LATEST JUDGMENT OF SUPREME COURT ON RE-OPENING OF ASSESSMENT – AN ANALYSIS

[Mr. M. GOVINDARAJAN]

Re-assessment

Reassessments mean reopening the already completed assessment on fulfillment of certain conditions and reassess the total income of the assessee by including the income which has escaped earlier assessment.   However it may be the First assessment where assessee has not furnished the return at all

Section 147 of the Income Tax Act, 1961 provides that if the Assessing Officer has reasons to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section or re-compute the loss of the depreciation allowance or any other allowance, as the case may be, for the relevant assessment year.

Amendment vide Finance Act, 2021

The Finance Act, 2021 brought radical changes in respect of re-assessment under Sections 147 to 153.

Income escaping assessment

Section 147 of the Income Tax Act provides that If any income chargeable to tax, in the case of an assessee, has escaped assessment for any assessment year, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance or any other allowance or deduction for such assessment year (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year.

Issue of notice

The newly substituted Section 148 of the Income Tax Act, provides that before making the assessment, reassessment or re-computation under section 147, and subject to the provisions of section 148A, the Assessing Officer shall serve on the assessee a notice, along with a copy of the order passed, if required, under clause (d) of section 148A, requiring him to furnish within such period, as may be specified in such notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. The provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139.

No notice under this section shall be issued unless there is information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year and the Assessing Officer has obtained prior approval of the specified authority to issue such notice.

No such approval shall be required where the Assessing Officer, with the prior approval of the specified authority, has passed an order under clause (d) of section 148A to the effect that it is a fit case to issue a notice under this section.

Conducting enquiry

The Finance Act, 2021 inserted a new Section 148A in the Income Tax Act which brings a radical change in the re-assessment procedure.  The said section provides that the Assessing Officer shall, before issuing any notice under section 148,-

1. conduct any enquiry, if required, with the prior approval of specified authority, with respect to the information which suggests that the income chargeable to tax has escaped assessment;
2. provide an opportunity of being heard to the assessee,  by serving upon him a notice to show cause within such time, as may be specified in the notice, being not less than seven days and but not exceeding thirty days from the date on which such notice is issued, or such time, as may be extended by him on the basis of an application in this behalf, as to why a notice under section 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year and results of enquiry conducted, if any, as per clause (a);
3. consider the reply of assessee furnished, if any, in response to the show-cause notice referred to in clause (b);
4. decide, on the basis of material available on record including reply of the assessee, whether or not it is a fit case to issue a notice under section 148, by passing an order, with the prior approval of specified authority, within one month from the end of the month in which the reply referred to in clause (c) is received by him, or where no such reply is furnished, within one month from the end of the month in which time or extended time allowed to furnish a reply as per clause (b) expires.

The provisions of this section shall not apply in a case where,-

1. a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A in the case of the assessee on or after the 1st day of April, 2021; or
2. the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any money, bullion, jewellery or other valuable article or thing, seized in a search under section 132 or requisitioned under section 132A, in the case of any other person on or after the 1st day of April, 2021, belongs to the assessee; or
3. the Assessing Officer is satisfied, with the prior approval of the Principal Commissioner or Commissioner that any books of account or documents, seized in a search under section 132 or requisitioned under section 132A, in case of any other person on or after the 1st day of April, 2021, pertains or pertain to, or any information contained therein, ³[relate to, the assessee; or
4. the Assessing Officer has received any information under the scheme notified under section 135A pertaining to income chargeable to tax escaping assessment for any assessment year in the case of the assessee.

Prior approval

The Finance Act, 2021 also inserted a new section 148B in the Income Tax Act.  The newly inserted section 148B provides that no order of assessment or reassessment or recomputation under this Act shall be passed by an Assessing Officer below the rank of Joint Commissioner, in respect of an assessment year to which clause (i) or clause (ii) or clause (iii) or clause (iv) of Explanation 2 to section 148 apply except with the prior approval of the Additional Commissioner or Additional Director or Joint Commissioner or Joint Director.

Time of notice

The Finance Act, 2021 revises the time limit for issuing notice for re-assessment.  According to Section 149(1) (a) of the Income Tax Act the notice shall be issued within three years from the end of the relevant assessment year. Section 149(1)(b) provides that if  the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to Rs.50 lakhs  or more for that year the notice shall be issued within 10 years. 

