Facts of the case

Petitioner is registered with Reserve Bank of India as Non-Banking Finance Company and is classified as an Asset Finance Company. The return of income was selected for scrutiny and a notice dated 05.09.2018 was issued under section 143(2). Petitioner responded and submitted the transaction wise summary in respect of expenditure on software consumables. An assessment order dated 23.12.2018 was passed under section 143(3) without making any adjustments to the total income as reported by the Petitioner in its return of income.

Thereafter, a notice dated 25.06.2021 was issued under section 148 for A.Y. 2016-17. The notice was issued after obtaining necessary satisfaction of Principal Commissioner of Income Tax. In the reasons recorded, it was stated that the Petitioner had debited an amount on account of software consumables as other expenses to the Profit and Loss Account. The Ld. Assessing Officer alleged that the said expenditure ought to be treated as capital expenditure which is not allowable as per section 37 and attracts depreciation @60%.
Accordingly, the Ld. Assessing Officer proposed to disallow 40% of said expenditure and add back to the business income of the Petitioner.
In response to the notice under section 148, the Petitioner submitted that the said notice is bad in law because it has been issued as per the provisions of section 147 to 151 as they stood prior to their substitution vide Finance Act, 2021. Post 01.04.2021, the Ld. Assessing Officer should have assumed jurisdiction in terms of the amended provisions.
Thereafter, vide issue letter dated 31.05.2022, the Assessing Officer deemed the notice dated 25.06.2021 under section 148 as show cause notice under section 148A(b) by applying the decision of Supreme Court in the case of Union of India vs. Ashish Agarwal.
Subsequently, the Assessing Officer passed order dated 31.07.2022 under section 148A(d) rejecting the submissions of the Petitioner therein and thereafter issued the notice dated 31.07.2022 under section 148. In the said notice, the Assessing Officer has not provided what information is available with him in terms of Explanation 1 or Explanation 2 to section 148.

Consequently, the order under section 148A(d) and notice under section 148 passed and issued respectively for A.Y. 2016-17 were challenged.

Issues raised:

I. Wrong specified authority

Contentions of the Petitioner:

For A.Y. 2016-17, 3 years elapsed on 31.03.2020. In the given case, order under section 148A(d) and notice under section 148 were passed and issued on 31.07.2022. Accordingly, the Assessing Officer had invoked extended period of limitation of 10 years under section 149(1)(b). As per section 151(ii), if more than 3 years have elapsed from the end of relevant assessment year, the specified authority who has to grant sanction for the purposes of section 148 and section 148A is the Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General. However, in the given case, for passing order under section 148A(d) prior approval of Principal Commissioner of Income Tax was taken. As the sanction of the competent authority has not been obtained, the impugned order under section 148A(d) and impugned notice under section 148 are bad in law and should be quashed.

Contentions of Department:

Sanction of the authority has been taken in view of the instructions given by CBDT on 11.05.2022.
In the given case, assessment year under consideration is A.Y. 2016-17 and period of 3 years for said A.Y. would have expired on 31.03.2020. However, the said period of 3 years got extended till 30.06.2021 by virtue of section 3 of TOLA read with notification dated 31.03.2020. Accordingly, the sanction has been rightly granted by Principal Commissioner of Income Tax and there is no violation of Section 151. The contention of the Petitioner that TOLA only seeks to extend the period of limitation and does not affect the scope of section 151 is misplaced because section 151 is time dependent and that the notice as being issued within 3 years, it is only section 151(i) which would apply.

Under TOLA, time for issuing notice stood extended and hence the notice issued under section 149(1)(b) was within time.

Observations of the Court

Admittedly in the given case, the approval/sanction for order under section 148A(d) has been granted by Principal Commissioner of Income Tax. The present petition relates to A.Y. 2016-17 and as the impugned order under section 148A(d) and impugned notice under section 148 are issued beyond the period of 3 years which elapsed on 31.03.2020, the approval as contemplated in section 151(ii) would have to be obtained i.e. Principal Chief Commissioner of Income Tax, Principal Director General, Chief Commissioner or Director General. The impugned notice under section 148 mentions that prior approval has been taken of Principal Commissioner of Income Tax which is bad in law as the approval should have been obtained in terms of section 151(ii) and not section 151(i).

II. Change of opinion

Contentions of Petitioner:

Query in respect of expenditure on computer software was raised by the Assessing Officer during the course of original proceedings. Petitioner had provided all the details in respect of the said expenditure and the Assessing Officer had accepted the explanation given by the Petitioner. Relying upon the judgment of Bombay High Court in the case of Aroni Commercials Ltd. vs. Deputy Commissioner of Income Tax, the Petitioner contended that once a query is raised during the assessment proceedings and the assessee has replied to it, it follows that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. In the given case there was a change of opinion on the part of the Assessing Officer. The concept of change of opinion is an in-built test to check abuse of power by the Assessing Officer as held in the case of CIT vs. Kelvinator of India Ltd. Even the recent judgment of Madras High Court in the case of Dr. Mathew Cherian vs. ACIT the court held that whether under old regime or new regime of reassessment it is settled position that the issues decided categorically by judicial precedent should not be revisited in the guise of reassessment.

