The Supreme Court decided the controversial issue of validity of notices issued u/s 148 between April 01, 2021 to June 30, 2021 which was followed by CBDT Instruction No. 1/2022 dated May 11, 2022 providing its interpretation of the judgment and the uniform procedures to be followed by the Revenue. Mr. Dharan Gandhi (Advocate) analyses the Supreme Court decision together with the CBDT Instruction and highlights the issues arising out of such Instruction. The author contemplates the term, "to travel back in time" used in the CBDT Instruction in the context of application of amended Section 149 and apprise that the theory of travel back in time was specifically negated by the High Courts. The author highlights the Supreme Court  direction that the notices u/s 148 be deemed to be issued u/s 148A(b) of the Act, however all the defences of the assessees have been kept open and opines that, "Court has only dispensed with the prior inquiries u/s 148A(a) of the Act, but has not dealt with the approval of specified authority u/s 148A(b) of the Act." The author lastly emphasises that the CBDT Instruction only represents the views of the Department on the Supreme Court Judgment and the  same is not binding on anyone except the Revenue. 

Buckle up for Round 2!!

Hopes of thousands of assessees, apparently, end with the invocation of a rarely used Article viz., Article 142 of the Constitution of India. But is this the real story?

The Supreme Court vide order dated 04.05.2022, has decided the hottest tax controversy of 2021 viz., validity of notices issued u/s 148 of the Income tax Act, 1961 (‘Act’) between 01.04.2021 to 30.06.2021. The main crux of the matter or the interpretation issue of “repeal clause” and “savings clause” and effect of delegated piece of legislation was not even touched upon by the Apex Court. The views of all the High Courts were accepted by the Apex Court in para 7 of the judgment, but at the end a unique way was adopted by the Apex Court to save all the notices issued under the old law by deeming the same to be issued under the new law, by using special powers under Article 142 of the Constitution of India.

Several questions have arisen as a result of the said judgment which are already deliberated upon in the Article titled “Vexed Issues Arising from Supreme Court Judgment on Reassessment” published on Taxsutra.

In the meanwhile, the CBDT has come out with Instruction No. 1/2022 dated 11.05.2022, providing its interpretation of the judgment and the uniform procedures to be followed, going forward. The said instruction, has raised some further questions. In this article, an attempt is made to deal with some issues arising out of such Instruction.

Judgment, whether applicable to cases, where the notices have not been challenged in a writ jurisdiction?

One of the prevailing views is that, directions and findings of the Apex Court is confined to only such cases where writ remedy has been exercised. Either such writ petitions have been disposed by setting aside such notice, or such writ petitions are pending as on the date of the judgment. There are many places in the judgment, wherefrom such inference can be drawn. Further, it is to be borne in mind, that cases before the Apex Court are those cases, where the notices were directly challenged. It is in such type of case, the Apex Court, invoking Article 142, has laid down the procedure to be followed from such stage. Apart therefrom, as per Article 142, in order to make such judgment enforceable across India, either an Ordinance is required to be promulgated or an Act has to be passed by the Parliament.

However, in para 5.1 of the Instruction, the CBDT has taken a view that judgment applies to all cases, where notices have been issued between 01.04.2021 and 30.06.2021 irrespective of the fact whether such notice has been challenged or not and the procedures laid down by the Apex Court have to be followed.

In cases where the assessment proceedings have been completed with passing of assessment order, such procedures cannot be followed. As already stated earlier, the judgment of the Apex Court is in context of cases where the notices were directly challenged. The instruction issued is silent in this regard. There is no provision, in the Act, to recall the order already passed. Therefore, in such case, in my view, the judgment of the Apex Court cannot be applied and since the proceedings have already been completed under the old law, therefore, one can contend in an appellate proceeding or a writ proceeding that the reassessment proceeding and notices have to be quashed on the ground that old law has been followed.

Secondly, there would be certain practical difficulties in implementing the procedures laid down where the cases are at advanced stages like:

i. where show cause notice has been issued;

ii. where order disposing objections have been passed by treating notices under the old law;

iii. where reasons have been furnished and objections have been filed.

