Introduction: Setting the context
Under the fiscal laws assessment has its own unique status and bearing. It implies determination of fiscal consequences under the law concerned, which may result into various implications, such as tax liability (or refund), interest and penal consequences, etc. Accordingly, most fiscal legislations carry specific provisions setting out the powers of the statutory authorities vis-à-vis assessment. These provisions inter alia also provide for “reopening” of assessment i.e. annulling a concluded assessment and redetermining the fiscal consequences.[1] Such provisions are generally applied when there has been non-compliance of the law during the assessment process and the circumstances set out (for the reopening) are complied with.
Different fiscal laws provide for reopening differently. It depends upon the legislative choice as to the process and consequences being stipulated in the fiscal law concerned. It is possible that a particular fiscal law does not stipulate an exhaustive provision for reopening of the entire assessment and only limited aspects of the assessment may be addressed in distinct proceedings, such as “revision”, “rectification”, etc. By contrast, the scheme relating to reopening under the Income Tax Act, 1961 (ITA) is elaborate and specifically sets out the pre-requisite conditions for reopening as also the powers of the assessing officer (AO) who carries out the reopening proceedings.
The reopening related provisions under the ITA have been legislatively revisited recently and a new scheme has been stipulated by the Finance Act, 2021. This new scheme for reopening is substantially different from the earlier scheme of the ITA which had been in vogue for more than two decades and had received extensive judicial enunciation. The temporal application of the new law, besides the admixture of various general orders passed on account of flexibilities required in view of Covid-related protocols, however, have resulted into a quagmire as regards the correct scope and application of the new reopening scheme under the ITA. This has even resulted into conflicting decisions of the High Courts. This article attempts an overview of the changes and the reason for the judicial challenges which are expected to shape the contours of the new scheme for reopening of assessments under the ITA.
The pre-2021 scheme of ITA for reopening of assessment
Chapter XIV of the ITA stipulates the “procedure for assessment”. Within this chapter, Sections 147 to 151 are the substantive provisions which deal with reopening and consequential reassessment of income. These provisions were, prior to the 2021 change, introduced by the Finance Act, 1987 and were operational since 1989. Under this scheme, reopening proceedings could be instituted if the AO had “reason to believe that any income chargeable to tax has escaped assessment”. Even though the ITA specified certain situations wherein it could be considered that income had escaped assessment, the ITA did not exhaustively set out the circumstances in which the AO could have reasons to believe. Accordingly, as is evident, this scheme gave considerable latitude and discretion to the AO as regards reopening of assessment under the ITA.
The 1989 scheme was interjected by the Supreme Court in two leading decisions. In GKN[2] the Supreme Court introduced a substantive entitlement for the taxpayer against whom reopening proceedings had been initiated. In this decision the Supreme Court directed that a taxpayer who was served with a notice for reopening of assessment could inter alia seek “reasons for issuing notice” and the AO was “bound to furnish reasons within a reasonable time”. Thereafter, on receipt of reasons, the taxpayer was entitled “to file objections to issuance of notice” whereupon the AO was “bound to dispose of the same by passing a speaking order”. It was only after such order disposing the objections to reopening that the AO could proceed with the substantive proceedings for the reassessment. Thereafter, in its decision in Kelvinator[3], the Supreme Court again intervened, this time to substantially address the scope of “reason to believe” and the powers of the AO to reopen assessments. The Supreme Court in this case inter alia declared that the power of AO under the 1989 scheme to reopen assessment was not an unlimited power which could be exercised indiscriminately. The “reason to believe”, according to the Supreme Court, could not be a mere “change of opinion” and instead, reopening could take place only if the AO has “tangible material to come to the conclusion that there is escapement of income from assessment” besides the fact that the “reasons must have a live link with the formation of the belief” regarding escapement of income.
