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“If you can’t win your cases on merits in Court, then simply amend the Law.”

Well Friends, off-late, 'Unsettling Settled Legal Positions' seems to be the New Norm for Bringing in Stability, in the Budget Fine Prints.

This notion or belief, has become a new synonym for bringing in the stable and predictable tax regime (read tax regime in favour of revenue authorities) and somehow, seems to be the underlying guiding philosophy in bringing about the majority of the budgetary amendments in the Finance Bills.

Our Hon’ble FM Smt. Nirmala Sitharaman in her budget speech presented in the Parliament on 1.2.2022, has stated:

“The proposals in this budget, while continuing with our declared policy of stable and predictable tax regime, intend to bring more reforms that will take ahead our vision to establish a trustworthy tax regime. This will further simplify the tax system, promote voluntary compliance by taxpayers, and reduce litigation.”

Like the previous year, this year’s Union Budget (Finance Bill 2022) is also full of budgetary amendments, which have been brought in by the legislature, primarily for the purpose of nullifying the well-settled and established judicial ratios or legal positions arising out of the time-tested judgements/judicial pronouncements of hon’ble High Courts and the hon’ble Supreme Court.

Let us analyse some of these budgetary amendments proposed in the Finance Bill, 2022.

1. Amendment related to validity of assessment or other income-tax proceedings, initiated or completed in the name of a predecessor non existing entity, pursuant to business re-organisation.

It is a settled position of law arising out of time-tested judicial pronouncements of various hon’ble High Courts and even the hon’ble Apex Court that assessment or any other income-tax proceedings initiated or completed in the name of any non-existing person or a corporate entity, is null and void-ab-initio, in the eyes of Law. The Hon’ble Supreme Court in the case of Principal CIT Vs. Maruti Suzuki Ltd. (2019) 416 ITR 613(SC) has categorically held that initiation of assessment proceedings against a predecessor corporate entity which had ceased to exist pursuant to a scheme of amalgamation, was void-ab-initio.

So, with the sole objective of nullifying this well-settled legal position, the Finance Bill 2022, has proposed to insert a sub-section (2A) to section 170, to provide that the assessment or other proceedings pending or completed on the predecessor in the event of a business reorganization, shall be deemed to have been made on the successor. This amendment will take effect from 1st April, 2022.

2. Amendments in the New Re-Assessment Regime

The Finance Act 2021, has substituted the old re-assessment regime with a new re-assessment regime, by substituting the then existing sections 147-151 with the new sections. In this new re-assessment regime, the well-settled and established legal position in respect of mandatory condition of formation of an independent reason to believe, of escapement of income, by the jurisdictional assessing authority, has been replaced with the presence of any flagged information as per the risk management strategy of CBDT or the final audit objection of C&AG, suggesting that income of the assessee has escaped assessment.

Now, the Finance Act 2022 has further proposed to clarify as to what constitutes information under Explanation 1 to section 148 so as to include any audit objection, or any information received from a foreign jurisdiction under an agreement or directions contained in a court order, or information received under a scheme notified under section 135A etc.

Further, the re-opening period was reduced from six years to three years by the Finance Act 2021. However, an exception was provided in cases, where the undisclosed income in the form of an asset, exceeds Rs. 50 lakhs in any assessment year, and such cases can be reopened up to ten years.

Now, the Finance Bill 2022 has proposed to amend the clause (b) of sub-section (1) of the section 149 to provide that a notice under section 148 shall be issued only for the relevant assessment year after three years but prior to ten years from the end of the relevant assessment year where the Assessing Officer has in his possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented,

(a)       in the form of an asset; or

(b)       expenditure in respect of a transaction or in relation to an event or occasion; or

(c)        an entry or entries in the books of account,

which has escaped assessment amounts to or likely to amount to fifty lakh rupees or more.

Further, the Finance Act 2021, has subsumed the erstwhile block assessments pursuant to search action u/s 132 or survey u/s 133A, within the newly substituted re-assessment regime, and has provided that such search/survey cases can be reopened only for previous three assessment years only.

However, the Finance Bill 2022, has once again proposed the enabling of re-opening of such cases up-to six preceding assessment years.    

Fortunately, the much anticipated, saving or enabling clause in the newly substituted proviso to section 149 by the Finance Act, 2021, has not been brought in by the Legislature in Finance Bill 2022, in order to nullify the recent undermentioned judgements of the hon’ble High Courts, holding the reassessment notices issued under old section 148, on or after 1.4.2021, as bad in law:

1. Delhi High Court in the case of Mon Mohan Kohli v ACIT and others (WP(C) No. 6176/2021);
2. Allahabad High Court in the case of Ashok Kumar Agarwal v UOI [2021] 131 taxmann.com 22;
3. Rajasthan High Court in the case of Bipip Infra Private Limited vs ITO (S.B. Civil Writ Petition No 13297/2021);
4. Calcutta High Court in the case of Manoj Jain v Union of India & Ors. (WPA No. 11950 of 2021)

3. Clarification regarding treatment of ‘Cess and Surcharge’

Sub-clause (ii) of clause (a) of section 40 of the Act provides that any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”.

