The Unanswered Question of Limitation– A contentious issue post Supreme Court ruling on reassessment controversy

The Hon’ble Supreme Court (‘SC’), in the case of Union of India & Ors vs. Ashish Agarwal has pronounced an exceptional decision concerning thousands of reassessment notices issued to taxpayers during the period 1.04.2021 to 31.06.2021 (‘specified period’), albeit under the reassessment provision of the Income Tax Act (‘the Act’) applicable till 31.03.2021. The decision has drawn immense interest given the consequence and uniqueness of the order.

The SC was faced with the challenge of balancing equity for both the taxpayer and the Revenue Authorities (‘RA’) given the magnitude of reassessment notices (90,000) and the impact on the government exchequer. The circumstances pivoted the SC to exercise its constitutional powers under Article 142 of the Indian Constitution to strike a balance, rather than adopt a strict technical view on this important subject. This can be inferred from the following observation of the Court:

“There is a broad consensus on the aforesaid aspects amongst the learned ASG appearing on behalf of the Revenue and the learned Senior Advocates/learned counsel appearing on behalf of the respective assessees. We are also of the opinion that if the aforesaid order is passed, it will strike a balance between the rights of the Revenue as well as the respective assesses as because of a bonafide belief of the officers of the Revenue in issuing approximately 90000 such notices, the Revenue may not suffer as ultimately it is the public exchequer which would suffer.’

Whatever the rationale for the decision, one would have hoped that the SC ruling would bring certainty and closure on this subject. Unfortunately, it may not be the last word yet on this contentious issue. One specific aspect that may now become a subject of dispute and litigation is the ‘question of limitation’ applicable to reassessment proceedings which have now been given a fresh lease of life consequent to the SC order.

Concurrence with High Court orders

The reading of the SC decision makes it clear that the court agreed with the proposition articulated by various High Courts holding that substituted reassessment provisions (effective 1.04.2021) would apply in respect of notices issued on or after 1.04.2021. This is inferable from the following observations:

“7. Thus, the new provisions substituted by the Finance Act, 2021 being remedial and benevolent in nature and substituted with a specific aim and object to protect the rights and interest of the assessee as well as and the same being in public interest, the respective High Courts have rightly held that the benefit of new provisions shall be made available even in respect of the proceedings relating to past assessment years, provided section 148 notice has been issued on or after 1st April, 2021. We are in complete agreement with the view taken by the various High Courts in holding so…..

…….It is true that due to a bonafide mistake and in view of subsequent extension of time vide various notifications, the Revenue issued the impugned notices under section 148 after the amendment was enforced w.e.f. 01.04.2021, under the unamended section 148. In our view the same ought not to have been issued under the unamended Act and ought to have been issued under the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021.”

It is accordingly decided by the SC that reassessment notices issued during the period 1.04.2021 to 30.06.2021 should have been issued under the substituted provision of Sec. 147 to 151 as per the Finance Act, 2021.

A middle ground for resolution

The legal consequence of the High Court orders was the carte blanche quashing of reassessment notices issued during the specified period as per the law applicable till 31.03.2021 (‘erstwhile law’). It was observed by the SC that the judgments of the several High Courts quashing the notices would result in no reassessment proceedings at all, even if the same are permissible under substituted Sec. 147 to 151 of the Finance Act, 2021. It would thus appear that to resolve this impasse, leeway has been given to proceed further with the reassessment proceedings as per the substituted provisions of Sec. 147 to 151 of the Finance Act, 2021. While adopting a middle ground, the SC has categorically stated that all defences/ rights/ contentions available to the assessee and the RA as under the Finance Act, 2021 and in law shall continue to be available. This is made clear by the following observations from the SC.

“However, at the same time, the judgments of the several High Courts would result in no reassessment proceedings at all, even if the same are permissible under the Finance Act, 2021 and as per substituted sections 147 to 151 of the IT Act. The Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated…….

… …..There appears to be genuine non application of the amendments as the officers of the Revenue may have been under a bonafide belief that the amendments may not yet have been enforced. Therefore, we are of the opinion that some leeway must be shown in that regard which the High Courts could have done so. Therefore, instead of quashing and setting aside the reassessment notices issued under the unamended provision of IT Act, the High Courts ought to have passed an order construing the notices issued under unamended Act/ unamended provision of the IT Act as those deemed to have been issued under section 148A of the IT Act as per the new provision section 148A and the Revenue ought to have been permitted to proceed further with the reassessment proceedings as per the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021, subject to compliance of all the procedural requirements and the defences, which may be available to the assessee under the substituted provisions of sections 147 to 151 of the IT Act and which may be available under the Finance Act, 2021 and in law.”

It can therefore be inferred that the limited point of disagreement with the decision of the High Courts is only vis-a-vis the treatment of reassessment notices. As against the quashing of the notices by the High Courts, the SC has opined that such notices should be deemed as a show cause notice under amended Sec. 148A of the Act and consequent proceedings should be conducted subject to substituted reassessment provisions. Other than this specific aspect, the SC has not withered down any other aspect of the High Court decisions. The SC has accordingly partly allowed the petition filed by the RA and modified/substituted the judgements passed by the various High Courts only to the extent of the following:

  • Notices issued u/s 148 (of erstwhile Act) will be construed as notice u/s 148A(b) of the amended Act [requiring the assessee to show cause as to why a reassessment notice u/s 148 (of the emended law) should not be issued on the basis of information suggesting escapement of income]
  • The RA shall, within 30 days (from the date of SC order i.e. 04.05.2022) provide to the assessee information and material relied upon alleging escapement of income
  • The assessee will have the opportunity to file reply to the show cause notices within 2 weeks.
  • The RA shall thereafter pass orders in terms of Sec. 148A(d) i.e. determining whether it is a fit case for reassessment and thereafter proceed to issued notices under substituted Sec.148 of the Act
  • All defences available to the assesses including those available u/s 149 of the Act and all rights and contentions under Finance Act, 2021 shall be available.

