Section 148 reassessment notices for 2014-15 and 2015-16 quashed as barred by limitation under TOLA 2021

ITAT Mumbai held that reassessment notices under section 148 for assessment years 2014-15 and 2015-16 were barred by limitation and quashed. For AY 2014-15, despite the assessee seeking adjournment, the two-week response period expired on 09.06.2022, starting the limitation clock. The notice issued on 28.07.2022 exceeded the surviving time limit under TOLA 2021. For AY 2015-16, the notice dated 28.07.2022 was issued beyond the six-year limitation period which expired on 31.03.2022. Both reassessment proceedings and orders were declared bad in law.

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The core legal questions considered by the Tribunal in these appeals and cross objection pertain primarily to the validity and limitation of reassessment proceedings initiated under section 148 of the Income-tax Act, 1961 (the Act), for Assessment Years (AY) 2014-15 and 2015-16. Specifically, the issues include:

• Whether the notices issued under section 148 of the Act for AY 2014-15 and 2015-16 are valid and within the prescribed limitation period considering the amendments introduced by the Finance Act, 2021 and the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA).
• The applicability of the procedural safeguards under section 148A introduced by the Finance Act, 2021, and whether the Assessing Officer complied with these mandatory preconditions before issuing the reassessment notices.
• The legal effect and application of the Supreme Court judgments in Union of India vs. Ashish Agarwal and Union of India vs. Rajeev Bansal on the reassessment notices issued during the TOLA period and thereafter.
• Whether the reassessment notices issued by the Revenue are barred by limitation under the amended provisions and the extended timelines provided by TOLA.
• Whether the reassessment proceedings and consequent orders passed pursuant to the notices are valid or liable to be quashed on grounds of limitation and procedural non-compliance.
• Ancillary contentions raised by the Revenue regarding allowance of certain expenses and deletion of additions on account of alleged improper gratification, which were rendered academic in view of findings on the legal issues.

Issue-wise Detailed Analysis

1. Validity and Limitation of Reassessment Notices under Section 148 for AY 2014-15 and 2015-16

The Tribunal examined the interplay between the old reassessment regime under the Act and the amendments introduced by the Finance Act, 2021, effective from 1 April 2021, which introduced a new procedural framework for reassessment proceedings, including mandatory compliance with section 148A. The TOLA Act, 2020 extended various limitation periods due to the COVID-19 pandemic, including the time for issuance of reassessment notices falling between 20 March 2020 and 31 March 2021, extended till 30 June 2021.

The Revenue issued original notices under section 148 on 30 June 2021 (within the extended period under TOLA) for both AYs. Subsequently, pursuant to the Supreme Court's judgment in Ashish Agarwal, these notices were deemed to be show cause notices under the new section 148A(b), creating a legal fiction to balance the interests of the Revenue and the assessee. The Assessing Officer then issued letters of proceedings (show cause notices) on 26 May 2022, providing reasons and material, and allowed two weeks for the assessee to respond.

The Tribunal analyzed the Supreme Court's decision in Rajeev Bansal, which clarified the legal fiction and introduced the concepts of "exclusion period" (time during which notices were stayed and time allowed for response) and "surviving time" (remaining limitation period available to the Revenue after excluding the exclusion period). The Court held that reassessment notices issued under the new regime must be within the surviving time limit calculated from the date of issuance of the deemed notice under section 148A(b) and the extended time under TOLA.

Applying these principles, the Tribunal found that for AY 2014-15, the surviving time available to the Revenue to issue the reassessment notice under the new regime was effectively one day. The assessee filed its reply beyond the prescribed two-week period (on 28 June 2022, whereas the two weeks ended on 9 June 2022). The Assessing Officer granted an adjournment to 24 June 2022 but the reply was still late. The reassessment notice under section 148 was issued on 28 July 2022, which was beyond the surviving time limit as per the Supreme Court's framework. Therefore, the reassessment notice and consequent reassessment order were held to be barred by limitation and invalid.

For AY 2015-16, the Tribunal noted that the six-year limitation period expired on 31 March 2022, and TOLA did not extend the limitation for this year as the relevant period did not fall within the TOLA extension window. The Revenue conceded before the Supreme Court that reassessment notices issued on or after 1 April 2021 for AY 2015-16 would have to be dropped. The reassessment notice issued on 28 July 2022 was thus beyond the limitation period and invalid. The Tribunal also relied on the decision of the Delhi High Court in IBIBO Group Pvt. Ltd. which quashed reassessment proceedings for AY 2015-16 on similar grounds.

