2025 (4) TMI 1363 - HC - Income Tax

Reopening of assessment u/s 147 as barred by time - Time limit for notice u/s 149 - escaped income from multiple assessment years to meet the threshold limit of Rs. 50 lakhs - HELD THAT - In the present case it is apparent that there is no singular occasion or event which has resulted in the income of more than one previous year exceeding the sum of Rs. 50 lakhs. The allegations against the Assessee are that it has undercharged its AE for the R D Services rendered by it and therefore the income is required to be adjusted to the extent of Rs. 27 lakhs. Additionally it is alleged that the Assessee has overpaid for certain managerial and group related services to the extent of Rs. 21 lakhs. None of these two adjustments can be stated to have been a part of a singular event or occasion spanning more than one previous year. AO has erred in proceeding on the basis that it was open for the AO to issue a notice u/s 148 of the Act bearing in mind the cumulative income that has escaped assessment in respect of FYs 2016-17 2017-18 and 2018-19. It is impermissible for the AO to add income which is alleged to have escaped assessment for different previous years for determining the threshold figure of Rs. 50 lakhs as specified under Section 149 (1) (b) of the Act. We find merit in the contention that the impugned notices have been issued beyond the period of limitation as prescribed u/s 149 (1). Accordingly the impugned notices and all proceedings commenced pursuant thereto are set aside.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

- Whether the notices issued under Section 148 of the Income Tax Act, 1961 for the Assessment Year 2018-19 were valid and within the prescribed time limits under Section 149 of the Act.

- Whether the Assessing Officer (AO) could aggregate the alleged escaped income from multiple assessment years to meet the threshold limit of Rs. 50 lakhs under Section 149(1)(b) and Section 149(1A) of the Act for issuing notices beyond three years.

- Whether the cumulative income alleged to have escaped assessment relating to different financial years could be considered as income represented in the form of "asset" or "expenditure in relation to an event or occasion" as required under Section 149(1)(b) and 149(1A) of the Act.

- The applicability and interpretation of Section 149(1), 149(1)(b), and 149(1A) of the Income Tax Act, 1961 in the facts of the case.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Notices Issued Under Section 148 and Time Limitations

Legal Framework and Precedents: Section 148 of the Income Tax Act empowers the AO to issue a notice for reassessment if income has escaped assessment. Section 149 prescribes the time limits for issuance of such notices. Specifically, Section 149(1)(a) prohibits issuance of notices beyond three years from the end of the relevant assessment year unless conditions under Section 149(1)(b) are met. Section 149(1)(b) allows issuance beyond three years but not more than ten years if the AO has evidence that income chargeable to tax, represented as an asset, expenditure, or entry, has escaped assessment exceeding Rs. 50 lakhs.

Section 149(1A) clarifies that if the escaped income represented as an asset or expenditure relates to more than one previous year, a notice can be issued for each such assessment year.

Court's Interpretation and Reasoning: The Court emphasized that the threshold of Rs. 50 lakhs must be assessed in respect of the specific assessment year for which the notice is issued. The Court held that the AO cannot aggregate escaped income from different assessment years to meet the Rs. 50 lakhs threshold for a single assessment year unless the income is represented in the form of an asset or expenditure related to a singular event or occasion spanning multiple years.

The Court noted that the opening sentence of Section 149(1) mandates that notices beyond three years are permissible only if the conditions in Section 149(1)(b) are satisfied for the relevant assessment year. The non obstante clause in Section 149(1A) permits aggregation only when the income is represented as an asset or expenditure related to an event or occasion across multiple years.

Key Evidence and Findings: The AO's reasons indicated that the Assessee had undercharged its associated enterprise (AE) for R&D services by Rs. 27 lakhs and had overpaid management fees by Rs. 21 lakhs for AY 2018-19. The AO also noted cumulative undercharges and overpayments across AYs 2016-17, 2017-18, and 2018-19 totaling Rs. 0.73 crores.

The AO relied on Section 149(1A) to justify issuance of notices beyond three years on the basis of cumulative escaped income exceeding Rs. 50 lakhs.

Application of Law to Facts: The Court found that the AO erred by aggregating escaped income from different years to meet the Rs. 50 lakhs threshold for AY 2018-19. The Court held that the income alleged to have escaped for AY 2018-19 was under Rs. 50 lakhs and that the alleged undercharging and overpayment were not linked to a singular event or occasion spanning multiple years.

Treatment of Competing Arguments: The Revenue argued that Section 149(1A) permits aggregation of escaped income across years to meet the threshold. The Court rejected this argument, clarifying that Section 149(1A) applies only when the escaped income is represented as an asset or expenditure related to an event or occasion spanning multiple years. Since no such singular event or occasion existed, aggregation was impermissible.

Conclusions: The Court concluded that the impugned notices under Section 148 were barred by limitation as the AO failed to satisfy the conditions under Section 149(1)(b) for AY 2018-19. The notices issued beyond three years were invalid.

3. SIGNIFICANT HOLDINGS

- "It is impermissible for the AO to add income which is alleged to have escaped assessment for different previous years for determining the threshold figure of Rs. 50 lakhs as specified under Section 149 (1) (b) of the Act."

- "A plain reading of Sub-section (1A) of Section 149 of the Act indicates that the condition of a minimum amount of Rs. 50 lakhs of income escaping assessment, may be satisfied by the cumulative amount that has escaped assessment or is likely to escape assessment in respect of more than one assessment year exceeding the said amount. However, the same is subject to the condition that the income chargeable to tax is represented in the form of an 'asset' or 'expenditure in relation to an event or occasion'."

- The Court established the principle that the threshold limit of Rs. 50 lakhs for issuing notices beyond three years under Section 149(1)(b) must be satisfied in relation to the specific assessment year unless the escaped income is represented as an asset or expenditure linked to a singular event or occasion spanning multiple years.

- The Court held that the impugned notices and all proceedings pursuant thereto are set aside as they were issued beyond the prescribed limitation period.

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