In a recent decision of Union of India vs. Ashish Agarwal[1], the Supreme Court (“SC”) effectively overturned several High Court decisions which had quashed reassessment notices issued under Section 148 (as it existed prior to the amendments introduced through the Finance Act, 2021). The decision has a significant impact for pending reassessments, notices for which have been issued after April 1, 2021. This blog shall briefly explain the background to the appeal as well as the decision of the SC, and analyse the reasoning and impact of the decision.
Background
Through the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (“TOPA”), the limitation for issuance of notices and other compliance requirements under the Income Tax Act, 1961 (“IT Act”) were extended due to the protracted effects of the COVID-19 pandemic. Section 3 of the TOPA extended these limitations to March 31, 2021 while allowing the Central Government to extend these timelines further by notification.
In March 28, 2021, the Finance Act, 2021 (“FA 21”) was enacted and led to the amendment to the reassessment procedure under the IT Act. Crucially, FA 21 introduced certain procedural safeguards in the newly-introduced Section 148A, under which the Assessment Officer (“AO”) is required to comply with prior to issuing a notice for reassessment under Section 148. These amendments came into force on April 1, 2021.
Meanwhile, the Central Board of Direct Taxes (“CBDT”) issued several notifications under the TOPA extending the limitation for issuing notices for reassessment under the IT Act. Two of these notifications[2] were issued after the enactment of the Finance Act, 2021, extending the limitation for issuing reassessment notices until April 30, 2021 and June 30, 2021, respectively. Importantly, by way of an explanatory clause in these notifications, the CBDT clarified that the reassessment notices issued after April 1, 2021 (until the date of such extension) would be governed by the reassessment procedure under the pre-amendment provisions of the IT Act (and they shall not be subject to the amendments introduced through FA 21).
Following the CBDT clarification, AOs across the country issued several reassessment notices as per the old reassessment procedure even after April 1, 2021 (not complying with the procedural safeguards introduced in FA 21). These notices were challenged in several writ petitions filed before High Courts across the country.
The High Courts of Allahabad[3], Madras[4], Calcutta[5], Delhi[6], Rajasthan[7] and Bombay[8], over the course of several decisions, held in favour of the assessee, and quashed such notices. The key reasons underlying these decisions are summarised below:
- Since the coming into force of the FA 21, the pre-amendment provisions have ceased to exist and the same could not be revived through a notification of the CBDT.
- To allow the CBDT to defer the coming into force of the amendments brought through the FA 21 would imply executive discretion overriding a legislative mandate (since the legislature itself provided that FA 21 would become applicable from April 1, 2021) which would be impermissible.
- Since the amendments introduced through the FA 21 were beneficial in nature, the amended provisions should be made applicable to pending reassessment notices issued after April 1, 2021 as well.
- The TOPA was enacted to extend the limitation for issuing notices under the IT Act and could not delegate power to the CBDT to defer the applicability of FA 21, particularly when FA 21 left no savings clause for applicability of the erstwhile provisions relating to reassessment.
On the other hand, the Chhattisgarh High Court[9] ruled in favour of the revenue, holding that the reassessment notices issued under the unamended Section 148 after April 1, 2021 would remain valid. The High Court reasoned that the TOPA was legislated during the COVID-19 pandemic in the interest of flexibility and, therefore, Parliament (through TOPA) had delegated the power to decide the date of applicability of the provisions amended through FA 21.
Appeals were filed by the Revenue against the common judgment of the Allahabad High Court in Ashok Kumar Agarwal v. Union of India (which directed the quashing of these notices) before the Supreme Court.
Before the Supreme Court of India
The SC briefly outlined the changes brought about by FA 21 to the reassessment procedure. The newly-inserted Section 148A provides for certain conditions precedent to be satisfied before issuing a notice initiating reassessment under Section 148 of the IT Act. The SC noted that the procedural safeguards articulated by it in its earlier decision of GVK Driveshafts[10] were streamlined through the amendment. The SC also acknowledged that the amended procedure introduced the requirement of prior approval from specified authorities at several stages before the commencement of reassessment proceedings (to conduct an enquiry and to send a show-cause notice). Finally, the SC noted that the FA 21 has also reduced the permissible time limit for issuance of a notice under Section 148 to three years since the close of the relevant assessment year (from four years under the pre-amendment procedure)
Therefore, the SC held that the amendments made by FA 21 were ‘benevolent’ and ‘remedial’ in nature and brought ‘radical and reformative changes’ to the reassessment procedure. The SC stressed that the amendments were introduced to streamline the reassessment process and grant further protections to such taxpayers whose assessments were being reopened. The SC agreed with the view adopted by the Allahabad High Court and several other High Courts that the amended provisions should be made applicable to reassessment notices issued after April 1, 2021.
However, the SC observed that quashing of the reassessment notices would result in discontinuation of reassessment proceedings since notices were issued under the unamended Section 148 by the Revenue due to a ‘bona fide mistake’ caused by the extension of limitation by various notifications. Resultantly, there was ‘genuine non-application’ of amendments since Revenue officers were under the bona fide belief that the amendments were yet to be enforced. Given that neither the Revenue could be left remediless nor could the object and purpose of reassessment be frustrated, the SC believed that some leeway should be shown to the Revenue.
