2024 (10) TMI 264 - SC - Income Tax

Validity of reassessment notices/ proceedings - scope of notices issued under Section 148 of the new regime between July and September 2022 - Application of TOLA to the Income Tax Act after 1 April 2021 - Whether TOLA and notifications issued under it will also apply to reassessment notices issued after 1 April 2021? - Whether the reassessment notices issued u/s 148 of the new regime between July and September 2022 are valid? - HELD THAT - The exercise of the jurisdiction under Article 142 is meant to supplement the existing legal framework to do complete justice between the parties. In a given circumstance this Court can supplement a legal framework to craft a just outcome when strict adherence to a source of law and exclusive rule based theories create inequitable results. The directions issued by this Court under Article 142 cannot be considered as a ratio because they are issued based on the peculiar facts and circumstances of the cause or matter before this Court. In State v. Kalyan Singh 2017 (4) TMI 1564 - SUPREME COURT this Court observed that a judgment has two components (a) declaration of law; and (b) directions. In Bir Singh v. Mukesh Kumar 2019 (2) TMI 547 - SUPREME COURT it was held that what is binding on all courts under Article 141 is the declaration of law and not the directions issued under Article 142. This Court has exercised its jurisdiction under Article 142 in tax matters where the actions of the Revenue are not in accordance with the law. In Whirlpool of India Ltd. v. CIT 2000 (2) TMI 15 - SUPREME COURT this Court directed the Income Tax Officer to give effect to the order of the Income Tax Appellate Tribunal by disallowing a particular deduction. In CIT v. Greenworld Corporation 2009 (5) TMI 14 - SUPREME COURT the issue before this Court was whether a Commissioner of Income Tax appropriately issued directions under Section 263 of the Income Tax Act to an assessing officer to reopen assessments. It was held that the facts of the case did not merit the CIT to issue directions to the assessing officer. Consequently this Court termed the reassessment notice issued by the assessing officer to be illegal and exercised its jurisdiction under Article 142 to direct the reopening of the assessment by an appropriate assessing authority. The scope of Ashish Agarwal 2022 (5) TMI 240 - SUPREME COURT extended to all the reassessment notices issued between 1 April 2021 and 30 June 2021 under the old regime - The purpose of this Court in deeming the reassessment notices issued under the old regime as show cause notices under the new regime was two-fold (i) to strike a balance between the rights of the assesses and the Revenue which issued approximately ninety thousand reassessment notices after 1 April 2021 under the old regime; and (ii) to avoid any further appeals before this Court by the Revenue on the same issue by challenging similar judgments and orders of the High Courts (arising from approximately nine thousand writ petitions). Ashish Agarwal supra was primarily concerned with the validity of the reassessment notices issued between 1 April 2021 and 30 June 2021 under the old regime. The scope of the directions in Ashish Agarwal (supra) applied PAN INDIA including all the ninety thousand reassessment notices issued under the old regime during the period 1 April 2021 and 30 June 2021 In Ashish Agarwal (supra) this Court was aware of the fact that it could not have used its jurisdiction under Article 142 to affect the vested rights of the assesses by deeming Section 148 notices under the old regime as Section 148 notices under the new regime. Hence it deemed the reassessment notices issued under the old regime as show cause notices u/s 148A(b) of the new regime. Further the Court directed the Revenue to provide all the relevant material or information to the assesses and thereafter allowed the assesses to respond to the show cause notice by availing all the defences including those available u/s 149. Thus the Court balanced the equities between the Revenue and the assesses by giving effect to the legislative scheme of reassessment as contained under the new regime. It supplemented the existing legal framework of the procedure of reassessment under the Income Tax Act with a remedy grounded in equitable standards. Effect of the legal fiction - A legal fiction is a supposition of law that a thing or event exists even though in reality it does not exist. The word deemed is used to treat a thing or event as something which otherwise it may not have been with all the attendant consequences.154 The effect of a legal fiction is that a position which otherwise would not obtain is deemed to obtain under the circumstances. Under Section 148A(b) the assessing officer has to comply with two requirements (i) issuance of a show cause notice; and (ii) supply of all the relevant information which forms the basis of the show cause notice. The supply of the relevant material and information allows the assessee to respond to the show cause notice. The deemed notices were effectively incomplete because the other requirement of supplying the relevant material or information to the assesses was not fulfilled. The second requirement could only have been fulfilled by the Revenue by an actual supply of the relevant material or information that formed the basis of the deemed notice. While creating the legal fiction in Ashish Agarwal (supra) this Court was cognizant of the fact that the assessing officers were effectively inhibited from performing their responsibility under Section 148A until the requirement of supply of relevant material and information to the assesses was fulfilled. This Court lifted the inhibition by directing the assessing officers to supply the assesses with the relevant material and information relied upon by the Revenue within thirty days from the date of the judgment. Thus during the period between the issuance of the deemed notices and the date of judgment in Ashish Agarwal (supra) the assessing officers were deemed to have been prohibited from proceeding with the reassessment proceedings. To summarize the combined effect of the legal fiction and the directions issued by this Court in Ashish Agarwal (supra) is that the show cause notices that were deemed to have been issued during the period between 1 April 2021 and 30 June 2021 were stayed till the date of supply of the relevant information and material by the assessing officer to the assessee. After the supply of the relevant material and information to the assessee time begins to run for the assesses to respond to the show cause notices. In Ashish Agarwal (supra) this Court provided two weeks to the assesses to reply to the show cause notices. This period of two weeks is also liable to be excluded from the computation of limitation given the third proviso to Section 149. Hence the total time that is excluded for computation of limitation for the deemed notices is (i) the time during which the show cause notices were effectively stayed that is from the date of issuance of the deemed notice between 1 April 2021 and 30 June 2021 till the supply of relevant information or material by the assessing officers to the assesses in terms of the directions in Ashish Agarwal (supra); and (ii) two weeks allowed to the assesses to respond to the show cause notices. Interplay of Ashish Agarwal with TOLA - Because of the legal fiction the deemed show cause notices will also come into effect from 1 May 2021. After accounting for all the exclusions the assessing officer will have sixty-one days days between 1 May 2021 and 30 June 2021 to issue a notice under Section 148 of the new regime. This time starts ticking for the assessing officer after receiving the response of the assessee. In this instance if the assessee submits the response on 18 June 2022 the assessing officer will have sixty-one days from 18 June 2022 to issue a reassessment notice under Section 148 of the new regime. Thus in this illustration the time limit for issuance of a notice under Section 148 of the new regime will end on 18 August 2022. In Ashish Agarwal (supra) this Court allowed the assesses to avail all the defences including the defence of expiry of the time limit specified under Section 149(1). In the instant appeals the reassessment notices pertain to the assessment years 2013-2014 2014-2015 2015-2016 2016-2017 and 2017-2018. To assume jurisdiction to issue notices under Section 148 with respect to the relevant assessment years an assessing officer has to (i) issue the notices within the period prescribed under Section 149(1) of the new regime read with TOLA; and (ii) obtain the previous approval of the authority specified under Section 151. A notice issued without complying with the preconditions is invalid as it affects the jurisdiction of the assessing officer. Therefore the reassessment notices issued under Section 148 of the new regime which are in pursuance of the deemed notices ought to be issued within the time limit surviving under the Income Tax Act read with TOLA. A reassessment notice issued beyond the surviving time limit will be time barred. Thus we conclude that a. After 1 April 2021 the Income Tax Act has to be read along with the substituted provisions; b. TOLA will continue to apply to the Income Tax Act after 1 April 2021 if any action or proceeding specified under the substituted provisions of the Income Tax Act falls for completion between 20 March 2020 and 31 March 2021; c. Section 3(1) of TOLA overrides Section 149 of the Income Tax Act only to the extent of relaxing the time limit for issuance of a reassessment notice under Section 148; d. TOLA will extend the time limit for the grant of sanction by the authority specified under Section 151. The test to determine whether TOLA will apply to Section 151 of the new regime is this if the time limit of three years from the end of an assessment year falls between 20 March 2020 and 31 March 2021 then the specified authority under Section 151(i) has extended time till 30 June 2021 to grant approval; e. In the case of Section 151 of the old regime the test is if the time limit of four years from the end of an assessment year falls between 20 March 2020 and 31 March 2021 then the specified authority under Section 151(2) has extended time till 31 March 2021 to grant approval; f. The directions in Ashish Agarwal (supra) will extend to all the ninety thousand reassessment notices issued under the old regime during the period 1 April 2021 and 30 June 2021; g. The time during which the show cause notices were deemed to be stayed is from the date of issuance of the deemed notice between 1 April 2021 and 30 June 2021 till the supply of relevant information and material by the assessing officers to the assesses in terms of the directions issued by this Court in Ashish Agarwal (supra) and the period of two weeks allowed to the assesses to respond to the show cause notices; and h. The assessing officers were required to issue the reassessment notice under Section 148 of the new regime within the time limit surviving under the Income Tax Act read with TOLA. All notices issued beyond the surviving period are time barred and liable to be set aside; The judgments of the High Courts rendered in Union of India v. Rajeev Bansal 2023 (2) TMI 1081 - ALLAHABAD HIGH COURT Keenara Industries Pvt. Ltd. v. ITO Surat 2023 (3) TMI 104 - GUJARAT HIGH COURT J M Financial and Investment Consultancy Services Pvt. Ltd. v. ACIT 2022 (4) TMI 1446 - BOMBAY HIGH COURT Siemens Financial Services Pvt. Ltd. v. DCIT 2023 (9) TMI 552 - BOMBAY HIGH COURT Geeta Agarwal v. ITO 2022 (10) TMI 1192 - RAJASTHAN HIGH COURT Ambika Iron and Steel Pvt Ltd v. PCIT 2022 (1) TMI 1291 - ORISSA HIGH COURT Twylight Infrastructure Pvt Ltd v. ITO 2024 (1) TMI 759 - DELHI HIGH COURT Ganesh Dass Khanna v. ITO 2023 (11) TMI 763 - DELHI HIGH COURT and other judgments of the High Courts which relied on these judgments are set aside to the extent of the observations made in this judgment.