There were many other decisions of the Supreme Court and the High Courts which shaped the 1989 scheme relating to reopening of assessment under the ITA. These judicially stipulated standards introduced, thus, the principles of natural justice (inter alia by way an opportunity to defend against reopening of assessment) and substantive entitlements of the taxpayers to guard against unjust reopening of assessments. At the same time, however, these decisions created a parallel remedy to the taxpayer whereby the reopening of assessment could be questioned by way of a judicial challenge through writ petition before the High Court. This, pragmatically, resulted into a number of disputes. The writ jurisdiction of the High Courts was clogged with challenges to reassessment proceedings which often alleged the failure of the AOs to observe the judicially established standards. A flip-flop judicial attitude (such as in Chhabil Dass[4] which was later distinguished[5]), etc., also did not help to settle the controversy. Resultantly the law did not attain tranquility and reopening of assessments under the ITA was an area perpetually mired in controversies.
The 2021 scheme of ITA for reopening of assessment
Driven by the “need to completely reform the system of assessment or reassessment or recomputation of income escaping assessment and the assessment of search related cases”, the Government proposed an overhaul of the scheme for reopening in the ITA through the Finance Bill, 2021.[6] The change was explained as being accentuated by the desire to introduce “a completely new procedure … [which] would result in less litigation and would provide ease of doing business to taxpayers”. This proposal was accepted by the Parliament, whereby the Finance Act, 2021 amended the ITA to introduce the 2021 scheme.
The most striking feature of the 2021 scheme is the removal of the “reason to believe” standard which prevailed under the pre-2021 scheme for reopening of assessments under the ITA. Instead, the AO can initiate the reopening proceedings only if “there is information with the [AO] which suggests that the income chargeable to tax has escaped assessment in the case of the assessee”.[7] Furthermore, it is not that any and every random data qualifies as “information” for the purpose. The ITA specifically provides what qualifies as “information” which enables the AO to initiate reopening proceedings, which is, either[8] (i) information arising from “risk management strategy” formulated by the Central Board of Direct Taxes (CBDT); or (ii) an objection raised by the Comptroller and Auditor General of India (CAG).
Unlike the pre-2021, it is no more a judicial fiat and instead the 2021 scheme now legally obliges the AO to share the information with the taxpayer concerned, provide a hearing opportunity to defend against reopening, and formally dispose the taxpayer’s objections before initiating the reopening proceedings.[9] Furthermore, the limitation period for reopening stands reduced under the 2021 scheme and reopening can ordinarily be ordered only within three years.[10]
Clearly, at least by design, the 2021 scheme appears to be an improvement as it codifies the taxpayers’ right emanating from the decisions under the pre-2021 scheme qua reopening of assessment under the ITA. The discretion of the AO to reopen assessments appears to be regimented with substantive pre-requisites and procedural conditions under the 2021 scheme. It is not out of place, therefore, that taxpayers would to be governed by the 2021 scheme for reopening instead of seeking judicial vindication of their rights under the pre-2021 scheme.
Issues regarding the applicable date and interfacing Covid-induced fiscal extensions
The Finance Act, 2021 provides that the 2021 scheme for reopening of assessments under the ITA shall come into force from 1-4-2021. However, there is no clarity whether the 2021 scheme for reopening of assessment applies for all reopening proceedings after 1-4-2021 or if the 2021 scheme is limited in application to reopening of an assessment which took place after 1-4-2021. In other words, the moot question which arises is that, if an assessment was concluded before 1-4-2021, would its reopening be governed by the 2021 scheme or the pre-2021 scheme would continue to apply for reopening of such assessment. The answer to this question is fraught with consequences because, as observed earlier, there are numerous limitations on the AO’s enablement to reopen under the 2021 and therefore the taxpayer is better off, at least from a substantive entitlement perspective if the 2021 scheme for reopening applies whereas AO has more discretion and powers if the reopening is governed by pre-2021 scheme.
