2025 (4) TMI 1351 - AT - Income Tax

Validity of Reopening of assessment u/s 147 as beyond the limitation period specified u/s 149(1) - Scope of new regime - HELD THAT - From the plain reading of the provisions of Section 149 of the Act it is evident that no notice under section 148 of the Act shall be issued after the expiry of 3 years from the end of the relevant assessment year unless the case falls under clause (b) to section 149(1) of the Act. Having considered the provisions of the Act pre as well as post the amendment by the Finance Act 2021 and the TOLA in the light of the decision of Ashish Agarwal 2022 (5) TMI 240 - SUPREME COURT and Rajeev Bansal 2024 (10) TMI 264 - SUPREME COURT (LB) we are of the considered view that the notice issued under section 148 of the Act on 28/07/2022 is barred by limitation period specified under section 149 of the Act. Accordingly we are of the considered view that notice issued under section 148 of the Act on 28/07/2022 is void ab initio and bad in law. Therefore the same is quashed. Consequently the entire re-assessment proceedings and assessment order passed under section 147 r.w. section 144B of the Act are also quashed. Appeal by the assessee are allowed.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in these appeals relate primarily to the validity of reopening of assessments under section 147 of the Income Tax Act, 1961 ("the Act"), specifically the limitation period for issuance of notices under section 148 of the Act for the assessment years 2013-14 and 2014-15. Ancillary issues raised include the correctness of disallowance of expenses under section 37(1) of the Act, levy of interest under sections 234A, 234B, 234C, and 234D, and initiation of penalty proceedings under sections 271(1)(b), 271(1)(c), 271B, and 270A(2)(b). However, the Tribunal focused primarily on the jurisdictional question regarding the limitation period for reopening assessments, as it is a threshold issue affecting the validity of the entire reassessment process.

Issue 1: Validity of Reopening of Assessment under Section 147 of the Act (Limitation Period for Issuance of Notice under Section 148)

Relevant Legal Framework and Precedents: The Tribunal examined the provisions of section 149 of the Act, which prescribes the time limits for issuance of notice under section 148 for reopening assessments. The provisions were considered both prior to and after amendment by the Finance Act, 2021. The Tribunal also analyzed the effect of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 ("TOLA") which extended limitation periods due to the COVID-19 pandemic. Key Supreme Court decisions relied upon were Union of India v. Ashish Agarwal and Union of India v. Rajeev Bansal, which clarified the interplay between the old and new regimes of section 148 notices, the effect of deemed show cause notices under section 148A(b), and computation of limitation periods including exclusions and extensions.

Court's Interpretation and Reasoning: The Tribunal noted that for the assessment years under consideration, the original limitation periods under the old regime expired on 31/03/2020 and 31/03/2021 respectively. The TOLA extended the limitation period to 30/06/2021 for reassessment notices falling within 20/03/2020 to 31/03/2021. The Supreme Court in Ashish Agarwal held that notices issued under section 148 during 1/4/2021 to 30/6/2021 are deemed to be show cause notices under section 148A(b), and the time for issuance of reassessment notice under the new regime starts only after the assessee is supplied relevant information and given time to respond. Rajeev Bansal further clarified that the time during which the show cause notice is stayed and the time allowed to the assessee to respond must be excluded in computing limitation, and the "surviving time" available to the AO to issue the reassessment notice under the new regime is the balance of the extended limitation period after exclusion of these periods.

Applying these principles, the Tribunal computed the surviving time available to the AO to issue notices under section 148 after receipt of the assessee's reply on 24/06/2022. It was found that only 2 days of surviving time remained (between 29/06/2021 and 30/06/2021), and thus the AO was required to issue the notice under section 148 by 26/06/2022. However, the notice was issued on 28/07/2022, i.e., 32 days beyond the surviving time limit. The Tribunal also considered the fourth proviso to section 149 which provides extension to 7 days if the surviving time is less than 7 days, but found that even with this extension, the notice was issued beyond the permissible period.

The Department's contention that the AO had one month from the end of the month in which the assessee's reply was received to pass the order under section 148A(d) and issue the notice under section 148 was rejected. The Tribunal relied on the decision of the Delhi High Court in Ram Balram Buildhome (P.) Ltd., which held that the time to complete proceedings under section 148A(d) is truncated by the limitation period under section 149 and cannot extend beyond it. The Tribunal also rejected reliance on a Tribunal decision which was inconsistent with this principle.

Key Evidence and Findings: The Tribunal examined the dates of issuance of notices and replies, the limitation periods under old and new regimes, the effect of TOLA, and the Supreme Court's directions regarding computation of limitation. The key finding was that the notice under section 148 issued on 28/07/2022 was beyond the extended and computed limitation period and hence void ab initio.

