2024 (10) TMI 264 - SC - Income Tax

Section 148 reassessment notices issued July-September 2022 valid if within surviving time limits under Income Tax Act with TOLA

SC held that reassessment notices issued under Section 148 of the new regime between July-September 2022 are valid if issued within surviving time limits ... Reading of TOLA into the Income Tax Act - extension of limitation by TOLA - proviso to Section 149(1)(b) (retrospective limitation protection) - sanction by specified authority under Section 151 - legal fiction created in Ashish Agarwal (deeming s.148 notices to be s.148A(b) show-cause notices) - exclusion of stayed period and time allowed to assessee under third proviso to s.149 - scope and limits of Article 142 in tax mattersReading of TOLA into the Income Tax Act - proviso to Section 149(1)(b) (retrospective limitation protection) - extension of limitation by TOLA - principle of harmonious construction - Whether TOLA and the notifications issued under it apply to reassessment proceedings after 1 April 2021 - HELD THAT: - The Court held that TOLA, being a free standing statute enacted to relax time limits for actions falling between 20 March 2020 and 31 March 2021, continues to apply to the Income Tax Act after 1 April 2021 where an action under the substituted provisions falls for completion in that TOLA period. The first proviso to Section 149(1)(b) of the substituted scheme must be read with TOLA: Section 3(1) of TOLA (which contains a non obstante clause) relaxes only the time limit for completion or compliance (including issuance of notices) and does not revive the old regime wholesale. The Income Tax Act as amended (by Finance Act 2021) must be read with TOLA and the notifications extending TOLA (including those up to 30 June 2021) so that the surviving time available to the Revenue to proceed in respect of deeds falling within TOLA is preserved. Consequently, for assessment years whose limitation expiry falls within the TOLA period, the extended dates provided by TOLA/notifications are available to the Revenue when applying the substituted provisions. [Paras 64, 68, 69, 71, 114]TOLA applies to the Income Tax Act after 1 April 2021 for actions falling for completion between 20 March 2020 and 31 March 2021; Section 3(1) of TOLA relaxes the time for issuance of reassessment notices and must be read with the proviso to Section 149(1)(b).Legal fiction created in Ashish Agarwal (deeming s.148 notices to be s.148A(b) show-cause notices) - exclusion of stayed period and time allowed to assessee under third proviso to s.149 - sanction by specified authority under Section 151 - scope and limits of Article 142 in tax matters - Whether reassessment notices issued under Section 148 of the new regime between July and September 2022 are valid - HELD THAT: - The Court examined the effect of the legal fiction created in Ashish Agarwal by which s.148 notices issued under the old regime (1 April-30 June 2021) were deemed to be s.148A(b) show cause notices. That fiction stopped the limitation clock from the date of the deemed notice until the supply of material directed by this Court and the period given to the assessee to reply. Under the third proviso to s.149 the time excluded (the stayed period and the time allowed to the assessee) must be deducted when computing the surviving limitation. The assessing officer thereafter had to obtain the appropriate sanction under s.151 of the substituted regime and issue any s.148 notice within the surviving period (as extended by TOLA where applicable). If a reassessment notice issued in July-September 2022 was beyond the surviving time available after accounting for the exclusions and/or was issued without the sanction prescribed by the substituted s.151 applicable to the surviving period, it is time barred and invalid. Applying these principles to the present batch, all reassessment notices issued beyond the surviving period are liable to be set aside. [Paras 106, 108, 111, 114, 116]Reassessments under s.148 issued pursuant to the deemed s.148A(b) notices had to be issued within the surviving limitation (after exclusion of the stayed period and the time allowed to the assessee) and with the sanction required by s.151; notices issued beyond that surviving period or without requisite sanction are time barred and invalid.Final Conclusion: The High Court judgments disallowing reassessment notices are set aside to the extent indicated. TOLA extends the time for completion of actions falling between 20 March 2020 and 31 March 2021 and must be read with the substituted reassessment regime; the legal fiction in Ashish Agarwal stopped the limitation clock until material was supplied and time given to assessees, and reassessment notices issued thereafter had to be within the surviving period and with proper sanction. Appeals by the Revenue are allowed; appeals by assessees shall be governed by the reasons in this judgment. 