Delhi HC quashes about 1346 writ petitions challenging re-assessment orders issued after March 31st vide single judgment

Mon Mohan Kohli vs Assitant Commissioner of Income Tax & Anr.; W.P.(C) 6176/2021; Delhi High Court; 15.12.2021

About 1346 writ petitions challenging re assessment orders issued after March 31st were quashed vide single judgment. the questions of law that arise for consideration are whether the Government/Executive can make or change law of the land by way of Explanations to Notifications without specific Authority from the Legislature to do so and whether the Government/Executive can impede the implementation of law made by the Legislature.

Issue:

• In the present batch of matters, the petitioners-assessees have sought quashing of the re-assessment Notices issued post 31st March, 2021 by the Respondents-Revenue under Section 148 of the Income Tax Act, 1961.
• The petitioners-assessees also seek a declaration declaring Explanations A(a)(ii)/A(b) to the Notification No.20 [S.O.1432(E)] dated 31st March, 2021 and Notification No.38 [S.O.1703(E)] dated 27th April, 2021 to the extent that the same extend the applicability of the “provisions of Section 148, Section 149 and Section 151 of the Act, as the case may be, as they stood as on the 31st day of March, 2021, before the commencement of the Finance Act, 2021” to the period beyond 31st March, 2021 as ultra vires the parent legislation, viz., The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (hereinafter referred to as ‘Relaxation Act, 2020’)

Facts:

• Due to the onset of Covid-19 pandemic followed by nationwide lockdown in March, 2020, the citizens and authorities inter alia faced difficulties in complying with the statutory time limits.
• To provide relaxation as well as to avoid any adverse consequence to either party, the Government of India announced various relaxations by way of The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 (hereinafter referred to as the ‘Relaxation Ordinance, 2020’)
• By way of Relaxation Act, 2020, various due dates/time limits/limitations prescribed in different Central Acts, including the Income Tax Act, 1961, were relaxed. Additionally, Section 3 of Relaxation Act, 2020 enabled the Central Government to issue Notifications for further relaxing the time limits/limitations prescribed in the ‘Specified Acts’.
• In pursuance to the power vested under Section 3 of Relaxation Act, 2020, the Central Government issued notifications inter-alia extending the time lines prescribed under Section 149 for issuance of reassessment notices under Section 148 of the Income Tax Act, 1961.
• The Explanations to the Notifications dated 31st March, 2021 and 27th April, 2021 issued under Section 3 of Relaxation Act, 2020 also stipulated that the provisions, as existed prior to amendment by Finance Act, 2021, shall apply to the reassessment proceedings initiated thereunder.
• The Explanations to the Notifications dated 31st March, 2021 and 27th April, 2021 are impugned in the present proceedings.
• Parliament introduced reformative changes to Sections 147 to 151 of the Income Tax Act, 1961 governing reassessment proceedings by way of the Finance Act, 2021, which was passed on 28th March, 2021.
• As, despite the substituted Sections 147 to 151 of the Income Tax Act, 1961 coming into force on 1st April, 2021, the respondents issued reassessment notices to the petitioners-assessees under the erstwhile Sections 148 to 151 of the Income Tax Act, 1961 relying on Explanations in the Notifications dated 31st March, 2021 and 27th April, 2021, the petitioners filed the present writ petitions challenging the legality and validity of the said Explanations as well as the reassessment notices issued pursuant thereto.

Observations and Findings:

