Friends, in this Taxalogue, our founder director Sh. Mayank Mohanka, FCA, discusses and addresses, all the practical and legal aspects of the critical issue of legal sanctity and validity of the reassessment notices issued under the old section 148 on or after 1.4.2021.
In current times, the most buzzing and critically debated and talked about tax issue, having PAN India relevance and some very high value stakes, doing rounds in all the tax circles and the coveted corridors of the hon’ble High Courts, is the issue of legal sanctity and validity of the reassessment notices issued under the old section 148 on or after 1.4.2021.
Till date, the two hon’ble High Courts viz. the Chhattisgarh High Court (single Judge Bench) and the Allahabad High Court (regular bench) have pronounced their final verdicts on this issue. While the single Judge bench of the hon’ble Chhattisgarh High Court has upheld the validity of old 148 notice in two cases, on the basis of doctrine of conditional legislation and practicality, the regular bench of the hon’ble Allahabad High Court has quashed all such old 148 notices, issued on or after 1.4.2021, in a batch of 74 writ petitions, by passing a very meticulous and comprehensive judgement on 30.9.2021. The copy of this Allahabad High Court's judgement is enclosed in the PDF file below, for ready reference of our Readers.
Friends, if you don’t have the patience and time to read and go through all the 54 pages of this long and meticulously drafted judgement of the hon’ble Allahabad High Court, and still, you want to grasp the entire judgement, then this Taxalogue is definitely for you. But, frankly speaking guys, I have cherished and loved reading, every word of this very well represented and meticulously drafted judgement and so my humble advice to you all, is to definitely read this judgement in its entirety in your spare time.
On 30.9.2021, the hon’ble Allahabad High Court, hearing a batch of 74 writ petitions, (leading case being ‘Ashok Kumar Aggarwal vs. Union of India’, Tax No. 524 of 2021), challenging the initiation of re-assessment proceedings, on or after 1.4.2021, pursuant to issue of notices under the old section 148, in its landmark judgement, have quashed the respective old 148 notices and have allowed all the 74 writ petitions, by holding that, “A delegated legislation can never overreach any Act of the principal legislature.”
But before we delve deeper into the finer nuances of some of the very significant observations and ratios as propounded by the hon’ble Allahabad High Court in this judgement, it will be useful and fruitful to briefly rush through the newly substituted legislative provisions concerning the new reassessment regime as brought up in the Finance Act 2021 and the corresponding chronology of events in this regard.
In the Finance Act 2021, amendments have been made, to substitute the pre-existing sections 147, 148, 149 and 151 (effective upto 31.3.2021) of the Income Tax Act, with corresponding new sections w.e.f. 1.4.2021 and thereby reducing the time barring limitation period for reopening the already concluded assessments from 6 years to 3 years, in cases where the escaped income representing an asset is less than Rs. 50 lakhs, and stipulating the replacement of the existing mandatory condition of formation of an independent reason to believe by the assessing authority that income of the assessee has escaped assessment so as to assume lawful jurisdiction u/s 147, by the presence of any flagged information as per the risk management strategy of CBDT or the final audit objection of C&AG, suggesting that income of the assessee has escaped assessment. Further a new section 148A, has also been inserted and made applicable w.e.f. 1.4.2021, requiring the assessing authority to provide a suitable opportunity of being heard to the assessee and also mandating prior approval of the competent income tax authority at various levels and steps, before issuing notice under the substituted section 148 of the Income Tax Act.
Friends, this reduction in time period of reopening of the already concluded assessments from 6 years to 3 years, has been announced as a path breaking taxpayer friendly relaxation, with a lot of fanfare, in the budget speech.
Exact Quote of the Budget Speech of our Hon’ble FM, during the presentation of the annual budget for 2021-22 fiscal, is reproduced below, for ready reference:
“Honourable Speaker, presently an assessment can be re-opened up to 6 years and in serious tax fraud cases for up to 10 years. As a result, taxpayers have to remain under uncertainty for a long time. I therefore propose to reduce this time-limit for re-opening of assessment to 3 years from the present 6 years.”
