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May 13, 2022

IN CBDT INSTRUCTION ON SC JUDGMENT, CURIOUS CASE OF MISSING FIRST PROVISO TO SECTION 149 AND MISCOUNTING OF 3 YEARS

by CA Shivam Jaiswal in Circular and Notifications

IN CBDT INSTRUCTION ON SC JUDGMENT, CURIOUS CASE OF MISSING FIRST PROVISO TO SECTION 149 AND MISCOUNTING OF 3 YEARS

The CBDT has established a common approach to be followed in order to execute the SC judgement in cases where prolonged reassessment notices have been issued, regardless of whether such notifications have been disputed or not. The CBDT Instruction, possibly the most important part of this Instruction, describes how the re-assessment notices in question are to be handled by the respective assessing authorities, and it states that:

Only if the assessing officer has in his possession books of accounts or other documents or evidence revealing that the income chargeable to tax, represented in the form of an asset, which has escaped assessment, amounts to or is likely to amount to fifty lakh rupees or more, for that year, can a fresh Notice be issued with the approval of the specified authority. Since these situations occur within three years of the end of the relevant assessment years, a new Notice can be issued with the approval of the required authorities. There is a significant gap in the CBDT’s interpretation of the Act’s limitation period.

Interestingly, the self-serving interpretation of the decision of the Hon’ble SC, read with the time extension provided by TOLA, will allow such impugned reassessment notices to travel back in time to the original date, when such notices were to be issued, and then the new Act will be applied at that point.

However, no mention of such reassessment notices travelling back in time, with TOLA extensions, was made in the honourable SC judgement. In reality, the basic foundation or architecture of this presumptive interpretation that TOLA Extensions will be valid concurrently with the modified Act provisions has no factual or legal basis or value.

A cursory reading of the CBDT Instruction makes it abundantly clear that the underlying inference and subsequent manner of dealing with the impugned reassessment notices is categorically and expressly in violation of the applicable time barring limitation periods of issuance of reassessment notices, on or after 1.4.2021, as mandated by the Finance Act, 2021.

The express legislative provisions of section 149 of the Income Tax Act, as amended by the Finance Act 2021, are reproduced below for easy reference: “Time limit for notice”

For the appropriate evaluation year, no notice shall be issued,—

(a) if three years have passed since the end of the relevant assessment year, unless the case falls under clause

(b) if three years, but not more than ten years, have passed since the end of the relevant assessment year, unless the Assessing Officer has in his possession books of account or other documents or evidence revealing that the income chargeable to tax, represented in the form of an asset, which has escaped assessment amounts to or is likely to amount to fifty lakh ,no notice shall be issued in any case for the relevant assessment year beginning on or before April 1, 2021, if such notice could not have been issued at that time due to being beyond the time limit specified under the provisions as they stood immediately before the commencement of the Finance Act, 2021.”

As a result, the aforementioned legislative measures as stated in the Act make it abundantly plain that, as of 1.4.2021: If the amount of alleged escape income in an assessment year is less than or equivalent to Rs. 50 lakhs, a notice must be given on or after 1.4.2021, within three years of the end of the relevant assessment year. If the Assessing Officer has books of accounts/documents/evidence revealing that income chargeable to tax exceeding fifty lakh rupees in an assessment year, represented in the form of an asset, has avoided assessment, a notice for reassessment may be issued after three years and up to ten years.

However, First Proviso  of the Income Tax Act, as per the Finance Act, 2021, clearly, categorically and expressly mandates that:

No notice shall be issued in any case for the relevant assessment year beginning on or before April 1, 2021, if such notice could not have been issued at that time due to being outside the time limit specified under the provisions as they stood immediately before the commencement of the Finance Act, 2021. As a result, under the Grandfathering provisions of the First Proviso of the Income Tax Act, as amended by the Finance Act, 2021, no Notice u/s 148 can be issued on or after 1.4.2021, even if the amount of claimed fugitive income in any of the assessment years exceeds Rs. 50 lakhs.

The CBDT Instruction is strangely silent on the applicability of the First Proviso to Section 149 of the Income Tax Act, and as a result, its interpretation for the fiscal years 2013-14 and 2014-15 has to be reconsidered and corrected. Furthermore, according to Section 149(1)(a) of the Act, a notification under Section 148 must be issued within three years of the end of the relevant assessment year.

However, all such impugned Notices under unamended  have been issued on or after 1.4.2021, i.e., after the mandated limitation period of 31.3.2021, in our present example.

This clearly means that any Notice issued on or after 1.4.2021, cannot be issued for the AY 2017-18 or preceding assessment years if the amount of claimed evaded income in that year is less than or equal to Rs. 50 lakhs. Let us assume that a Notice u/s 148 must be issued for AY 2017-18 within three years after the conclusion of the relevant assessment year, in order to grasp it clearly. These three years are definitely Year 2018-19, Year 2019-20, and Year 2020-21. As a result, notice must be sent on or before 31.3.2021. . However, all such impugned Notices under unamended section 148 have been issued on or after 1.4.2021, i.e., after the mandated limitation period of 31.3.2021, in our present example.The abovementioned CBDT Instruction appears to have missed this easy mathematical calculation of counting three years, since it has been directed that AY 2016-17 and AY 2017-18 fall inside a three-year term as of 1.4.2021. Interestingly, AY 2016-17 + 3 Years = 2021-22, not Year 2019-20, and AY 2017-18 + 3 Years = Year 2021-22, not Year 2020-21, according to the abovementioned CBDT Instruction,the undeniable and unambiguous picture that emerges, contrary to what has been understood in the aforementioned CBDT Instruction, is as follows:

Reassessment By virtue of the First Proviso, notices for the years 2013-14 and 2014-15 will be regarded invalid. Only if the alleged escaped income represented in the form of an asset exceeds Rs 50 lakhs in each of the three assessment years, and the assessing authority has books of accounts or other documents or evidence revealing that such income in the form of an asset has escaped assessment, will the notices for those years survive.

As a result of this wide gap in interpretation of the time barring limitation period of issuance of reassessment notices in section 149 of the Income Tax Act, in the said CBDT Instruction No. 01/2022, dated 11.5.2022, and the clear, unambiguous, and undisputed time limits explained and discussed supra, the Pandora box of unnecessary litigations has been reopened. Surprisingly, these legislative amendments were enacted to reduce litigation, but yet, additional litigation is now being sought.

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