• As the legislature has permitted re assessment to be made only in accordance with the substituted provisions, it can only be done in this manner, or not at all.
• The Court was of the view that by virtue of Section 1(2)(a) of the Finance Act, 2021, the substituted Sections 147, 148, 149 and 151 of the Income Tax Act, 1961 pertaining to reopening of assessments came into force on 1st April, 2021. There is also no power with the Executive/Respondents/Revenue to defer/postpone the implementation of Sections 2 to 88 of the Finance Act, 2021 which includes the substituted Sections 147 to 151 of the Income Tax Act, 1961.
• It is settled law that the law prevailing on the date of issuance of the notice under Section 148 has to be applied.
• The Court was of the view that had the intention of the Legislature been to keep the erstwhile provisions alive, it would have introduced the new provisions with effect from 1st July, 2021, which has not been done.
• Accordingly, the notices relating to any assessment year issued under Section 148 on or after 1st April, 2021 have to comply with the provisions of Sections 147, 148, 148A, 149 and 151 of the Income Tax Act, 1961 as specifically substituted by the Finance Act, 2021 with effect from 1st April, 2021.
• Consequently, this Court is of the opinion that as the Legislature has permitted re-assessment to be made in this manner only, it can be done in this manner, or not at all.
• Section 3(1) of Relaxation Act empowers the government/executive to extend only the timelines. Consequently, the government/executive can neither make or change law of the land nor can it impede the implementation of law made by the parliament.
• Upon perusal of Section 3(1) of Relaxation Act, 2020, the Court was of the view that it extends only the time lines. Section 3(1) of the Relaxation Act, 2020 stipulates that where, any time limit has been stipulated in a specified Act which falls between the period 20th day of March, 2020 and 31st day of December, 2020 for the completion or compliance of such action as issuance of any notice under the provisions of the specified Acts and where completion or compliance of such action has not been made within such time, then the time limit for completion or compliance of such action shall, notwithstanding anything contained in the specified Acts, stand extended.
• It is important to bear in mind that Section 3(1) of the Relaxation Act, 2020 does not empower the Central Government to postpone the applicability of any provision which has been enacted from a particular date.
• Relaxation Act, 2020 nowhere delegates power to the Central Government to postpone the date of applicability of a new law enacted by the Legislature. Relaxation Act, 2020 also does not put any embargo on the power of the Legislature to legislate.
• Also, the impugned Explanations in the Notifications dated 31st March, 2021 and 27th April, 2021 are beyond the power delegated to the Government, as the Relaxation Act does not give power to Government to extend the erstwhile Sections 147 to 151 beyond 31st March, 2021 and/or defer the operation of substituted provisions enacted by the Finance Act, 2021.
• Accordingly, the provisions of Section 148A had to be complied with before issuing notices under Section 147 of the Income Tax Act.
• Consequently, the Relaxation Act, 2020 and Notifications issued thereunder can only change the time-lines applicable to the issuance of a Section 148 notice, but they cannot change the statutory provisions applicable thereto which are required to be strictly complied with. Further, just as the Executive cannot legislate, it cannot impede the implementation of law made by the Legislature.
• The Impugned explanations in the notifications dated 31.03.2021, and 27.04.2021 are ultra vires, the parent statute i.e. the relaxation act. This Court is respectfully not in agreement with the view of the Chhattisgarh High Court in the matter of Palak Khatuja vs.Union of India and Ors., W.P.(T) No. 149 of 2021 but with the views expressed by the Allahabad High Court in Ashok Kumar Agarwal vs. Vs. Union of India through its Revenue Secretary North Block; Writ Tax No. 524/2021 and Rajasthan High Court in BPIP Infra Pvt. Ltd. vs Income Tax Officer, Ward 4(1), S.B. Civil Writ Petition 13297/2021.
• Consequently, Explanations A(a)(ii)/A(b) to the Notifications dated 31st March, 2021 and 27th April, 2021 are ultra vires the Relaxation Act, 2020 and are therefore, bad in law and null and void.
• Finance Act, 2021 has merely changed the procedure of issuing notice. Consequently, the “Power” of reassessment that existed prior to 31.12.2021 continues to exist even thereafter.
• It is not disputed that as per Hohfeld’s theory, the jural correlative of “power” is “liability”. Where there is power, there is corresponding liability imposed upon the person against whom such power exists.
• However, with the coming into force of the Finance Act, 2021 w.e.f. 1st April, 2021, there has been no curtailing or taking away the power of the Revenue. It has merely changed the procedure of issuing notice.
• Consequently, the “power” as per Hohfeld’s theory that existed prior to 31st March, 2021 continues to exist even thereafter. To ignore the legislative intent of Finance Act, 2021 would not be in accordance with past practice.