The Finance Act, 2022 substituted section 149(1)(b).  The said section provides that no notice under section 148 shall be issued for the relevant assessment year if three years, but not more than ten years, have elapsed from the end of the relevant assessment year unless the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of-

1. an asset;
2. expenditure in respect of a transaction or in relation to an event or occasion; or
3. an entry or entries in the books of account,

which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more, which came into effect from 01.04.2022.

Notice for reassessment by the erstwhile procedure

The issue to be discussed in this article is as to whether the procedure adopted by the Department in respect of reassessment for issue of notice prevailing prior to 01.04.2021 on or after 01.04.2021 is valid or not.  Many notices were issued by the Department under the old procedure on 01.04.2021.  Writ petitions were filed by the aggrieved assessees.  The various High Courts held that the notice issued is in violation of the provisions of the Act and quashed the same.  The Supreme Court held that the notices issued by the Department on or after 01.04.2021, after the implementation of Finance Act, 2021are deemed to be valid and set aside the orders of High Court in UNION OF INDIA & ORS. VERSUS VERSUS ASHISH AGARWAL [2022 (5) TMI 240 - SUPREME COURT].

In the above said case the Income Tax Department issued notices for reassessment under section 148 of unamended Income Tax Act to nearly 90000 assessees.  Nearly 9000 writ petitions were filed before various High Courts by various assessees challenging the re-assessment notice issued to them.  The various High Courts set aside the re-assessment order issued under Section 148. 

The Department filed appeal before the Supreme Court in all cases.  The Supreme Court proposed to pass an order in exercise of powers under Article 142 of the Constitution of India the present order shall govern all the other judgments and orders passed by various High Courts on the similar issue and it did not require the Department to file appeal in all cases. 

The Supreme Court observed that by substitution of sections 147 to 151 of the Income Tax Act (IT Act) by the Finance Act, 2021, radical and reformative changes are made governing the procedure for reassessment proceedings. The said amended sections prescribed the procedure governing initiation of reassessment proceedings.  However, for several reasons, the same gave rise to numerous litigations and the reopening were challenged inter alia, on the grounds such as-

• no valid ‘reason to believe’;
• no tangible/reliable material/information in possession of the Assessing Officer leading to formation of belief that income has escaped assessment;
• no enquiry being conducted by the assessing officer prior to the issuance of notice;
• reopening is based on change of opinion of the assessing officer; and
• the mandatory procedure laid down by this Court in the case of GKN DRIVESHAFTS (INDIA) LTD. VERSUS INCOME-TAX OFFICER AND OTHERS - 2002 (11) TMI 7 - SUPREME COURT, has not been followed.

The Supreme Court observed that the judgments of the several High Courts would result in no reassessment proceedings at all, even if the same are permissible under the Finance Act, 2021 and as per substituted sections 147 to 151.  The Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated. It is true that due to a bona fide mistake and in view of subsequent extension of time vide various notifications, the Revenue issued the impugned notices under section 148 after the amendment was enforced with effect from 01.04.2021, under the unamended section 148.  After amendment of the Income Tax Act by Finance Act, 2021, no notice under section 148 of the Income Tax  Act can be issued without following the procedure prescribed under section 148A of the Income Tax Act.   Along with the notice under section 148 of the Income Tax  Act, the assessing officer is required to serve the order passed under section 148A of the Income Tax Act.

The newly inserted Section 148A provides that before issuing any notice under section 148, the assessing officer shall-

• conduct any enquiry, if required, with the approval of specified authority, with respect to the information which suggests that the income chargeable to tax has escaped assessment; 
• provide an opportunity of being heard to the assessee, with the prior approval of specified authority; 
• consider the reply of the assessee furnished, if any, in response to the show cause notice ;
• decide, on the basis of material available on record including reply of the assessee, as to whether or not it is a fit case to issue a notice under section 148 of the IT Act; and
• the AO is required to pass a specific order within the time stipulated.

The Supreme Court observed that the said notices ought not to have been issued under the unamended Act and ought to have been issued under the substituted provisions of sections 147 to 151 as per the Finance Act, 2021. There appears to be genuine non-application of the amendments as the officers of the Revenue may have been under a bonafide belief that the amendments may not yet have been enforced. 