2. Compliance with Procedural Safeguards under Section 148A

The Tribunal considered whether the Assessing Officer complied with the mandatory procedural requirements under section 148A, which include issuing a show cause notice, providing an opportunity of hearing, considering the assessee's reply, and passing a reasoned order before issuing a notice under section 148.

The Assessing Officer issued a letter of proceedings on 26 May 2022, treating the original notice as a deemed show cause notice under section 148A(b) as per Ashish Agarwal. The assessee was given an opportunity to reply, which was filed late. The Assessing Officer passed an order under section 148A(d) on 28 July 2022 and issued the reassessment notice on the same date.

The Revenue contended that the extended time granted to the assessee for filing the reply (beyond two weeks) should be considered for limitation purposes under section 148A(d). The Tribunal rejected this contention, holding that the Supreme Court judgments did not contemplate any extension of the two-week period for filing replies. The legal fiction and the procedural safeguards were to be strictly construed to protect the legislative intent and balance equities.

3. Effect of Supreme Court Judgments in Ashish Agarwal and Rajeev Bansal

The Tribunal extensively analyzed the Supreme Court's rulings, which created a legal fiction by deeming reassessment notices issued under the old regime during the TOLA period as show cause notices under the new regime, thereby allowing the Revenue to complete reassessment proceedings under the amended law while protecting the assessee's rights.

The judgments clarified that the limitation period was effectively stayed during the period the show cause notices were pending and the time allowed for the assessee to respond. The Assessing Officer had to complete the reassessment within the surviving time limit after the exclusion period. Notices issued beyond this surviving period are time-barred and invalid.

The Tribunal emphasized that these judgments apply pan India and to all reassessment notices issued during the TOLA period and thereafter, including the present case. It rejected the Revenue's argument that the assessee's late reply disentitles it from relief under these judgments, noting that the legal fiction and procedural framework must be applied strictly and consistently.

4. Ancillary Issues on Allowance of Expenses and Deletion of Additions

The Revenue had also challenged the Commissioner of Income Tax (Appeals)'s orders allowing certain subcontracting expenses and deleting additions on account of alleged improper gratification. However, as the Tribunal found the reassessment notices and proceedings to be invalid and barred by limitation, these merit-based grounds were rendered academic and not adjudicated upon.

5. Cross Objection by the Assessee Challenging Validity of Notice for AY 2015-16

The assessee's cross objection challenged the validity of the reassessment notice for AY 2015-16 as void ab initio. The Tribunal upheld this contention based on the limitation analysis and Supreme Court precedents, quashing the notice and reassessment order.

Conclusions and Significant Holdings

The Tribunal held that:

• The reassessment notices issued under section 148 for AY 2014-15 and 2015-16 are barred by limitation and invalid, as they were issued beyond the surviving time limit calculated in accordance with the Supreme Court's rulings and TOLA extensions.
• The procedural safeguards under section 148A are mandatory and must be strictly complied with; the Assessing Officer's acceptance of an adjournment beyond the two-week period prescribed by the Supreme Court judgments does not extend the limitation period.
• The legal fiction created by the Supreme Court in Ashish Agarwal and further explained in Rajeev Bansal must be applied in a manner that balances the interests of the Revenue and the assessee, strictly adhering to the exclusion period and surviving time concepts.
• The reassessment proceedings and orders consequent to the invalid notices are themselves bad in law and liable to be quashed.
• The grounds raised by the Revenue on merits of the case, including disallowance of expenses and additions for improper gratification, were rendered academic due to the invalidity of reassessment proceedings.

Verbatim from the judgment encapsulates the core legal reasoning: "The reassessment notices issued under section 148 of the new regime, which are in pursuance of the deemed notices, ought to be issued within the time limit surviving under the Income-tax Act read with TOLA. A reassessment notice issued beyond the surviving time limit will be time barred." Further, "The purpose of this Court in deeming the reassessment notices issued under the old regime as show cause notices under the new regime was two-fold: (i) to strike a balance between the rights of the assesses and the Revenue... and (ii) to avoid any further appeals before this Court by the Revenue on the same issue."

Accordingly, the Tribunal dismissed the Revenue's appeals for AY 2014-15 and 2015-16 and allowed the assessee's cross objection for AY 2015-16, quashing the reassessment notices and proceedings as barred by limitation and invalid under the amended statutory framework and judicial precedents.

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