BACKGROUND

Sections 147 to 151 of the Income Tax Act, 1961 (IT Act) contain the procedure and timeline for reopening past assessments. Due to the COVID-19 pandemic, timelines for various compliances were relaxed by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act 2020 (TOLA). While TOLA was enacted on 29 September 2020, it was made retrospectively effective from 31 March 2020. Thereafter, various notifications were issued by the Central Government to extend the period of relaxation till 30 June 2021. While the relaxation period was in force, the Finance Act 2021 (FA 2021) amended the erstwhile scheme of reassessment with effect from 1 April 2021.

The validity of reassessment notices issued between 1 April 2021 and 30 June 2021 under the old regime was before different High Courts (HC) by various taxpayers. As the HC treated such notices as invalid – i.e. HC held that notices should have been issued as per the new regime – the matter was referred to the Supreme Court (SC). In the case of Ashish Agrawal¹, SC held that the notices issued under Section 148 of the old regime shall be deemed to be notices issued under Section 148A(b) of the new regime. Please click here  to read our alert in this regard. Subsequently, the Central Board of Direct Taxes (CBDT) issued an Instruction² wherein it was clarified that Ashish Agrawal’s decision will apply to all cases where extended reassessment notices have been issued irrespective of the fact whether such notices have been challenged or not. Please click here to read our alert.

As SC, in the earlier judgement, did not deal with the issue of whether the reassessment notices were issued within the time limit prescribed under TOLA, the matter relating to reassessment once again reached the SC. Recently, SC in a batch of appeals³ has pronounced its verdict on this matter. We, at BDO in India, have summarised this ruling and provided our comments on the impact of this decision hereunder:         

FACTS OF THE CASE

• For Tax Year (AY) 2013-14 to 2017-18, following the CBDT’s instruction, notices under section 148 of the new regime were issued to the taxpayer between July and September 2022.

• These notices were challenged before several HCs.

• The below table tabulates the period of limitation under the old regime as well as the new regime.

AY	Within 3 years	Expiry of limitation read with TOLA for (2)	Within 6 years	Expiry of limitation read with TOLA for (4)
(1)	(2)	(3)	(4)	(5)
2013-14	31 March 2017	N.A.*	31 March 2020	30 June 2021
2014-15	31 March 2018	N.A.*	31 March 2021	30 June 2021
2015-16	31 March 2019	N.A.*	31 March 2022	N.A.*
2016-17	31 March 2020	30 June 2021	31 March 2023	N.A.*
2017-18	31 March 2021	30 June 2021	31 March 2024	N.A.*

* TOLA Not Applicable

• HC declared the notices to be invalid on the grounds that they were:

  • Time-barred; and

  • Issued without the appropriate sanction of the specified authority.

• Aggrieved, the Revenue Authority raised the following issues before the SC:

  • For the notices issued after 1 April 2021, Whether provisions contained in TOLA relating to relaxation of the time for completion of any actions or proceedings etc would also apply; and

  • Whether the reassessment notices issued under section 148 of the new regime between July and September 2022 are valid.

SUPREME COURT RULING

Hon’ble SC while upholding the validity of notices issued⁴, made the following observations:

Re. Interpretation of the amended reassessment provisions under the IT Act

• Section 149(1) of the IT Act under the new regime is not prospective. It also applies to past tax years.

• The time limit of four years is now reduced to three years for all situations. The Revenue Authority can issue notices under section 148 of the new regime only if three years or less have elapsed from the end of the relevant AY.

• The proviso to Section 149(1)(b) of the new regime stipulates that the Revenue Authority can issue reassessment notices for past tax years only if the time limit survives according to Section 149(1)(b) of the old regime of the IT Act, that is, six years from the end of the relevant tax year;

• All notices issued invoking the time limit under Section 149(1)(b) of the old regime will have to be dropped if the income chargeable to tax which has escaped assessment is less than INR 5mn.

Re. Interplay of TOLA and IT Act

• The purpose of the IT Act is to levy tax on income and raise revenues for the functioning of the Government. On the other hand, the purpose of TOLA is to provide relaxation of the time for completion of any actions or proceedings falling for completion within a particular period. Thus, the two enactments operate in separate and distinct fields.

