AO's Section 148 notice issued beyond three-year limitation period under Section 149(1)(a) despite exclusion periods

The Delhi HC held that the AO's notice under Section 148 was issued beyond the statutory limitation period. The court found that while the AO initially decided against reopening assessment, this decision was later revised based on specified authority approval. Since the case didn't fall under Section 149(1)(b), the three-year limitation under Section 149(1)(a) applied, expiring on 31.03.2023. Although the AO issued a Section 148A(b) notice on the last date, considering the mandatory exclusion periods under the Fifth and Sixth provisos to Section 149(1), the final notice was time-barred. The petition was allowed following the precedent in Raminder Singh case.

---

---

ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

(i) Whether the notice issued under Section 148 of the Income Tax Act, 1961 (the Act) for the relevant Assessment Year (AY) 2019-20 was validly issued within the prescribed period of limitation;

(ii) Whether the Assessing Officer (AO) had the authority to review and alter an order passed under Section 148A(d) of the Act, particularly when such an order had concluded that issuance of notice under Section 148 was not warranted;

(iii) Whether the procedure adopted by the AO in passing two contradictory orders under Section 148A(d) of the Act on the same date and subsequently issuing a notice under Section 148 was in conformity with the statutory framework and principles of natural justice;

(iv) The interpretation and application of the provisions of Section 148A of the Act, including the role and powers of the AO and the specified authority in the issuance of notices under Section 148;

(v) The effect of the provisos and extensions under Section 149 of the Act on the limitation period for issuance of notices under Section 148;

(vi) The validity and effect of corrigendum and subsequent orders issued by the AO to nullify earlier orders and issue fresh notices.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of the Notice Issued Under Section 148 vis-`a-vis Limitation Period

The legal framework governing the limitation period for issuance of notices under Section 148 of the Act is contained in Section 149(1). The AO is generally barred from issuing such notice beyond three years from the end of the relevant assessment year, except in cases falling under specified clauses. The present case did not fall within any exception under Section 149(1)(b).

The AO issued a notice under Section 148A(b) on 31.03.2023, which was the last permissible date for issuance of notice under Section 148 for AY 2019-20. The petitioner was given time to respond, and the period allowed to the assessee to reply under Section 148A(b) is excluded from the limitation period under the Fifth proviso to Section 149(1). Moreover, if the AO's time to pass an order under Section 148A(d) was less than seven days, it had to be extended to seven days as per the Sixth proviso.

Applying these provisions, the Court found that the AO's time to pass the order under Section 148A(d) extended up to 27.04.2023. However, the impugned notice under Section 148 was issued on 28.04.2023, beyond the extended limitation period. The Court referred to a binding precedent from this jurisdiction which held similarly that the AO cannot issue notices beyond the extended limitation period calculated in this manner.

Thus, the Court concluded that the impugned notice was issued beyond the period of limitation and was therefore invalid.

2. Authority of the AO to Review and Alter an Order Under Section 148A(d)

Section 148A(d) requires the AO to decide, based on material on record including the assessee's reply, whether it is a fit case to issue a notice under Section 148, and to pass an order accordingly with prior approval of the specified authority within prescribed timelines.

In this case, the AO initially passed an order on 27.04.2023 under Section 148A(d) accepting the assessee's explanation and dropping the proceedings. This order was passed with prior approval of the Principal Commissioner of Income Tax (PCIT) as required under Section 151.

Subsequently, the AO purported to review and reverse this decision by passing another order on the same date (27.04.2023) under Section 148A(b), holding that the case was fit for issuance of notice under Section 148. This second order was also supported by the approval of the specified authority and was followed by issuance of the impugned notice and a corrigendum nullifying the earlier order.

The Court noted that the statutory scheme does not confer power on the AO to review or revise an order passed under Section 148A(d). The AO's role under Section 148A(d) is that of a deciding authority whose decision is final for the purpose of issuing a notice under Section 148.

