The order of the Supreme Court in Union of India & Ors. v. Ashish Agarwal (Civil Appeal No. 3005/2022) dated 04-05-2022, is perhaps the most talked about tax judgement in the recent times, not as much as what it holds in as far as the interpretation of conflict of two concurrent statutes is concerned, but also in the unique way the relief has been equitably moulded.
Why is this judgement so talked about? A perusal of the judgement itself grants the answer. The Income tax department issued approximately 90,000 reassessment notices under Section 148 of the unamended Income-tax act (prior to Finance Act, 2021) after 01.04.2021. Let’s call it the ‘unamended Act’ for the sake of brevity. More than 9000 writ petitions are said to be filed before the various High Courts across the country and by different judgements and orders, most of the High Courts have set aside/quashed the respective reassessment notices issued under the said unamended Section 148 on grounds similar to each other. A notable exception is the High Court of Chhattisgarh which in Sanjay Agarwal v. PCIT  258 Taxman 576 (Chattisgarh), which was one of the first high courts to pass a reasoned order on the said issue.
The basic issues in the Petitions
In most of these Petitions, the Petitioners had sought quashing of reassessment notices issued post 31-3-2021 by the revenue authorities under Section 148 the unamended Act, on the ground that same were issued in violation of the mandatory procedure prescribed under section 148A which came into force on 1-4-2021 as per the Finance Act, 2021, which amended the Income-tax Act, 1961. Let’s call the Income-tax Act,1961, as amended by the Finance Act 2021 as the ‘amended act’.
The Petitioners had also sought a declaration declaring Explanation A(a)(ii)/A(b) to the Notification No. 20 [S.O. 1432(E)], dated 31-3-2021 and Notification No. 38 [S.O. 1703 (E)], dated 27-4-2021 to the extent that the same extend the applicability of the ‘provisions of Section 148, Section 149 and Section 151, as the case may be, as they stood as on 31-3-2021, before the commencement of the Finance Act, 2021 to the period beyond 31-3-2021 as ultra vires the parent legislation [the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020] that sought to relax/extend certain timelines due to the covid-19 pandemic, including the time line for the issue of the Notice under Section 148 of the unamended Act.
What did the Court hold?
The Supreme Court was seized with the issue through appeals of the Revenue authorities against the orders of the Allahabad High Court. However, as the issue was common across various High Courts and there would invariably be a multiplicity of proceedings (primarily due to the statement of the additional Solicitor general of India that the revenue was contemplating to prefer appeals against similar judgements and orders passed by various High Courts) in order to lessen the burden upon itself, the Supreme Court held that it would be passing an order that would lay to rest this issue.
It is telling that the court made its intention of exercising its powers under Article 142 of the Constitution of India clear right from the outset (Paragraph 2.1 of the Order). It was also made clear that the present order would govern all other judgements and orders passed by various High Courts on the issue and that the Revenue need not file separate individual appeals.
The Supreme Court order specifically records that despite the substituted Sections 147 to 151 of the amended Act coming into force on 1st April 2021, according to the Additional Solicitor General of India, the revenue authorities issued approximately 90,000 reassessment notices to Assessees under the erstwhile Sections 148 to 151 of the unamended Act, by relying upon the explanations in the Notifications dated 31st March 2021 and 27th April 2021. These Reassessment notices were the subject matter of writ petitions before the various high Courts which, with the exception of the High Court of Chhattisgarh, held that the said notices were to be set aside or quashed.
The Court specifically observed that it could not be disputed that by the substitution of Sections 147 to 151 of the Income-tax Act, 1961, by the Finance Act, 2021, radical and reformative changes were made to govern the procedure for reassessment proceedings. The amended Sections prescribed the procedure governing initiation of reassessment proceedings, however the procedure pre-amendment gave rise to numerous litigations for a multitude of reasons and the reopening was challenged inter-allia on the grounds such as
- No valid ‘reason to believe’ that Income
chargeable to tax had escaped assessment
- No tangible/reliable material/information in possession of the assessing officer leading to a formation of the belief that income had escaped assessment
- No enquiry being conducted by assessing officer prior to issuance of notice and that the reopening was based on a change of opinion of the assessing officer and
- The mandatory procedure laid down by the Supreme Court in the case of GKN Driveshafts (India) Ltd. v. ITO & ors. (2003) 1 SCCC 72 had not been followed.
The Court also observed that prior to the amendment, the reopening of assessment was permissible for a maximum period up to 6 years and in some cases beyond six years leading to uncertainty for a considerable time. It was observed that the amended procedure was aimed to simplify the tax administration, its compliances and to reduce litigation.
