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"A legal fiction may even say that a man shall be deemed to be a woman or a woman shall be deemed to be a man.”
Well Friends, frankly speaking, it was not until the judgements being pronounced by the hon’ble Supreme Court in the cases of ‘Asish Agarwal’ [2022] 138 taxmann.com 64 and ‘Rajeev Bansal’ [2024] 167 taxmann.com 70 (SC), that I realised the true purport, significance and the weighty force of the concept of ‘Legal Fiction’, being so aptly summarised in the above words, by the hon’ble Justice D.S Tewatia in the case of ‘CIT v. Swaroop Krishan’ [1985] 21 Taxman 404 (Punj. & Har.).
Magic of ‘Legal Fiction’
Para 97 of the ‘Rajeev Bansal’ judgement explains the concept of ‘legal fiction’ as,
“a supposition of law that a thing or event exists, even though, in reality, it does not exist."
In my humble understanding, it is this doctrine of ‘legal fiction’ only, which more than anything else, has turned out to be the ‘Saviour’ and ‘Messiah’, coming to the rescue and saving of the 90,000 reassessment notices, issued for AYs 2013-14 till 2017-18, under the unamended section 148 of the Income Tax Act, which otherwise had become time barred and dead, going by the strict but plain and correct interpretation of the relevant substantive legislative provisions of the substituted reassessment regime, by the Finance Act, 2021.
In ensuing paras, I have discussed the magic of ‘legal fiction’ coming into play in full circle, in the said two judgements, to revive the otherwise dead reassessment notices.
(i) Reassessment Notices issued under Old Section 148 Deemed as Show Cause Notices under New Section 148A(b) of the Income Tax Act:
The hon’ble Supreme Court, in the case of ‘Asish Agarwal’, by invocation of its extraordinary jurisdiction under Article 142 of the Constitution of India, which probably became the first such instance in the direct tax matters, conceived and created a deeming legal fiction wherein such 90,000 reassessment notices issued under the old reassessment regime, were held as deemed to have been issued under the new reassessment regime, as substituted by the Finance Act, 2021 and construed or treated to be show-cause notices (SCNs) in terms of section 148A(b) of the Income Tax Act.
However, in the very same judgement, the hon’ble Apex Court, in no unclear terms, had also pronounced that all defences which may be available to the assessees including those available under substituted section 149 of the Income Tax Act, under the Finance Act, 2021 and in law, shall continue to be available.
The first round of litigations didn’t get settled even after the said judgement of the hon’ble Supreme Court. The apex body CBDT brought in an Instruction No 1 of 2022 dated 11.5.2022, bringing a fictional concept of ‘time travel’, envisaging that the reassessment notices will travel back in time to their original dates when such notices were to be issued and then new section 149 of the Act is to be applied at that point.
Subsequently, notices u/s 148 of the new regime were issued to the assesses by the assessing officers between July and September 2022 for the AYs 2013-2014 till 2017-2018. These notices were challenged by assessees before several High Courts on PAN India basis. The hon’ble High Courts on PAN India basis, had held the notices to be invalid on the ground that they were: (i) time-barred; and (ii) issued without the appropriate sanction of the specified authority.
With the second round of litigations, in the TOLA batch of cases, again travelling upto the hon’ble Supreme Court, with ‘Rajeev Bansal’ as the leading case, the hon’ble Apex Court, has again given a new lease of life to such otherwise quashed reassessment notices, and once again the doctrine of ‘Legal Fiction’ has become instrumental in doing this magic as under.
(ii) Reading in TOLA extension Notifications into New Sections 149 & 151, even though these notifications themselves were issued for old section 149
The fictional time travel theory of the CBDT Instruction, visualising reassessment notices travelling back in time to their supposed original due dates, got a head-start when the hon’ble Apex Court, in the ‘Rajiv Bansal’ judgement, read in TOLA notifications’ extended deadline of 30.6.2021, into the new time barring deadlines, for issuance of reassessment notice under the new regime, provided in the substituted section 149 of the Income Tax Act, as well as in its first proviso, by the Finance Act, 2021.
In para nos. 67 and 68 of its judgement, for reading in TOLA into new section 149, the hon’ble SC had observed that,
“The substitution of Sections 147 to 151 will not affect the purpose of TOLA, which is, to provide relaxation of the time limit for completion or compliance of any actions falling for completion between 20 March 2020 and 31 March 2021. TOLA will continue to apply to the Income Tax Act after 1 April 2021 if any action or proceeding specified under the substituted provisions of the Income Tax Act falls for completion between 20 March 2020 and 31 March 2021.”
“On 1 April 2021, TOLA was still in existence, and the Revenue could not have ignored the application of TOLA and its notifications. Therefore, for issuing a reassessment notice under Section 148 after 1 April 2021, the Revenue would still have to look at: (i) the time limit specified under Section 149 of the new regime; and (ii) the time limit for issuance of notice as extended by TOLA and its notifications. The Revenue cannot extend the operation of the old law under TOLA, but it can certainly benefit from the extended time limit for completion of actions falling for completion between 20 March 2020 and 31 March 2021.”
Author’s Humble Understanding & View Point on Reading of TOLA into New Section 149:
Though the reading of TOLA into the new section 149 has got the stamp of approval by the hon’ble Apex Court, but nonetheless, I humbly feel that certain very basic yet critical facts and issues needed more convincing clarity and lawful interpretation.
