2024 (9) TMI 655 - HC - Income Tax

Validity of reopening of assessment - reassessment action was initiated based on a notice u/s 148 and the subsequent notice u/s 148A(b) - reassessment action violated the First Proviso to Section 149(1) and was barred by the limitation period - reassessment action which had been commenced post 01 April 2021 - HELD THAT - Judgment in Ashish Agarwal 2022 (5) TMI 240 - SUPREME COURT opined that rather than the reassessment notices issued under the unamended provisions of the Act being quashed, the High Courts would have been well advised to modulate their directions by providing that those notices issued under the unamended provisions of the Act be treated as notices under Section 148A (b). It was, while proceeding on the aforesaid reasoning that the Supreme Court held that the impugned Section 148 notices issued to respective assessees should be deemed to be under Section 148A and treated to be Show Cause Notices SCN as contemplated under clause (b) thereof. The judgments of respective High Courts were thus proposed to be modified in terms set forth. However, it becomes pertinent to note that while doing so, the Supreme Court in Ashish Agarwal significantly observed that the modulation of the directions in terms aforenoted would be subject to compliance with all procedural requirements and without prejudice to the various defences which may be available for assessees to adopt in terms of the substituted provisions of Section 147 to 151 of the Act as well as those which may be available in terms of Finance Act, 2021. The preservation of defences and objections which assessees could possibly take, including those comprised in Section 149 stood reiterated in Ashish Agarwal supra . Proceeding to invoke its powers flowing from Article 142 of the Constitution, the Supreme Court further held that its judgment would not only apply to those notices which stood impugned in the appeals forming part of that batch but would also be applicable to all similar judgments and orders passed by various High Courts irrespective of whether any appeal had been instituted and thus observed that its order would be applicable PAN INDIA . It was in purported compliance and implementation of Ashish Agarwal that the respondents proceeded to issue a notice on 27 May 2022 under Section 148A (b) of the Act to the petitioner. However, and by the time the said notice came to be issued, the terminal point for commencement of reassessment, namely, 31 March 2022 had already passed. It was in the aforesaid light that one of the objections which the petitioner took was of the same being in contravention of the First Proviso to Section 149 (1) of the Act. In terms of the First Proviso appended to sub-section (1) of Section 149, a notice for reassessment pertaining to any AY prior to 01 April 2021 would have to be in accord with the time limit specified under Section 149 (1) (b) as it stood prior to the amendments enforced by virtue of Finance Act, 2021. Insofar as our case is concerned, that time limit would constitute a maximum of six years from the end of the relevant assessment year bearing in mind the language in which Section 149 (1) (b) stood couched and existed prior to 01 April 2021. We consequently find ourselves unable to read Ashish Agarwal as a decision which deprived the assessee of the right to question the initiation of reassessment on grounds based on the First Proviso to Section 149 (1). We also find ourselves unable to construe those directions as being intended to reinvent the wheel or reverse those proceedings in respect of which no challenge had ever been mounted. Viewed in light of the above, we find ourselves unable to recognise the notice dated 27 May 2022 as a continuation of the original Section 148 notice. Although the petitioner neither assailed the original notice nor obtained a declaration of invalidity, it was the respondents who chose to commence proceedings afresh by issuing the notice dated 27 May 2022. Thus, the notice of 27 May 2022 cannot be viewed as being in continuation or substitution of the original notice dated 30 June 2021. While parting, we note that although the petitioner had while responding to the original Section 148 notice dated 30 June 2021 alluded to the amended statutory regime which had come into existence and had placed the AO on notice of an obligation to follow the procedure as prescribed under Section 148A, however, no legal challenge seeking to impugn the action commenced by virtue of the notice dated 30 June 2021 was ever instituted. The reassessment action also did not come to be interdicted by any order or injunction passed by a court. This was, therefore, clearly not a case where the subsequent notice under section 148A (b) could be countenanced to be in continuance or substitution of the original notice. The substitution of original notices was one which Ashish Agarwal had provisioned for in respect of notices which had been impugned before various High Courts and had come to be quashed. No fetter operated upon the AO to take remedial steps and follow or adopt the procedure as prescribed by Section 148A prior to 31 March 2022. This aspect assumes added significance in light of the writ petitioner itself having drawn the respondents attention to the amended procedure for reassessment. Thus, even though the AO was duly apprised and placed on notice of the aforesaid aspects, it failed to take any corrective action. Petitioner had merely asserted that the notice of 30 June 2021 was liable to be withdrawn as opposed to being placed in abeyance. In fact it had been submitted on its behalf that in case the notice of 30 June 2021 was proposed to be proceeded with, they should be provided the reasons underlying the formation of opinion that income had escaped assessment. It had also furnished a return pursuant to that notice. We thus find ourselves unable to sustain the action impugned before us. Accordingly, we allow the instant writ petition and quash the impugned notice referable to Section 148A (b), order u/s 148A (d), notice referable to Section 148 - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reassessment action for AY 2015-16 initiated under Section 148A(d) of the Income Tax Act, 1961.
2. Compliance with the First Proviso to Section 149(1) and the prescription of limitation.
3. Classification of remittances as "royalty" or "fee for technical services" under Section 195.
4. Alleged tax avoidance through share transfer and resultant capital gains.
5. Alleged tax evasion through Non-Convertible Debentures and dividend distribution.