It is also expedient to factor certain aberrations which arose in view of the various legislative extensions granted under the law to address the complexities arising out Covid-induced restrictions. In view of the various lockdowns, the “Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020” was promulgated in March 2020 to extend the time limit under various fiscal laws. This Ordinance was succeeded by the “Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020”[11] which provided similarly. Various notifications were issued under this Act whereby time limits under various fiscal laws were further extended. These included certain notifications wherein it was provided that the pre-2021 scheme for reopening of assessment was extended (and was to be applied) in respect of concluded assessments.
Current controversy
As evident from above, the introduction of 2021 scheme has resulted into a controversy regarding its contemporaneous application. The AOs have continued to initiate proceedings for reopening assessments of earlier years on the basis of the pre-2021 provisions on the purported premise that the 2021 scheme does not apply to assessments concluded before the assessment of the 2021 scheme. This premise is based partly on account of the 2021 Act and partly on account of the temporary changes introduced in tax laws as relaxation owing to Covid-related restrictions. This premise and actions of the AOs have resulted into a large number of disputes with mixed judicial response.
The first decision on challenge to 2021 reopening scheme was rendered by the Chhattisgarh High Court in Palak case[12] wherein a Single Judge dismissed the challenge citing practical difficulties in giving strict effect to the 2021 scheme. Sustaining the action of the AO in issuing new reopening notices after 1-4-2021 but under the pre-2021 scheme as necessitated by factual and legal circumstances on account of Covid-related restrictions, the High Court inter alia observed as under:
“The necessity occurred because of the Covid pandemic lockdown in the backdrop of the fact that few of the assessees could not file their return. Likewise since the offices were closed, the Department also could not perform the statutory duty under the Income Tax Act. Considering the complexity, the Parliament thought it proper to delegate the Ministry of Finance, the date of applicability of the amended section. The delegation is not a self-contained and complete Act and was only made in the interest of flexibility and smooth working of the Act, and the delegation therefore was a practical necessity. … The notification is made by the Ministry of Finance, Central Government considering the fact of lockdown all over India, it can be always be assumed that the deferment of the application of Section 148-A was done in a control way.
…
The pandemic and lockdown prevailed all over India. The people could not file their return or comply with the various mandate of Income Tax Act. Considering such situation for the benefit of the assessee and to facilitate the individual to come out of woods, the time limit framed under Income Tax Act was extended. Likewise certain right which was reserved in favour of the Income Tax Department was also preserved and was extended at parity. Consequently the provisions of Section 148 which was prevailing prior to the amendment of Finance Act, 2021 was also extended. Here in this case, the power to issue notice under Section 148 which was prior to the amendment was also saved and the time was extended. In a result, the notice issued on 30-6-2021 (Annexure P-1) would also be saved. Therefore, no interference is required to be made in the said issuance of notice and accordingly the petitions are dismissed.”
The aforesaid reasoning of the Chhattisgarh High Court, however, was not found acceptable by the Allahabad High Court. Its Division Bench in Ashok[13] concluded that the AO was not competent to invoke the pre-2021 scheme for reopening of assessment after 1-4-2021 and therefore all proceedings on that basis lacked legal validity. The Allahabad High Court, in concluding such, opined that the legislative extensions owing to the Covid-related restrictions did not extend the application of the pre-2021 scheme beyond 1-4-2021 inter alia observing as under:
“… in absence of any proceeding of reassessment having been initiated prior to the date 1-4-2021, it is the amended law alone that would apply. We do not see how the delegate i.e. Central Government or the CBDT could have issued the notifications, plainly to overreach the principal legislation. …
Unless specifically enabled under any law and unless that burden had been discharged by the respondents, we are unable to accept the further submission advanced by the learned Additional Solicitor General of India that practicality dictates that the reassessment proceedings be protected. Practicality, if any, may lead to legislation. Once the matter reaches court, it is the legislation and its language, and the interpretation offered to that language as may primarily be decisive to govern the outcome of the proceeding. To read practicality into enacted law is dangerous. Also, it would involve legislation by the court, an idea and exercise we carefully tread away from.
