The Central Board of Direct Taxes (CBDT) issued an Instruction on May 11, 2022 for the implementation of the Supreme Court’s judgment in the case of Union of India v. Ashish Agarwal, in a uniform manner. It is essential to mention that through this judgment, the apex court revived nearly 90,000 notices issued under Section 148 of the Income Tax Act, 1961 which different High Courts of India earlier quashed.

The Court held that notices issued under Section 148 would be deemed to have been issued under Section 148A of the Act. However, there are divergent views on the Instruction issued by the CBDT regarding the re-opening of tax cases for Assessment Years 2013-14 and 2014-15.

This article seeks to analyse the tenability of the Instruction in light of Section 149 of the Act and the judgments of the Supreme Court on this issue.

Background

Under the erstwhile regime, the Supreme Court laid down the procedure for dealing with the reassessment of cases in GKN Driveshafts (India) Ltd v. Income Tax Officer. Briefly stated, it provided that upon receipt of notice of reassessment, the taxpayer had the option to demand the reasons for re-opening from the tax officer and file objections to it if the taxpayer disagreed with the reasons for re-opening the assessment. The tax officer was duty-bound to dispose of the objection by way of a speaking order, and against such order, the taxpayer had an option to file a writ petition challenging the re-opening. This entire process of re-opening was overhauled by codifying the procedure with effect from April 1, 2021.

Under the new procedure, it is provided that the tax authority will first issue a notice under Section 148A of the Act sharing the information based on which it wishes to re-open the case and elicit a reply from the taxpayer. In case of an unsatisfactory response, the tax authority can proceed with reopening the assessment under Section 148.

The timelines under various provisions were extended due to COVID-19, and the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 [TOLA] was also passed, whereby the date of limitation for completion of various situations falling between March 23, 2020 to March 31, 2021 was extended to June 30, 2021. However, tax authorities kept issuing notices for re-opening even after April 1, 2021 under the old law with the notion that TOLA applies to the substituted provisions. Taxpayers approached various High Courts challenging the validity of notices issued under old law after April 1, 2021. Most of the High Courts quashed the notices, holding that TOLA did not supersede the amendment made vide the Finance Act 2021, introducing new procedures.

The matter ultimately reached the Supreme Court, which while preserving the notices, exercised its power under Article 142 of the Constitution and effectively held that all notices issued after April 1, 2021 under Section 148 shall be deemed to be notices under the newly inserted Section 148A. Accordingly, all defences including the defence of limitation provided under Section 149 shall remain available to the taxpayers.

Thereafter, an instruction was issued by the CBDT containing guidelines for uniform implementation of the Supreme Court’s judgment. However, a debate has ensued about whether CBDT, while issuing the Instruction, failed to take into account that the first proviso to Section 149(1), which provides that reassessment proceedings cannot be re-opened under the new law if the same was not possible under the old law. It is important to note that the scope of any circular, notification or instruction issued by CBDT is essentially to ameliorate the hardship caused to the taxpayer and that the executive instructions cannot run contrary to statutory provisions or whittle down their effect, as held in the case of State of Madhya Pradesh v. GS Dall & Flour Mills.

The instruction issued by the CBDT

It appears that the CBDT has possibly interpreted the judgment of the Supreme Court in its favour while still reaping the benefit of the provisions of TOLA. The CBDT has relied on the presumption that since notices could be issued under the old law coupled with the TOLA benefits, the same will be applicable in the new substituted law as well. Thus, basis the above interpretation, the CBDT gave the following guidelines with respect to issuance of notice of previous assessment years:

For AY 2013-14, AY 2014-15 and AY 2015-16:

Fresh notice u/s 148 can be issued in these cases, provided the amount involved in the dispute is or is likely to be fifty lakh rupees or more, for that particular year.

For AY 2016-17, AY 2017-18:

Fresh notice u/s 148 can be issued in these cases as they are well within the period of three years prescribed in Section 149.

Therefore, the view of CBDT is that notices can be validly issued for Assessment Years 2013-14 and 2014-15. This view derives its strength from the following judgments.

In Mon Mohan Kohli v. ACIT, the Delhi High Court, while considering the validity of the above-mentioned notifications, has clearly held that the Executive does not have any power to defer/postpone the implementation of the Finance Act, 2021. The Court took the view that Section 3(1) of the TOLA in no way empowers the Central government to postpone the applicability of any provision which has been enacted from a particular date. Thus, notices issued after April 1, 2021 are not protected by the benefit of the TOLA extended period, as the substituted provisions were made effective, and the Court has held that in case of a conflict between TOLA and the amending Act, the latter will prevail.

Further, in Ashok Kumar Agarwal v. Union of India, the Allahabad High Court has held,

“…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.”

The High Courts unequivocally held that the notification could not infuse any life into a provision that stood obliterated from the statute with effect from March 31, 2021 and thus notices were set aside. These notices have been revived by the Supreme Court. However, the question which may still need examination is what happens to the notices which were issued for AY 2013-14 using the extended period of limitation after March 31, 2020, but before the new law came into effect? Can they be considered valid notices under the old law and hence be resurrected in light of the Supreme Court judgment?

It will be interesting to see how the courts delve into this issue and interpret the applicability of TOLA extended benefit to notices issued on or before March 31, 2021.

Gagan Kumar is a settlor at Krishnomics Legal.