This relaxation or reduction in the time period for reopening of the already concluded assessments from 6 years to 3 years, has been legislated w.e.f. 1.4.2021 by substitution of the old section 149 with a new section 149 which reads as under:
“149. Time limit for notice.—(1) No notice under section 148 shall be issued for the relevant assessment year,—
- if three years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b);
- if three years, but not more than ten years, have elapsed from the end of the relevant assessment year unless the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more for that year:
Provided that no notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of this section, as they stood immediately before the commencement of the Finance Act, 2021…..”
The practical aftermath of the legislation of the above legislative amendment was that suddenly, the Revenue Authorities realised that w.e.f. 1.4.2021, they will no longer be able to reopen the already concluded assessments, beyond a period of 3 years from the end of the relevant assessment year, if the escaped income represented in the form of an asset including any immovable property (land and building), shares and securities, loans and advances and bank deposits, is less than Rs. 50 lakhs, in each assessment year.
In simple words, no notice under the newly substituted section 148, could have been issued for reopening the already concluded assessments for the AYs 2017-18 and earlier assessment years, on or after 1.4.2021, by virtue of the above stipulated time barring limitation period of 3 years, in the newly substituted section 149 of the Income Tax Act. Further, even in cases of perceived escapement of income represented in the form of assets, amounting to Rs. 50 lakhs and more, the increased burden of issuing a prior show cause notice u/s 148A, with several layers of approvals, has been mandated by the Legislature w.e.f 1.4.2021.
Thus, somehow, this perceived relaxation or reduction in the time period for reopening the already concluded assessments from 6 years to 3 years, aimed at reducing the uncertainty and litigation, ironically, became the root cause of the issuance of an unprecedented huge number of reassessment notices on or before 31.3.2021, under the old section 148, by the revenue authorities, during the transition to the new reassessment regime.
However, it appears that it became practically very difficult for the revenue authorities, to issue such unprecedented and large number of re-assessment notices under the old section 148, on or before 31.3.2021, in view of the adequate and well settled and established safeguards placed by the Legislature and the Judiciary in issuance of reassessment notices u/s 148, viz. formation of an independent reason to believe of escapement of income and recording of reasons and taking prior approval of the competent income tax authority u/s 151, by the jurisdictional AO, coupled with the hardships arising out of corona pandemic.
Infact, even now, it would be interesting to know through an RTI, as to how many approvals were accorded by the competent incometax authority u/s 151 of the Act, on the eve of 31.3.2021 or for that matter on 30.6.2021.
In the meanwhile, the Taxation & Other Laws (Relaxation & Amendment of Certain Provisions) Act, 2020 (referred to as ‘The Enabling Act’ in the judgement), got enacted on 29.9.2020, after receiving the Presidential Assent.
Section 3(1) of ‘the Enabling Act’ provided a general relaxation of limitation in respect of several compliance deadlines, granted on account of general hardship existing upon the spread of pandemic COVID -19. However, it does not itself speak of reassessment proceedings or of sections 147/148 of the Act as existed prior to 01.04.2021.
Reference to reassessment proceedings with respect to pre-existing and now substituted provisions of Sections 147 and 148 of the Act has been introduced only by the later Notifications issued under ‘the Enabling Act’ namely, Explanation appended to clause (A)(a) of CBDT Notification No. 20 of 2021, dated 31.03.2021 and further Explanation appended to clause (A)(b) of CBDT Notification No. 38 of 2021, dated 27.04.2021 by way of Delegated Legislation, wherein the time barring limitation period of issuance of reassessment notices under the old section 148 has been extended from 31.3.2021 till 30.6.2021.
Therefore, ‘the Enabling Act’, which was primarily enacted to ease out the hardships of taxpayers concerning meeting several compliance deadlines in the wake of widespread corona pandemic, has somehow been used as a rescue instrument, by the revenue authorities, by appending explanations to subsequent extension notifications, by way of delegated legislation, to extend the time barring limitation period of issuance of reassessment notices under the old section 148, beyond 31.3.2021 and upto 30.6.2021.
