2025 (5) TMI 1502 - HC - Income Tax

Reopening of assessment - period of limitation - as argued notice is invalid as it was not issued with the prior approval of the authorities specified u/s 151 (ii) - HELD THAT - The question as to which would be the specified authority under Section 151 of the Act in respect of approval of notices under Section 148 of the Act that were issued pursuant to proceedings that were initiated under Section 148A of the Act prior to 30.06.2021 the extended limitation under TOLA has been considered by this Court in several cases including Twylight Infrastructure Pvt. Ltd. 2024 (1) TMI 759 - DELHI HIGH COURT This Court has consistently held that TOLA would have no relevance for determining the specified authority whose approval was mandatory under Section 151 of the Act for issuance of a notice under Section 148 of the Act. In the recent decision of Communist Party Of India (Marxist) 2025 (5) TMI 754 - DELHI HIGH COURT held question as to which is the specified authority whose approval is mandatory would depend on whether the notice under Section 148 of the Act was issued within a period of three years from the end of the relevant assessment year or thereafter. In view of the above the impugned notice is liable to be set aside on this ground alone

Summary

The principal legal issue considered in the judgment is whether the notice issued under Section 148 of the Income Tax Act, 1961 (the Act), dated 29.07.2022, was validly issued, specifically focusing on whether the requisite prior approval from the specified authority under Section 151(ii) of the Act was obtained before issuance of the notice beyond the three-year period from the end of the relevant assessment year.

Another closely related issue is the applicability and effect of the procedural changes introduced by the Finance Act, 2021, including the amended provisions of Sections 148, 148A, and 151 of the Act, and the impact of the Supreme Court's directions in Union of India & Ors. v. Ashish Agarwal on notices issued between 01.04.2021 and 04.05.2022.

Additionally, the Court considered the legal effect of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2021 (TOLA) on the determination of the specified authority for sanction under Section 151 when reassessment proceedings are initiated beyond the prescribed time limits.

Lastly, the Court examined the factual basis for reopening the assessment, including the Revenue's allegation of accommodation entries and bogus capital gains, and the petitioner's response denying such transactions.

Issue-wise Detailed Analysis:

1. Validity of the Notice under Section 148 of the Act and Requirement of Prior Approval under Section 151(ii)

Legal Framework and Precedents: Section 148 of the Act empowers the Assessing Officer (AO) to issue a notice for reassessment if income has escaped assessment. The Finance Act, 2021 amended the Act to introduce a mandatory prior approval requirement under Section 151 before issuance of such notices. Section 151 distinguishes between authorities competent to grant approval based on whether the notice is issued within three years or beyond three years from the end of the relevant assessment year. Specifically, Section 151(ii) mandates that if more than three years have elapsed, prior approval must be obtained from the Principal Chief Commissioner or Principal Director General or equivalent higher authorities.

Earlier judicial pronouncements, including decisions of this Court in Twylight Infrastructure Pvt. Ltd. v. Income Tax Officer and Abhinav Jindal HUF v. Income Tax Officer, have consistently held that the approval of the specified authority under Section 151 is mandatory and that the extended limitation period under TOLA does not alter the hierarchy or authority prescribed for sanction.

Court's Interpretation and Reasoning: The Court reiterated that the approval authority is determined strictly based on the time elapsed from the end of the relevant assessment year and is not affected by the extended limitation period granted by TOLA. The Court relied on the detailed analysis in Abhinav Jindal HUF, which clarified that TOLA merely extends the limitation period but does not amend the distribution of sanctioning powers under Section 151.

The Court noted that the impugned notice dated 29.07.2022 was issued beyond three years from the end of the relevant AY 2017-18 but lacked the mandatory prior approval of the Principal Chief Commissioner or equivalent authority as required under Section 151(ii). Instead, approval was obtained from an authority competent only for notices issued within three years, rendering the notice invalid.

Key Evidence and Findings: The notice itself and the accompanying order under Section 148A(d) did not disclose any prior approval from the authorities specified under Section 151(ii). The Revenue's contention that approval was validly obtained was rejected based on the statutory scheme and judicial precedents.

Application of Law to Facts: The Court applied the statutory provisions and binding precedents to the facts, concluding that the procedural lapse in obtaining the correct approval vitiated the notice. The Court emphasized that the statutory mandate for prior approval is a jurisdictional condition precedent to the issuance of a valid notice under Section 148 beyond three years.

