Assessment under Section 153A and 143(3) barred by limitation due to DTAA protocol timing and exclusions

The ITAT Delhi held that the assessment framed under Section 153A read with Section 143(3) for AY 2011-12 was barred by limitation. The Court relied on the Delhi HC ruling in Sneh Lata Sawhney, clarifying that the exclusion under Explanation (ix) to Section 153B applies only when the reference for exchange of information is made under Sections 90/90A in accordance with the India-Hongkong DTAA. Since the DTAA came into force on 30.11.2018, requests for information relating to periods before that date are invalid under Article 26 of the Protocol. Consequently, the period of limitation for assessment could not be extended based on the reference made on 04.12.2018. The appeal was allowed, and the assessment order was set aside as barred by limitation.

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ISSUES:

Whether the assessment orders framed under section 153A read with section 144 of the Income Tax Act, 1961 ("the Act") for Assessment Years 2011-12 to 2017-18 are barred by limitation under section 153B of the Act due to reliance on a reference made for exchange of information under the India-Hong Kong DTAA after the limitation period expired.Whether the extension of limitation period under Explanation (ix) to section 153B of the Act is permissible when the reference for exchange of information is not made in terms of the Agreement referred to in section 90 or 90A of the Act.Whether the reference made to the competent authority of Hong Kong for information relating to periods prior to the effective date of the India-Hong Kong DTAA (30.11.2018) is valid and can justify extension of limitation.Whether other grounds challenging the validity of the assessment orders including absence of incriminating material, mechanical approval under section 153D, and jurisdictional issues require adjudication once the limitation issue is decided.

RULINGS / HOLDINGS:

The assessment orders framed under section 153A read with section 144 for Assessment Years 2011-12 to 2017-18 are barred by limitation as the assessments were completed beyond the prescribed period of 21 months under section 153B of the Act without valid extension.Extension of limitation under Explanation (ix) to section 153B applies only if the reference for exchange of information is made "under the Agreement referred to in Section 90 or Section 90A" of the Act; since the reference to Hong Kong was not in conformity with the DTAA provisions applicable for the relevant years, the time exclusion is not available.The reference made to the competent authority of Hong Kong for information relating to assessment years prior to the DTAA's effective date (30.11.2018) is outside the permissible scope of Article 26 of the DTAA and its Protocol, and thus invalid for extending limitation.Other grounds of appeal challenging the assessment orders need not be adjudicated once the limitation issue is decided in favour of the assessee.

RATIONALE:

The Court applied the statutory framework of sections 153A, 153B, 153D, and Explanation (ix) to section 153B of the Income Tax Act, 1961, which prescribe the limitation period and conditions for extension in search and seizure cases.The Court relied on the interpretation of Article 26 of the India-Hong Kong DTAA and its Protocol, which restricts exchange of information to fiscal years or taxable events occurring after the DTAA's effective date (30.11.2018), rendering requests for prior periods invalid.Precedent from the jurisdictional High Court and Supreme Court was applied, particularly the principle that "the exclusion as provided under Explanation (ix) to Section 153B ... is applicable only if a reference for exchange of information has been made as per Section 90/90A," and that substitution of treaty provisions operates as novation, extinguishing prior provisions without revival.The Court referred to authoritative decisions clarifying that substitution of treaty provisions or legislative rules results in the old provisions ceasing to exist, and invalidity of the new provision does not revive the old one.The Court noted that the limitation period must be strictly construed as per Supreme Court rulings, and that since the reference to Hong Kong was not valid under the DTAA for the relevant years, the extension of limitation was impermissible.In light of the limitation bar, the Court held that other grounds challenging the assessment orders were rendered unnecessary to decide.

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