2024 (10) TMI 264 - SC - Income Tax

Validity of reassessment notices/ proceedings - scope of notices issued under Section 148 of the new regime between July and September 2022 - Application of TOLA to the Income Tax Act after 1 April 2021 - TOLA enacted in the backdrop of the COVID-19 pandemic by extending time limits for completion or compliance of actions under specified Acts - Interpretation of expression any in Section 3(1) of TOLA - non obstante clause - Principles of strict interpretation and workability - Principle of harmonious construction - expression any cause or matter mentioned under Article 142 - Effect of the legal fiction - Whether TOLA and notifications issued under it will also apply to reassessment notices issued after 1 April 2021? - Whether the reassessment notices issued u/s 148 of the new regime between July and September 2022 are valid? HELD THAT - The exercise of the jurisdiction under Article 142 is meant to supplement the existing legal framework to do complete justice between the parties. In a given circumstance this Court can supplement a legal framework to craft a just outcome when strict adherence to a source of law and exclusive rule based theories create inequitable results. The directions issued by this Court under Article 142 cannot be considered as a ratio because they are issued based on the peculiar facts and circumstances of the cause or matter before this Court. In State v. Kalyan Singh 2017 (4) TMI 1564 - SUPREME COURT this Court observed that a judgment has two components (a) declaration of law; and (b) directions. In Bir Singh v. Mukesh Kumar 2019 (2) TMI 547 - SUPREME COURT it was held that what is binding on all courts under Article 141 is the declaration of law and not the directions issued under Article 142. This Court has exercised its jurisdiction under Article 142 in tax matters where the actions of the Revenue are not in accordance with the law. In Whirlpool of India Ltd. v. CIT 2000 (2) TMI 15 - SUPREME COURT this Court directed the Income Tax Officer to give effect to the order of the Income Tax Appellate Tribunal by disallowing a particular deduction. In CIT v. Greenworld Corporation 2009 (5) TMI 14 - SUPREME COURT the issue before this Court was whether a Commissioner of Income Tax appropriately issued directions under Section 263 of the Income Tax Act to an assessing officer to reopen assessments. It was held that the facts of the case did not merit the CIT to issue directions to the assessing officer. Consequently this Court termed the reassessment notice issued by the assessing officer to be illegal and exercised its jurisdiction under Article 142 to direct the reopening of the assessment by an appropriate assessing authority. The scope of Ashish Agarwal 2022 (5) TMI 240 - SUPREME COURT extended to all the reassessment notices issued between 1 April 2021 and 30 June 2021 under the old regime - The purpose of this Court in deeming the reassessment notices issued under the old regime as show cause notices under the new regime was two-fold (i) to strike a balance between the rights of the assesses and the Revenue which issued approximately ninety thousand reassessment notices after 1 April 2021 under the old regime; and (ii) to avoid any further appeals before this Court by the Revenue on the same issue by challenging similar judgments and orders of the High Courts (arising from approximately nine thousand writ petitions). Ashish Agarwal supra was primarily concerned with the validity of the reassessment notices issued between 1 April 2021 and 30 June 2021 under the old regime. The scope of the directions in Ashish Agarwal (supra) applied PAN INDIA including all the ninety thousand reassessment notices issued under the old regime during the period 1 April 2021 and 30 June 2021 In Ashish Agarwal (supra) this Court was aware of the fact that it could not have used its jurisdiction under Article 142 to affect the vested rights of the assesses by deeming Section 148 notices under the old regime as Section 148 notices under the new regime. Hence it deemed the reassessment notices issued under the old regime as show cause notices u/s 148A(b) of the new regime. Further the Court directed the Revenue to provide all the relevant material or information to the assesses and thereafter allowed the assesses to respond to the show cause notice by availing all the defences including those available u/s 149. Thus the Court balanced the equities between the Revenue and the assesses by giving effect to the legislative scheme of reassessment as contained under the new regime. It supplemented the existing legal framework of the procedure of reassessment under the Income Tax Act with a remedy grounded in equitable standards. Effect of the legal fiction - A legal fiction is a supposition of law that a thing or event exists even though in reality it does not exist. The word deemed is used to treat a thing or event as something which otherwise it may not have been with all the attendant consequences.154 The effect of a legal fiction is that a position which otherwise would not obtain is deemed to obtain under the circumstances. Under Section 148A(b) the assessing officer has to comply with two requirements (i) issuance of a show cause notice; and (ii) supply of all the relevant information which forms the basis of the show cause notice. The supply of the relevant material and information allows the assessee to respond to the show cause notice. The deemed notices were effectively incomplete because the other requirement of supplying the relevant material or information to the assesses was not fulfilled. The second requirement could only have been fulfilled by the Revenue by an actual supply of the relevant material or information that formed the basis of the deemed notice. While creating the legal fiction in Ashish Agarwal (supra) this Court was cognizant of the fact that the assessing officers were effectively inhibited from performing their responsibility under Section 148A until the requirement of supply of relevant material and information to the assesses was fulfilled. This Court lifted the inhibition by directing the assessing officers to supply the assesses with the relevant material and information relied upon by the Revenue within thirty