Open question of Limitation

The reassessment notices in question were issued during the period 1.04.2021 to 30.06.2021 under the erstwhile Sec. 148 of the Act. Such notices were issued within the extended timelines specified under notifications issued under Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA). Further, such notices have primarily been issued in relation to assessment year (AY) 2013-14 to AY 2017-18.

The Finance Act 2021 has altered the scheme of reassessment substituting Sec. 147 to Sec 149 and Sec. 151 of the Act. The substituted Sec. 149 of the Act has curtailed the time limit for issuance of notice u/s 148 to 3 years (where the alleged concealment is less than INR 50 lacs) and 10 years where the monetary threshold is breached (subject to further grandfathering to 6 years for pre-amendment years).

The question thus arises is whether the limitation period as prescribed under amended Sec. 149 of the Act would be applicable in respect of the proceedings proposed to be regularized pursuant to the decision of the SC, or would such proceedings continue unabated, notwithstanding the period of limitation u/s 149 of the amended Act. This has significance considering that if the limitation under amended Sec. 149 of the Act were to apply, AY 2013-14 to AY 2017-18 would fall beyond the limitation period of 3 years (where allegation for concealment is less than INR 50 Lacs). Also, where the threshold is breached, AY 2013-14 and AY 2014-15 may still fall outside the limitation period [extended limitation of 10 years (restricted to 6 years for pre-amendment years)].

It should be possible to argue that the decision of the SC has merely regularized a step in the process to be followed under the amended reassessment law applicable w.e.f. April 2021. The SC has unequivocally agreed with the decision of the High Courts on the matter, however, with leeway to proceed with the proceedings as per the substituted reassessment provisions as per the Finance Act, 2021.

In this respect, the SC has only construed the reassessment notices issued u/s 148 of the unamended Act as a deemed notice to show cause as per the amended Sec. 148A(b). The SC has categorically stated that the judgements passed by the various High Courts, pursuant to the SC decision have been modified/substituted only to the limited extent as specified. There is no disagreement with the High Courts with respect to the proposition that notices issued on or after 1.04.2021 will be subject to reassessment provisions as amended. It may therefore be fair to state that SC has in fact affirmed the decision of the HCs which have held that the notification issued under TOLA have no applicability to the reassessment proceedings initiated on or after 1.04.2021.

The following extract of the decision of the Allahabad High Court which was under review by the SC clarifies this aspect.

“75. As we see there is no conflict in the application and enforcement of the Enabling Act and the Finance Act, 2021. Juxtaposed, if the Finance Act, 2021 had not made the substitution to the reassessment procedure, the revenue authorities would have been within their rights to claim extension of time, under the Enabling Act. However, upon that sweeping amendment made the Parliament, by necessary implication or implied force, it limited the applicability of the Enabling Act and the power to grant time extensions thereunder, to only such reassessment proceedings as had been initiated till 31.03.2021. Consequently, the impugned Notifications have no applicability to the reassessment proceedings initiated from 01.04.2021 onwards.

Upon the Finance Act 2021 enforced w.e.f. 1.4.2021 without any saving of the provisions substituted, there is no room to reach a conclusion as to conflict of laws. It was for the assessing authority to act according to the law as existed on and after 1.4.2021. If the rule of limitation permitted, it could initiate, reassessment proceedings in accordance with the new law, after making adequate compliance of the same. That not done, the reassessment proceedings initiated against the petitioners are without jurisdiction.”

Thus, given the limited modification of High Court orders primarily deeming the notices issued u/s 148 of the erstwhile reassessment provisions as show cause notice under the substituted provisions of Sec. 148A(b) of the Act and specifying the procedure to be followed thereafter, the SC has not disturbed the position stated by the Allahabad High Court that notifications issued under TOLA will not be applicable in relation to reassessment proceedings initiated on or after 1.04.2021. Further in light of unequivocal declaration by the SC that reassessment proceedings shall proceed as per substituted provisions of Sec. 147 to 151 of the Finance Act, 2021, the reassessment reinitiated should be subject to process, requirements, and limitations imposed (as under amended Sec. 149 of the Act). Thus, the view that reassessment proceedings will be subject to the period of limitation as prescribed under the substituted Sec.149 of the Act should be sustainable.

Conclusion

The moot point of debate now is whether the amended period of limitation as prescribed under the substituted Sec. 149 of the Act will have a bearing on the fate of reassessment notices regularized consequent to the SC order. It seems fair to take a view that reassessment proceedings thus initiated will be subject to limitation period as specified under the amended Sec. 149, in which case AY 2013-14 to AY 2017-18 would fall beyond the limitation period of 3 years (where allegation for concealment is less than INR 50 Lacs). Also, where the threshold is breached, AY 2013-14 and AY 2014-15 may still fall outside the limitation period. While the position seems justified, it is highly unlikely that the RA will give into the same without a legal fight. The stage seems set for the next round of legal battles on this contentious issue.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

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