QUASHING OF RE ASSESSMENT NOTICES ISSUED AFTER 1.4.2021

Many notices were issued under section 148 of Income Tax Act by the Income Tax Department after 01.04.2021 without complying with the mandatory procedure prescribed under Section 148A as introduced by the Finance Act, 2021 with effect from 31.3.2021 in the State of Uttarakhand as well as other States. This resulted in havoc as arbitrary and unreasonable notices were being issued and that too without any authority of law. I got an opportunity to challenge these notices in the Hon'ble High Court of Uttarakhand and the Hon'ble High Court stayed the effect of the notices issued under section 148 of the Income Tax Act after 1.4.2021 directing the department to file counter affidavit.

Before stating my arguments in brief a little introduction is required for better understanding of the controversy at hand.

INTRODUCTION

The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 dated 31.03.2020 brought about an extension in the Income Tax Act, 1961 timelines in view of the Covid-19 pandemic. According to Section 3 of the Ordinance the time limit for passing orders, issuing notices that was to be between 20th March 2020 to 29th June 2020 could be done till 30th June, 2020. The period for which notices could be issued was further extended from 20th March 2020 to 31st December 2020 and the compliance date was extended to 31st March, 2021 by CBDT Notification No: 35 of 2020 dated 24.06.2020. The ordinance received the assent of the President and became an Act on 29.09.2020. According to Section 3 of the Act, issuing notices/passing orders that was to be done between 20th March 2020 to 31st December 2020 could be done till 31st March, 2021. The Act was enforced retrospectively from 31st March 2020. That the period for which notices could be issued was again revised from 20th March 2020 to 31st March 2021 by CBDT Circular No: 4805(E) of 2020 and the deadline to issue/pass them was extended to 30th April 2021 vide CBDT Notification No: 1432(E) of 2021 dated 31.03.2021 and then 30th June 2021 vide CBDT Notification No: 1703(E) of 2021 dated 27.04.2021. These notifications contained an explanation that the provisions for reassessment as they stood before Finance Act, 2021 shall apply for issuing notices and passing orders.

Meanwhile Finance Act, 2021 came into force which became applicable from 1st April 2021. The Act brought about changes in the law relating to reassessment proceedings. Section 147, 148, 149 and 151 were amended and a new section in the form of Section 148A was introduced. The following changes were brought about in the sections because of the amendment:

1. Section 147- The highly controversial wording “If the assessing officer has reason to believe that any income chargeable to tax has escaped assessment” was done away with.

2. Section 148- The assessing officer was now to conduct an enquiry under Section 148A before issuing the notice under Section 148.

3. Section 148A- Conducting inquiry and providing the assessee an opportunity of being heard as to why notice under section 148 should not be issued.

4. Section 149- Timeline for issuing notice under section 148 reduced from 6 years to 3 years. However, if the income chargeable to tax which has escaped assessment exceeds Rs. 50 lacs, then the time for issuing notice has been extended to 10 years.

Many notices were issued after 01.04.2021 by the Income Tax Department but the procedure as prescribed under Section 148A of the Finance Act, 2021 was not followed by the assessing officers in the State of Uttarakhand as well as other States. I got an opportunity to challenge these notices and also the vires of the Notification. The Hon'ble High Court of Uttarakhand stayed the effect of the notices issued under section 148 of the Income Tax Act after 1.4.2021.

Arguments raised by the petitioners:

A.) The said notices have been issued in violation of mandatory provision prescribed under the 148(A) of the Income Tax Act, as substituted by Finance Act, 2021. As per clause (a) of new section 149 reassessment proceeding could not be initiated within three years from the end of relevant assessment year, therefore, prescribing three years time limit, whereby reassessment from assessment year 2018-19 onwards, could only be reopened on or after 1-4-2021 and prior years reassessment were barred. It is, further, relevant to mention here that as per clause (b) of section 149, the reassessment proceeding in exceptional cases could be initiated within 10 years from the end of relevant year, however, the extended time limit of 10 years was fettered with precondition, which are (a) the assessing officer has in is possession books of account or other document or evidence; (b) such document/evidence in possession of the assessing officer reveals escapement of income chargeable to tax in the form of an asset as defined amounts to Rs. 50,00,000/- or more. Therefore, before initiation of reassessment proceeding for any assessment year prior to the assessment year 2018-19, exceptional conditions of section 149(B) were required to be satisfied by the Revenue Department.