Treatment of Competing Arguments: The Revenue argued that the extended limitation period under TOLA should be considered for determining the sanctioning authority. The Court rejected this argument, holding that TOLA does not modify the hierarchy or distribution of powers under Section 151. The Court also declined the Revenue's request for liberty to re-initiate proceedings on the same facts without proper sanction.

Conclusion: The impugned notice under Section 148 was invalid for want of prior approval from the specified authority under Section 151(ii) and was therefore quashed along with all proceedings initiated thereunder.

2. Applicability of the Supreme Court's Directions in Union of India & Ors. v. Ashish Agarwal

Legal Framework and Precedents: The Supreme Court in Ashish Agarwal held that notices issued under Section 148 after 01.04.2021 but before 04.05.2022, even if struck down by High Courts for procedural defects, would be treated as show cause notices under Section 148A(b). The AO was directed to provide the material relied upon to the assessee to enable a response.

Court's Interpretation and Reasoning: The Court noted that the AO complied with the Supreme Court's directions by furnishing the information on 02.06.2022. The petitioner responded denying the allegations of accommodation entries and bogus capital gains. The AO, however, was not persuaded and passed an order under Section 148A(d) to reopen the assessment.

Key Evidence and Findings: The Revenue's case was based on information alleging fictitious purchases of shares amounting to Rs. 1,70,16,855/- through Asian Bulls Capital Pvt. Ltd., which was denied by the petitioner who stated actual transactions of much smaller magnitude supported by banking channels.

Application of Law to Facts: While the Court acknowledged the factual dispute, it did not delve into the merits of the Revenue's allegations since the procedural infirmity regarding sanction under Section 151 was dispositive.

Treatment of Competing Arguments: The petitioner's denial of the accommodation entry was noted but the Court refrained from adjudicating the substantive merits in light of the procedural defect.

Conclusion: The Court held that the procedural requirement of prior approval must be complied with before reopening assessments, irrespective of the Supreme Court's directions on notices issued during the transitional period.

3. Effect of TOLA on the Power to Grant Approval under Section 151

Legal Framework and Precedents: The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2021 (TOLA) extended the limitation period for reassessment beyond four years in certain cases. However, the Court in multiple precedents including Abhinav Jindal HUF and Twylight Infrastructure Pvt. Ltd. clarified that TOLA does not alter the specified authority for sanction under Section 151.

Court's Interpretation and Reasoning: The Court emphasized that the extended limitation period granted by TOLA is distinct from the statutory scheme regulating the hierarchy of authorities competent to grant approval. The approval authority is determined solely by the period elapsed from the end of the relevant AY, not by TOLA's extended timelines.

Key Evidence and Findings: The Court referred to authoritative extracts from earlier judgments which held that TOLA does not amend or affect the distribution of powers under Section 151.

Application of Law to Facts: Since the reassessment proceedings were initiated beyond three years, approval from the higher authorities specified under Section 151(ii) was mandatory, irrespective of TOLA's extended limitation period.

Treatment of Competing Arguments: The Revenue's argument that TOLA's extended timelines should influence the approval authority was rejected as contrary to the statutory scheme and judicial interpretation.

Conclusion: The Court reaffirmed that TOLA does not impact the identity of the specified authority under Section 151, and failure to obtain approval from the correct authority invalidates the notice.

Significant Holdings:

"It would therefore be wholly incorrect to read TOLA as intending to amend the distribution of power or the categorisation envisaged and prescribed by Section 151. The additional time that the said statute provided to an authority cannot possibly be construed as altering or modifying the hierarchy or the structure set up by Section 151 of the Act."

"The approval is mandatory... 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... and the Assessing Officer has obtained prior approval of the specified authority to issue such notice."

"The impugned notices and orders... are quashed on the ground that there is no approval of the specified authority, as indicated in section 151 (ii) of the Act. The direction is issued with the caveat that the Revenue will have liberty to take steps, if deemed necessary, albeit as per law."

"The question as to which is the specified authority whose approval is mandatory, would depend on whether the notice under Section 148 of the Act was issued within a period of three years from the end of the relevant assessment year or thereafter."

The Court conclusively held that the impugned notice under Section 148 dated 29.07.2022 was invalid for lack of prior approval from the specified authority under Section 151(ii). Consequently, the reassessment proceedings initiated pursuant to the notice were set aside. The Court granted liberty to the Revenue to initiate reassessment proceedings afresh in accordance with law, ensuring compliance with the mandatory approval requirements.