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Bombay High Court Clarifies FAO's Authority Over S. 148 Notice Issuance and Tax Escapement Cases

Introduction

In the significant judgment, Hexaware Technologies Ltd. v. Assistant Commissioner of Income-tax, Circle 15(1)(2)(ST)[i], the Bombay High Court (‘BHC’) delved into the intricate issues surrounding income tax reassessment and the validity of deductions claimed by a petitioner involved in information technology and software development services. The case, with its substantial earnings and deductions under ss. 10AA and 80JJAA of the Income-tax Act (‘Act’), and the subsequent reassessment notices and the petitioner's challenge, led to a comprehensive examination of income tax reassessment's procedural and substantive aspects under the amended legal framework.

Brief Facts

  • The petitioner was engaged in information technology and software development services. The petitioner filed a return of income (‘ROI’) for the assessment year (‘AY’) 2015-16, declaring an income of Rs. 204,54,44,990/-. In the ROI, the petitioner claimed deductions under ss. 10AA and 80JJAA of the Act. The petitioner submitted an audit report in Form No.56F and Form No.10DA for these deductions, which were also reported in the tax audit report in Form 3CB and Form 3CD and submitted during assessment proceedings.

  • The petitioner’s case was selected for scrutiny and a notice under s. 143(2) of the Act was issued. The petitioner also received various notices under s. 142(1) of the Act, calling for details of deductions claimed under ch. VIA, along with all supporting documents. The petitioner submitted the requested details and supporting documents, including references to Form 3CD disclosures.

  • Thereafter, respondent no.1 passed an assessment order under s. 143(3) of the Act, accepting the return filed by the petitioner. Nearly 3.5 years later, on 08.04.2021, the respondent no.1 issued a notice under s. 148 of the Act, stating that income chargeable to tax for AY 2015-2016 had escaped assessment under s. 147 of the Act. The petitioner challenged this notice via writ petition No.3179 of 2021, arguing that the notice was issued based on provisions that had ceased to exist. Vide order dated 29.03.2022, the BHC ruled that the notice dated 08.04.2021 is invalid.

  • Following the Hon’ble Supreme Court's (‘SC’) decision in Union of India & Ors. v. Ashish Agarwal[ii] held that notices issued after 01.04.2021 would be treated as issued under s. 148A(b) of the Act, respondent no.1 issued a new notice on 25.05.2022, referencing the SC decision and providing reasons for reassessment.

  • In the reasons recorded by the respondent in the aforesaid notice, it was alleged that-

i. The basic condition to avail deduction under s. 80JJAA of the Act is to derive profit from manufacturing goods in the factory, which the petitioner had not fulfilled.

ii. The petitioner had reported higher profits in the units to claim a deduction under s. 10AA of the Act.

iii. A difference of Rs. 6.90 crores had escaped assessment and needed to be added to the total income of the petitioner on account of realized foreign exchange loss.

iv. Income arising from transactions under Calibre Point Business Solutions Ltd., which was not independently filing returns but had merged with the petitioner, should be taxed.

  • The petitioner filed its objections challenging the validity of the notice, submitting that-

i. The reopening was contrary to s. 149(1)(b) of the Act, as no income in the form of an ‘asset’ had escaped assessment.

ii. Approval under s. 151 of the Act for issuing the impugned notice had not been obtained from the appropriate authority.

iii. The reopening was clearly a case of change of opinion; hence, it was invalid and bad in law.

iv. Relying on the provisions of the Act, it was submitted that the petitioner was eligible for the deduction under s. 80JJAA of the Act and the deduction had been consistently allowed since AY 2010-11.

v. No income had escaped assessment on account of a realized foreign exchange loss.

vi. All the Calibre Point Business Solutions Ltd. transactions were already accounted for in the books of the petitioner and considered while filing the ITR.

  • Despite these objections, Respondent no.1 issued another notice on 29.06.2022 requesting further explanations. The petitioner reiterated its earlier submissions and filed an online response on 22.07.2022. However, vide order dated 26.08.2022 (‘impugned order’), respondent no. 1 rejected the response filed by the petitioner and accepted the reasons recorded by respondent no. 1.

  • Thereafter, respondent no.1 issued a manual notice on 27.08.2022 (‘impugned notice’), indicating further action was required as per the SC judgment, with approval from respondent no.3. A communication on 27.08.2022 stated the issuance of a notice with a generated Document Identification Number (‘DIN’).

  • On 23.09.2022, the petitioner filed a return in response and requested the approval copy provided on 30.09.2022. The petitioner contended that any communication without a DIN was invalid as per CBDT Circular No.19 of 2019.

  • Aggrieved by respondent no.1’s actions in issuing notices and orders, the petitioner approached the BHC under a. 226 of the Constitution of India.

Held

  • The BHC allowed the writ petition filed by the petitioner and quashed the notice dated 25.05.2022, the impugned order and the impugned notice issued by the respondents.

  • The BHC, while disposing of the petition, framed eight issues and made in-depth observations while answering the same.

  • On the issue of applicability of the provisions of Taxation and other Laws (Relaxation and Amendment of certain provisions) Act, 2020 (‘TOLA’) for AY 2015-16, it observed that the provisions of TOLA were not applicable and placed reliance upon the judgement passed by the SC in Tata Communications Transformation Services Ltd[iii]. and Siemens Financial Services (P.) Ltd[iv]. Therefore, it held that the revenue could not rely on TOLA to justify the notice under s. 148 of the Act as being within the limitation period. Further, it rejected the revenue’s argument on travel back and held that any notice issued under s. 148 of the Act after 31.03.2021 could not return to the original date.

