Dharan Gandhi, Advocate

In life, it is evidenced that an action is initiated with a particular purpose, but with the passage of time, either the purpose changes or is lost. This is so often witnessed under the Income-tax Act, 1961 (‘Act’). A particular section is inserted with a particular object, but then the section gets amended over a period of time and the purpose seems to fade away.

Also, sometimes, it is seen that a particular section is introduced with a very limited scope, which may be constitutionally valid. But then, slowly and steadily, the scope of the section is expanded such that the section becomes very lethal and, in fact, unconstitutional. In hindsight, when one sees the pattern of amendments, it appears, that a long- term strategy was chalked out by the Government to slowly and steadily introduce some sweeping provisions, so that the same goes unnoticed or the same does not garner much attention. u/s

One of such instances is very recently witnessed and is subject matter of the present article.

New reassessment scheme

In the Finance Bill, 2021, the Hon’ble Finance Minister proposed sweeping changes in so far as the reassessment provisions are concerned. She proposed to introduce a completely new scheme with new jurisdictional requirements, new procedures and new time limits. In the Explanatory Memorandum to Finance Bill, 2021, it is stated that now the Department is driven by information received from third parties and that there is a need to completely reform the system of assessment or reassessment which will result in less litigation and would provide ease of doing business to taxpayers.

The Hon’ble Finance Minister in her Budget Speech, had stated that “I therefore propose to reduce this time-limit for re-opening of assessment to 3 years from the present 6 years. In serious tax evasion cases too, only where there is evidence of concealment of income of Rs. 50 lakh or more in a year, can the assessment be re-opened up to 10 years. Even this reopening can be done only after the approval of the Principal Chief Commissioner, the highest level of the Income Tax Department.”

Thus, vide Finance Act, 2021, the entire scheme of reassessment under the Act was replaced by a completely new scheme. In fact, even the provisions relating to search assessments u/s 153A and 153C of the Act are discontinued and all the assessments pursuant to search and survey are to be completed u/s 147 of the Act. There are several new jurisdictional requirements prescribed in section 147, 148, 148A, 149 and 151 of the Act as amended by Finance Act, 2021. The onus will be on the Assessing Officer (‘AO’) to demonstrate that all the jurisdictional requirements are satisfied to issue notice u/s 148 of the Act. Some of the important conditions which need to be fulfilled are as under:

• AO must have information in his possession which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the relevant assessment year – first proviso to section 148
• Such information must be either an information in accordance with the risk management strategy formulated by the Board or based on audit objection or based on information which is received by the AO from some sources– Explanation 1 to section 148.
• Before issuing a notice u/s 148 of the Act, procedures u/s 148A have to be complied with which includes providing an opportunity of being heard to the assessee, by serving upon him a notice to show cause as to why a notice u/s 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment and after hearing the assessee, the AO has to pass a speaking order to decide whether or not it is a fit case to issue a notice u/s 148. All such steps are to be taken with the prior approval of the specified authority.
• Any reassessment after 1.4.2021 has to be with the approval of the specified authority as per section 151 of the Act. Further, different authorities are prescribed for approval if the assessment is sought to be reopened within 3 years and a case where it is sought to be reopened beyond 3 years.
• An assessment can be reopened only upto 3 years from the end of the relevant assessment year. If an Officer wants to reopen beyond 3 years and upto 10 years, then, certain additional conditions are required to be fulfilled by the AO which is discussed later on.

Whether applicable with effect from 1.4.2021?

The biggest tax controversy of the year 2021 was whether such amendments brought in by Finance Act, 2021, to replace the old reassessment provisions with the new provisions are applicable from 1.4.2021 or 1.7.2021. This is on account of notifications issued under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (hereinafter referred to as ‘TOLA’).

Section 3(1) of the TOLA, empowered the Central Government to extend the time-limit

and date of compliance of any action specified therein including issuing notice and according sanction under the Act. Utilising such power, the Government, inter alia, issued a Notification No. 20/2021 on 31.03.2021 which is the last day to issue notice u/s 148 of the Act under the old scheme. In the said notification, the due date to issue notices u/s 148 of the Act and to obtain sanction u/s 151 of the Act, which due dates were to expire on 31.03.2021 were extended by one month i.e., upto 30.04.2021. Another Notification bearing number 38/2020 dated 27.04.2021 was issued to further extend such dates to 30.06.2021. In both the notifications, the Government added an Explanation to the effect that for the purposes of such extension, one has to consider the provisions of section 148, 149 and 151 as it stood prior to its amendment by Finance Act, 2021; meaning thereby, such Notifications not only extended the time limit to issue notice u/s 148 of the Act but it also sought to revive the old provisions which were already repealed and substituted by the Finance Act, 2021.

Under the shelter of the above-mentioned notifications, Tax Department issued notices u/s 148 of the Act under the old law from 01.04.2021 till 30.06.2021. Such notices were challenged by way of thousands of writ petitions filed across various High Courts in India.