Contentions of the Department

In view of the change in the language of amended Section 147 of the Act, the concept of change of opinion would not be applicable. The Assessing Officer had observed that even though Petitioner had produced books of accounts, audited profit and loss account and balance sheet but requisite material facts were embedded in such a manner that material evidence could not be discovered with due diligence and accordingly attracted the provisions of explanation of sub-section (1) of section 147. Therefore, it is not a case of change of opinion but the case where assessee had failed to make true and full disclosure.

Observations of Court

The Assessing Officer has only power to reassess not to review. If the concept of change of opinion is removed as contended on behalf of the Department, then in the garb of re-opening the assessment, review would take place. The concept of change of opinion is an in-built test to check abuse of power by the Assessing Officer. As held in the case of Dr. Mathew Cherian, whether under old or new regime of reassessment, it is settled position that the issues decided categorically should not be revisited in the guise of reassessment. That would include issues where query have been raised during the assessment and query have been answered and accepted by the Assessing Officer while passing the assessment order. As held in Aroni Commercials even if assessment order has not specifically dealt with that issue, once the query is raised it is deemed to have been considered and the explanation accepted by the Assessing officer. It is not necessary that an assessment order should contain reference and/or discussion to disclose his satisfaction in respect of the query raised.

The Assessing Officer cannot initiate reassessment proceedings to have a relook at the documents that were filed and considered by him in the original assessment proceedings as the power to reassess cannot be exercised to review an assessment. In Petitioner’s case the Assessing Officer having allowed the amount of software consumables as a revenue expenditure now seeks to treat the same as capital expenditure which is a clear change of opinion. Various judicial precedents have held that reassessment proceedings initiated on the basis of a mere change of opinion are invalid and without jurisdiction.

III. Applicability of provisions of TOLA

Contentions of Petitioner

The Petitioner cited the decision of Bombay High Court in the case of Tata Communications Transformation Services Ltd. vs. ACIT wherein the court had observed that TOLA is not applicable to A.Y. 2015-16 or any subsequent years and therefore reliance on TOLA would be of no assistance. In Ashish Agarwal case, the Apex Court did not interfere with this view expressed by the Bombay High Court.

Also, in the case of J.M. Financial & Investment Consultancy Services Pvt. Ltd. vs. ACIT, Bombay High Court had held that for A.Y. 2015-16, the period of limitation of 6 years was expiring on 31.03.2022 and TOLA will not be applicable and in any event, the time to issue notice may have been extended but that would not amount to amending the provisions of section 151.

Observations of Court

TOLA, inter-alia, provided for a relaxation of certain provisions of Income-tax Act, 1961. Where any time limit for completion or compliance of an action such as completion of any proceedings or passing of any order or issuance of any notice fell between the period 20.03.2020 to 31.12.2020, the time limit for completion of such action stood extended to 31.03.2021. Thus, TOLA only seeks to extend the period of limitation and does not affect the scope of section 151.
The Assessing Officer cannot rely on the provisions of TOLA and the
notifications issued thereunder as section 151 has been amended by Finance Act, 2021 and the provisions of the amended section would have to be complied with by the Assessing Officer, w.e.f., 1st April 2021. Hence, the Assessing Officer cannot seek to take the shelter of TOLA as a subordinate legislation cannot override any statute enacted by the Parliament.

Further, the notification extending the dates from 31st March 2021 till 30th June 2021 cannot apply once the Finance Act, 2021 is in existence. The sanction of the specified authority has to be obtained in accordance with the law existing when the sanction is obtained and, therefore, the sanction is required to be obtained by applying the amended section 151(ii) of the Act and since the sanction has been obtained in terms of section 151(i) of the Act, the impugned order under section 148A(d) and impugned notice under section 148 are bad in law and should be quashed and set aside.

The interpretation placed by the CBDT in paragraph 6.1 of Instruction No. 1 / 2022 dated 11th May 2022 cannot be countenanced as it is not open to them to clarify that the law laid down by the Apex Court means that the extended reassessment notices will travel back in time to their original date when such notices were to be issued and, then, the new section 149 of the Act is to be applied as this is contrary to the judgment of Bombay High Court in Tata Communications wherein it is held that TOLA does not envisage traveling back of any notice.

However, even assuming that it is held that these notices travel back to the date of the original notice issued on 25.06.2021, even then the approval of the Principal Chief Commissioner of Income Tax should be obtained in terms of section 151(ii) of the Act as a period of three years from the end of the relevant assessment year ended on 31.03.2020 for AY 2016-17.

Further, the CBDT in Instruction no.1/2022 at paragraph 6.2(ii) has
wrongly stated that the notices issued under section 148 of the Act for A.Y. 2016-17 are to be considered as having been issued within a period of three years from the end of the relevant assessment year and on that basis has wrongly mentioned that the approval of the specified authority under section 151(i) should be taken. This conclusion is premised on the basis that these notices travel back to 31 March 2020 which premise is completely erroneous.