  • On the issue of limitation of impugned notice issued under s. 148 of the Act, the BHC observed that the first proviso to s. 149 of the Act specified that no notice under s.148 of the Act could be issued for any assessment year before 01.04.2021 if it was beyond the time limit specified in the erstwhile s. 149(1)(b) of the Act. As in the present case, for AY 2015-16, the six-year period expired on 31.03.2022; the BHC noted that the impugned notice had been issued beyond this limitation period. Therefore, the BHC held that the law of limitation barred the impugned notice as per the first proviso to s. 149 of the Act.

  • With regards to the issue of the validity of the impugned notice due to the absence of a document identification number (‘DIN’), the BHC observed that the impugned notice did not mention a DIN, which was a requirement as per CBDT Circular No.19 of 2019. The absence of DIN rendered the notice invalid and bad in law. It further observed that the letter supposedly validating the notice referred to a DIN for a notice dated 26.08.2022, not the impugned notice. Since the prescribed procedure for issuing notices without DIN was not followed, therefore, the impugned notice was held invalid and bad in law.

  • With regards to the issue as to whether the impugned notice was invalid and bad in law being issued by the jurisdictional assessing officer (‘JAO’) as the same was not in accordance with s. 151A of the Act, the BHC answered positively and observed that section 151A of the Act, which empowers the CBDT to do certain acts, aims to enhance efficiency, transparency, and accountability by eliminating direct interaction between income tax authorities and the assessee. The CBDT issued Notification No. 18/2022 on 29.03.2022, establishing a scheme specifying that assessment, reassessment, or recomputation under s. 147 of the Act, and issuance of notices under s. 148 of the Act will be conducted through automated allocation as per a risk management strategy in a faceless manner, as provided in s. 144B of the Act. However, the impugned notice issued by respondent no. 1 violated the scheme as the National Faceless Assessment Centre (NFAC) did not issue it. Further, the argument of concurrent jurisdiction between the JAO and the faceless assessing officer (‘FAO’) for issuing notices under s. 148 of the Act or for assessment/reassessment was held to be invalid.

  • On the issue of deduction/allowances and escapement of income, the BHC observed that the respondent accepted that the forex loss was valid. Hence, it could not justify income escapement and held that none of the issues raised indicated an escapement of income represented as an asset under s. 149(1)(b) of the Act. It was of the opinion that the correctness of a deduction claims under s. 80JJAA of the Act did not fall under s. 149(1)(b) of the Act pertains to income as an asset, expenditure, or book entry. It was held that the term ‘asset’ in s. 149 of the Act included immovable property, shares, securities, loans, and bank deposits, none of which applied to this case. Therefore, the disallowance of a deduction did not fit into the categories under ss. 149(1)(b) or (c) of the Act.

  • With regards to the issue of change of opinion and review, the BHC observed that respondent no.1 had no power to review his own assessment when the same information was provided and considered in the original assessment. It held that the concept of change of opinion was an in-built test to prevent abuse of power by the AO. Therefore, reassessment proceedings based on a change of opinion were invalid and without jurisdiction, leading to quashing the impugned notice under s. 148 of the Act.

  • On the issue of consistent allowance of deduction under s. 80JJAA of the Act in favour of the petitioner by the AOs/ appellate authorities in the earlier years, the BHC observed that respondent no.1 could not allege income escapement due to this claim for AY 2015-2016 when it had been allowed in earlier years under identical circumstances.

  • Regarding the alleged non-application of mind in granting approval for an order under s. 148A(d) of the Act, the BHC held that no person properly instructed in law could have granted approval for passing the order u/s 148A(d) of the Act. Therefore, it disagreed with this submission, finding no evidence of non-application of mind by the approving authority.

Our Analysis

The BHC’s judgment scrutinizes the procedural and substantive aspects of the income tax reassessment process, emphasizing key legal principles that affect both taxpayers and tax authorities. The findings highlight the necessity for tax authorities to adhere strictly to statutory deadlines and procedural requirements, ensuring that reassessment actions are legally sound and compliant with established regulations.

Moreover, the judgment delved into the concept of 'change of opinion,' reaffirming that reassessment based on the same information already considered in the original assessment is impermissible. This principle protects taxpayers from arbitrary reassessment actions without new or compelling evidence. The court also emphasized the importance of consistency in deduction claims, noting the unjust disallowance of deductions under s. 80JJAA of the Act when they had been previously accepted in similar circumstances. Additionally, the judgment underscored the procedural requirements for issuing reassessment notices through the NFAC, finding that the impugned notice violated these requirements. This reflects the ongoing shift towards a more automated and transparent tax assessment process to reduce biases and enhance efficiency. Overall, the BHC’s ruling reinforces critical tax law principles, guiding taxpayers and tax authorities in effectively managing income tax reassessments.




End Notes

[i] 2024 SCC OnLine Bom 1249.

[ii] (2022) 444 ITR 1 (SC).

[iii] (2022) 443 ITR 49 (Bom).

[iv] (2023) 154 taxmann.com 159 (Bombay).






Authored by Onam Singhal, Chartered Accountant at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.


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