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This article has been written by Dhivyaprabha pursuing a Diploma in US Tax Compliance and Paralegal Work at LawSikho, and has been edited by Shashwat Kaushik. This article discusses the case of Union of India & Ors. vs. Ashish Agarwal (2022).

It has been published by Rachit Garg.

Introduction

The re-assessment provisions under the Income Tax Act of 1961 have been the subject of many discussions and arguments during 2022. The re-assessment provisions were amended through the Finance Act, 2021, and the amendments were applicable from April 1, 2021. Still, the revenue department sent notices to the assessees from 01.04.2021 until 30.06.2021 under the old provisions in pursuance of the notification issued under the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance of 2020. In an order dated May 4, 2022, the Supreme Court of India gave a landmark judgement for the appeals made by the Union of India and the Central Board of Direct Taxes (CBDT) by reinstating the validity of over 90,000 re-assessment notices issued by the Revenue Department. The following analysis discusses the views and judgement of the Apex Court on the above issue.

Facts of the case

The Union of India & Ors. appealed before the Supreme Court against the judgements of the Allahabad High Court and various other courts to quash the re-assessment notices sent by the revenue department under Section 148 of the Income Tax Act, 1961 (the Act), stating that they are invalid because they were issued under the old provisions even after the applicable provisions of Sections 147 to 149 and 159 of the Act were amended. Before proceeding with the case analysis, it is important to understand the relevant law and the timeline of events that led to this decision by the Apex Court.

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The amendments through the Finance Act 2021 were applicable w.e.f. 01.04.2021, which made significant changes to the re-assessment provisions of the Income Tax Act. Sections 147 to 149 were substituted by new sections 147, 148, 148A, and 149 of the Act, and 153A to 153C were removed to be merged under Section 147.

Following are sections 147 to 149 and section 151 of the Act before and after the Finance Act, 2021:

Section 147 – Income escaping assessment

Before the Finance Act, 2021

Subject to sections 148 to 153, the Assessing Officer (AO) may assess or reassess any income that he has reason to believe has escaped assessment in any assessment year. 

During the above-mentioned assessment or reassessment, if the AO finds any other income, loss, depreciation, or other allowance that has also escaped assessment, he may assess or compute it accordingly for the assessment year it belongs to.

After the Finance Act, 2021

Subject to sections 148 to 153, the Assessing Officer (AO) may assess or reassess any income that he finds/knows has escaped assessment in any assessment year. 

During the above-mentioned assessment or reassessment, if the AO finds any other income, loss, depreciation, or other allowance that has also escaped assessment, he may assess or compute it accordingly for the assessment year it belongs to, irrespective of whether Section 148A has been complied with or not.

Section 148 – Issue of notice where income has escaped assessment

Before the Finance Act, 2021 

Before proceeding with Section 147, the AO should issue a notice to the assessee requiring him to submit his return or any other person’s return for whom he is assessable in the relevant assessment year in the prescribed format and within the prescribed time.

The return submitted by the assessee under this section shall be treated as if it were required to be submitted under Section 139 of the Act.

After the Finance Act, 2021

Before proceeding with Section 147 and subject to Section 148A, the AO should send a notice to the assessee along with the order passed under Section 148A (if any) asking him to submit his return or any other person’s income for whom he is assessable in the relevant assessment year. The return is to be submitted in the prescribed format and within the prescribed time.

The return that the assessee submits in accordance with this section is treated as though it were required to be submitted in accordance with Section 139 of the Act. The AO cannot send a notice under Section 148 unless he has information that taxable income has escaped assessment.

Section 148A is substituted as per the Finance Act, 2021 – Conducting inquiry and providing opportunity before the issue of notice under Section 148. Before issuing notice under 148, the AO shall:

  • If needed, conduct an inquiry regarding the information on taxable income that escaped assessment with the approval of the specified authority.
  • Give the assessee an opportunity to be heard by sending him a notice to show cause within 7 to 30 days of sending the notice or within the time extended on application by the assessee.
  • Consider the reply of the assessee.
  • Decide whether to issue a notice under Section 148 by passing an order within 1 month from the end of the month of receiving the reply for show cause notice or 1 month from the end of the month of the time given or extended time given to reply to the show cause notice.