The Supreme Court was of the opinion that some leeway must be shown in that regard which the High Courts could have done so. Therefore, instead of quashing and setting aside the reassessment notices issued under the unamended provision of Income Tax Act, the High Courts ought to have passed an order construing the notices issued under unamended Act/unamended provision of the Income Tax Act as those deemed to have been issued under section 148A of the Income Tax  Act as per the new provision section 148A and the Revenue ought to have been permitted to proceed further with the reassessment proceedings as per the substituted provisions of sections 147 to 151 of the Income Tax Act as per the Finance Act, 2021, subject to compliance of all the procedural requirements and the defences, which may be available to the assessee under the substituted provisions of sections 147 to 151 of the Income Tax  Act and which may be available under the Finance Act, 2021 and in law.  If the aforesaid order is passed, it will strike a balance between the rights of the Revenue as well as the respective assesses as because of a bona fide belief of the officers of the Revenue in issuing approximately 90000 such notices, the Revenue may not suffer as ultimately it is the public exchequer which would suffer.

The Supreme Court has proposed to pass the present order with a view avoiding filing of further appeals before this Court and burden this Court with approximately 9000 appeals against the similar judgments and orders passed by the various High Courts, the particulars of some of which are referred to hereinabove. The Supreme Court has  also proposed to pass the aforesaid order in exercise of our powers under Article 142 of the Constitution of India by holding that the present order shall govern, not only the impugned judgments and orders passed by the High Court of Judicature at Allahabad, but shall also be made applicable in respect of the similar judgments and orders passed by various High Courts across the country and therefore the present order shall be applicable to PAN INDIA.

The Supreme Court held that the present order shall be applicable PAN INDIA and all judgments and orders passed by different High Courts on the issue and under which similar notices which were issued after 01.04.2021 issued under section 148 of the Act are set aside and shall be governed by the present order and shall stand modified to the aforesaid extent. The present order is passed in exercise of powers under Article 142 of the Constitution of India so as to avoid any further appeals by the Revenue on the very issue by challenging similar judgments and orders, with a view not to burden this Court with approximately 9000 appeals. The Supreme Court also observes that the present order shall also govern the pending writ petitions, pending before various High Courts in which similar notices under Section 148 of the Act issued after 01.04.2021 are under challenge.

Implementation of judgment by Department

The Income Tax Department adopted the above said Supreme Court judgment.  In implementation of the said judgment the Department prescribed the procedure to be followed by the Assessing Officer as detailed below-

• The extended reassessment notices are deemed to be show cause notices under clause (b) of section 148A of the Act in accordance with the judgment of Supreme Court. Therefore, all requirement of new law prior to that show cause notice shall be deemed to have been complied with.
• The Assessing Officer shall exclude cases less than Rs.50 lakhs.
• Within 30 days i.e. by 02.06.2022, the Assessing Officer shall provide to the assessees, in remaining cases, the information and material relied upon for issuance of extended reassessment notices
• The assessee has two weeks to reply as to why a notice under section 148 of the Act should not be issued, on the basis of information which suggests that income chargeable to tax has escaped assessment in his case for the relevant assessment year. The time period of two weeks shall be counted from the date of last communication of information and material by the Assessing Officer to the assessee.
• In view of the observation of  Supreme Court that all the defences of the new law are available to the assessee, if assessee makes a request by making an application that more time be given to him to file reply to the show cause notice, then such a request shall be considered by the Assessing Officer on merit and time may be extended by the Assessing Officer as provided in clause (b) of new section 148A of the Act.
• After receiving the reply, the Assessing Officer shall decide on the basis of material available on record including reply of the assessee, whether or not it is a fit case to issue a notice under section 148 of the Act. The Assessing Officer is required to pass an order under clause (d) of section 148A of the Act to that effect, with the prior approval of the specified authority of the new law. This order is required to be passed within one month from the end of the month in which the reply is received by him from the assessee. In case no such reply is furnished by the assessee, then the order is required to be passed within one month from the end of the month in which time or extended time allowed to furnish a reply expires.
• If it is a fit case to issue a notice under section 148 of the Act, the Assessing Officer shall serve on the assessee a notice under section 148 after obtaining the approval of the specified authority under section 151 of the new law. The copy of the order passed under clause (d) of section 148A of the Act shall also be served with the notice u/s 148.
• If it is not a fit case to issue a notice under section 148 of the Act, the order passed under clause (d) of section 148A to that effect shall be served on the assessee.

Conclusion

All safeguards are provided before notice under section 148 of the Income Tax Act is issued. At every stage the prior approval of the specified authority is required, even for conducting the enquiry as per section 148A (a). Only in a case where, the assessing officer is of the opinion that before any notice is issued under section 148A(b) and an opportunity is to be given to the assessee, there is a requirement of conducting any enquiry, the assessing officer may do so and conduct any enquiry. Thus if the assessing officer is of the opinion that any enquiry is required, the assessing officer can do so, however, with the prior approval of the specified authority, with respect to the information which suggests that the income chargeable to tax has escaped assessment.