Barring one judgment, viz., single judge order of the Hon’ble Chhattisgarh High Court in case of Palak Khatuja vs. Union of India and Ors., W.P.(T) No. 149 of 2021, all other judgments by six different High Courts have held such notices to be bad in law and have held that the new reassessment provisions inserted by the Finance Act, 2021, are applicable from 01.04.2021. These judgments are as under:

• [2021] 439 ITR 1 (All.) Ashok Kumar Agarwal v. UOI;
• [2022] 441 ITR 207 (Del.) Mon Mohan Kohli v. ACIT;
• [2022] 440 ITR 300 (Raj.) Bpip Infra (P.) Ltd. v. ITO;
• [2022] 325 CTR 148 (Madras) Vellore Institute of Technology v. CBDT;
• [2022] 441 ITR 359 (Cal.) Bagaria Properties and Investment (P.) Ltd. v. UOI
• [2022] 135 taxmann.com 5 (Rajasthan) Sudesh Taneja v. ITO
• [2022] 137 taxmann.com 2 (Bombay) Tata Communications Transformation Services Ltd. v. ACIT

All the above judgments have held that, vide Finance Act, 2021, the old reassessment provisions have been repealed without any savings clause. By virtue of the notifications issued under TOLA, only the date to issue notice has been extended however, the notice has to be issued under the new law. Further, the explanation in the notification has been struck down as unconstitutional.

Amendments in section 149 of the Act by Finance Act, 2022

• Reassessment beyond 3 years – income represented in the form of asset

I have already brought out earlier, the extract of the speech of the Hon’ble Finance Minister while delivering Budget for the year 2021-22. It was stated that the time limit to reopen the assessment was reduced to 3 years from the existing 6 years. Only in case in serious tax evasion cases too, only where there is evidence of concealment of income of Rs. 50 lakh or more in a year, can the assessment be re-opened up to 10 years. Even this reopening can be done only after the approval of the Principal Chief Commissioner, the highest level of the Income Tax Department.

Such provisions are contained in section 149 of the Act. Section 149 deals with the time limits for issue of notices. Before amendment, it stated that, no notice u/s 148 shall be issued for the relevant assessment year,—

• if three years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b);
• if three years, but not more than ten years, have elapsed from the end of the relevant assessment year unless the AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to rupees fifty lakh or more for that year.

The old time limits have changed from 4 to 6 and 16 years to 3 to 10 years. The outer limit for reopening the assessment is 3 years now. However, if the following conditions are fulfilled, then the assessment could have been reopened upto 10 years from the end of the relevant assessment year:

• AO has in his possession books of accounts
• or other documents or evidence
• Such documents etc. reveal that the income

  chargeable to tax has escaped assessment

• Such income is represented in the form of asset
• Income escaping assessment is Rs. 50 lakhs or more.

Thus, if all the above conditions are fulfilled, only then the assessment could have been reopened beyond 3 years and upto 10 years.

Such kind of provision also finds mention in fourth proviso to section 153A of the Act, which was inserted vide Finance Act, 2017. There again it was restricted to an income escaping assessment represented in the form of asset. Explanatory Memorandum to Finance Act, 2017, explained that, in order to protect the interest of the revenue in cases where tangible evidence(s) are found during a search or seizure operation (including 132A cases) and the same is represented in the form of undisclosed investment in any asset. Thus, the logic was to tax any undisclosed asset found during the course of search. Since, the search and reassessment provisions were merged, therefore, the same wordings were continued in the new section 149 of the Act.

Now, the Finance Act, 2022, has amended the said clause (b) of section 149(1). Instead of the condition that income should be represented in the form of asset, now the clause has been expanded to even include income in the form of

• asset,
• expenditure in respect of a transaction or in

  relation to an event or occasion; or

• an entry or entries in the books of account.

The explanatory memorandum to Finance Bill 2022, gives a very simple explanation in this regard i.e., “To bring clarification and align them with the intent”.

The implications of the above amendment are grave. The promise was to reopen an assessment beyond 3 years only if serious tax evasion cases were identified where the income escaping assessment was more than Rs. 50 lakh. Such serious tax evasion cases were cases, where the assessee is apparently found to be the owner of some undisclosed assets. However, this has now been expended to included income in the nature of expenditure in resect of a transaction or in relation to an event or occasion and most importantly any entry in the books of account. Each and every transaction is recorded in the books of account. Thus, almost everything gets covered by the impugned amendment. Clearly, the Legislature has gone back on the promise made. Now the Department can reopen any assessment beyond three years without there being any concealed or undisclosed asset by taking shelter under the last limb viz., any entry in the books of accounts.

Such an interpretation, in my humble opinion, cannot be accepted. Therefore, it would be pertinent to give contextual meaning to such words “any entry in books of accounts”. Since, the intent it to reopen only serious tax evasion cases, therefore, such entry in books of account should cover only cases where there is an allegation of accommodation entry or a bogus entry, which does not lead to any unearthing of any undisclosed asset. Similarly, the second limb which deals with expenditure in respect of transaction or an event, should be an undisclosed expenditure.