Resultantly, the SC directed that the notices issued under the unamended Section 148 should not be quashed and instead they should be treated as show-cause notices issued under Section 148A(b). It was observed that the AOs must furnish relevant information (on the basis of which assessment has been reopened) to the assessees within 30 days of the Order, who in turn would be given two weeks to respond to the notice. The protections offered within the amended provisions of the IT Act would be available to the assessee and the procedure prescribed under Section 148A would be followed prior to issuance of a notice under Section 148 of the IT Act. The SC noted that there was ‘broad consensus’ on these directions amongst the assessees and the Revenue and that these directions would strike a ‘balance’ between the rights of the Revenue and the assessee.
It must be remembered that the Revenue’s appeal before the Supreme Court pertained only to the Allahabad High Court’s common judgment in Ashok Kumar Agarwal. The Revenue submitted that it intended to file appeals in similar writs where orders were passed by other High Courts. To avoid the need for filing further appeals, the SC exercised its jurisdiction under Article 142 of the Constitution to hold that the SC’s order would “also be made applicable in respect of the similar judgments and orders passed by various High Courts across the country and therefore the present order shall be applicable to pan India”.
Analysis and Conclusion
The SC’s decision impacts reassessment notices issued as per the pre-amendment reassessment procedure after April 1, 2021. As per the Revenue’s submission before the SC, approximately 9,000 notices were quashed by the High Courts across the country.
Apart from the obvious impact it has on the assessees whose reassessment will now be held as valid, the decision also serves an important precedent of the judiciary allowing ‘leeway’ to the Revenue which would potentially impact future assessments as well. The SC, while admitting that the interpretation furthered by the Allahabad High Court and other High Courts was correct, permitted leeway to ensure that the Revenue is not left remediless, considering that the notices were issued under the unamended Section 148 due to ‘bona fide’ mistake on the part of the Revenue.
The statutory basis of the SC’s decision, however, is being universally debated and questioned. Given that the SC acknowledged the correctness of the interpretation adopted by several High Courts and relies its decision on a ‘bona fide mistake’ on part of the Revenue to allow it some ‘leeway’, it is absurd to consider that the SC had to rely on its extraordinary power to do ‘complete justice’ under Article 142 of the Constitution. It is a settled law that the SC’s invocation of Article 142 of the Constitution should not come ‘directly in conflict with what has been expressly provided in a statute dealing expressly with the subject’[11] Additionally, given that the power is extraordinary in nature, it should only be used sparingly. In light of this, the SC’s granting of ‘leeway’ to the Revenue does appear to be questionable.
The SC’s decision is also significant since it relies on Article 142 of the Constitution to make its decision applicable for all reassessment notices issued after April 1, 2021 which were quashed by High Courts for not complying with FA 21. By doing this, the SC effectively dispensed with the requirement of requiring the Revenue to file separate appeals and issuing notices to individual assessees, thus denying them an opportunity of being heard.
The directions also leave some important questions unanswered: Would the notice deemed to be a show cause notice under Section 148A lapse in case the Revenue is unable to furnish relevant material to the assessee within 30 days as prescribed by the SC? Would the two-week period granted to the assessee be flexible considering that Section 148A(b) allows a period between seven and thirty days to respond to the notice? Further, the SC directed that the requirement of conducting an enquiry specified in Section 148A(a) would be dispensed for “notices which have been issued under Section 148 of the pre-amendment IT Act from 01.04.2021 till date”. Would the notices issued after June 30, 2021 (the date till which limitation was extended as per the CBDT notification) also fall within this exclusion?
In conclusion, the Supreme Court’s decision in Ashish Agarwal revives reassessments of several taxpayers, which were quashed by multiple High Courts. In doing this, the SC does not offer a clear statutory basis for offering ‘leeway’ to the Revenue, nor does it offer several taxpayers an adequate opportunity to be heard. The SC’s decision is significant and may be a troubling precedent in allowing ‘leeway’ to the Revenue while bypassing the clear mandate of the law. Nevertheless, several aspects of the SC’s directions are also unclear, for which, we hope necessary clarifications will be forthcoming.
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
srpatnaik@cyrilshroff.com
[1] C.A. 3005/2022 (order dated May 4, 2022)
[2] CBDT notifications 20/2021 (dated March 31, 2021) and 38/2021 (dated April 27, 2021)
[3] Ashok Kumar Agarwal v. Union of India Writ Tax No. 524/2021 (Order dated September 30, 2021)
[4] Vellore Institute of Technology Vs. CBDT, W.P. No. 15019/2021 (Order dated February 04, 2022)
[5] Manoj Jain vs. Union of India, W.P.A. No. 11950 of 2021 (Order dated January 17, 2022), Bagaria Properties & Investment Pvt. Ltd. vs. Union of India, W.P.O No. 244/2021 (Order dated January 17, 2022)
[6] Mon Mohan Kohli Vs. ACIT, W.P.(C) No. 6176/2021 (Order dated December 15, 2021)
[7] Bpip Infra Pvt. Ltd. Vs. Income Tax Officer & Others, Civil Writ Petition No. 13297/2021 (Order dated November 25, 2021), Sudesh Taneja Vs. ITO, Civil Writ Petition No. 969/ 2022 (Order dated January 27, 2022)
[8] Tata Communications Transformation Services Vs. ACIT, Writ Petition No. 1334 of 2021 (Order dated March 29, 2022)
[9] Palak Khatuja vs. Union of India, W.P.(T) No. 149 of 2021 (Order dated 23.08.2021)
[10] GKN Driveshafts (India) Ltd. vs. Income Tax Officer and ors, (2003) 1 SCC 72
[11] Supreme Court Bar Association v. Union of India, (1998) 4 SCC 409