However, it is this very wishful act of delegated legislation of the revenue authorities, of extending the time barring limitation period of issuance of reassessment notices under the old section 148, beyond 31.3.2021 and upto 30.6.2021, even after the substitution and implementation of new sections 147, 148, 148A, 149 and 151 by the Finance Act, 2021, w.e.f. 1.4.2021, which has become the main bone of contention and litigation between the taxpayers and the revenue authorities on PAN India basis.
Key Takeaways of the Judgement of the Hon’ble Allahabad High Court
The main contentions and arguments being put forth by the learned representatives of the tax petitioners can be summed up as under:
- The Enabling Act does not, and it could not save the pre-existing Sections 147, 148 and other provisions pertaining to reassessment, nor overriding effect can arise or be given (to itself) by the Enabling Act, since on the date of enactment of the Enabling Act, the Finance Act, 2021 was not born. Therefore, it was only through the Finance Act, 2021 that the provisions of the pre-existing law may have been saved if it had been so intended by the Parliament. In absence of that saving clause, there exists no power either under Section 3(1) of the Enabling Act or any other law as may validate the issuance of the impugned Notifications. To validate such Notifications, would be to resurrect and enforce a dead law, contrary to the statutory law in force, on the date of issuance of impugned Notification dated 27.04.2021. Clearly, that would be a legislative overreach by the delegate and therefore, ultra vires the Constitution of India. Reliance placed on decisions of the hon’ble Supreme Court in the cases of Kolhapur Canesugar Works Ltd. & Anr. Vs. Union Of India & Ors., ( 2000) 2 SCC 536; Assam Company Ltd. & Anr. Vs. State of Assam & Ors., (2001) 248 ITR 567 (SC); Union of India & Ors. Vs. S. Srinivasan, ( 2012) 7 SCC 683.
- By substituting the provisions of the Act by means of the Finance Act, 2021 with effect from 01.04.2021, the old provisions of reassessment were omitted from the statute book and replaced by fresh provisions with effect from 01.04.2021. Relying on the principle - substitution omits and thus obliterates the pre-existing provision, it was submitted, that in the absence of any saving clause shown to exist either under the Enabling Act or the Finance Act 2021, there exists no presumption in favour of the old provisions continuing to operate for any purpose, beyond 31.03.2021. Reliance placed on decisions of the hon’ble Supreme Court in the cases of Government of India & Ors. vs. Indian Tobacco Association, (2005) 7 SCC 396; Gottumukkala Venkata Krishamraju Vs. Union of India & Ors., ( 2019) 17 SCC 590; PTC India Limited Vs. Central Electricity Regulatory Commissioner, (2010) 4 SCC 603.
- The Act is a dynamic enactment that sustains through enactment of the Finance Act every year. Therefore, on 1st April every year, it is the Act as amended by the Finance Act, for that year which is applied. In the present case, it is the Act as amended by the Finance Act 2021, that confronted the Enabling Act as was pre-existing. In absence of any legislative intent expressed either under the Finance Act, 2021 or under the Enabling Act, to preserve any part of the pre-existing Act, plainly, reference to provisions of Sections 147 and 148 of the Act and the words 'assessment' and 'reassessment' appearing in the Notifications issued under the Enabling Act may be read to be indicating only at proceedings already commenced prior to 01.04.2021, under the Act (before amendment by the Finance Act, 2021). The delegated action performed under the Enabling Act cannot, itself create an overriding effect in favour of the Enabling Act.
- The delegation made could be exercised within the four corners of the principal legislation and not to overreach it. Insofar as the Enabling Act does not delegate any power to legislate - with respect to enforceability of any provision of the Finance Act, 2021 and those provisions (Sections 2 to 88) had come into force, on their own, on 01.04.2021, any exercise of the delegate under the Enabling Act, to defeat the plain enforcement of that law would be wholly unconstitutional. Reliance placed upon the judgements of the hon’ble Supreme Court in the cases of Chairman and Managing Director, Food Corporation of India & Ors. vs. Jagdish Balaram Bahira & Ors., (2017) 8 SCC 670 and Dilip Kumar Ghosh & Ors. Vs Chairman & Ors., (2005) 7 SCC 567.