• Section 3(1) of TOLA applies to the action of “issuance of any notice” under the IT Act. TOLA did not amend the time limits of four years and six years from the end of the relevant tax years as specified under the IT Act but merely provided a relaxation of the time period for issuance of a reassessment notice under Section 148 of the IT Act.

• The effect of TOLA is that at the time of issuance of a reassessment notice under Section 148 of the IT Act, the Revenue Authorities has to determine two things:

1. The time limit specified under Section 149; and

2. The extent of relaxation provided by TOLA and its notifications for issuance of notices.

Therefore, although TOLA did not amend Section 149 of the IT Act, the legislative intent is that it has to be read along with Section 149 of the IT Act to determine the time limit for issuance of a notice.

• Section 2(1)(b)(ii) of TOLA defines ‘specified Act’ to include the IT Act. After 1 April 2021, Section 2(1)(b)(ii) must be read to mean the IT Act as amended by the Finance Act 2021. The substitution of Sections 147 to 151 will not affect the purpose of TOLA. TOLA will continue to apply to the IT Act after 1 April 2021 if any action or proceeding specified under the substituted provisions of the IT Act falls for completion between 20 March 2020 and 31 March 2021.

• On 1 April 2021, TOLA was still in existence, and the Revenue Authorities could not have ignored the application of TOLA and its notifications.

• For issuing a reassessment notice under section 148 after 1 April 2021, the Revenue Authorities would still have to look at:

  • The time limit specified under section 149 of the new regime

  • The time limit for issuance of notice as extended by TOLA and its notifications

• The Revenue Authorities cannot extend the operation of the old law under TOLA, but it can certainly benefit from the extended time limit for completion of actions falling for completion between 20 March 2020 and 31 March 2021.

• Section 3(1) of TOLA contains a non obstante clause: “notwithstanding anything contained in the specified Act (IT Act).” The legislative intention of including the non obstante clause is to remove any obstacles which may come in the way of the operation of the extension of the time limit till 31 March 2021 or such other date after 31 March 2021 specified by the Central Government.

• In the context of the issuance of a reassessment notice, the non obstante clause will override the provisions of the IT Act in case of any direct conflict or inconsistency.

• The time limit for issuance of reassessment notices, which fall for completion between 20 March 2020 and 31 March 2021, has been extended till 30 June 2021. However, the non obstante clause under section 3(1) of TOLA will operate neither to extend the time limit of 3 years from the end of the relevant tax year under section 149(1)(a) of the new regime nor to extend the time limit of 6 years from the end of the relevant tax year under section 149(1)(b) of the old regime.

Re. SC decision in Ashish Agrawal’s case

• When the SC in Ashish Agrawal deemed the Section 148 notices under the old regime as Section 148A(b) notices under the new regime of the IT Act, it impliedly waived the requirement of obtaining prior approval from the specified authorities under Section 151 for Section 148A(b) of the IT Act.

• Although SC waived off the requirement of obtaining prior approval under Section 148A(a) and Section 148A(b), it did not waive the requirement for Section 148A(d) and Section 148 of the IT Act. Therefore, the tax officer was required to obtain prior approval of the specified authority according to Section 151 of the new regime before passing an order under Section 148A(d) or issuing a notice under Section 148. These notices ought to have been issued following the time limits specified under Section 151 of the new regime of the IT Act read with TOLA, where applicable.

• Ashish Agarwal's case was primarily concerned with the validity of the reassessment notices issued between 1 April 2021 and 30 June 2021 under the old regime of the IT Act. The scope of the directions in Ashish Agarwal applied to Pan India, including all the ninety thousand reassessment notices issued under the old regime during the period 1 April 2021 and 30 June 2021.

• Further, in the Ashish Agarwal case, this Court created a legal fiction by deeming the Section 148 notices issued under the old regime as show cause notices under Section 148A(b) of the new regime of the IT Act. The purpose of the legal fiction was to enable the tax officer “to proceed further with the reassessment proceedings as per the substituted provisions” of the IT Act. This ensured the continuance of the reassessment process initiated by the tax authorities from 1 April 2021 to 30 June 2021 under the old regime of the IT Act.