Alluding to the substituted provisions post amendment, the court observed that no notice under section 148 of the act could be issued without following the procedure prescribed under section 148A of the Act. It was observed that along with the notice under Section 148, the assessing officer is required to serve an order passed under Section 148A of the amended Act which is a new provision in the nature of a condition precedent. The Supreme Court has dubbed the introduction of this provision to be a game changer with an aim to achieve the ultimate object of simplifying the tax administration, its compliance and to reduce litigation and went on to observe that, under the new scheme all safeguards are provided before the notice under Section 148 of the act is issued. The substitution to section 149 has reduced the permissible time-limit for issuance of such notice to 3 years and only in exceptional cases, 10 years and also the amended Act provides additional safeguards which were absent in the earlier regime prior to the Finance Act, 2021. The Court observed that the new provisions substituted by the Finance Act, 2021, being remedial and benevolent in nature and substituted with the specific aim an object to protect the rights and interests of the Assessee as well as and the same being in public interest, the respective High Courts have rightly held that the benefit of new provision shall be made available
even in respect of the proceedings related to past assessment years, provided that the Section 148 notice has been issued on or after 1st April 2021. The Court pertinently observed that the Delhi High Court in the case of Mon Mohan Kohli v. ACIT  441 ITR 207 had explicitly stated that if the law permitted the Revenue to take further steps in the matter, they would be at liberty to do so.
The Supreme Court explicitly held that it was in complete agreement with the view taken by the various high Courts in holding so. This therefore would allow the ratio of the said judgement, that the high court orders were correct in law. Curiously, the judgement of the Chhattisgarh High Court does not find any mention or discussion at all in this order.
Enter Equity and Constitutional Power Having agreed with the various High Courts and on the side of the Assessees on the merits of their case and in law, the Court observed that the judgements of the several High Courts would result in no reassessment proceedings at all, even if the same was permissible under the Finance act, 2021, and as per the substituted Sections 147 to 151 of the amended act. As already declared at the outset, the Court decided to invoke its constitutional power under Article 142 of the Constitution of India.
What is this over arching power in Article 142 of the Constitution of India? It is perhaps best explained by quoting the Supreme Court itself. A Constitution Bench (Five Judges) of the Supreme Court in the case of Supreme Court Bar Assn. v. Union of India, (1998) 4 SCC 409 held that “The plenary powers of this Court under Article 142 of the Constitution are inherent in the Court and are complementary to those powers which are specifically conferred on the Court by various statutes though are not limited by those statutes. These powers also exist independent of the statutes with a view to do complete justice between the parties. These powers are of very wide amplitude and are in the nature of supplementary powers.
This power exists as a separate and independent basis of jurisdiction apart from the statutes. It stands upon the foundation and the basis for its exercise may be put on a different and perhaps even wider footing, to prevent injustice in the process of litigation and to do complete justice between the parties. This plenary jurisdiction is, thus, the residual source of power which this Court may draw upon as necessary whenever it is just and equitable to do so and in particular to ensure the observance of the due process of law, to do complete justice between the parties, while administering justice according to law. There is no doubt that it is an indispensable adjunct to all other powers and is free from the restraint of jurisdiction and operates as a valuable weapon in the hands of the Court to prevent “clogging or obstruction of the stream of justice”. It, however, needs to be remembered that the powers conferred on the Court by Article 142 being curative in nature cannot be construed as powers which authorise the Court to ignore the substantive rights of a litigant while dealing with a cause pending before it. This power cannot be used to “supplant” substantive law applicable to the case or cause under consideration of the Court. Article 142, even with the width of its amplitude, cannot be used to build a new edifice where none existed earlier, by ignoring express statutory provisions dealing with a subject and thereby to achieve something indirectly which cannot be achieved directly The construction
of Article 142 must be functionally informed by the salutary purposes of the article, viz., to do complete justice between the parties. It cannot be otherwise.”
But equity and taxation, like an estranged couple, have a chequered history. That there is no equity in tax is a phrase much quoted and repeated, but perhaps it is misleading. The Indian Courts have, from time to time, been pleased to mete out equitable reliefs and to fastidiously strike down state action in violation of natural justice. On what principles would these be granted if not on equity?