1. ISSUES PRESENTED and CONSIDEREDa. Whether the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) and the notifications issued under it apply to reassessment notices issued after 1 April 2021, particularly in light of the substitution of Sections 147 to 151 of the Income Tax Act by the Finance Act 2021.b. Whether the reassessment notices issued under Section 148 of the new regime (post 1 April 2021) between July and September 2022 are valid, especially considering the time limits prescribed under the Income Tax Act read with TOLA and the procedural requirements including prior sanction under Section 151.2. ISSUE-WISE DETAILED ANALYSISa. Applicability of TOLA to reassessment notices issued after 1 April 2021Relevant legal framework and precedents: The Income Tax Act originally prescribed time limits and procedural safeguards for reassessment notices under Sections 147 to 151. These provisions were substantially amended by the Finance Act 2021, effective from 1 April 2021, introducing a new regime with altered time limits and sanctioning authorities.TOLA was enacted in 2020 to provide relief during the COVID-19 pandemic by extending time limits for completion or compliance of actions under specified Acts, including the Income Tax Act, for actions falling due between 20 March 2020 and 31 March 2021. The Central Government issued notifications extending these time limits further, up to 30 June 2021.In Ashish Agarwal (supra), the Court held that reassessment notices issued under the old regime after 1 April 2021 should be deemed to be show cause notices under the new regime, balancing the interests of Revenue and assesses.Court's interpretation and reasoning: The Court observed that the Income Tax Act post 1 April 2021 must be read with the substituted provisions introduced by the Finance Act 2021. However, TOLA, enacted prior to the Finance Act 2021, applies to any action or proceeding falling for completion between 20 March 2020 and 31 March 2021, irrespective of subsequent amendments, due to its non obstante clause.The Court held that TOLA's extension of time limits applies to the Income Tax Act even after 1 April 2021, provided the action falls within the specified period. The time limits prescribed under Section 149 of the Income Tax Act are to be read in conjunction with the extensions under TOLA and its notifications.Key evidence and findings: The Court examined the text of Section 3(1) of TOLA, the Finance Act 2021's substitution of Sections 147 to 151, and the notifications issued under TOLA extending deadlines. It also considered the legislative intent behind TOLA-to provide relief during the pandemic-and the procedural safeguards introduced by the Finance Act 2021.Application of law to facts: The reassessment notices issued between 1 April 2021 and 30 June 2021, although under the old regime, fall within the extended time limits under TOLA. The Court reasoned that TOLA's non obstante clause overrides conflicting provisions in the Income Tax Act to the extent of time limit relaxation, thus allowing reassessment notices issued in this period to be valid if other conditions are met.Treatment of competing arguments: The respondents argued that TOLA ceased to apply after 31 March 2021 and could not extend time limits under the new regime, especially since the Finance Act 2021 substituted the old provisions. The Court rejected this, holding that TOLA applies to actions falling due in the specified period regardless of subsequent amendments, and that the Income Tax Act must be read harmoniously with TOLA.Conclusions: TOLA and its notifications apply to reassessment notices issued after 1 April 2021 if the relevant action falls within the period covered by TOLA. The time limits for issuance of notices and sanction under Sections 149 and 151 of the Income Tax Act are extended accordingly.b. Validity of reassessment notices issued under Section 148 of the new regime between July and September 2022Relevant legal framework and precedents: The Finance Act 2021 introduced a new regime with reduced time limits (three years generally, ten years for substantial escaped income exceeding Rs. 50 lakhs) and different sanctioning authorities under Section 151. The first proviso to Section 149(1)(b) restricts issuance of notices for assessment years beginning on or before 1 April 2021 if barred under the old regime's time limits.Ashish Agarwal (supra) created a legal fiction deeming notices issued under the old regime after 1 April 2021 as show cause notices under Section 148A(b) of the new regime, with directions for assessing officers to supply relevant material and allow responses before proceeding.Court's interpretation and reasoning: The Court held that reassessment notices issued under the new regime in July-September 2022 must be issued within the surviving time limits under the Income Tax Act read with TOLA, accounting for the period during which the proceedings were stayed under the legal fiction created by Ashish Agarwal (supra) and the time allowed for responses.The Court explained that the legal fiction effectively 'stopped the clock' on limitation from the date of issuance of the deemed show cause notice until the supply of relevant material and information to the assessee, plus the period allowed for response. The assessing officer must then issue the reassessment notice within the remaining time.Key evidence and findings: The Court analyzed the third proviso to Section 149 excluding periods of stay or time allowed to the assessee from limitation computation. It also examined the procedural requirements under Section 151 for prior sanction by specified