Validity of reopening notice under Section 148 upheld; prior approval under Section 151 confirmed, remand for fresh adjudication

The ITAT Mumbai upheld the validity of the reopening notice issued under section 148, confirming it was within the three-year limitation period after excluding the time allowed for the assessee's response under section 148A(d). The tribunal found prior approval under section 151 was correctly obtained before issuing the notice. The recent amendment by the Finance Act, 2023, was not considered necessary to decide at this stage. On merits, as no substantive arguments were presented and the assessment was protective pending related proceedings against the assessee's spouse, the matter was remanded to the AO for fresh adjudication after providing the assessee a reasonable opportunity. The appeal was partly allowed for statistical purposes.

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1. ISSUES PRESENTED and CONSIDERED

1. Whether the issuance of notice under section 148 of the Income Tax Act, 1961 (the Act) dated 23-04-2022 is valid, particularly regarding the legality and validity of the prior approval/sanction under section 151 of the Act.

2. Interpretation and applicability of the provisions of sections 147, 148, 148A, 149, and 151 of the Act as amended by the Finance Act, 2021, and subsequent amendments, especially concerning the time limits for issuance of reassessment notices and the identity of the specified authority competent to grant approval.

3. Whether the period allowed to the assessee to respond to the show cause notice under section 148A(b) is to be excluded in computing the limitation period under section 149.

4. The retrospective or prospective applicability of the proviso to section 151 inserted by the Finance Act, 2023.

5. The effect of non-compliance with the mandatory prior approval requirement under section 151 on the jurisdictional validity of reassessment proceedings.

6. Treatment of the assessment on a protective basis in the context of ongoing assessment proceedings in the hands of a related person (co-owner of property).

2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Issuance of Notice under Section 148 and Prior Approval under Section 151

- Legal Framework and Precedents:

Section 148 mandates issuance of notice before reassessment, subject to prior approval from the specified authority as per section 151. Section 151 defines specified authority depending on whether the notice is issued within or beyond three years from the end of the relevant assessment year. The Supreme Court has emphasized strict adherence to section 151 as it contains important safeguards against harassment by mechanical reopening of assessments.

- Court's Interpretation and Reasoning:

The Court analyzed the timeline: the relevant assessment year is 2018-19; the notice under section 148 and order under section 148A(d) were issued on 23-04-2022. The three-year period from the end of the relevant assessment year expired on 31-03-2022. However, the Court held that the period allowed to the assessee to respond to the show cause notice under section 148A(b) (from 23-03-2022 to 18-04-2022) must be excluded for limitation computation as per the third proviso to section 149. Excluding this period extends the limitation to 26-04-2022, making the issuance of notice on 23-04-2022 within the three-year period.

Accordingly, the sanctioning authority competent to grant approval under section 151(i) is the Principal Commissioner or Commissioner, not the higher authorities under section 151(ii) applicable beyond three years. The approval was obtained from the Commissioner of Income Tax (IT)-4, Mumbai, a competent authority under section 151(i).

- Key Evidence and Findings:

Show cause notice under section 148A(b) dated 23-03-2022, with response period till 18-04-2022; order under section 148A(d) and notice under section 148 issued on 23-04-2022; prior approval dated 21-04-2022 from Commissioner of Income Tax (IT)-4, Mumbai.

- Application of Law to Facts:

Applying the exclusion of response period under section 149 proviso, the notice was issued within three years; thus, the approval from Commissioner (section 151(i) authority) was valid.

- Treatment of Competing Arguments:

The assessee argued that approval from Commissioner was invalid as the notice was beyond three years, requiring approval from Principal Chief Commissioner under section 151(ii). The Revenue contended that the exclusion period applies, making the notice within three years and approval valid. The Court found the Revenue's interpretation consistent with statutory provisions and rejected the assessee's contention.

- Conclusion:

The issuance of notice under section 148 dated 23-04-2022 and prior approval under section 151(i) are valid and lawful. The reassessment proceedings are not vitiated on this ground.

Issue 2: Interpretation of Section 149 Time Limits and Exclusion of Period Allowed to Respond under Section 148A(b)

- Legal Framework and Precedents:

Section 149(1)(a) bars issuance of notice under section 148 after three years from the end of the relevant assessment year unless exceptions apply. The third proviso to section 149 excludes the period allowed to the assessee to respond to the show cause notice under section 148A(b) from the limitation computation. This exclusion is mandatory and not discretionary.