Again, the Instruction is silent in this regard. It appears, that all the notices and submissions and return of income filed earlier, would be ignored and a fresh proceeding will be commenced by providing material and documents and requiring the assessee to show cause as to why notice u/s 148 should not be issued.

In respect of AY 2013-14, 2014-15 and 2015-16, as discussed later, the notices will become time barred.

Section 149 of the Act – AY 2013-14 till 2017-18

In para 6.1. and 6.2 of the Instruction, a very interesting stand has been taken by the Board. In para 6.1, it is stated that “Decision of the Hon’ble Supreme Court read with the time extension provided by TOLA will allow the extended reassessment notices to travel back in time to their original date when such notices were to be issued and the new section 149 of the Act is to be applied at that point.” (emphasis supplied). Based on such understanding, in para 6.2, the following is stated:

• Notice u/s 148 of the Act for AY 2013-14 to AY 2015-16 can be issued if the case falls u/s 149(1)(b) of the Act, with the approval of authority as specified u/s 151(ii) of the Act.
• AY 2016-17 and 2017-18 would fall within the provisions of section 149(1)(a) of the Act and approval of specified authority has to be taken u/s 151(i) of the Act, as the assessment has been reopened within three years from the end of the assessment year.

The above interpretation appears to be incorrect. Firstly, the theory of travel back in time was specifically negated by the High Courts. Of course, there the Department had used different nomenclature i.e., “rolling of clock back”. Secondly, High Courts have also held that TOLA has no application, once the provisions have been substituted with effect from 01.04.2021, which fact is even accepted in para 2 of the said Instruction. In fact, the High Courts have held that TOLA does not apply to AY 2015-16 and subsequent years, as those years were not getting time barred. The said findings of the High Court have neither been modified nor reversed by the Apex Court. As a result, the above understanding of the Department does not sync with the judicial findings.

Moreover, if the notices were to travel back in time so as to take it before 31.03.2021, then the new section 149 cannot apply as the same is not retrospective in nature. Apex Court and the High Courts have clearly held that the amended provisions are applicable from 01.04.2021. Also, the clarification states that the notices would travel back “to their original date when such notices were to be issued”. But what is the original date? As such, an assessment can be reopened upto 6 years under the old law. Therefore, there is no such original date. In most of the cases, information based on which assessment has been reopened is only received in 2021 or 2022.

AY 2013-14 and 2014-15

In the other article, the authors have discussed, that the assessment for AY 2013-14 and AY 2014-15 cannot be reopened under the new law. One, because of first proviso to section 149(1) of the Act, which states that if a particular year cannot be reopened under the old law, the same cannot be reopened under the new law. Since, last day to reopen assessment for AY 2013-14 and AY 2015-16 is 31.03.2021, therefore, it cannot be reopened under the new law. Secondly, a notice u/s 148 will be issued by the Department after 03.05.2022 i.e., after disposing the objections to be raised by the assessees in pursuance of the judgment of the Apex Court. As on today, certainly, no notice u/s 148 can be issued in respect of AY 2013-14 and AY 2014-15 by virtue of first proviso to section 149(1) of the Act.

AY 2015-16

In so far as AY 2015-16 is concerned, though notice could have been issued after 01.04.2021, however the last day to issue notice was 31.03.2022 subject to the provisions of section 149 of the Act. As already mentioned earlier, a notice u/s 148 will be issued by the Department after 03.05.2022 i.e., after disposing the objections to be raised by the assessees in pursuance of the judgment of the Apex Court. As on today, no notice u/s 148 can be issued in respect of AY 2015-16 by virtue of first proviso to section 149(1) of the Act.

However, the Board, in Instruction No. 1/2022 has, in para 6.2, stated that notice u/s 148 of the Act for AY 2013-14 to 2015-16 can be issued if the case falls in section 149(1)(b) of the Act. There is no mention about the first proviso to section 149 of the Act. Thus, the interpretation of the Board springs from the travel back theory, which as discussed earlier, is not appropriate.