authorities, which must be complied with for the notice to be valid.Application of law to facts: The reassessment notices issued in mid-2022 were challenged as time-barred and lacking proper sanction. The Court found that if the notices were issued beyond the surviving time limits after accounting for TOLA extensions and the stay period, they are invalid. Further, the sanction must be obtained from the appropriate authority as per the new regime's Section 151.Treatment of competing arguments: The Revenue contended that invalidating these notices would frustrate the purpose of Ashish Agarwal (supra) and that TOLA's extensions apply. The respondents argued that the new regime's time limits apply strictly and that TOLA cannot extend time beyond 31 March 2021. The Court balanced these views, affirming TOLA's applicability but emphasizing strict compliance with time limits and sanction requirements under the new regime.Conclusions: Reassessment notices issued under the new regime after July 2022 must be issued within the surviving time limits under the Income Tax Act read with TOLA, considering the stay period and response time. Notices issued beyond this period or without proper sanction are invalid.c. Sanction of the specified authority under Section 151Relevant legal framework and precedents: Section 151 requires prior sanction of specified authorities before issuing reassessment notices. The old regime prescribed Joint Commissioner or higher authorities depending on time elapsed; the new regime prescribes Principal Commissioner or higher authorities, with higher level authorities involved if more than three years have elapsed.In Ashish Agarwal (supra), the Court waived the requirement of prior approval for certain stages under Section 148A but not for issuance of notice under Section 148 or order under Section 148A(d).Court's interpretation and reasoning: The Court held that sanction is a jurisdictional precondition. Non-compliance with Section 151 affects the jurisdiction of the assessing officer and renders the notice invalid. TOLA extends the time for grant of sanction if the time limit for sanction falls within the TOLA period.Key evidence and findings: The Court examined the timelines for sanction under both regimes and the effect of TOLA's extension of time limits. It found that sanction must be obtained from the appropriate authority as per the time elapsed and regime applicable at the time of issuance.Application of law to facts: Notices issued without proper sanction per the new regime and beyond the extended time limits are invalid. The Court emphasized the importance of strict adherence to procedural safeguards to prevent harassment and protect vested rights.Treatment of competing arguments: The Revenue argued for a liberal reading of sanction requirements in light of TOLA and Ashish Agarwal (supra). The Court acknowledged the need for relief due to the pandemic but maintained that jurisdictional safeguards cannot be ignored.Conclusions: Sanction by the specified authority under Section 151 is mandatory. TOLA extends the time for sanction where applicable. Failure to obtain proper sanction invalidates the reassessment notice.3. SIGNIFICANT HOLDINGS'Section 3(1) of TOLA applies notwithstanding anything contained in the specified Act and extends the time limits for completion or compliance of any action falling between 20 March 2020 and 31 March 2021, including reassessment notices under the Income Tax Act, even after the substitution of Sections 147 to 151 by the Finance Act 2021.''The proviso to Section 149(1)(b) of the new regime limits the retrospective operation of the extended time limits by providing that no notice under Section 148 shall be issued for assessment years beginning on or before 1 April 2021 if such notice could not have been issued at that time under the old regime's time limits.''The reassessment notices issued under the old regime between 1 April 2021 and 30 June 2021 shall be deemed to be show cause notices under Section 148A(b) of the new regime, and the time during which these notices were stayed by court order and the time allowed to the assessee to respond shall be excluded for computing limitation under the third proviso to Section 149.''Sanction of the specified authority under Section 151 is a jurisdictional precondition for issuing reassessment notices. TOLA extends the time for grant of sanction where applicable, but failure to obtain proper sanction invalidates the notice.''The reassessment notices issued under Section 148 of the new regime between July and September 2022 must be issued within the surviving time limits under the Income Tax Act read with TOLA, considering the exclusion of the stay period and response time. Notices issued beyond this period or without proper sanction are liable to be set aside.''The directions issued under Article 142 in Ashish Agarwal (supra) were exercised to balance the equities between the Revenue and the assesses, and do not constitute a binding ratio but a procedural remedy limited to the peculiar facts of that case.''The Income Tax Act and TOLA must be read harmoniously to give effect to the legislative intent of both statutes, ensuring that the machinery provisions are workable and the relief intended by TOLA is effective.'