Issue-wise Detailed Analysis:

1. Validity of Reassessment Action:
The writ petitioner challenged the reassessment action for AY 2015-16, initiated under Section 148A(d) and the consequential notice under Section 148, both dated 30 July 2022. The principal ground for the challenge was that the reassessment action violated the First Proviso to Section 149(1) and was barred by the limitation period. The petitioner argued that reassessment for AY 2015-16 could only be initiated up to 31 March 2022, making the reassessment action commenced on 27 May 2022 invalid.

2. Compliance with First Proviso to Section 149(1):
The respondents contended that the reassessment action was initiated based on a notice under Section 148 dated 30 June 2021, and the subsequent notice under Section 148A(b) was in continuation and substitution of the original notice, as per the Supreme Court's decision in Union of India vs. Ashish Agarwal. However, the court noted that the petitioner had not challenged the original notice dated 30 June 2021, nor was it a party to the batch of writ petitions allowed by the court in Man Mohan Kohli. Therefore, the original notice remained unscathed, and there was no need for its revival or resuscitation under Ashish Agarwal.

3. Classification of Remittances:
The reassessment action was based on information from a survey conducted at the petitioner's premises, revealing various remittances to foreign entities. The respondents classified these remittances under categories such as ESOPs, communication charges, data-centre bandwidth, license fees, foreign language translation, training, and software licensing. The respondents alleged that these remittances fell within the meaning of "royalty" or "fee for technical services" and were covered by Section 195, requiring tax deduction at source, which the petitioner failed to do.

4. Alleged Tax Avoidance through Share Transfer:
The second subject of the proposed reassessment was the transfer of shares and the resultant capital gains. The Assessing Officer (AO) alleged that the shareholding of Genpact India was transferred to ERKS to avoid tax, as the transaction lacked commercial substance. The AO also noted ERKS's subsequent amalgamation with Genpact India and alleged that funds were remitted in the form of principal payment of liabilities to avoid dividend distribution tax.

5. Alleged Tax Evasion through Non-Convertible Debentures:
The AO alleged that ERKS made repayments for Non-Convertible Debentures and interest over several years, camouflaging dividend payouts as principal payments to evade taxes. The petitioner had not raised any legal challenge to the original notice, nor had any court order interdicted the reassessment action. The court concluded that the subsequent notice under Section 148A(b) could not be considered a continuation of the original notice.

Conclusion:
The court found that the reassessment action initiated on 27 May 2022 was not in compliance with the First Proviso to Section 149(1) and was barred by the limitation period. The court also noted that the petitioner had not challenged the original notice and had participated in the reassessment proceedings by filing a return. Therefore, the court quashed the notice under Section 148A(b) dated 27 May 2022, the order under Section 148A(d) dated 30 July 2022, the notice under Section 148 dated 30 July 2022, and all consequential proceedings.