- Court's Interpretation and Reasoning:

The Court held that the period from 23-03-2022 to 18-04-2022, allowed to the assessee to respond to the show cause notice, must be excluded in computing the three-year limitation period. This exclusion extends the limitation period to 26-04-2022, thereby validating the issuance of notice on 23-04-2022 within time.

- Key Evidence and Findings:

Show cause notice dated 23-03-2022 with response deadline 18-04-2022; no response was filed by the assessee.

- Application of Law to Facts:

Exclusion of the response period is mandatory irrespective of the assessee's non-response. The notice issuance date falls within the extended limitation period.

- Treatment of Competing Arguments:

The assessee argued that the notice was beyond three years and that the exclusion should not apply. The Court rejected this, emphasizing the statutory mandate to exclude the response period regardless of the assessee's conduct.

- Conclusion:

The time allowed to the assessee to respond to the show cause notice under section 148A(b) must be excluded in computing limitation under section 149, validating the notice issuance within time.

Issue 3: Retrospective vs. Prospective Application of Proviso to Section 151 Inserted by Finance Act, 2023

- Legal Framework and Precedents:

The proviso to section 151 inserted by Finance Act, 2023, clarifies the computation of the three-year period for determining the specified authority, taking into account periods excluded or extended under section 149. The proviso is stated to take effect from 01-04-2023.

Supreme Court precedents recognize that some amendments, even if stated to be prospective, may be interpreted as clarificatory and retrospective if they clarify existing law rather than change it.

- Court's Interpretation and Reasoning:

The Court observed that the issue of retrospective application of the proviso to section 151 is not necessary to decide in this case because the notice was issued within three years even without relying on the proviso. The Court left open the question of retrospective application for future consideration.

- Key Evidence and Findings:

Explanatory Memorandum to Finance Bill, 2023; Circular No. 1/2024; relevant Supreme Court decisions on retrospective application of tax amendments.

- Treatment of Competing Arguments:

The Revenue argued that the proviso should be applied retrospectively as clarificatory; the assessee contended it is prospective only and cannot validate prior invalid approvals. The Court refrained from deciding this issue.

- Conclusion:

The Court did not decide on retrospective applicability of the proviso to section 151 (Finance Act, 2023) and left the issue open for future adjudication.

Issue 4: Jurisdictional Nature of Prior Approval under Section 151 and Effect of Non-Compliance

- Legal Framework and Precedents:

Section 151 imposes a mandatory jurisdictional condition requiring prior approval by specified authority before issuance of notice under section 148 or passing order under section 148A(d). Failure to obtain valid approval vitiates the reassessment proceedings.

- Court's Interpretation and Reasoning:

The Court reiterated that prior approval is a sine qua non and jurisdictional requirement to protect assessee from harassment. However, in the instant case, the approval was validly obtained from the competent authority under section 151(i), so the reassessment proceedings are not invalidated on this ground.

- Treatment of Competing Arguments:

The assessee argued invalid approval as it was not from the higher authority required beyond three years. The Court rejected this based on the limitation period analysis.

- Conclusion:

Valid prior approval under section 151 is mandatory; non-compliance invalidates proceedings. In this case, approval was valid and proceedings are not vitiated.

Issue 5: Treatment of Protective Assessment in Context of Related Party Assessment Proceedings

- Legal Framework and Precedents:

Protective assessments are permissible to safeguard revenue interests, especially where substantive assessment is pending or ongoing in related persons' cases, to prevent double taxation.

- Court's Interpretation and Reasoning:

The DRP directed the AO to maintain the assessment as protective in the assessee's case while substantive assessment proceeds in the wife's case, to avoid double taxation and preserve options depending on outcome in the wife's assessment.

- Application of Law to Facts:

The Court found no objection by parties on merits except on procedural grounds and remanded the matter to AO for fresh decision after considering the status of proceedings in the wife's case and providing opportunity to assessee.

- Conclusion:

Protective assessment is appropriate in the facts and circumstances; matter remanded for fresh adjudication considering related party proceedings.

Issue 6: Applicability of Jurisdictional High Court and Tribunal Decisions on Section 151 Approval

- Legal Framework and Precedents:

Several decisions of the jurisdictional High Court and Tribunal have quashed reassessment notices for AY 2018-19 on ground of invalid sanction under section 151 when issued beyond three years without approval from Principal Chief Commissioner.

- Court's Interpretation and Reasoning:

The Court distinguished these decisions on facts, noting those cases did not consider exclusion of period allowed to respond under section 148A(b) in limitation computation, which is central to the present case. Hence, those decisions do not apply here where notice was within three years after exclusion.

- Conclusion:

The Court declined to follow those decisions as binding precedent in the present facts and circumstances.

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