- The Parliament being aware of all realities, both as to the fact situation and the laws that were existing, it had consciously enacted the Enabling Act, to extend certain time limitations and to enforce only a partial change to the reassessment procedure, by enacting section 151-A to the Act. It then enacted the Finance Act, 2021 to change the substantive and procedural law governing the reassessment proceedings. That having been done, together with introduction of section 148-A to the Act, legislative field stood occupied, leaving the delegate with no room to manipulate the law except as to the time lines with respect to proceedings that may have been initiated under the Act (both prior to and after enforcement of the Finance Act, 2021). The delegated legislation can never defeat the principal legislation. Reliance placed upon Syndicate Bank v Prabha D. Naik & Anr., AIR 2001 SC 1968.
Observations & Principal Ratios propounded by the Hon’ble Allahabad High Court
The key observations and factual and legal propositions as pronounced by the hon’ble Allahabad High Court in the batch of these 74 writ petitions are being summarised as under:
i) There can be no exception to the principle - an Act of legislative substitution is a composite act. Thereby, the legislature chooses to put in place another or, replace an existing provision of law. It involves simultaneous omission and re-enactment. By its very nature, once a new provision has been put in place of a pre-existing provision, the earlier provision cannot survive, except for things done or already undertaken to be done or things expressly saved to be done.
ii) Undeniably, on 01.04.2021, by virtue of plain/unexcepted effect of Section 1(2)(a) of the Finance Act, 2021, the provisions of Sections 147, 148, 149, 151 (as those provisions existed upto 31.03.2021), stood substituted, along with a new provision enacted by way of Section 148A of that Act. In absence of any saving clause, to save the pre-existing (and now substituted) provisions, the revenue authorities could only initiate reassessment proceeding on or after 01.04.2021, in accordance with the substituted law and not the pre-existing laws.
iii) A reassessment proceeding is not just another proceeding emanating from a simple show cause notice. Both, under the pre-existing law as also under the law enforced from 01.04.2021, that proceeding must arise only upon jurisdiction being validly assumed by the assessing authority. Till such time jurisdiction is validly assumed by assessing authority - evidenced by issuance of the jurisdictional notice under Section 148, no re-assessment proceeding may ever be said to be pending before the assessing authority. The admission of the revenue authorities that all re-assessment notices involved in this batch of writ petitions had been issued after the enforcement date 01.04.2021, is tell-tale and critical. As a fact, no jurisdiction had been assumed by the assessing authority against any of the petitioners, under the unamended law. Hence, no time extension could ever be made under section 3(1) of the Enabling Act, read with the Notifications issued thereunder.
iv) The submission of the learned Additional Solicitor General of India that the provision of Section 3(1) of the Enabling Act gave an overriding effect to that Act and therefore saved the provisions as existed under the unamended law, cannot be accepted. That saving could arise only if jurisdiction had been validly assumed before the date 01.04.2021. In the first place Section 3(1) of the Enabling Act does not speak of saving any provision of law. It only speaks of saving or protecting certain proceedings from being hit by the rule of limitation. That provision also does not speak of saving any proceeding from any law that may be enacted by the Parliament, in future. For both reasons, the submission advanced by learned Additional Solicitor General of India is unacceptable.
v) It may also be clarified, Section 3(1) of the Enabling Act does not itself speak of reassessment proceeding or of Section 147 or Section 148 of the Act as it existed prior to 01.04.2021. It only provides a general relaxation of limitation granted on account of general hardship existing upon the spread of pandemic COVID -19. After enforcement of the Finance Act, 2021, it applies to the substituted provisions and not the pre-existing provisions. In absence of any specific delegation made, to allow the delegate of the Parliament, to indefinitely extend such limitation, would be to allow the validity of an enacted law i.e. the Finance Act, 2021 to be defeated by a purely colourable exercise of power, by the delegate of the Parliament.