B.) By virtue of section 1 (2) (A) of the Finance Act, 2021, the substituted sections 147, 148, 149 & 151 of the Income Tax Act, 1961, pertaining to reopening of assessment came into force on 1-4-2021. The significance of the expression "shall" in section 1(2) clause (A) of the Finance Act, 2021 cannot be lost sight of. This is in contrast to the language under section 1(2) clause (B), which states that section 108 to 123 of Finance Act, 2021 shall come into force on such date as the Central Government may by notification in official gazette appoint. Further, it is submitted that the Memorandum to the Finance Bill, 2021 also clarifies that its section 2 to 88, which included substituted sections 147 to 151 of the Income Tax Act, will take effect from 1-4-2021. Therefore, the impugned notices passed by the respondent no. 3 and the part of the impugned notifications issued by respondent nos. 1 & 2 are without jurisdiction and ultra-vires.

C.) There is no power with the Executive/respondents to defer or postpone the implementation of section 2 to 88 of Finance Act, 2021, which includes substituted sections 147 to 151 of the Income Tax Act. It is humbly submitted here that it is settled law that the law prevailing on the date of issuance of notice under section 148 had to be applied.

D.) Section 3(1) of Relaxation Act stipulates that where anytime limit in a specified Act, which falls between the period 20-3-2020 and 31-12-2020 for completion or compliance of such action as issuance of any notice under the provisions of the specified Act and where completion or compliance of such action has not been made within such time, then the time limit for completion or compliance of such action shall notwithstanding anything contained in the specified Act, stand extended. It is submitted here that section 3(1) of the Relaxation Act, 2020 does not empower the Central Government to postpone the applicability of any provision, which has been enacted from a particular date. It is humbly submitted here that there is a difference between extension of time or an action, which is getting time barred and applicability of a provision, which has been enacted and notified by the legislature. Relaxation Act, 2020, nowhere delegates power to the Central Government to postpone the date of applicability of a New Law enacted by legislature. Further, it is submitted here that the Relaxation Act, 2020 also does not put and embargo on the power of the legislature to legislate. Therefore, the impugned part of the notifications are ultra-vires; the provisions of Relaxation Act, 2020.

E.) The impugned explanations of notification dated 31-3-2021 & 27-4-2021 are beyond the power delegated to the Government, as the Relaxation Act, 2020 does not give the power to the Government to extend the erstwhile sections 147 to 151 beyond 31-3-2021. Further, the impugned explanations are also in conflict with the provisions of Income Tax Act, which had specifically made new reassessment scheme from 1-4-2021. It is a settled law that delegation of authority must be express. There is no scope of any implied delegation of authority. The delegated authority cannot over right the Act either by exceeding the authority or by making provisions in consistent with the Act.

F.) By substituting provisions of the Act by means of Finance Act, 2021 w.e.f. 1-4-2021, the old provisions were omitted from the statute book and replaced by fresh provisions w.e.f. 1-4-2021. It is submitted here that the principle that substitution omits, and thus, obliterates the preexisting provisions. Further, in absence of any saving clause to exist under the Relaxation Act or the Finance Act, there exists no presumption in favour of old provisions continuing to operate after 1-4-2021.

G.) Even prior to Finance Act, 2021, the legislature from time to time had enhanced or reduced time limits specified in section 149 of Income Tax Act by way of Finance Act, 1961, 1989, 2001, 2012 and pertinently such enhancement or reduction to the time limit was made effective from different dates of the relevant financial year. It is submitted here that the Hon'ble Delhi High Court in earlier decisions of C.B. Richards Ellis Mauritius V/s Additional Director of Income Tax' W.P.(C) No. 8359/2010 has held that amendment to section 149 wide Finance Act, 2001, whereby the earlier existing time limit of 10 years was reduced to 6 years has held that the reduce time limit was to be applied w.e.f. the Finance Act come into force, therefore, to ignore the legislative intent of Finance Act, 2021, would not be in accordance with pass practices.

H.) Substituted provisions as well as speech of Finance Minister and memorandum, explaining the provisions in the Finance Act, it is apparent that the legislative intent behind the aforesaid substitution is to reduce the time limit in ordinary cases to three years and increased the threshold amount of income having escaped assessment to Rs. 50,00,000/- for invoking extended time of 10 years is to reduce litigation and compliance burden, remove discretion, impart certainty and promote ease of doing business. Therefore, the benefit of new provisions must necessarily be made available even in respect of the proceedings.

I.) It is a settled proposition of law that the non-obstante clause in a statute has to be given a contextual interpretation and cannot be interpreted in a way, which defeats of extends the object and purpose of the enactment. The non-obstante clause in section 3 of Relaxation Act, 2020, only operates to prevail over time lines laid down in the specified Act. It is submitted here that apart from these time lines, no other provisions of any specified Act is suspended or overridden, therefore, by virtue of power provided under section 3 of Relaxation Act, 2020, notification cannot be issued by the department to overwrite the provisions of the Income Tax Act. It is submitted here that any notification issued under the Relaxation Act, 2020 cannot possibly have a reach and ambit wider than the Relaxation Act, 2020 itself for that would be contrary to basic rules of any interpretation of statutes.