Summary

Issues Involved:

1. Applicability of TOLA and its notifications to reassessment notices issued after 1 April 2021.
2. Validity of reassessment notices issued under Section 148 of the new regime between July and September 2022.
3. Interpretation of the legal fiction created by the Supreme Court in the Ashish Agarwal case.
4. Interaction between TOLA and the new provisions of the Income Tax Act.

Detailed Analysis:

1. Applicability of TOLA and its Notifications:

The judgment addresses whether the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act 2020 (TOLA) and its notifications apply to reassessment notices issued after 1 April 2021. TOLA was enacted to provide relief during the COVID-19 pandemic by extending time limits for actions under specified Acts, including the Income Tax Act. The Finance Act 2021 substituted the old reassessment regime with a new one effective from 1 April 2021. The court held that TOLA continues to apply to the Income Tax Act after 1 April 2021 if any action or proceeding specified under the substituted provisions falls for completion between 20 March 2020 and 31 March 2021. TOLA extends the time limit for issuing reassessment notices under Section 148, overriding Section 149 of the Income Tax Act to that extent.

2. Validity of Reassessment Notices:

The court examined the validity of reassessment notices issued under Section 148 of the new regime between July and September 2022. It concluded that these notices must be issued within the time limit surviving under the Income Tax Act read with TOLA. The notices issued beyond this surviving period are time-barred and liable to be set aside. The court emphasized that the assessing officers must comply with the preconditions of issuing notices within the prescribed time limits and obtaining the necessary sanctions from the specified authorities.

3. Legal Fiction in Ashish Agarwal Case:

In the Ashish Agarwal case, the Supreme Court created a legal fiction by deeming the reassessment notices issued under the old regime as show cause notices under Section 148A(b) of the new regime. This was intended to balance the rights of the assesses and the Revenue, which had issued approximately ninety thousand reassessment notices under the old regime. The court clarified that the legal fiction should be limited to the purpose for which it was created and should not be extended beyond that legitimate field. The legal fiction ensured the continuance of the reassessment process initiated by the Revenue from 1 April 2021 to 30 June 2021 under the old regime.

4. Interaction between TOLA and New Provisions:

The court analyzed the interaction between TOLA and the new provisions of the Income Tax Act. It held that TOLA extends the time limit for the grant of sanction by the authority specified under Section 151. The test to determine whether TOLA will apply to Section 151 of the new regime is whether the time limit of three years from the end of an assessment year falls between 20 March 2020 and 31 March 2021. The specified authority under Section 151(i) then has extended time till 30 June 2021 to grant approval. The court emphasized that TOLA provides a relaxation of time limits for completion or compliance of actions falling for completion during the specified period, and this relaxation applies to the issuance of reassessment notices under Section 148.

Conclusion:

The Supreme Court concluded that the directions in the Ashish Agarwal case extend to all reassessment notices issued under the old regime during the period 1 April 2021 to 30 June 2021. The assessing officers were required to issue reassessment notices under Section 148 of the new regime within the time limit surviving under the Income Tax Act read with TOLA. Notices issued beyond this surviving period are time-barred and liable to be set aside. The judgments of various High Courts that relied on the earlier regime were set aside to the extent of the observations made in this judgment.