• It is pertinent to mention that the Legislature had even prior to Finance Act, 2021 enhanced/reduced time limit specified in Section 149 of the Income Tax Act, 1961, by way of Finance Acts, 1961, 1989, 2001, 2012 and pertinently such enhancement/reduction to the time limit was made effective from different dates of the relevant financial year.
• Consequently, in the present cases to ignore the legislative intent of Finance Act, 2021 would neither be legal nor reasonable. It is a principle of legal policy that changes in the substantive law should normally not take effect retrospectively except in relation to procedural matters.
• In contrast to statutes dealing with substantive rights, statutes dealing with merely matters of procedure are presumed to be retrospective, unless such a construction is textually inadmissible.
• In fact, there is line of authority to the effect that, in the absence of contrary intention, procedural changes apply to pending as well as future proceedings. Rationale behind the principle that change in procedural law operates retrospectively.
• The Supreme Court has quoted with approval the reason of the rule as expressed in MAXWELL.[MAXWELL: Interpretation of Statutes, 11th Edition, p. 216]. “No person has a vested right in any course of procedure. He has only the right of prosecution or defence in the manner prescribed for the time being by or for the Court in which the case is pending, and if, by an Act of Parliament the mode of procedure is altered, he has no other right than to proceed according to the altered mode”.
• In the opinion of this Court, this is because a procedural change is expected to improve matters for everyone concerned (or at least to improve matters for some, without inflicting detriment on anyone else who uses ordinary care, vigilance and promptness).
• For determining whether the amendment is a procedural or a substantive law one will have to examine the intent, purpose and scope of the amendments.
• The intent purpose and scope of the amendments introduced by the Finance Act, 2021 was to protect the rights and interests of assessees as well as promote public interest. It is settled law that if legislation is introduced to remedy the defective rule and no one suffers thereby, it is sensible to apply it to pending proceedings.
• The unamended sections 147 to 149 and 151 of teh Income Tax Act, 1961 prescribed the procedure governing initiation of reassessment proceedings. However, the same gave rise to numerous litigations, particularly on the issues that reassessment proceedings were often initiated:
  • without recording any valid ‘reason to believe’,
  • in absence of any tangible/reliable material/information in possession the Assessing Officer leading to formation of belief that income has escaped assessment,
  • without any enquiry being conducted by the Assessing Officer prior to the issuance of notice,
  • without following the mandatory procedure laid down by the Supreme Court
• The Legislature, being conscious of the shortcomings in the unamended Sections 147 to 151 of the Income Tax Act, 1961, which were relaxed by the aforesaid provisions of the Relaxation Act and the Notifications issued thereunder, introduced reformative changes to the said Sections governing the procedure for reassessment proceedings by way of the Finance Act, 2021 passed on 28th March, 2021.
• Behind the aforesaid act of reformative changes it is apparent that the legislative intent behind the aforesaid substitutions/amendments is to reduce the time limit in ordinary cases to three years and to increase the threshold amount of income having escaped assessment to Rs.50 lakhs for invoking extended time limit of ten years is to reduce litigation and compliance burden, remove discretion, impart certainty and promote ease of doing business.
• The Hon’ble Court was of the opinion that the new provisions are remedial and benevolent provisions which are meant and intended to protect the rights and interests of assessees as well as promote public interest.
• If the procedural rules are defective, the legal apparatus works less efficiently and the public interest suffers. If legislation is introduced to remedy the defective rule and no one suffers thereby, it is sensible to apply it to pending proceedings.
• Therefore, the Court was of the view that the Finance Act, 2021 introduces a new regime regarding the procedure to be complied with in respect of the re-opening of an Income-tax assessment and accordingly, the benefit of the new provisions must necessarily be made available even in respect of proceedings relating to past Assessment Years provided, of course, Section 148 notice has been issued on or after 01.04.2021.
• The argument of the Respondent that the substitutions made by the Finance Act 2021 is not applicable to past assessment years, as it it substantial in nature is contradicted by its own circular 549 of 1989 and its own submission that from 01.07.2021, the substitutions made by the Finance Act, 2021 will be applicable.
• If the argument of the Respondents that the explanation in notification no. 20 dated 31.03.2021 extended the applicability of old procedure of reassessment beyond 31.03.2021 ias accepted, the same shall lead to amnifest arbitrariness and conflict.
