The Division bench of the High Court of Delhi in the case of Mon Mohan Kohli Vs Assistant Commissioner of Income Tax & Anr. quashed all reassessment notices on 15th Dec, 2021 issued by taxmen under the old regime on or after April 1, 2021, bringing in a huge relief for the taxpayers. They made it clear that the revenue cannot use the administrative power ‘undermining the expression of Parliamentary supremacy in the form of an Act of Parliament.’
The whole issue behind this litigation is the substitution of provisions related with Sections 147 (income escaping assessment), 148 (issue of notice where income has escaped assessment), 149 (time limit for notice) and 151 (sanction for issue of notice) through the Finance Act 2021. The act also inserted new Section 148A, which prescribes for conducting inquiry, providing opportunity before issue of notice under Section 148.
In the present case, Revenue had issued reassessment notices under the old regime in the light of extension notifications in the wake of the pandemic by the Central Board of Direct Taxes under Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA).
Apparently, these notices have been dismissed by the High Court on certain grounds. Let us have an insight of the decision in detail.
Firstly, we need to understand few provisions and what the old and new regime about.
Old regime (Finance Act 2012)
Under sec 148 of the old tax regime which existed till 31st March, 2021, reassessment notices could be issued by the revenue authorities up to 4 years, 6 years, or 16 years (under Finance Act, 2012), depending on various scenarios.
New regime (Finance Act 2021)
The finance ministry has changed the law for reassessment proceedings under Section 148 from this year onwards in the Union Budget 2021. The new rule says that an assessing officer cannot issue a notice if three years (10 years in exceptional cases) have elapsed from the end of the relevant assessment year.
The law change was supposed to come into effect from April 1, 2021 which meant that notices are to be issued by March 31, 2021. But income tax authorities have extended the time limit to June 30, 2021, owing to the restrictions due to the second wave, leading to a flurry of notices to companies, businesses wherever the requirement of reassessment has been determined.
Explanation of provisions: Income escaping assessment
Under the Income Tax Act, 1961, the provisions related to income escaping assessment provide that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may assess or reassess or recompute the total income for such year under section 147 of the Act by issuing a notice under section 148 of the Act. However, such reopening is subject to the time limits prescribed in section 149 of the Act. Under the old tax regime which existed till 31st March, 2021, reassessment notices could be issued by the revenue authorities up to 4 years, 6 years, or 16 years (under Finance Act, 2012), depending on various scenarios.
The Legislature, being conscious of the shortcomings in the unamended Sections 147 to 151 of the Income Tax Act, 1961, which were relaxed by the aforesaid provisions of the Relaxation Act and the Notifications issued thereunder, introduced reformative changes to the said Sections governing the procedure for reassessment proceedings by way of the Finance Act, 2021.
Thus, w.e.f. 1st April, 2021, the reassessment notices relating to any Assessment Year issued under Section 148 after 31st March, 2021 have to comply with the substituted sections as below:
a. Section 147:The earlier existing concept of income escaping assessment was simplified by substituting a new provision;
b. Section 148:The provision governing issuance of notice for initiation of reassessment proceedings was substituted with a new provision, inter alia, prohibiting issuance of such notice,
(i) in absence of any ‘information’ with the Assessing Officer suggesting escapement of income;
(ii) in absence of approval from the specified authority and
(iii) without following the procedure prescribed under Section 148A of the Income Tax Act, 1961.
Moreover, the said notice issued under Section 148 is now required to be served along with order passed under Section 148A of the Income Tax Act, 1961;
c. Section 148A: New provision has been introduced in the Income Tax Act, 1961, inter alia prescribing,
(i) Assessing Officer to conduct inquiry, if required, with prior approval;
(ii) opportunity of heard to be given to the assessee, with prior approval;
(iii) Assessing Officer to consider reply of assessee; and
(iv) order to be passed as to whether it is a fit case for issuance of notice under Section 148 of the Income Tax Act, 1961;
d. Section 149:The provisions governing time limit for issuance of notice under Section 148 of the Income Tax Act, 1961 have been replaced with new provisions, inter alia, reducing the permissible time limit for issuance of such notice to three years [and ten years only in exceptional cases] and further changing the earlier existing criteria governing such time limit;
e. Section 151:The earlier existing provision prescribing the sanctioning authorities for issuance of notice under Section 148 is replaced with new provisions prescribing the sanctioning authorities for the purposes of Sections 148 & 148A; pertinently for issuance of notice after three years from the end of relevant Assessment Year, wherein reopening is permitted in exceptional cases, sanction from the highest level of Income Tax Department is required to be obtained.
Based on the above substituted provisions and the Memorandum explaining the provisions in the Finance Bill, 2021, it is apparent that the legislative intent behind the substitutions/amendments is to reduce the time limit in ordinary cases to three years and to increase the threshold amount of income having escaped assessment to Rs.50 lakhs for invoking extended time limit of ten years is to reduce litigation and compliance burden, remove discretion, impart certainty and promote ease of doing business.
Validity of notices challenged by assessees
The assessees challenged the validity of reassessment notices issued under the old regime of reassessment but after April 1, 2021 in the light of the extension notifications issued by the Central Board of Direct Taxes (CBDT) under Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA), without adhering to the procedure entailed in Section 148A.
Opinion of the High Court
The Chhattisgarh High Court is of the opinion that Section 3(1) of Relaxation Act (TOLA) empowers the Government to extend only the time limits and it does not delegate the power to legislate on provisions to be followed for initiation of reassessment proceedings. In fact, the Relaxation Act does not give power to Government to extend the erstwhile Sections 147 to 151 beyond 31st March, 2021 and/or defer the operation of substituted provisions enacted by the Finance Act, 2021.
Further, Revenue cannot rely on Covid-19 for contending that the new provisions Sections 147 to 151 of the Income Tax Act, 1961 should not operate during the period 1st April, 2021 to 30th June, 2021 as Parliament was fully aware of Covid-19 Pandemic when it passed the Finance Act, 2021.
After going through detailed hearing, the Bench (comprising Justices Manmohan and Navin Chawla) rejected the doctrine of conditional legislation relied upon by the Chhattisgarh High Court but concurred with the view of the Allahabad High Court and the Rajasthan High Court. It held the impugned explanations to extension notifications as ultra vires TOLA. It also held that TOLA does not empower the Revenue to extend time-limit of application of the old reassessment regime beyond March 31, 2021 as the Finance Act, 2021 introduced new scheme of reassessment with effect from April 1, 2021.
Impact and Outcome
This judgment will not only provide relief to thousands of taxpayers, who have filed similar petitions before the Delhi High Court, but will also have favorable impact for taxpayers, who have filed similar petitions before other High Courts across the country.
The move may affect 1.33 lakh reassessment notices issued during the period, said a senior tax official added that I-T department may move special leave petition in Supreme Court against the HC ruling or seek amendment in the Finance Act.