A constitutional bench of the Supreme Court in the case of CC(I), Mumbai v. Dilip Kumar & Co. (2018) 9 SCC 1 has relied heavy on the concept of the absence of equity in the interpretation of a taxing statute. While quoting from Justice G.P. Singh’s ‘The Principles of Statutory Interpretation’, the court quoted “It is well settled that in the field of taxation, hardship or equity has no role to play in determining eligibility to tax and it is for the legislature to determine the same [Kapil Mohan v. CIT [Kapil Mohan v. CIT, (1999) 1 SCC 430 : AIR
1999 SC 573] ]. Similarly, hardship or equity is not relevant in interpreting provisions imposing stamp duty, which is a tax, and the court should not concern itself with the intention of the legislature when the language expressing such intention is plain and unambiguous [State of M.P. v. Rakesh Kohli [State of M.P. v. Rakesh Kohli, (2012) 6 SCC 312 : (2012) 3 SCC (Civ) 481] ]. But just as reliance upon equity does not avail an assessee, so it does not avail the Revenue.”
In CIT v. J.H. Gotla  156 ITR 323 (SC), the Supreme Court held that “though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction”.
The heavy infusion of equitable principles into moulding the final relief in the Union of India & Ors. v. Ashish Agarwal case by exercising the Constitutional powers of the Supreme Court is clearly brought out by statement “the Revenue cannot be made remediless, and the object and purpose of reassessment proceedings cannot be frustrated.” The court went on to hold that it is true that due to a ‘bonafide’ mistake and in view of subsequent extension of time and various notifications, the revenue issued the impugned notices under Section 148 even after the amendment was enforced with effect from 01.04.2021 which ought to have been issued under the substituted provisions of Section 147 to 151 of the amended Act. The court observed that there appears to be genuine non-application of the amendments as the officers of the Revenue may have been under a bonafide belied that the amendments may not yet have been enforced. The court was therefore of the opinion that some leeway must be shown in that regard which the High Court could have done. The court opined that instead of quashing and setting aside the reassessment notices under the provisions of the, the High Court sought to have passed an order construing the notices issued under the unamended act/ unamended provisions of the Income-tax Act as those deemed to have been issued under Section 148A of the income tax act and allowing the revenue to proceed further in line with the substituted provisions subject to compliance of all procedural requirements and defences which may be available to the assessee in law.
Needless to say, the Supreme Court proceeded to do just that. The intent of passing this order is clearly brought out in the order itself where it is re-itereated that the aforesaid order would strike a balance between the rights of the Revenue as well as of the respective Assessees. The fact was that the Court was moulding a special relief specifically due to the fact that a bonafide error of belief of the officers of the Revenue, resulting in the issuance of approximately 90,000 notices which if quashed would cause the public exchequer to suffer could not be considered complete justice.
The Reliefs Take Shape
The Supreme Court held, amongst other reliefs that :-
- The impugned Section 148 notices were deemed to be issued under Section 148A of the act and treated as show cause notices under Section 148A.
- The Assessing officer shall pass an order under Section 148A after following the due procedure as required by law and all defences which may have been available to assessee in law post amendment are kept open/continue to be available.
- The aforesaid order was passed in exercise of the courts power under Article 142 of the Constitution of India by holding that would to would govern not only the impugned judgement and orders before it but also be made applicable in respect of similar judgements and orders passed by various high courts across the country and therefore would be applicable pan India.
How is the power under Article 142 of the Constitution exercised once or twice?
A question was asked to me as to why did the
Supreme Court have to exercise its powers under Article 142 of the Constitution of India to make this judgement binding upon the various High Courts of the country. Besides the obvious answer of ‘docket explosion’ that the Supreme Court seems to have wanted to avoid given the already heavy demands upon its time, there is potentially one more answer. In Yogesh Ramchandra Naikwadi
v. State of Maharashtra (2008) 5 SCC 652 it was held that what has precedential value is the ratio decidendi of the decision and not the direction issued while moulding the relief in exercise of power under Article 142 on the special facts and circumstances of a case.
What is interesting to see is that it appears that the Supreme Court has exercised its constitutional powers not once, but twice! The first instance seems to be when the Section 148 notices have been deemed to be issued under Section 148A and treated as show cause notices. The Second however seems to be when the Supreme Court exercised its powers under Article 142 of the Constitution to make the judgements passed by the exercise of powers under Article 142 to make the judgement applicable in respect of similar judgements and orders passed by various High Courts across the country and therefore would be applicable pan India. The method of using Article 142 to extend the benefit of a Judgement to those who have not prosecuted appeals is not without precent. In B.N. Nagarajan v. State of Mysore (1966) 3 SCR 682, it was held that that” some of the appellants have not prosecuted their appeals but there is no reason why they should not have the benefit of this judgment and exercising our powers under Article 142 of the Constitution, we direct that in order to do complete justice they should also have the benefit of the judgment given by us.” Therefore, it is not for the first time that the Supreme Court has exercised powers under Article 142 of the Constitution to extend the benefit of its equitable orders to those litigants who were not actually before them.