In case, where writ petitions have been filed challenging the notice issued u/s 148 of the Act, the Department may probably rely on the third proviso to section 149(1) of the Act, which excludes the time period given to file reply, which cannot extend beyond 30 days, and the period of stay granted by the Courts, if any, while computing the limitation period. Since, the High Courts have granted stay to the notices issued u/s 148 of the Act, therefore, such period has to be excluded. The probable reply to the same is as under:

• Stay granted, if any, by the High Court was in respect of notice u/s 148 of the Act and not notice u/s 148A(b) of the Act. The said notice got converted into a notice u/s 148A(b) of the Act, due to invocation of special powers of the Apex Court. Thus, the same cannot therefore, be relied upon to say that notice u/s 148A(b) of the Act was stayed.
• Moreover, there would be various categories of cases like:
  • Cases where assessees would have preferred a writ petition challenging the notice u/s 148 of the Act and stay granted by the High Court immediately;
  • Cases where assessees would have preferred a writ petition challenging the notice u/s 148 of the Act, after expiry of certain time or after filing of objections or after disposal of objections. Such writ would have been filed 2-3 months after the receipt of notice u/s 148 of the Act, meaning thereby the stay would not have been immediate; or
  • Cases where the High Court would have disposed the petitions before the judgement of the Apex Court and therefore, the stay would have vacated.

In all the above cases, subject to the peculiar facts of each case, it appears, that notice u/s 148 cannot be issued for the AY 2013-14 to 2015-16 as the last date to issue such notice would have expired.

If an assessee, has not filed any writ petition challenging the notice, and there is no stay in his case, in such a scenario, reassessment proceedings for AY 2013-14 till 2015-16 have certainly become time barred. It is important to note that the Apex Court have specifically kept the contentions of the assessee u/s 149 open and thus, the Apex Court has neither impliedly nor expressly, granted any waiver on the aspect of limitation.

AY 2016-17 and 2017-18

A notice for AY 2016-17 and 2017-18 would be a notice issued beyond three years from the end of the relevant assessment year. Three years from the end of AY 2016-17 expired on 31.03.2020 and from the end of AY 2017-18 expired on 31.03.2021.

However, in respect of AY 2016-17 and 2017-18, the Board has clarified that such notices are issued within three years from the end of the relevant assessment year and therefore, section 149(1)(a) will apply as well as approval would be required of Principal Commissioner or Principal Director or Commissioner or Director u/s 151(i) of the Act. This again by relying on travel back theory. As already explained earlier, such stand is not in accordance with law.

In fact, on 04.03.2021, an Instruction bearing F. No.225/40/2021/ITA-II was issued by CBDT, laying down guidelines for selection of cases for issue of notice u/s 148 of the Act. In para 1 of the said Instruction, it was clarified that the following categories of cases be considered as ‘potential cases’ for taking action u/s 148 of the Act by 31.03.2021 for the A.Y 2013-14 to A.Y 2017-18 by the Jurisdictional Assessing Officer. The logic behind selecting these five years is that under the new law, these would be then governed by section 149(1)(b) of the Act, i.e., cases where three years from the end of the years have elapsed and then conditions would be much more stringent. Now, the Department it trying to take a contrary stand that AY 2016-17 and AY 2017-18 is a case, where three years from the end of the AY has not expired.

Consequence of treating AY 2016-17 and AY 2017-18 as falling within three years from the end of the relevant assessment year is that jurisdictional condition of section 149(1)(b) would not be fulfilled as well as the approval would be taken of an inferior authority u/s 151(i) of the Act and not 151(ii) of the Act. It is very well settled that onus to prove that all the jurisdictional conditions have been fulfilled is on the AO. Further, an approval of an authority different from one authorised is fatal.

The above, it appears, is only a ploy to save reassessment proceedings of AY 2013-14 till AY 2015-16 from becoming time barred and to save reassessment proceedings of AY 2016-17 and 2017-18 from being barred u/s 149(1)(b) of the Act.

Approval prior to issue of notice u/s 148A(b) of the Act

The Apex Court has directed that the notices u/s 148 of the Act be deemed to be issued u/s 148A(b) of the Act. At the same time, all the defences of the assessees have been kept open. This, leaves us with the question whether the Apex Court has cured the defect of deemed notice u/s 148A(b) of the Act being issued with the prior approval of specified authority. The answer, in my humble understanding, is no. Court has only dispensed with the prior inquiries u/s 148A(a) of the Act, but has not dealt with the approval of specified authority u/s 148A(b) of the Act.

