[Bombay HC] Reassessment requires approval of a Specific Authority, not the AO’s change of mind

In the case of *Siemens Financial Services Pvt. Ltd. v. DCIT, Mumbai and Ors.[i], *the Bombay High Court analyzed the arguments presented by both the Assessee’s counsel and the Income Tax (‘IT’) Department regarding the reassessment initiated by the IT Department due to its change of mind. The Court unequivocally held that the IT authorities can initiate reassessment only under ss. 148 and 148A of the IT Act, 1961 (‘the Act’) after obtaining approval from the designated specific authority under s. 151 of the Act.

Brief Facts

• On 28.11.2016, the Petitioner filed its income tax return (‘ITR’) for assessment year (‘AY’) 2016-17, declaring a total income of Rs. 44,92,46,370/-. On 28.03.2018, the Petitioner filed a revised return, declaring a total income of Rs. 50,67,32,580/-. The revised return underwent scrutiny, leading to a notice dated 05.09.2018, under s. 143(2) of the Act, followed by another notice dated 05.12.2018, under s. 142(1) of the Act.

• The Petitioner responded to these notices vide letter dated 06.12.2018, providing a transaction-wise summary of expenditure on software consumables. The IT Department issued an assessment order on 23.12.2018, under s. 143(3) of the Act, without making adjustments to the total income reported in the revised return.

• After nearly 3 years, on 25.06.2021, the Petitioner received a notice under s. 148 of the Act from the IT Department, claiming that there was a reason to believe that the Petitioner's income for AY 2016-17 had escaped assessment. The Petitioner replied on 22.07.2021, contending that the notice was issued as per ss. 147 to 151 of the Act, prior to their substitution by the Finance Act, 2021, and requested that the proceedings be dropped.

• However, the Petitioner received another notice dated 31.05.2022, under s. 148A(b) of the Act. In this notice, the IT Department referred to various writs filed before the Bombay High Court and relied on the judgement of the Apex Court in Union of India v. Ashish Agarwal*[ii]*. It stated that this notice should be deemed to be issued under s. 148A of the Act, as substituted by the Finance Act 2021, and treated as a show cause notice (‘SCN’). The IT Department relied on the evidence attached to the SCN, along with the approval of the competent authority annexed to the impugned SCN.

• Consequently, the IT Department treated the notice as an SCN, to which the Petitioner responded on 09.06.2022 and 07.07.2022, stating how the SCN was legally flawed. This led to an order dated 31.07.2022, passed under s. 148A(d) of the Act, rejecting the Petitioner’s submissions. An intimation letter and notice were issued on the same day, stating that income chargeable to tax had escaped assessment.

Held

• In this case, the Court found the approval for issuing the notice under s. 148A(d) of the Act to be invalid, leading to the quashing of the reassessment proceedings against the Petitioner. The Court ruled that the approval should have been granted under s. 151(ii) rather than s. 151(i) of the Act and emphasized that reopening an assessment based on a change of opinion is not a valid ground.

• The Court clarified that the 1st proviso to s. 148 of the Act mandates obtaining approval from the specified authority before issuing a notice under s. 148. Explanation 3 to s. 148 of the Act further clarifies that “specified authority” has the same meaning as provided under s. 151 of the Act. Additionally, the Court noted that s. 148(d) requires the Assessing Officer (‘AO’) to make a decision, considering the assessee’s response, on whether it is a fit case to issue a notice under s. 148. Importantly, this decision under s. 148(d) of the Act must have the prior approval of the specified authority.

• The Court highlighted that s. 151 of the Act designates the specified authority for granting approvals under ss. 148 and 148A of the Act as the Principal Chief Commissioner or Principal Director General. In the absence of a Principal Chief Commissioner or Director General, the Chief Commissioner or Director General may grant approval, but only if more than 3 years have passed since the end of the relevant AY.

• The Court further pointed out that in this case, the notice was issued after 31.03.2020, which is more than 3 years after the end of the relevant AY. Consequently, the approval of the Principal Chief Commissioner or Principal Director General was required. However, the impugned notice claimed to have obtained approval from the Principal Commissioner of Income-Tax-8, which the Court deemed legally flawed. Resultantly, the order dated 31.07.2022 passed under s. 148A(d) read with the notice under s. 148 of the Act, was deemed invalid and set aside.

• The Court reaffirmed that the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (‘TOLA’),only extends the period of limitation and does not affect the scope of s. 151 of the Act. Moreover, the Court rejected the observations made by the Central Board of Direct Taxes (‘CBDT’) in paragraph 6.1 of Instruction No. 1/2022 dated 11.05.2022, asserting that the CBDT cannot clarify the law established by the Supreme Court. The Court maintained that the extended reassessment notices should not travel back in time, contrary to the CBDT’s interpretation.

• The Court further observed that even if it assumed that the extended reassessment notices could retrospectively apply to the original notice issued on 25.06.2021, the approval of the Principal Chief Commissioner of Income-Tax would still be required under s. 151(ii) of the Act, given the passage of more than 3 years since the end of the relevant AY.

• Ultimately, the Court upheld the principle, as established in Dr. Mathew Cherian v. Asst. CIT*[iii]*, that under both the old and new reassessment regimes, settled issues should not be reopened under the pretext of reassessment. Therefore, the concept of a "change of opinion" should not be exploited to revisit assessments, as demonstrated in this case where the AO altered his stance.

Analysis

The recent ruling by the Bombay High Court carries significant implications, offering explicit guidance on tax reassessment protocols and procedures. The Court has set forth precise and unambiguous limitations on the authority of the AO, emphasizing the need for strict interpretation of taxation statutes. The Court has also stressed the importance of adhering to jurisdictional requirements for reassessment approvals and has prohibited the mere “change of opinion” as a valid basis for initiating reassessments.

The Court has ruled that the IT Department cannot arbitrarily reopen a taxpayer’s assessment solely due to a change of mind within the department. This underscores that the IT Department must have a valid reason or access to new evidence that was unavailable during the original assessment. Additionally, the IT Department must obtain approval of the specified authority before reopening such an assessment, ensuring that the State does not burden taxpayers without proper legal authority. This verdict represents a significant triumph for taxpayers, shielding them from capricious reassessments and providing clarity and confidence in the tax reassessment process.

End Notes

[i] (2023) 154 taxmann.com 159 (Bombay) - [25.08.2023]

[ii] (2022) 138 taxmann.com 64(SC)

[iii] (2023) 152 taxmann.com 154 (Madras)

*Authored by Aishwarya Pawar, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion. *