The Court found that the AO's attempt to revisit and reverse the earlier order was contrary to the statutory mandate and was not a mere clerical or typographical correction but a substantive change in decision based on different reasoning. This procedure was therefore held to be contrary to law.

3. Procedural Irregularity and Natural Justice in Issuance of Contradictory Orders

The Court observed that the AO had passed two contradictory orders on the same date, one dropping the proceedings and the other holding the case fit for reopening. The earlier order was well reasoned and accepted the assessee's contentions, while the latter order rejected the same contentions on different grounds.

The Court held that such contradictory orders caused confusion and violated the principles of natural justice. The AO's procedure of passing an order and then nullifying it by a corrigendum and issuing a fresh order was not in accordance with the statutory scheme or fair procedure.

The Court emphasized that the AO's decision under Section 148A(d) must be final and cannot be arbitrarily altered after the fact, especially when the assessee has acted upon the initial order.

4. Interpretation and Application of Section 148A of the Act

The Court examined the provisions of Section 148A, which were introduced to provide a structured procedure before issuing a notice under Section 148. The AO is required to conduct an enquiry (with prior approval), provide the assessee an opportunity to show cause, consider the reply, and then decide whether it is a fit case to issue a notice, passing an order accordingly with prior approval.

The Court underscored that the AO's decision under Section 148A(d) is a quasi-judicial determination that cannot be unilaterally reviewed or altered without following due process. The specified authority's approval is necessary but does not empower the AO to revisit and change the order once passed.

The Court found that the AO's conduct in this case was inconsistent with the statutory scheme, as the AO first decided against issuing a notice and then reversed the decision without fresh enquiry or opportunity to the assessee.

5. Effect of Provisos and Extensions Under Section 149 on Limitation

The Court analyzed the interplay between Section 149(1) and Section 148A, particularly the exclusion of time allowed to the assessee to respond to the show cause notice under Section 148A(b) from the limitation period, and the mandatory extension of time to seven days for passing the order under Section 148A(d) if the time available was less than seven days.

Applying these provisions, the Court held that the AO's last date to pass the order and issue the notice was 27.04.2023. The impugned notice issued on 28.04.2023 was therefore beyond the limitation period, rendering it invalid.

6. Validity and Effect of Corrigendum and Subsequent Orders

The AO issued a corrigendum dated 28.04.2023 nullifying the earlier order dropping the proceedings and followed it with a fresh order under Section 148A(d) and notice under Section 148. The Court found this procedure irregular and without statutory basis, as the initial order under Section 148A(d) was final and could not be nullified retrospectively.

The Court held that such corrigendum and fresh orders could not cure the fundamental illegality of issuing the notice beyond limitation and altering the AO's decision without statutory authority.

SIGNIFICANT HOLDINGS

"A plain reading of Section 148A(d) of the Act indicates that the AO has to decide on the basis of material on record including the reply of an Assessee whether or not it is a fit case to issue a notice under Section 148 of the Act by passing an order with the prior approval of the specified authority. The AO is a deciding authority."

"The AO's attempt to review its earlier order passed under Section 148A(d) and to substitute the same with a contrary order is not permissible under the statutory scheme. The power to review or alter such an order is not conferred by the statute."

"The impugned notice issued on 28.04.2023 was beyond the extended period of limitation prescribed under Section 149(1) of the Act and is therefore invalid."

"The procedure adopted by the AO in passing two contradictory orders on the same date and subsequently issuing a corrigendum nullifying the earlier order is contrary to the principles of natural justice and the statutory scheme under the Act."

Final determinations:

(i) The notice issued under Section 148 of the Act for AY 2019-20 was invalid as it was issued beyond the period of limitation;

(ii) The AO did not have the power to review or alter the order passed under Section 148A(d) which dropped the proceedings;

(iii) The procedure adopted by the AO in issuing contradictory orders and corrigendum was irregular and contrary to law;

(iv) The impugned notice and order were set aside accordingly.

---