That this controversy was decided by a Single Bench of the Hon'ble High Court of Chhatisgarh in the matter of Palak Khatuja V/s Union of India & others' W.P. (T) No. 149/2021 alongwith connected petitions. The Hon'ble High Court in the said matter upheld the validity of the notices issued under section 148 even enactment of Finance Act, 2021, stating that due to covid-19 pandemic, the time limits of various actions were increased, without taking into consideration that a delegated legislation can never over reach any Act of principal legislature.

27. That it is submitted here that the issue raised in the instant writ petition, regarding the validity of notice issued under section 148 of the Income Tax Act in violation of mandatory provisions, as substituted by way of Finance Act, 2021, which came into effect from 1-4-2021, was decided by Division Bench of Hon'ble Allahabad High Court in the matter of 'Ashok Kumar Aggrawal V/s Union of India & others', 2021 S.C.C. (Online) All. 299. The Hon'ble Allahabad High Court quashed the notices issued under section 148 of Income Tax Act after coming into force of the provisions of Finance Act, 2021 w.e.f. 1-4-2021. The above mentioned judgement of Hon'ble High Court of Chhatisgarh was also taken into consideration by the Hon'ble Court.

28. That similarly, other writ petitions, being W.P.(C) 6176/2021 'Manmohan Kohli V/s Assistant Commissioner of Income Tax & another' was pending with connected writ petition before the Division Bench of Hon'ble High Court of Delhi. The Hon'ble High Court Delhi declared the explanations A(a) (ii) of notification dated 31-3-2021 and explanation A(b) of notification dated 27-4-2021 to be ultra-vires the Relaxation Act, 2020 and quashed the reassessment notices issued under section 148 of Income Tax Act, which were issued after enactment of Finance Act, 2021. The above mentioned judgment of Hon'ble High Court of Chhatisgarh was also taken into consideration by the Hon'ble Court.

29. That it is humbly submitted here that the similar controversy has also been decided by the Hon'ble High Court of Rajasthan in the matter of Bpip Infra Pvt. Ltd. V/s Income Tax Officer S.B. Civil Writ Petition No. 13297/2021 alongwith other connected petitions. The Hon'ble High Court of Rajasthan also quashed the notices issued under section 148 of Income Tax Act issued after enactment of Finance Act, 2021. The above mentioned judgment of Hon'ble High Court of Chhatisgarh was also taken into consideration by the Hon'ble Court.

Observations of Other High Court

I.) Single Bench of the Hon'ble High Court of Chhatisgarh in the matter of Palak Khatuja V/s Union of India & others' W.P. (T) No. 149/2021 alongwith connected petitions. The Hon'ble High Court in the said matter upheld the validity of the notices issued under section 148 even enactment of Finance Act, 2021, stating that due to covid-19 pandemic, the time limits of various actions were increased, without taking into consideration that a delegated legislation can never over reach any Act of principal legislature.

II.) Division Bench of Hon'ble Allahabad High Court in the matter of 'Ashok Kumar Aggrawal V/s Union of India & others', 2021 S.C.C. (Online) All. 299, quashed the notices issued under section 148 of Income Tax Act after coming into force of the provisions of Finance Act, 2021 w.e.f. 1-4-2021. The above mentioned judgment of Hon'ble High Court of Chhatisgarh was also taken into consideration by the Hon'ble Court.

III.) In W.P.(C) 6176/2021 'Manmohan Kohli V/s Assistant Commissioner of Income Tax & another' the Hon'ble High Court at Delhi declared the explanations A(a) (ii) of notification dated 31-3-2021 and explanation A(b) of notification dated 27-4-2021 to be ultra-vires the Relaxation Act, 2020 and quashed the reassessment notices issued under section 148 of Income Tax Act, which were issued after enactment of Finance Act, 2021. The above mentioned judgment of Hon'ble High Court of Chhatisgarh was also taken into consideration by the Hon'ble Court.

IV.) The Hon'ble High Court of Rajasthan in the matter of Bpip Infra Pvt. Ltd. V/s Income Tax Officer S.B. Civil Writ Petition No. 13297/2021 alongwith other connected petitions also quashed the notices issued under section 148 of Income Tax Act issued after enactment of Finance Act, 2021. The above mentioned judgment of Hon'ble High Court of Chhatisgarh was also taken into consideration by the Hon'ble Court.

V.) This controversy is pending in several high courts as well as Hon'ble Supreme Court of India.