The Hon’ble Bombay High Court in the case of “Sesa Goa Limited Vs. JCIT” (2020) 117 taxmann.com and the Hon’ble Rajasthan High Court in the case of “Chambal Fertilizers & Chemicals Ltd Vs. JCIT”: D.B Income-tax Appeal No. 52/2018, relying upon the CBDT Circular Dt. 18-05- 1967 have held that ‘education cess’ can be claimed as an allowable deduction while computing the income chargeable under the heads “profits and gains of business or profession”.

Thus, with a view to nullify these judgements, the Finance Bill 2022 has proposed to include an Explanation retrospectively in the Act itself to clarify that for the purposes of this sub-clause, the term “tax” includes and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. This amendment is proposed to take effect retrospectively from 1st April, 2005 and will accordingly apply in relation to the assessment year 2005-06 and subsequent assessment years.

4. Disallowance u/s 14A in absence of any Exempt Income

The Fine Print of the Finance Bill 2022 proposes to insert an Explanation to section 14A of the Act, to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. This amendment will take effect from 1st April, 2022.

Thus, this amendment has also been proposed in the Finance Bill 2022, just to nullify several judgements of the hon’ble High Courts including the judgements of the hon’ble Delhi High Court in the cases of ‘Cheminvest Ltd vs. CIT reported in CIT (2015) 378 ITR  33 (DEL) and ‘PCIT vs IL&FS Energy Development Company Ltd reported in 250 Taxman 0174, holding that no disallowance u/s 14A of the Act could be made in respect of any expenditure incurred in earning any exempt income, in the absence of any exempt income.

5. Cash Credits under section 68

The hon’ble Delhi High Court in a very recent judgement in the case of Principal CIT v. Agson Global (P.) Ltd. [2022] 134 taxmann.com 256 (Delhi) [Judgment dated 19th January, 2022] has held that:

"addition under section 68 of the Act is not attracted when assessee-company routes its own accounted money back to itself, through other entities, as share capital/premium especially when the same is done through banking channels.AO cannot make any additions under section 68 where assessee-company loans its funds to other entities which then invest it back in assessee company as share capital unless the funds so routed back are assessee-company's unaccounted money. Routing of assessee-company's duly accounted money back to itself may violate other laws, but that does not attract section 68."

The hon’ble Apex Court in its judgements in the cases of CIT v. Lovely Exports (P.) Ltd. [2008] 216 CTR 195 (SC) and CIT v. Steller Investment Ltd. [2001] 115 Taxman 99 (SC), have held that only identity and creditworthiness of creditor and genuineness of transactions for explaining the credit in the books of account is sufficient, and the onus does not extend to explaining the source of funds in the hands of the creditor.

Thus, with a view to overcome and nullify such numerous judgements, it has been proposed in the Finance Bill 2022 to amend the provisions of section 68 of the Act so as to provide that the nature and source of any sum, whether in form of loan or borrowing, or any other liability credited in the books of an assessee shall be treated as explained only if the source of funds is also explained in the hands of the creditor or entry provider. However, this additional onus of proof of satisfactorily explaining the source in the hands of the creditor, would not apply if the creditor is a well-regulated entity, i.e., it is a Venture Capital Fund, Venture Capital Company registered with SEBI.

This amendment will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.

Thus, it has now become mandatory to explain the source of the source also in order to establish the identity, creditworthiness and genuine-ness parameters under section 68 of the Income Tax Act.

6. Amendment in Faceless Assessment u/s 144B under the Act:

The existing section 144B inserted by the Finance Act 2021, mandating for the conduct of the assessments in a faceless manner and in accordance with the prescribed procedure therein, has now been proposed to be replaced with a new section 144B.

In this new section 144B, a by-default right of personal hearing through video conferencing to the assesses, in line with the recent amendments in the Faceless Appeal Scheme, has been vested in the assesses. This is a welcome amendment aimed at reducing probable tussles and litigations.

However, at the same time, the existing sub-section (9) of section 144B, mandating that the entire assessments proceedings shall be considered as non est in law, if the prescribed procedure of conduct of faceless assessments in section 144B is not being complied with, has been proposed to be omitted.

It is pertinent to mention here that in numerous High Court Judgements, (some of which are listed below), the faceless assessments for the AY 2018-19, have been set-aside, on the grounds of non-adherence to the prescribed assessment procedure in section 144B(9)/ faceless assessment scheme.

1. DJ Surfactants vs. National E-Assessment Centre in W.P.(C) No. 4814/2021 dated 3.5.2021 (Delhi High Court);
2. SAS Fininvest LLP vs. National e-Assessment Centre in W.P.(C). No. 5087/2021 dated 4.5.2021 (Delhi High Court);
3. K L Trading Corporation vs. National e-Assessment Centre in W.P. (C) 4774/2021 dated 16.4.2021 (Delhi High Court).

Thus, the Legislature, in order to provide a predictable assessment regime (probably in favour of revenue authorities), has conveniently chosen to omit, the very same section 144(9), which was inserted by the Legislature, in the first place, to ensure adequate safeguard for adoption of principles of natural justice, (audi alteram partem), in the conduct of faceless assessments, instead of encouraging the concerned assessment authorities to ensure adherence to the said subsection.

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