AO's reopening assessment quashed for obtaining approval from wrong authority under section 151

ITAT Mumbai quashed the reopening assessment for AY 2016-17 after finding the AO failed to obtain proper statutory approval. The order under section 148A(d) was passed on 30-06-2022, exceeding three years from the assessment year end, requiring approval from Principal Chief Commissioner or equivalent authority per section 151. However, AO obtained approval only from Principal Commissioner, violating statutory requirements. Following Bombay HC precedent in Siemens Financial Services case with identical facts, ITAT held both the section 148A(d) order and section 148 notice were bad in law, consequently quashing the assessment order and allowing the assessee's appeal.

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The core legal questions considered in this judgment revolve around the validity of the reopening of assessment under section 148 of the Income Tax Act, 1961, specifically:

1. Whether the reopening notice issued under the old provisions of section 148 after 1st April 2021, without following the mandatory procedure under the newly inserted section 148A, is valid.

2. Whether the Assessing Officer (AO) complied with the procedural requirements under section 148A of the Act, including issuance of notice under section 148A(b) and passing order under section 148A(d).

3. Whether the AO obtained prior approval from the appropriate "specified authority" as mandated by section 151 of the Act before passing the order under section 148A(d) and issuing the notice under section 148.

4. The legal effect of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 ("TOLA") on limitation periods and procedural requirements under sections 148, 148A, and 151.

5. The consequences of non-compliance with the statutory requirement of obtaining approval from the correct specified authority on the validity of the reassessment proceedings.

Issue-wise Detailed Analysis

1. Validity of reopening notice issued under old section 148 provisions post 1st April 2021 without following section 148A procedure

The relevant legal framework involves the amendment made by the Finance Act, 2021, effective from 1st April 2021, which substituted the provisions relating to reopening of assessments under section 148 by introducing a mandatory preliminary enquiry procedure under section 148A. Under the new regime, before issuing a notice under section 148, the AO must issue a notice under section 148A to conduct enquiries and provide the assessee an opportunity to respond.

The AO in this case issued a notice under section 148 on 9th April 2021, after the new provisions came into effect, but did not issue a prior notice under section 148A as required. The assessee challenged the validity of this reopening on this ground.

The Court noted that various High Courts struck down such notices issued under the old provisions after 31st March 2021. However, the Supreme Court in Union of India vs. Ashish Agarwal provided a remedy by holding that such notices under old section 148 shall be deemed to have been issued under section 148A and treated as show cause notices under section 148A(b). This decision regularized the procedural lapse retrospectively, subject to compliance with the new procedural safeguards thereafter.

The AO accordingly treated the 9th April 2021 notice as a section 148A notice and issued a fresh notice under section 148A(b) on 20th May 2022, followed by an order under section 148A(d) on 30th June 2022.

2. Compliance with procedural requirements under section 148A

Section 148A mandates that after issuing the show cause notice under section 148A(b), the AO must consider the assessee's objections and pass a reasoned order under section 148A(d) deciding whether it is a fit case to reopen the assessment. The AO complied by passing the order on 30th June 2022.

The Court examined whether the AO obtained the requisite prior approval from the specified authority under section 151 before passing the order under section 148A(d) and issuing the notice under section 148.

3. Requirement of prior approval from the specified authority under section 151

Section 151 defines the "specified authority" whose approval is mandatory before issuing a notice under section 148 or passing an order under section 148A(d). The authority depends on whether the notice is issued within or beyond three years from the end of the relevant assessment year:

• If within three years, approval must be obtained from Principal Commissioner or Principal Director or Commissioner or Director.
• If beyond three years, approval must be obtained from Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General.

In this case, the relevant assessment year was 2016-17, and the order under section 148A(d) was passed on 30th June 2022, which is beyond three years from the end of AY 2016-17 (which ended 31st March 2017). Hence, approval should have been obtained from the higher authorities mentioned in section 151(ii).

However, the AO obtained approval from the Principal Commissioner of Income Tax, which falls under the category of specified authority for cases within three years, not beyond.