vi) Unless specifically enabled under any law and unless that burden had been discharged by the respondents, we are unable to accept the further submission advanced by the learned Additional Solicitor General of India that practicality dictates that the reassessment proceedings be protected. Practicality, if any, may lead to legislation. Once the matter reaches Court, it is the legislation and its language, and the interpretation offered to that language as may primarily be decisive to govern the outcome of the proceeding. To read practicality into enacted law is dangerous. Also, it would involve legislation by the Court, an idea and exercise we carefully tread away from.
vii) As to the decision of the Chhattisgarh High Court, with all respect, we are unable to persuade ourselves to that view. According to us, it would be incorrect to look at the delegation legislation i.e. Notification dated 31.03.2021 issued under the Enabling Act, to interpret the principal legislation made by Parliament, being the Finance Act, 2021. A delegated legislation can never overreach any Act of the principal legislature. Second, it would be over simplistic to ignore the provisions of, either the Enabling Act or the Finance Act, 2021 and to read and interpret the provisions of Finance Act, 2021 as inoperative in view of the fact circumstances arising from the spread of the pandemic COVID-19. Practicality of life de hors statutory provisions, may never be a good guiding principle to interpret any taxation law. In absence of any specific clause in Finance Act, 2021, either to save the provisions of the Enabling Act or the Notifications issued thereunder, by no interpretative process can those Notifications be given an extended run of life, beyond 31 March 2020. They may also not infuse any life into a provision that stood obliterated from the statute with effect from 31.03.2021. Inasmuch as the Finance Act, 2021 does not enable the Central Government to issue any notification to reactivate the pre-existing law (which that principal legislature had substituted), the exercise made by the delegate/Central Government would be de hors any statutory basis. In absence of any express saving of the pre-existing laws, the presumption drawn in favour of that saving, is plainly impermissible. Also, no presumption exists that by Notification issued under the Enabling Act, the operation of the pre-existing provision of the Act had been extended and thereby provisions of Section 148A of the Act (introduced by Finance Act 2021) and other provisions had been deferred. Such Notifications did not insulate or save, the pre-existing provisions pertaining to reassessment under the Act.
viii) In view of the above, all the writ petitions must succeed and are allowed. It is declared that the Ordinance, the Enabling Act and Sections 2 to 88 of the Finance Act 2021, as enforced w.e.f. 01.04.2021, are not conflicted. Insofar as the Explanation appended to Clause A(a), A(b), and the impugned Notifications dated 31.03.2021 and 27.04.2021 (respectively) are concerned, we declare that the said Explanations must be read, as applicable to reassessment proceedings as may have been in existence on 31.03.2021 i.e. before the substitution of Sections 147, 148, 148A, 149, 151 & 151A of the Act. Consequently, the reassessment notices in all the writ petitions are quashed. It is left open to the respective assessing authorities to initiate reassessment proceedings in accordance with the provisions of the Act as amended by Finance Act, 2021, after making all compliances, as required by law.
Update on Similar Recent Developments in Hon’ble Delhi & Mumbai High Courts
The Hon’ble Delhi High Court has also commenced hearing in the batch of 1300 writ petitions challenging the validity and legal sanctity of reassessment notices issued under the old section 148, on or after 1.4.2021 on 28.9.2021.
The Hon’ble Bombay High Court has also listed the batch of similar writ petitions for hearing on 11.10.2021.
The Revenue Authorities have filed an application for transfer of these writ petitions before the Hon’ble Supreme Court Bench.
Friends, the peculiar situation as highlighted in our above entire discussion, is a classic example of a glaring and unfortunate mismatch between the perceived legislative intent of reducing the time barring limitation period of reopening of already concluded assessments u/s 148 from 6 years to 3 years w.e.f. 1.4.2021, aimed at reducing uncertainty, and the practical ground-level implementation of the said policy decision, during the transition to the substituted reassessment regime.
The concerned authorities should appreciate that the taxpayer friendly image by reducing litigations and bringing in more certainity on account of reduction of the time period for reopening the already concluded assessments and the wishful act of extending the pre-amended time barring limitation period of issuance of notice under the old section 148, beyond 31.3.2021, by way of delegated legislation, so as to cover the entire 6 years, even in the newly substituted reassessment regime, can’t go hand in hand.