend time limits under the new regime, especially since the Finance Act 2021 substituted the old provisions. The Court rejected this, holding that TOLA applies to actions falling due in the specified period regardless of subsequent amendments, and that the Income Tax Act must be read harmoniously with TOLA.

Conclusions: TOLA and its notifications apply to reassessment notices issued after 1 April 2021 if the relevant action falls within the period covered by TOLA. The time limits for issuance of notices and sanction under Sections 149 and 151 of the Income Tax Act are extended accordingly.

b. Validity of reassessment notices issued under Section 148 of the new regime between July and September 2022

Relevant legal framework and precedents: The Finance Act 2021 introduced a new regime with reduced time limits (three years generally, ten years for substantial escaped income exceeding Rs. 50 lakhs) and different sanctioning authorities under Section 151. The first proviso to Section 149(1)(b) restricts issuance of notices for assessment years beginning on or before 1 April 2021 if barred under the old regime's time limits.

Ashish Agarwal (supra) created a legal fiction deeming notices issued under the old regime after 1 April 2021 as show cause notices under Section 148A(b) of the new regime, with directions for assessing officers to supply relevant material and allow responses before proceeding.

Court's interpretation and reasoning: The Court held that reassessment notices issued under the new regime in July-September 2022 must be issued within the surviving time limits under the Income Tax Act read with TOLA, accounting for the period during which the proceedings were stayed under the legal fiction created by Ashish Agarwal (supra) and the time allowed for responses.

The Court explained that the legal fiction effectively "stopped the clock" on limitation from the date of issuance of the deemed show cause notice until the supply of relevant material and information to the assessee, plus the period allowed for response. The assessing officer must then issue the reassessment notice within the remaining time.

Key evidence and findings: The Court analyzed the third proviso to Section 149 excluding periods of stay or time allowed to the assessee from limitation computation. It also examined the procedural requirements under Section 151 for prior sanction by specified authorities, which must be complied with for the notice to be valid.

Application of law to facts: The reassessment notices issued in mid-2022 were challenged as time-barred and lacking proper sanction. The Court found that if the notices were issued beyond the surviving time limits after accounting for TOLA extensions and the stay period, they are invalid. Further, the sanction must be obtained from the appropriate authority as per the new regime's Section 151.

Treatment of competing arguments: The Revenue contended that invalidating these notices would frustrate the purpose of Ashish Agarwal (supra) and that TOLA's extensions apply. The respondents argued that the new regime's time limits apply strictly and that TOLA cannot extend time beyond 31 March 2021. The Court balanced these views, affirming TOLA's applicability but emphasizing strict compliance with time limits and sanction requirements under the new regime.

Conclusions: Reassessment notices issued under the new regime after July 2022 must be issued within the surviving time limits under the Income Tax Act read with TOLA, considering the stay period and response time. Notices issued beyond this period or without proper sanction are invalid.

c. Sanction of the specified authority under Section 151

Relevant legal framework and precedents: Section 151 requires prior sanction of specified authorities before issuing reassessment notices. The old regime prescribed Joint Commissioner or higher authorities depending on time elapsed; the new regime prescribes Principal Commissioner or higher authorities, with higher level authorities involved if more than three years have elapsed.

In Ashish Agarwal (supra), the Court waived the requirement of prior approval for certain stages under Section 148A but not for issuance of notice under Section 148 or order under Section 148A(d).

Court's interpretation and reasoning: The Court held that sanction is a jurisdictional precondition. Non-compliance with Section 151 affects the jurisdiction of the assessing officer and renders the notice invalid. TOLA extends the time for grant of sanction if the time limit for sanction falls within the TOLA period.

Key evidence and findings: The Court examined the timelines for sanction under both regimes and the effect of TOLA's extension of time limits. It found that sanction must be obtained from the appropriate authority as per the time elapsed and regime applicable at the time of issuance.

Application of law to facts: Notices issued without proper sanction per the new regime and beyond the extended time limits are invalid. The Court emphasized the importance of strict adherence to procedural safeguards to prevent harassment and protect vested rights.

Treatment of competing arguments: The Revenue argued for a liberal reading of sanction requirements in light of TOLA and Ashish Agarwal (supra). The Court acknowledged the need for relief due to the pandemic but maintained that jurisdictional safeguards cannot be ignored.

Conclusions: Sanction by the specified authority under Section 151 is mandatory. TOLA extends the time for sanction where applicable. Failure to obtain proper sanction invalidates the reassessment notice.

3. SIGNIFICANT HOLDINGS

"Section 3(1) of TOLA applies notwithstanding anything contained in the specified Act and extends the time limits for completion or compliance of any action falling between 20 March 2020 and 31 March 2021, including reassessment notices under the Income Tax Act, even after the substitution of Sections 147 to 151 by the Finance Act 2021."

"The proviso to Section 149(1)(b) of the new regime limits the retrospective operation of the extended time limits by providing that no notice under Section 148 shall be issued for assessment years beginning on or before 1 April 2021 if such notice could not have been issued at that time under the old regime's time limits."

"The reassessment notices issued under the old regime between 1 April 2021 and 30 June 2021 shall be deemed to be show cause notices under Section 148A(b) of the new regime, and the time during which these notices were stayed by court order and the time allowed to the assessee to respond shall be excluded for computing limitation under the third proviso to Section 149."

"Sanction of the specified authority under Section 151 is a jurisdictional precondition for issuing reassessment notices. TOLA extends the time for grant of sanction where applicable, but failure to obtain proper sanction invalidates the notice."

"The reassessment notices issued under Section 148 of the new regime between July and September 2022 must be issued within the surviving time limits under the Income Tax Act read with TOLA, considering the exclusion of the stay period and response time. Notices issued beyond this period or without proper sanction are liable to be set aside."

"The directions issued under Article 142 in Ashish Agarwal (supra) were exercised to balance the equities between the Revenue and the assesses, and do not constitute a binding ratio but a procedural remedy limited to the peculiar facts of that case."

"The Income Tax Act and TOLA must be read harmoniously to give effect to the legislative intent of both statutes, ensuring that the machinery provisions are workable and the relief intended by TOLA is effective."