The Board in para 8.1. of the Instruction, has stated that since the Court has deemed such notice to be issued u/s 148A(b) of the Act, therefore it is deemed that all the prior requirements have been complied with. It is submitted that, the Apex Court has merely dispensed with the requirement of prior inquiry and nothing more. Therefore, this statement of the Board appears to be incorrect.

Procedures laid down by the Apex Court to be followed in all cases irrespective of the status of its writ petition

AO has to provide the assessee with the information and material relied upon within 30 days from 04.05.2022 i.e., the date of the judgment. Such judgment is applicable to all cases, where writ petition has been filed, whether disposed of or not. This, would also be irrespective of any stay granted by any High Court. Thus, in all cases, AO has to issue material and information within 30 days from 04.05.2022 i.e. upto 03.06.2022. The same has been accepted in the Instruction. If such time lines are not followed, in such case, it can be argued that the jurisdictional conditions have not been adhered to and therefore, the proceedings are bad in law. The AO cannot give any excuse in this regard, as the said opportunity of making the notices alive is a onetime opportunity, provided to the AOs by using special power under Article 142 of the Constitution of India.

Amendment vide Finance Act, 2022 whether applicable?

The next issue for consideration is whether, the amended provisions as amended by Finance Act, 2022 would apply to the notices issued u/s 148 of the Act as a consequence of the judgment of the Apex Court. This is especially applicable in context of section 149 of the Act.  Scope of reopening has widened with amendments in section 149(1)(b) and 149(1A) of the Act.

Notice u/s 148, in consequence of the order of the Apex Court, shall be issued after 01.04.2022. Therefore, the Department can argue, that since the notices are issued after such date, such notices can be issued under the new law which is wider in nature. This appears to be incongruent. Firstly, leeway given to the Department is by way of special powers to not make them remediless. They cannot get benefit of their own wrong, by getting a wider scope. Therefore, it is submitted, that notice, if any to be issued u/s 148 of the Act has to be issued under the law as it existed between 01.04.2021 till 31.03.2022. This stand has been fairly accepted by the Board in the Instruction No. 1/2022.

Where income escaping assessment is less than Rs. 50 lakhs

The Apex Court has left the contentions u/s 149 open. The old notice has been deemed to be issued under new law. Section 149(1)(b) of the Act states that where the assessment is reopened after 3 years from the end of the AY, the income has escaping assessment has to be more than Rs. 50 lakhs. Thus, for all the years starting from AY 2013-14 till AY 2017-18, if the income alleged to have escaped assessment is less than Rs. 50 lakhs, then the reassessment proceedings have to be dropped. The said contention has been accepted by the Board in para 7.1. of the Instruction. However, as the Board is of the view, that AY 2016-17 and AY 2017-18 are reopened within three years from the end of the year, therefore, such cases are not covered by section 149(1)(b) of the Act.

Time limits

Assessee has been given two weeks to reply by the Apex Court. Under the Act, assessee can be provided time from 7 days to 30 days. But the Apex Court has capped such time period to two weeks. However, in the Instruction No. 1/2022, the Board has clarified that such extended time may be allowed, if the assessee so seeks.

Lastly, the time limit to complete the assessment would be governed by section 153(2) of the Act. Had the notice u/s 148 been issued in the FY 2021-22, then the last day to complete the assessment would have been 9 months from the end of the year in which notice is served i.e., 31.12.2022. However, in pursuance of the judgment of the Apex Court, since the notice u/s 148 would be served in FY 2022-23, therefore, the fresh time limit would be 31.12.2023. There is no clarity in this regard.

The above instruction only represents the views of the Department about the judgment of the Apex Court. The same is not binding on anyone except the Officers. There are umpteen number of precedents on this issue.

The only thing which is certain, is uncertainty. The above discussion shows, that even Round 2 of the litigation would be as interesting as the Round 1. Hopefully, this time around, there would not be any need to invoke the special powers under Article 142 of the Constitution of India.