days from the date of the judgment. Thus during the period between the issuance of the deemed notices and the date of judgment in Ashish Agarwal (supra) the assessing officers were deemed to have been prohibited from proceeding with the reassessment proceedings. To summarize the combined effect of the legal fiction and the directions issued by this Court in Ashish Agarwal (supra) is that the show cause notices that were deemed to have been issued during the period between 1 April 2021 and 30 June 2021 were stayed till the date of supply of the relevant information and material by the assessing officer to the assessee. After the supply of the relevant material and information to the assessee time begins to run for the assesses to respond to the show cause notices. In Ashish Agarwal (supra) this Court provided two weeks to the assesses to reply to the show cause notices. This period of two weeks is also liable to be excluded from the computation of limitation given the third proviso to Section 149. Hence the total time that is excluded for computation of limitation for the deemed notices is (i) the time during which the show cause notices were effectively stayed that is from the date of issuance of the deemed notice between 1 April 2021 and 30 June 2021 till the supply of relevant information or material by the assessing officers to the assesses in terms of the directions in Ashish Agarwal (supra); and (ii) two weeks allowed to the assesses to respond to the show cause notices. Interplay of Ashish Agarwal with TOLA - Because of the legal fiction the deemed show cause notices will also come into effect from 1 May 2021. After accounting for all the exclusions the assessing officer will have sixty-one days days between 1 May 2021 and 30 June 2021 to issue a notice under Section 148 of the new regime. This time starts ticking for the assessing officer after receiving the response of the assessee. In this instance if the assessee submits the response on 18 June 2022 the assessing officer will have sixty-one days from 18 June 2022 to issue a reassessment notice under Section 148 of the new regime. Thus in this illustration the time limit for issuance of a notice under Section 148 of the new regime will end on 18 August 2022. In Ashish Agarwal (supra) this Court allowed the assesses to avail all the defences including the defence of expiry of the time limit specified under Section 149(1). In the instant appeals the reassessment notices pertain to the assessment years 2013-2014 2014-2015 2015-2016 2016-2017 and 2017-2018. To assume jurisdiction to issue notices under Section 148 with respect to the relevant assessment years an assessing officer has to (i) issue the notices within the period prescribed under Section 149(1) of the new regime read with TOLA; and (ii) obtain the previous approval of the authority specified under Section 151. A notice issued without complying with the preconditions is invalid as it affects the jurisdiction of the assessing officer. Therefore the reassessment notices issued under Section 148 of the new regime which are in pursuance of the deemed notices ought to be issued within the time limit surviving under the Income Tax Act read with TOLA. A reassessment notice issued beyond the surviving time limit will be time barred. Thus we conclude that a. After 1 April 2021 the Income Tax Act has to be read along with the substituted provisions; b. TOLA will continue to apply to the Income Tax Act after 1 April 2021 if any action or proceeding specified under the substituted provisions of the Income Tax Act falls for completion between 20 March 2020 and 31 March 2021; c. Section 3(1) of TOLA overrides Section 149 of the Income Tax Act only to the extent of relaxing the time limit for issuance of a reassessment notice under Section 148; d. TOLA will extend the time limit for the grant of sanction by the authority specified under Section 151. The test to determine whether TOLA will apply to Section 151 of the new regime is this if the time limit of three years from the end of an assessment year falls between 20 March 2020 and 31 March 2021 then the specified authority under Section 151(i) has extended time till 30 June 2021 to grant approval; e. In the case of Section 151 of the old regime the test is if the time limit of four years from the end of an assessment year falls between 20 March 2020 and 31 March 2021 then the specified authority under Section 151(2) has extended time till 31 March 2021 to grant approval; f. The directions in Ashish Agarwal (supra) will extend to all the ninety thousand reassessment notices issued under the old regime during the period 1 April 2021 and 30 June 2021; g. The time during which the show cause notices were deemed to be stayed is from the date of issuance of the deemed notice between 1 April 2021 and 30 June 2021 till the supply of relevant information and material by the assessing officers to the assesses in terms of the directions issued by this Court in Ashish Agarwal (supra) and the period of two weeks allowed to the assesses to respond to the show cause notices; and h. The assessing officers were required to issue the reassessment notice under Section 148 of the new regime within the time limit surviving under the Income Tax Act read with TOLA. All notices issued beyond the surviving period are time barred and liable to be set aside; The judgments of the High Courts rendered in Union of India v. Rajeev Bansal 2023 (2) TMI 1081 - ALLAHABAD HIGH COURT Keenara Industries Pvt. Ltd. v. ITO Surat 2023 (3) TMI 104 - GUJARAT HIGH COURT J M Financial and Investment Consultancy Services Pvt. Ltd. v. ACIT 2022 (4) TMI 1446 - BOMBAY HIGH COURT Siemens Financial Services Pvt. Ltd. v. DCIT 2023 (9) TMI 552 - BOMBAY HIGH COURT Geeta Agarwal v. ITO 2022 (10) TMI 1192 - RAJASTHAN HIGH COURT Ambika Iron and Steel Pvt Ltd v. PCIT 2022 (1) TMI 1291 - ORISSA HIGH COURT Twylight Infrastructure Pvt Ltd v. ITO 2024 (1) TMI 759 - DELHI HIGH COURT Ganesh Dass Khanna v. ITO 2023 (11) TMI 763 - DELHI HIGH COURT and other judgments of the High Courts which relied on these judgments are set aside to the extent of the observations made in this judgment.

Summary

1. ISSUES PRESENTED and CONSIDERED

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."