Similarly, the mischief rule has limited application in the present case. Only in case of any doubt existing as to which of the two interpretations may apply or to clear a doubt as to the true interpretation of a provision, the court may look at the mischief rule to find the correct law. However, where plain legislative action exists, as in the present case (whereunder the Parliament has substituted the old provisions regarding reassessment with new provisions w.e.f. 1-4-2021), the mischief rule has no application.
***
Upon the Finance Act, 2021 enforced w.e.f. 1-4-2021 without any saving of the provisions substituted, there is no room to reach a conclusion as to conflict of laws. It was for the assessing authority to act according to the law as existed on and after 1-4-2021. If the rule of limitation permitted, it could initiate, reassessment proceedings in accordance with the new law, after making adequate compliance of the same. That not done, the reassessment proceedings initiated against the petitioners are without jurisdiction.”
Thus, as on date there are conflicting views of the High Courts as regards the relevant date for application of the 2021 scheme. Purportedly seeking a consistent outcome, a transfer petition was filed in the Supreme Court to consolidate all challenges to reopening proceedings. However, that transfer petition also stands dismissed.[14] Thus, more High Court decisions can be expected on this aspect. In fact, various other High Courts are in process of hearing similar challenges.[15] The Delhi High Court alone has over 1300 writ petitions which were heard recently.[16] In any case, given the conflicting views so far, the closure of the issue will indeed require a closer examination by the Supreme Court.
Conclusion
It would be impractical to exhaustively set out the grounds for challenge to the reopening proceedings. These grounds, however, can be summarised to state that the legal challenges to the reopening proceedings present an interesting area of inquiry with an admixture of administrative law, interpretation law, constitutional law and various other dimensions playing out in the arena of fiscal laws. In fact, research would reveal that challenges to reopening of assessment, not just under ITA but also under other fiscal laws, are too frequent and continue to disproportionately claim judicial time. The 2021 scheme is clearly an improvement over the earlier provisions dealing with reopening of assessments under ITA because the 2021 scheme relies upon objectively demonstrable factors as a condition for reopening which arrests the discretion of the AO and thus obviates the scope for errors and abuse of power. Perhaps the recent controversy over the application of the 2021 scheme will also get the attention of the Parliament such that its applicability stands legislatively clarifies instead of relegating them to seek judicial remedies.
† Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics.
[1] For the substantive implications of reopening and reassessment in the context of income tax law, see Calcutta Discount Co. Ltd. v. ITO, AIR 1961 SC 372 : (1961) 2 SCR 241 : (1961) 41 ITR 191.
[2]GKN Driveshafts (India) Ltd. v. ITO, (2003) 1 SCC 72.
[3]CIT v. Kelvinator of India Ltd., (2010) 2 SCC 723.
[4]CIT v. Chhabil Dass Agarwal, (2014) 1 SCC 603.
[5]See, Jeans Knit (P) Ltd. v. CIT, (2018) 12 SCC 36.
[6]Memorandum explaining the provisions in the Finance Bill, 2021, p. 46.
[7] Proviso to S. 148, ITA (as amended by Finance Act, 2021).
[8] Explanation 1 to S. 148, ITA. Except that in a “search” case, certain additional conditions apply, as detailed in Explanation 2 to S. 148.
[9] S. 148-A, ITA.
[10] The limitation can be extended in certain specific cases
[12]Palak Khatuja v. Union of India, (2021) 322 CTR 417.
[13]Ashok Kumar Agarwal v. Union of India, Writ Tax No. 524 of 2021 (and connected petitions), decision dated 30-9-2021 (Allahabad High Court).
[14]Rajinder Kumar v. CBDT, Transfer Petition (Civil) No. 1698 of 2021 (and connected petitions), decided on 15-11-2021 (SC).
[15]For illustration, the issue is currently pending before the Bombay High Court in Tata Communications Transformation Services Ltd. v. CIT, Writ Petition No. 1334 of 2021, notice issued vide order dated 5-7-2021.
[16]For illustration, see Mon Mohan Kohli v. CIT, 2021 SCC OnLine Del 4717.