Thus, it can be seen that the slowly and steadily, amendments are made so as to go back on the promise made, and expand the scope of section to reopen.

In any case, the requirement of section 149(1) (b) of the Act, is that the AO needs to have in his possession, books of accounts or other documents or evidence. For the first time the word “evidence” has been used. Such words are used in contradistinction to the word “information” used in section 148 of the Act. Thus, to satisfy the conditions of section 149(1)(b) of the Act, the AO needs to have something more than mere information. The terms “books of accounts”, “documents” and “evidences” connotes different meaning, but the common thread running through all such terms is that it has be something more than information.

Apart therefrom, such documents, books etc. should “reveal” that income has escaped assessment; meaning thereby, from such documents, books etc., the AO should come to a certain conclusion that there is an income which has escaped assessment. Mere presumption, conjecture or a reason to believe that income has escaped assessment would not suffice.

Reassessment for AY 2021-22 and prior years

First proviso to section 149 is a clause which, in a sense, restricts the retrospective application of the new reassessment provisions. Proviso to section 149(1)(b) deals with reassessment of AY 2020-21 and earlier years. The new reassessment scheme is applicable w.e.f. 1.4.2021, therefore, it shall apply to all the reassessments taking place after 1.4.2021. In case of assessment years, prior to AY 2020-21, technically speaking, the same can be reopened for 10 years, though such years would be outside the scope of reassessment under the old regime. Therefore, the proviso to protect the assessee. It states that if assessment years, prior to AY 2020-21, could not have been reopened as on 1.4.2021 as being beyond 6 years under the erstwhile section 149(1)(b), then the same cannot be reopened under the proposed section 149(1)(b). Thus, AY 2014-15 would become time barred as on 31.03.2021 under the erstwhile section 149(1)(b). All years prior to and including AY 2014-15 cannot be reopened under the new provisions, though it will fall within the extended time limit of 10 years. Similarly, AY 2015-16 has become time barred on 31.03.2022, AY 2016-17 will become time barred on 31.03.2023 and so on and so forth.

Now, an amendment has been made in the said section. The amendment is concerning the search related assessments. The amendment now provides that no notice u/s 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if such notice could not have been issued at that time on account of being beyond the time limit specified u/s 153A(1)(b) or section 153C of the Act, as the case may be, as they stood immediately before the commencement of the Finance Act, 2021.

If a search has been initiated u/s 132 of the Act on or after 01.04.2021, then assessments related to such search have to be made u/s 147 of the Act. Such assessments can be made for 10 years prior to the year of search u/s 149(1)(b) of the Act. However, under the old section 153A and 153C of the Act, an AO can go beyond six years only on fulfilling certain conditions as specified in fourth proviso to section 153A of the Act. Such proviso provides that in cases where an AO has in his possession books of account or other documents or evidence which reveal that the income, represented in the form of asset, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more in the relevant assessment year or in aggregate in the relevant assessment years, then he can reopen beyond 6 years. Thus, though under the amended provisions of section 149(1)(b) of the Act, an assessment can be reopened beyond 6 years even if the income is represented in the form expenditure or book entry, however, if such reopening is on account of search u/s 132 of the Act, and if it pertains to AY 2021-22 or prior years

and such reassessment is after 6 years from the end of the relevant assessment year, then to reopen such assessment, income escaping assessment has to be represented in the form of asset only.

Income escaping assessment spread over a period of more than 1 year

If an assessment is to be reopened beyond 3 years from the end of the assessment year, the threshold prescribed is Rs. 50 lakhs. Further, first two limbs of section 149(1)(b) talk about asset or expenditure in relation to an event etc. There might be some cases, where the income escaping assessment in the form of investment in asset or expenditure is less than Rs. 50 lakhs in a particular year but more than Rs. 50 lakhs if 2 or more years combined. As a result, a new subsection (1A) has been inserted. It states that notwithstanding anything contained in subsection (1), where the income chargeable to tax represented in the form of an asset or expenditurein relation to an event or occasion of the value referred to in section 149(1)(b), has escaped the assessment and the investment in such asset or expenditure in relation to such event or occasion has been made or incurred, in more than one previous years relevant to the assessment years within the period referred to in section 149(1)(b), a notice u/s 148 shall be issued for every such assessment year for assessment, reassessment or recomputation, as the case may be. Again, here the Legislature has backtracked from its promise. The statement of the Hon’ble Finance Minister was that an assessment can be reopened beyond 3 years, only if the income escaping assessment is more than Rs. 50 lakh. However, now they have amended the section wherein, an assessment can be reopened even if income escaping assessment is less than Rs. 50 lakh. It is pertinent to note that, section 149(1A) does not apply to income escaping assessment being in the nature of book entry.

The above demonstrates how, the Legislature slowly expands the scope of provisions thereby violating the promise or statement made. In such situations, the principles of “promissory estoppel” should apply with full force.