Application of Law to Facts: The Tribunal applied the amended provisions of section 149, TOLA, and Supreme Court rulings to the factual matrix of the case, particularly the dates of notices and replies. It concluded that the AO failed to issue the notice within the legally permissible time frame, rendering the reopening invalid.

Treatment of Competing Arguments: The Tribunal carefully considered the Revenue's arguments regarding the applicability of the extension period under section 148A(d) and the exclusion of time under the provisos to section 149. It rejected these arguments based on authoritative judicial precedents and the legislative intent underlying the limitation provisions. The Tribunal also distinguished the Revenue's reliance on a contrary Tribunal decision.

Conclusions: The Tribunal held that the notice issued under section 148 on 28/07/2022 for both assessment years 2013-14 and 2014-15 was barred by limitation and thus void ab initio. Consequently, the entire reassessment proceedings and assessment orders passed under section 147 read with section 144B were quashed. The jurisdictional issue being decided in favour of the assessee rendered other grounds raised in the appeals academic and left open.

Issue 2: Disallowance of Expenses under Section 37(1) of the Act

Relevant Legal Framework and Precedents: Section 37(1) allows deduction of business expenses which are not specifically disallowed elsewhere and are incurred wholly and exclusively for the purpose of business or profession. The Tribunal noted that the Assessing Officer and the First Appellate Officer disallowed certain percentages of expenses claimed by the assessee on an ad hoc basis due to lack of documentary evidence.

Court's Interpretation and Reasoning: Since the jurisdictional issue regarding reopening was decided in favour of the assessee, the Tribunal did not delve into the merits of the disallowance of expenses. The grounds challenging the disallowance were rendered academic.

Conclusions: No adjudication was made on this issue due to the prior quashing of reassessment proceedings.

Issue 3: Levy of Interest and Penalty Proceedings

Relevant Legal Framework and Precedents: The Assessing Officer levied interest under sections 234A, 234B, 234C, and 234D, and initiated penalty proceedings under sections 271(1)(b), 271(1)(c), 271B, and 270A(2)(b). The assessee challenged these actions.

Court's Interpretation and Reasoning: Similar to the disallowance issue, the Tribunal did not consider these grounds on merit since the reassessment proceedings themselves were quashed for lack of jurisdiction.

Conclusions: These grounds were left open as academic.

Significant Holdings:

"We are of the considered view that the notice issued under section 148 of the Act on 28/07/2022 is barred by limitation period specified under section 149 of the Act. Accordingly, we are of the considered view that notice issued under section 148 of the Act on 28/07/2022 is void ab initio and bad in law. Therefore, the same is quashed. Consequently, the entire re-assessment proceedings and assessment order passed under section 147 r.w. section 144B of the Act are also quashed."

"The provisions of sub-section (1) as to the issue of notice shall be subject to the provisions of section 151."

"The Income Tax Act read with TOLA extended the time limit for issuing reassessment notices under Section 148, which fell for completion from 20 March 2020 to 31 March 2021, till 30 June 2021. All the reassessment notices under challenge in the present appeals were issued from 1 April 2021 to 30 June 2021 under the old regime. Ashish Agarwal (supra) deemed these reassessment notices under the old regime as show cause notices under the new regime with effect from the date of issuance of the reassessment notices. The effect of creating the legal fiction is that this Court has to imagine as real all the consequences and incidents that will inevitably flow from the fiction. Therefore, the logical effect of the creation of the legal fiction by Ashish Agarwal (supra) is that the time surviving under the Income Tax Act read with TOLA will be available to the Revenue to complete the remaining proceedings in furtherance of the deemed notices, including issuance of reassessment notices under Section 148 of the new regime."

"The third proviso to Section 149 allows the exclusion of time allowed for the assesses to respond to the show cause notice under section 149A(b) to compute the period of limitation. The third proviso excludes 'the time or extended time allowed to the assessee.' Resultantly, the entire time allowed to the assessee to respond to the show cause notice has to be excluded for computing the period of limitation."

Core principles established include that the limitation period for reopening assessments under section 148 is strictly governed by section 149 and its provisos, including the effect of TOLA and Supreme Court rulings. Notices issued beyond the surviving time after exclusion of periods allowed for response are void ab initio. The time allowed under section 148A(d) cannot extend the limitation period under section 149. The Tribunal emphasized the primacy of jurisdictional limitation provisions over procedural timelines.

Final determinations on each issue were that the reopening notices under section 148 for both assessment years were invalid due to expiry of limitation, leading to quashing of reassessment proceedings and assessment orders. Other substantive grounds raised by the assessee were not adjudicated due to the jurisdictional ruling.