• Under Section 148A(b) of the IT Act, the tax officer has to comply with two requirements:

  • Issuance of a show cause notice; and

  • Supply of all the relevant information which forms the basis of the show cause notice.

The deemed notices were effectively incomplete because the other requirement of supplying the relevant material or information to the taxpayer was not fulfilled. The second requirement could only have been fulfilled by the tax officer by an actual supply of the relevant material or information that formed the basis of the deemed notice.

• The third proviso to Section 149 of the new regime provides that the period during which the proceedings under Section 148A are stayed by an order or injunction of any court shall be excluded for computation of limitation. During the period from the date of issuance of the deemed notice under Section 148A(b) and the date of the decision in Ashish Agarwal, the tax officers were deemed to have been prohibited from passing a reassessment order. Resultantly, the show cause notices were deemed to have been stayed by order of this Court from the date of their issuance (somewhere from 1 April 2021 till 30 June 2021) till the date of decision in Ashish Agarwal, that is, 4 May 2022.

• Further, SC provided two weeks to the taxpayer 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:
  • 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 tax officers to the taxpayers in terms of the directions in Ashish Agarwal; and
  • Two weeks allowed the taxpayers to respond to the show cause notices.

• The IT Act read with TOLA extended the time limit for issuing reassessment notices under Section 148, which fell for completion from 20 March 2020 to 31 March 2021, till 30 June 2021. All the reassessment notices under challenge in the present appeals were issued from 1 April 2021 to 30 June 2021 under the old regime of the IT Act. Ashish Agarwal’s decision deemed these reassessment notices under the old regime as show cause notices under the new regime with effect from the date of issuance of the reassessment notices.

• Therefore, the logical effect of the creation of the legal fiction by Ashish Agarwal’s decision is that the time surviving under the IT Act read with TOLA will be available to the tax officer to complete the remaining proceedings in furtherance of the deemed notices, including issuance of reassessment notices under Section 148 of the new regime. The surviving or balance time limit can be calculated by computing the number of days between the date of issuance of the deemed notice and 30 June 2021.

• The effect of the creation of the legal fiction in Ashish Agarwal’s decision was that it stopped the clock of limitation with effect from the date of issuance of Section 148 notices under the old regime, which is also the date of issuance of the deemed notices.

• The clock started ticking for the tax officer only after it received the response of the taxpayers to the show causes notices. After the receipt of the reply, the tax officer had to perform the following responsibilities:

  • Consider the reply of the taxpayer under Section 149A(c) of the IT Act;

  • Take a decision under Section 149A(d) of the IT Act based on the available material and the reply of the taxpayer; and

  • Issue a notice under Section 148 if it was a fit case for a reassessment.

• Once the clock started ticking, the tax officer was required to complete these procedures within the surviving time limit. The surviving time limit, as prescribed under the IT Act read with TOLA, was available to the tax officers to issue the reassessment notices under Section 148 of the new regime.

• To assume jurisdiction to issue notices under Section 148 with respect to the relevant tax years, a tax officer has to:

  • Issue the notices within the period prescribed under Section 149(1) of the new regime read with TOLA; and

  • Obtain the previous approval of the authority specified under Section 151 of the IT Act.

• A notice issued without complying with the preconditions is invalid as it affects the jurisdiction of the tax 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 IT Act read with TOLA. A reassessment notice issued beyond the surviving time limit will be time-barred.

 

BDO IN INDIA COMMENTS

TOLA was introduced to resolve the difficulties faced by both the tax authorities and the taxpayers as a result of disruption and restrictions in conducting business due to COVID-19. This ruling balances the equities between the tax authorities and the taxpayers. With this ruling, it has laid to rest the issue of the applicability of TOLA to the reassessment timelines specified under the new regime. SC has made a clear distinction that the TOLA only extends the time limit for issuance of notice and in no way tinkers with the period for which past assessments can be reopened. Further, it also brings out that the TOLA is to be read along with the amended provisions of the IT Act.