The assessee challenged the validity of the reopening on this ground, contending that the approval from an incorrect authority vitiates the entire proceedings.

4. Effect of TOLA Act on limitation and procedural requirements

The AO contended that due to the COVID-19 pandemic, the Government enacted the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 ("TOLA"), which extended limitation periods for issuing notices under various provisions up to 30th June 2021. The AO argued that this extension allowed issuance of the section 148 notice under old provisions up to that date and that approval from Principal Commissioner was valid under old provisions.

The Court referred to the decision of the Bombay High Court in Siemens Financial Services Pvt. Ltd., which held that the TOLA Act only extended the limitation period but did not alter the substantive procedural requirements under section 151 as amended by the Finance Act, 2021. Since the Finance Act, 2021 came into effect on 1st April 2021, the AO was required to comply with the amended provisions, including obtaining approval from the appropriate specified authority as per section 151(ii) for notices issued beyond three years.

The Court held that the AO cannot rely on the TOLA Act to override the mandatory statutory approval requirement under the amended section 151.

5. Consequences of non-compliance with approval requirement under section 151

The Court extensively relied on the Bombay High Court's ruling in Siemens Financial Services Pvt. Ltd., which held that failure to obtain prior approval from the correct specified authority as mandated by section 151 renders the notice and the order under section 148A(d) invalid and liable to be quashed.

Applying this principle, the Court found that since the AO obtained approval from the Principal Commissioner instead of the Principal Chief Commissioner or equivalent authority, the approval was invalid. Consequently, the notice issued under section 148 and the order under section 148A(d) were held to be bad in law.

Therefore, the reassessment proceedings initiated on the basis of such invalid notice and order could not survive, and the impugned assessment order was quashed.

Treatment of Competing Arguments

The Revenue's argument that the Supreme Court's decision in Ashish Agarwal regularized the notice issued under old section 148 provisions was accepted to the extent that the reopening proceedings were to be continued under the new provisions of section 148A. However, the Revenue's contention that approval from Principal Commissioner was valid was rejected based on the statutory mandate of section 151 and the binding precedent of the Bombay High Court.

The Court distinguished the extension of limitation under TOLA from the substantive procedural requirement of obtaining valid approval under section 151, holding that the latter cannot be circumvented by reliance on TOLA.

Significant Holdings

"The approval is not valid. Hence, the impugned order passed under section 148A(d) read with notice issued under section 148 of the Act dated July 31, 2022 is not valid and has to be quashed and set aside."

"The sanction of the specified authority has to be obtained in accordance with the law existing when the sanction is obtained and, therefore, the sanction is required to be obtained by applying the amended section 151(ii) of the Act and since the sanction has been obtained in terms of section 151(i) of the Act, the impugned order and impugned notice are bad in law and should be quashed and set aside."

"The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act only seeks to extend the period of limitation and does not affect the scope of section 151."

"The Assessing Officer cannot seek to take the shelter of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act as a subordinate legislation cannot override any statute enacted by Parliament."

Core principles established include:

• Mandatory compliance with procedural safeguards under section 148A for reopening of assessments post 1st April 2021.
• Strict adherence to the requirement of obtaining prior approval from the correct specified authority as per section 151 depending on the period elapsed since the end of the relevant assessment year.
• Extension of limitation period under TOLA does not modify or dilute the substantive procedural requirements under the Income Tax Act.
• Non-compliance with mandatory approval provisions renders notices and reassessment orders invalid and liable to be quashed.

Final determinations on each issue:

• The reopening notice issued under old section 148 provisions without following section 148A was regularized by Supreme Court's ruling and the AO proceeded under new provisions.
• The AO failed to obtain approval from the correct specified authority under section 151 for issuing notice and passing order beyond three years from the end of the assessment year.
• The approval obtained from the Principal Commissioner was invalid as per section 151(ii), rendering the notice and order invalid.
• The extension of limitation under TOLA does not validate non-compliance with section 151.
• The reassessment proceedings and impugned assessment order were quashed accordingly.

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