Approval under s.151(i) upheld but s.148 notices issued beyond surviving time per recent directions are time-barred and quashed

HC held that approval under s.151(i) for issuance of orders under s.148A(d) and notices under s.148 was valid, but the impugned s.148 notices were issued beyond the "surviving time" permitted by recent SC directions and therefore were time-barred. Consequently the s.148 notices and the consequential s.148A(d) orders were quashed and set aside as invalid.

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ISSUES PRESENTED AND CONSIDERED

1. Whether notices issued under section 148 of the Income-tax Act (post-April 1, 2021) are time-barred having regard to section 149 as substituted by the Finance Act, 2021 and the temporal extensions granted by the Taxation and other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 ("TOLA") (the concept of "surviving time" as explained by the Supreme Court).

2. Whether prior sanction required by section 151 (as substituted with effect from April 1, 2021) was validly obtained for issuance of reassessment notices (i.e., whether the correct specified authority granted sanction, taking into account the interplay of the new regime, TOLA and the Supreme Court directions).

ISSUE-WISE DETAILED ANALYSIS - ISSUE 1: TIME-BAR UNDER SECTION 149 AND EFFECT OF TOLA AND SUPREME COURT DIRECTIONS

Legal framework: Section 149 (as substituted w.e.f. April 1, 2021) prescribes a three-year limit (or three-to-ten years subject to the fifty lakh threshold) for issuance of section 148 notices, with provisos excluding certain periods such as time allowed to an assessee to reply. TOLA (s.3(1)) extended time limits for actions falling due between March 20, 2020 and March 31, 2021 to June 30, 2021.

Precedent treatment: The Supreme Court (in the two landmark judgments considered) interpreted TOLA and section 149 to mean that TOLA does not extend the substantive old regime but operates to extend the time available to complete actions that fell during the specified COVID period; the Supreme Court also created a legal fiction by deeming certain earlier invalid notices to be show-cause notices under section 148A(b) (first decision) and later explained how the "surviving time" under TOLA and the title directions must be computed (second decision).

Interpretation and reasoning: The Court follows the Supreme Court's exposition that (i) TOLA's non obstante clause relaxes time limits for actions falling between March 20, 2020 and March 31, 2021 and thus supplies additional time to the Revenue up to June 30, 2021 where applicable; (ii) the legal fiction adopted earlier stopped the clock from the date of issuance of the deemed show-cause notice until supply of material and the two-week reply period, both of which are to be excluded in computing limitation under the third proviso to s.149; (iii) the "surviving time" available to the Revenue to complete reassessment under the new regime must be computed by reference to the date of the original (TOLA-era) notice up to June 30, 2021, less any period excluded by the Supreme Court's directions.

Ratio vs. Obiter: The conclusions about application of TOLA to extend only time limits (and not to resurrect the old substantive regime), about stopping the limitation clock via the legal fiction and exclusion of the reply period, and the requirement that reassessment under the new regime must fall within the surviving time (or be otherwise time-barred) are treated as binding ratio drawn from the Supreme Court analysis and applied by The Court.

Conclusions: Applying the Supreme Court's tests, The Court computed surviving time for each petition using: (a) date of original TOLA notice; (b) days remaining up to June 30, 2021; (c) date of supply of material; and (d) two-week reply window. Where the subsequent order under section 148A(d) and issuance of a fresh section 148 notice occurred after the surviving time expired, The Court held those notices to be time-barred and invalid. Accordingly, reassessment orders and downstream proceedings founded on such notices were quashed.

ISSUE-WISE DETAILED ANALYSIS - ISSUE 2: SANCTION UNDER SECTION 151 AFTER APRIL 1, 2021 AND EFFECT OF TOLA

Legal framework: Section 151 (as substituted w.e.f. April 1, 2021) prescribes the specified authority for grant of sanction for issuance of notices under sections 148/148A: (i) Principal Commissioner/Principal Director/Commissioner/Director if three years or less have elapsed; (ii) Principal Chief Commissioner/Principal Director General/Chief Commissioner/Director General if more than three years have elapsed. TOLA may extend the time available to specified authorities to grant sanction where the limitation period falls within March 20, 2020-March 31, 2021.

Precedent treatment: The Supreme Court held that (a) grant of sanction by the appropriate authority under s.151 is a jurisdictional precondition to assume jurisdiction under s.148; (b) TOLA extends the time available to the specified authority to grant sanction where the three-year time limit falls within the TOLA window; and (c) the earlier exercise of Article 142 (deeming old notices as 148A(b) show-cause notices) implicitly waived prior approval requirements for the 148A(b) step but did not waive the requirement of sanction under s.148A(d) or s.148, which must comply with s.151 and surviving time as applicable.

Interpretation and reasoning: The Court adopts the Supreme Court's two-part approach: identify whether the relevant three-year (or four-year under old regime) expiry fell within March 20, 2020-March 31, 2021; if yes, the specified authority under s.151(i) (new regime) had extended time to grant sanction up to June 30, 2021. The Court rejects the petitioners' submission that the date of the substituted (post-Ashish Agarwal) s.148 notice is the only relevant date for determining which authority must sanction; instead, the genesis of the proceedings in TOLA-era notices controls and the authority who could validly sanction within the extended period is the one indicated by the Supreme Court's test.

Ratio vs. Obiter: The holding that sanction is jurisdictional and must come from the authority indicated in s.151 (as applied with TOLA extensions) is treated as ratio derived from the Supreme Court precedent and applied to facts. The earlier judicial dispensation (waiver) limited to s.148A(b) was distinguished as not affecting the requirement of sanction under s.148A(d)/s.148.

Conclusions: On factual application, The Court held that where the initial TOLA-era notice had been issued within the TOLA window and the specified authority appropriate under s.151(i) (as extended by TOLA) had granted sanction within the extended time, such sanction is valid. Thus, in the present matters The Court found the approvals obtained (by the Principal Commissioner level where applicable under the Supreme Court's test) to be valid; however, validity of sanction did not save those notices that, on computation of surviving time and the dates of supply/reply/order, were issued beyond the surviving time-those notices were nonetheless quashed (see cross-reference to Issue 1 conclusion).

CROSS-REFERENCE POINT

The Court applied the Supreme Court's integrated scheme: (i) treat TOLA-era notices as giving rise to surviving time; (ii) compute surviving time excluding the stay period and two-week reply window in line with the legal fiction; (iii) ensure sanction under s.151 is from the authority indicated by the combined operation of s.151 and TOLA; and (iv) where surviving time expired before issue of the fresh s.148 notice under the new regime, the notice is time-barred even if sanction had been obtained.

FINAL CONCLUSIONS

(a) The Court followed and applied the Supreme Court's rulings interpreting the interplay of TOLA, the substituted sections 147-151, and the Article 142 directions; those rulings are binding and govern computation of limitation ("surviving time") and the sanction requirement.

(b) Where, on computation in accordance with the Supreme Court's methodology, the reassessment notice under section 148 (issued after the s.148A(d) order) was found to have been issued beyond the surviving time available under TOLA and the directions, such notice and the corresponding section 148A(d) order (and subsequent assessment proceedings) are invalid and are quashed.

(c) Where sanction obtained complied with section 151 as read with TOLA (i.e., the correct specified authority granted approval within the extended period), sanction was held valid; but valid sanction alone does not cure notices issued after expiration of the surviving time.

(d) The Court quashed the impugned section 148 notices and section 148A(d) orders in the group of matters before it to the extent they were issued beyond the surviving time computed under the governing Supreme Court principles; consequent downstream proceedings were also quashed.

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