The notice under section 148 is issued on 31.07.2022 and, hence, is issued beyond period of three years from the end of the relevant assessment year and, accordingly, the approval of the specified authority under section 151(ii) should be taken.

Bombay High Court in Tata Communications, has rejected the argument of the Revenue on the issue of travel back. It was held that Section 3(1) of TOLA does not provide that any notice issued under Section 148 after 31st March 2021 will relate back to the original date or that the clock is stopped on 31st March, 2021 such that the provision as existing on such date will be applicable to notices issued relying on the provision of TOLA. The court held that Section 3(1) of TOLA merely extends the limitation provided in the specified Acts including Income-tax Act for doing certain acts but such acts must be performed in accordance with the provisions of the specified Acts. The court had also recorded that the Delhi High Court had considered and rejected the contention of the Revenue that the notice issued after 1st April 2021 relates back to an earlier period. The Delhi High Court had considered and rejected the argument of the Revenue that TOLA creates a legal fiction such that the notices issued under Section 148 of the Act are deemed to be issued on 31st March, 2021. TOLA only granted power to the Central Government to notify the period during which actions are required to be taken that can fall within the ambit of TOLA and the power to extend the time limit within which those actions are to be
taken. There was no amendment to the provisions of Sections 147 to 151 of the Act. The court also observed that amendments to the substantive provisions of the Act were envisaged under Section 3 of TOLA which was only a relaxation provision dealing with time limits under various enactments.
The Assessing Officer could have assumed jurisdiction while issuing the impugned notices only after complying with the amended Section 147 which has not been done. In Tata Communications, Bombay High Court also held that TOLA was not applicable for A.Y.-2015-2016 or any subsequent years. Hence question of applicability of notification issued under TOLA also would not arise.

These findings of the Bombay High Court have not been disturbed by the Apex Court in Ashish Agarwal (Supra). The Apex Court only modified the orders passed by the respective High Courts to the effect that the notices issued under Section 148 of the Act which were subject matter of writ petitions before various High Courts shall be deemed to have been issued under Section 148A(b) of the Act and the Assessing Officer was directed to provide within 30 days to the respective assessee the information and material relied upon by the Revenue so that the assessee could reply to the show cause notices within two weeks thereafter. The Apex Court held that the Assessing Officer shall thereafter pass orders in terms of Section 148A(d) in respect of each of the concerned assessees. Thereafter, after following the procedure as required under Section 148A may issue notice under Section 148 (as substituted). The Apex Court also expressly kept open all contentions which may be available to the assessee including those available under Section 149 of the Act and all rights and contentions which may be available to the concerned assessee and revenue under the Finance Act 2021 and in law, shall be continued to be available.

IV. Applicability of CBDT Instruction dated 11.05.2022

Observations of Court

The instructions dated 11th May 2022, on which Department have relied upon, has no applicability to the facts of this case. These instructions expressly provides that it applies only to the issue of reassessment notice issued by the Assessing Officer during the period beginning 1st April 2020 and ending with 30.06.2021 within the time extended under TOLA and various notifications issued thereunder. Since the impugned notice in this case is dated 31.07 2022, certainly the instructions no.1 of 2022 dated 11.05.2022 shall have no applicability at all. Even for a moment, if Department’s arguments are considered that Apex Court’s findings in Ashish Agarwal read with time extension provided by TOLA will allow extended reassessment notices to travel back to their original date when such notices were issued and then new Section 149 of the Act is to be applied at that time but such arguments are not tenable because the extended reassessment notices are defined under the instructions to be notice issued between 1st April 2021 and ending with 30th June 2021. Therefore, the instructions would not help Department’s case at all.

V. Sanction of specified authority – Jurisdictional Condition

Contentions of Department

Department submitted that the effect of setting aside notice on the ground of not having obtained proper sanction would result in stalling the entire reassessment proceedings.

Observations of Court

Bombay High Court in Godrej Industries Limited v. DCIT has held that an assessment can be reopened under section 147 and 148 of the Act only on the jurisdictional preconditions being satisfied strictly. The court held that sanction of a superior officer to the reasons recorded in terms of section 151 should be obtained before issuing the notice under section 148 of the Act and all jurisdictional requirements are required to be satisfied cumulatively and even if one of the numerous jurisdictional requirements necessary for issuing the notice under section 148 of the Act are not satisfied, the reopening of an assessment would fail. Hence, in the present facts also since the approval of the specified authority in terms of section 151(ii) of the Act is a jurisdictional requirement and in the absence of complying with this requirement, the reopening of assessment would fail.

Decision of the Court

The order passed under section 148A(d) and consequent notice issued under Section 148 have to be quashed and set aside on following grounds:

a) that approval for issuance of notice under Section 148A(d) of the Act has not been properly obtained.

b) The notice to reopen has also been issued on the basis of change of opinion which is not permissible.

Posted on: September 9th, 2023