• Revenue cannot rely on Covid-19 for contending that new provisions should not operate during the period 01.04.2021 to 30.06.2021.
• Non- Obstante Clause has to be construed strictly section 3(1) of relaxation act is expressly confined to and only supersedes the time limits. It does not exclude the applicability of provisions substituted by Finance Act, 2021.
• The Revenue’s choosing and picking of two terms viz. “such action” & “extension/extended” is contrary to basic principles of interpretations which prohibits selectively choosing/ignoring words from the statutory language as well as teh fact that the relaxation Act, 2020 was enacted long before Finance Act, 2021.
• It is settled law that when the words of a statute are clear and unambiguous, it is not permissible for the Court to read words into the statute. The Consequence of not mentioning substituted section 147 of the Income Tax Act, 1961 in the impugned explanations.
• The “Legal Fiction” argument is without any foundation. There is no provision in relaxation act stating that if the “action” is taken within the extended time limit, it would be deemed to have been taken before the expiry of the original (un-extended) time limit.
• The essential condition for a provision to be termed as stop the clock provision is absent in as much as the time during which such clock is stopped has not been stipulated to be excluded. It cannot be that a fiction is created or clock stopped only for reassessment and not for assessment and/or faceless penalty scheme.
• The Court was of the view that as the Legislature has introduced the new provisions, Sections 147 to 151 of the Income Tax Act, 1961 by way of the Finance Act, 2021 with effect from 1st April, 2021 and as the said Section 147 is not even mentioned in the impugned Explanations, the reassessment notices relating to any Assessment Year issued under Section 148 after 31st March, 2021 had to comply with the substituted Sections.
• It is clarified that the power of reassessment that existed prior to 31st March, 2021 continued to exist till the extended period i.e. till 30th June, 2021; however, the Finance Act, 2021 has merely changed the procedure to be followed prior to issuance of notice with effect from 1st April, 2021.
• This Court is of the opinion that Section 3(1) of Relaxation Act empowers the Government/Executive to extend only the time limits and it does not delegate the power to legislate on provisions to be followed for initiation of reassessment proceedings.
• In fact, the Relaxation Act does not give power to Government to extend the erstwhile Sections 147 to 151 beyond 31st March, 2021 and/or defer the operation of substituted provisions enacted by the Finance Act, 2021.
• Consequently, the impugned explanations in the notifications dated 31st March, 2021 and 27th April, 2021 are not conditional legislation and are beyond the power delegated to the Government as well as ultra vires the parent statute i.e. the Relaxation Act.
• The submission of the Revenue that Section 6 of the General Clauses Act saves notices issued under Section 148 post 31st March, 2021 is untenable in law, as in the present case, the repeal is followed by a fresh legislation on the same subject and the new Act manifests an intention to destroy the old procedure.
• Consequently, if the Legislature has permitted reassessment to be made in a particular manner, it can only be in this manner, or not at all. The argument of the respondents that the substitution made by the Finance Act, 2021 is not applicable to past Assessment Years, as it is substantial in nature is contradicted by Respondents’ own Circular 549 of 1989 and its own submission that from 1st July, 2021, the substitution made by the Finance Act, 2021 will be applicable.
• Revenue cannot rely on Covid-19 for contending that the new provisions Sections 147 to 151 of the Income Tax Act, 1961 should not operate during the period 1st April, 2021 to 30th June, 2021 as Parliament was fully aware of Covid-19 Pandemic when it passed the Finance Act, 2021.
• Also, the arguments of the respondents qua non-obstante clause in Section 3(1) of the Relaxation Act, ‘legal fiction’ and ‘stop the clock provision’ are contrary to facts and untenable in law.
• The Court was of the view that the Executive/Respondents/Revenue cannot use the administrative power to issue Notifications under Section 3(1) of the Relaxation Act, 2020 to undermine the expression of Parliamentary supremacy in the form of an Act of Parliament, namely, the Finance Act, 2021.

Held:

• Keeping in view the aforesaid conclusions, Explanations A(a)(ii)/A(b) to the Notifications dated 31st March 2021 and 27th April 2021 are declared to be ultra vires the Relaxation Act, 2020 and are therefore bad in law and null and void.
• The impugned reassessment notices issued under Section 148 of the Income Tax Act, 1961 are quashed and the present writ petitions are allowed.
• If the law permits the respondents/revenue to take further steps in the matter, they shall be at liberty to do so. Needless to state that if and when such steps are taken and if the petitioners have a grievance, they shall be at liberty to take their remedies in accordance with the law.