Some questions that remain
With great respect to the Supreme Court, it is telling that what was considered ‘a bonafide mistake’ by the court was actually approximately 90,000 wrong jurisdictional notices being issued after due application of mind by the officers of the Revenue. The jurisdictional aspect of the notices under Section 148 and 148A are not delved into in the Judgement. If the Revenue authorities have issued jurisdictional notices without following the proper process laid down in an onerous Section of the statute, what followed was clearly not a procedural mistake to be rectified, but action without Jurisdiction. This aspect does not seem to be reflected or discussed in the Judgement.
The bonafide mistake that seems to have happened not in one but in admittedly approximately 90,000 cases by the officers of the Revenue can also be seen as a serious defect of law. It is my belief that the Central Board of Direct Taxes is extremely involved with the Ministry of Finance with respect to the yearly Finance Acts. The issuance of 90,000 notices under the unamended Act, even if mistaken, has to be considered seriously and accountability has to be fixed. It has caused a large numbers of litigations to crop up. The Revenue authorities have been clearly saved by the justifiably equitable order of the Supreme Court. This further accentuates the need to establish accountability in the tax administration, often a hot topic of discussion amongst tax professionals.
What is most troubling to me, however is that the requirement of conducting any enquiry with the prior approval of the specified authority has been dispensed with as a one-time measure these are the those Notices which have been issued under Section 148 of the unamended act including those that have not been dealt with by the High Courts. This is clearly in derogation of express provisions of the statute that the Supreme Court admittedly has upheld, even though it may be a one time extraordinary situation. The Supreme Court in the case of State of Haryana & Ors. v. Sumitra Devi & Ors. (2004) 12 SCC 322 has held that an order cannot be passed under Article 142 of the Constitution which will be contrary to the statute or statutory rules. A Constitution bench has held in Prem Chand Garg & Onr. v. The Excise Commissioner AIR 1963 SC 996 that “we ought to bear in mind that though the powers conferred on this Court by Article 142(1) are very wide, and the same can be exercised for doing complete justice in any case, as we have already observed, this Court cannot even under Article 142(1) make an order plainly inconsistent with the express statutory provisions of substantive law, much less, inconsistent with any constitutional provisions.” Whereas in Laxmidas Morarji v. Behrose Darab Madan (2009) 10 SCC 425 it was observed that “Article 142 being in the nature of a residuary power based on equitable principles, the Courts have thought it advisable to leave the powers under the article undefined. The power under Article 142 of the Constitution is a constitutional power and hence, not restricted by statutory enactments. Though the Supreme Court would not pass any order under Article 142 of the Constitution which would amount to supplanting substantive law applicable or ignoring express statutory provisions dealing with the subject, at the same time these constitutional powers cannot in any way, be controlled by any statutory provisions. However, it is to be made clear that this power cannot be used to supplant the law applicable to the case. This means that acting under Article 142, the Sureme Court cannot pass an order or grant relief which is totally inconsistent or goes against the substantive or statutory enactments pertaining to the case. The power is to be used sparingly in cases which cannot be effectively and appropriately tackled by the existing provisions of law or when the existing provisions of law cannot bring about complete justice between the parties.”
That being said, there can always be a view that the prior approval issue is a procedural provision rather than a substantive one, though the exercise of this power in express derogation of a statutory provision may still give rise to questions.
Has the power under Article 142 of the Constitution of India been exercised earlier in tax proceedings? And can it be exercised again?
The Supreme Court has, in the past exercised it’s powers under Article 142 of the Constitution of India in tax proceedings. In CIT v. Greenworld Corporation  314 ITR 81 (SC), the court exercised its jurisdiction under Article 142 of the Constitution of India to direct the ‘re-opening’ of the assessment where the court was of the opinion that the Assessing Officer had passed an order at the instance of a higher authority.
As for the exercise of this power, the powers under Article 142 of the Constitution is deliberately couched wide. These powers are highly discretionary and are exercised by the Court for bringing about an equitable solution. Though this power has been rarely invoked in Income-tax provisions, it is not far fetched to think that this power may be exercised again. It is to be concerned that the powers have been used, in this case as before, as a balancing Act. The Supreme Court has balanced equities in a very explicit way in tax proceedings. The effects of this Judgement on the Income tax jurisprudence shall be closely watched in the future.