Direct Tax Alert - Validity of Re-assessment notices issued under section 148 of the Income-tax Act, 1961 as per old provisions of the law upheld

Background

The Finance Act of 2021 introduced section 148A (New Provision) whereby the re-assessment procedures as prescribed in the Income-tax Act, 1961 (IT Act) were modified from 1 April 2021. As per the New Provision if the authorities believe that any income has escaped assessment, then, before issuing such notices under section 148 of the IT Act (Erstwhile Provision), the Tax authorities ought to conduct an inquiry and provide the taxpayer an opportunity to be heard.

Covid-19 pandemic resulted in delay in complying with the various regulations under the Act and the Finance Ministry enacted the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (Relaxation Act) wherein the time for issuance of notice under the Erstwhile Provision was extended vide notifications¹, initially to 30 April 2021 and further to 30 June 2021.

It has been observed across the board that several Writ Petitions have been filed against the notices issued under the Erstwhile Provision on the ground that the said notice is based on non-existent provision (i.e. issued under Erstwhile Provision) and stay has been granted on such a notice.

However, recently the Chhattisgarh High Court² (High Court) upheld the validity of such notice thereby, making it a vexed issue.

We, at BDO in India, have summarized the ruling of the High Court and provided our comments on the impact of this decision hereunder.

Facts of the case

The taxpayer being resident individual, had filed the Return of Income for Financial Year (FY) 2014-15 which was subjected to scrutiny. Neither  escapement of income nor concealment of income being found, a notice for re-assessment was issued under the Erstwhile Provision, on 30 June 2021. The counsel for the taxpayer submitted that the New Provision being operational from 1 April 2021 any notice issued under the Erstwhile Provision after 1 April 2021 would not sustain since the procedures laid down by the Finance Act 2021 were not followed. Further, notifications issued by the Ministry of Finance (MoF) would not over-ride the Parliament enacted law.

High Court Ruling

The High Court, rejecting the taxpayer’s plea and upheld the validity of reassessment notice based on the following:

• The tax department and taxpayers both could not dispense their statutory obligations under the Act due to the lockdown. This intricacy led to the Parliament delegating the operation of the New Provision to the MoF. This does not amount to abduction of power but is sound basis of administrative efficiency;
• The operation of New Provision being deferred by MoF on delegation of the Central Government, the same was deemed to be done in a controlled manner and the issuance of notifications by MoF was well within the legislative functions;
• Reliance was also placed on the decision of Hon’ble Supreme Court in case of A.K. Roy³ wherein it was held that delegation of operation of certain provisions of an enactment to an Executive, which, in the instant case, MoF, does not amount to excessive delegation of power and the purpose of Finance Act does not stand defeated. This would merely amount to conditional legislation;
• When the law is complete and certain conditions are laid down as to how and when the law would be applied by the delegate, it is conditional legislation. Thus, the circumstances under which the deferment of operation of New Provision was delegated cannot amount to encroachment upon turf of Parliament;
• The extension of operation of Erstwhile Provision in exercise of powers of the Relaxation Act merely insulated its identity, as prevailed prior to insertion of New Provision;
• Parity was maintained while extending time limits for taxpayers and operation of erstwhile provisions for the Tax department

BDO Comments

The High Court ruling is in contrast to the rulings wherein stay was granted in similar cases. Considering the fact that a High Court’s ruling is binding on that particular state and the authorities having jurisdiction in that state, the validity of the notices issues still remain a question as the Writ Petitions are still pending before other High Courts including the Bombay High Court. However, it would be relevant to note that a judicial precedence with regard to the validity of notices issued for re-opening of assessment proceedings has been set which will be taking into consideration by other courts while delivering their judgements.

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