Section 149 – Time limit for notice

Before the Finance Act, 2021

A notice cannot be issued under Section 148 for the relevant assessment year if:

  • Four years have passed since the end of the relevant assessment year.
  • Four years but not more than 6 years, have passed from the end of the relevant assessment year
    • Unless the income escaping assessment is Rs. 1 lakh or more.

After Finance Act 2021: 

A notice cannot be issued under Section 148 for the relevant assessment year if:

  • Three years have passed from the end of the relevant assessment year but subject to clause 
  • Three years but not more than 10 years, have passed from the end of the relevant assessment year,
    • Unless the AO has some evidence in possession that income in the form of an asset amounting to 50 lakhs or more has escaped assessment.

Section 151 – Sanction for issue of notice

Before Finance Act, 2021: 

AO cannot issue a notice under Section 148 if 4 years have expired from the end of the relevant assessment year unless he satisfies the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner with reasons recorded that it is right to issue notice for the case.

After Finance Act, 2021: 

Specified authority for fulfilling requirements under sections 148 and 148A shall be:

  1. If 3 years or less have expired since the end of the relevant assessment year, contact the Principal Commissioner, Director, or Director.
  2. Principal Chief Commissioner or Principal Director General, or if they are unavailable, Chief Commissioner or Director General if more than 3 years have passed from the end of the assessment year.

Under the powers given in Section 3 of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, the extension of time to issue a notice under Section 148 of the Income Tax Act.

Criminal litigation

Notifications dated 31.03.2021 and 27.04.2021 provided for an extension of the time limit to issue notice up to 30.06.2021. These notifications also had explanations that stated that the provisions that existed before the amendment by the Finance Act, 2021, applied to the re-assessment proceedings on the notices issued. Approximately 90,000 such notices were issued by the Revenue after 01.04.2021 until 30.06.2021 under the old provisions, even though the Income Tax Act, 1961, had been amended w.e.f. 01.04.2021. 

Many assessees challenged the notices issued as they did not follow the procedures laid down in the amended provisions as applicable from 01.04.2021. More than 9000 writ petitions were filed, and all the high courts except the Chattisgarh high court quashed and set aside all the re-assessment notices issued under the unamended Section 148 of the Act because they were bad in law due to not following the new applicable provisions.

The Union of India and CBDT appealed to the Supreme Court against the common judgement and order of the High Court of Allahabad and other similar writ petitions to quash the re-assessment notices through Civil appeals 3005/2022 to 3020/2022.

Supreme Court’s judgement

In the order dated 04.05.2022 in the case of Union of India & Ors. vs. Ashish Agarwal (2022), the Supreme Court of India observed the following:

  • The Supreme Court completely agrees with the decision of the various high courts that the benefit of new provisions would be available even if the assessment is related to previous assessment years because the new provisions were made to protect the rights of the assessee.
  • Even if the decision of the high courts is permissible under the Finance Act, 2021 and the amended Income Tax Act, the revenue cannot be left remediless due to a bonafide/genuine mistake in following the notification issued by the government. Thus, some relief is to be provided because if the revenue suffers, it is ultimately the government that suffers.
  • The Supreme Court passed the following order through the powers given under Article 142 of the Indian Constitution to govern and modify/substitute all judgements and orders passed by various high courts to quash the re-assessment notices, including the High Court of Allahabad, i.e., the order shall be applicable PAN INDIA:
  • The notices issued under Section 148 of the unamended Income Tax Act shall be deemed to be issued under Section 148A of the amended Income Tax Act and be treated as show cause notices as per Section 148A.
  • The respective AOs should, within 30 days, provide the information relied upon so that the assessee can make a reply within 2 weeks.
  • The requirement to conduct an inquiry under Section 148A shall be dispensed with as a one-time measure.
  • The assessing officers shall pass orders as required under Section 148A.

Conclusion

The rarely used Article 142 of the Constitution of India was invoked to settle the controversy over the validity of re-assessment notices. The observation by the Supreme Court that the Revenue Department may have genuinely believed that the amendments had not yet been enforced paved the way to the ruling in favour of the Revenue Department. Even though the benefits of the new provisions have been provided to the assessees by the Supreme Court judgement, the order has increased taxpayers’ burden.

 References

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