In this regard, it is essential to understand the correct chronology of the enactment of TOLA and the Finance Act, 2021. TOLA was enacted on September 29, 2020 with retrospective effect from 31.3.2020 and the Finance Act, 2021 came into force w.e.f. 1.4.2021, and the substituted section 149 became effective from 1.4.2021 only and not before. Therefore, in actuality, there was no action or proceeding specified under the substituted section 149 by the Finance Act, 2021, which could fall for completion between March 20, 2020 and March 31, 2021.
Neither the Finance Act, 2021, nor the substituted section 149 made effective from 1.4.2021, contained any reference of TOLA. More importantly, the subsequent TOLA extension Notification No. 38/2021, was issued on 27th April, 2021, when the Finance Act, 2021 and the substituted section 149 had already come into force. However, still the said TOLA notification did not contain even a whisper leave aside any reference of the Finance Act 2021, and the substituted section 149. To the contrary, this Notification itself referred only to relaxing the timelines for the old section 149 of the old reassessment regime, and its Explanation infact went beyond to say that the provisions of the Income Tax Act, as they stood on 31 March 2021, would continue to apply to reassessment notices issued between 1 April 2021 and 30 June 2021.
Therefore, the Legislature had never intended to apply TOLA into the substituted section 149.The plain and basic truth of the matter is that the proposed reduction in reopening time period from the earlier 6 years to 3 years was announced by our hon’ble FM as a significant taxpayer friendly measure in the Budget speech on 1.2.2021, and consequently the Finance Act, 2021 with the substituted reassessment regime came into force w.e.f. 1.4.2021. However, the enforcing agency, viz. the Income Tax Department was not able to comply and accommodate the said mandate of the Ministry of Finance, of the implementation of the new reassessment regime, w.e.f. 1.4.2021 and reassessment notices continued to be issued under the old reassessment regime only, even after 1.4.2021.
In view of the grandfathering legislative provisions provided in the first proviso to the substituted section 149, the extended allowable time period of ten years for reopening assessments gets applicable prospectively only for AYs 2021-22 and onwards and for the prior assessment years, the maximum time period for reopening remained six years only which ended on 31.3.2021. So, by virtue of the first proviso to substituted section 149, no reassessment notice could have been issued on 1.4.2021 and afterwards for AYs 2013-14 and 2014-15.
This cut-off date for issuing reassessment notices under the old reassessment regime of 31.3.2021, by the income tax officers, got breached. In order to bypass this breach, as an afterthought, the revenue authorities took shelter u/s 3(1) of TOLA by issuing a subsequent notification dated 27.4.2021, but still referring only to old section 149, even when the substituted section 149 had already come into force. Thus, inspite of the assertion put forward by the learned ASG, before the hon’ble Apex Court that TOLA didn’t extend the life of the old reassessment regime, the Notification dated 27.4.2021, issued therein sought to accomplish, exactly the said objective only.
Also, the non-obstante clause of section 3(1) of TOLA also could not have any significant role to play as the TOLA extended window of the period between March 20, 2020 till March 31, 2021 didn’t get in conflict with any of the timelines mandated by the substituted timelines of section 149, by the Finance Act, 2021, in the first place, so as to override any such timelines, as contended by the learned ASG before the hon’ble Apex Court.
Further, the contention and justification that it was a bonafide mistake on part of the assessing officers and the revenue can’t be made remedy-less, also lacks any merit and substance as it is a trite and cardinal rule that ‘Ignorance of Law is no Excuse’, if for the assessees, then more so for the assessing authorities. And regarding the remedy-less plea, the Legislature was having full-fledged opportunity, atleast on two occasions, to remedy the situation of such reassessment notices getting time barred.
Firstly, as the Finance Act, 2021 was enacted and enforced after the enactment of TOLA, so the intended relaxation in time barring reopening timelines could have been easily incorporated in the Finance Act, 2021 itself, but the same was not done.
Secondly, the TOLA extension notification dated 27.4.2024 was issued when the Finance Act, 2021 and the substituted section 149 had already come into place. Thus, instead of extending the timeline of the old section 149, the same could have been done by referring the substituted section 149, as per the Finance Act, 2021, in the said TOLA notification, but once again the same was not done, by the Legislature, in its own wisdom, and infact to the contrary, the said notification sought extension of applicability of old reassessment regime even after 31.3.2021.
(iii) Deeming Exclusion Window [Legal Fiction under Third Proviso to New Section 149]
The fictional time travel theory of the CBDT Instruction, visualising reassessment notices travelling back in time to their supposed original due dates, faced and encountered a factual reality check, as even after reading in TOLA extended deadline of 30.6.2021 into the new section 149, the fresh reassessment notices issued under the new section 148, issued almost 1.5 years after, between July 2022 and September 2022, were still getting time barred.
That is where we have now witnessed the doctrine of legal fiction coming in full circle in the Rajeev Bansal judgement. The sheer large number of ninety-thousand reassessment notices and their perceived revenue considerations naturally out-weighed the strict but correct legal interpretation of Law. So, another deeming legal fiction has been conceived by the hon’ble Supreme Court, to deem that the said reassessment notices had been stayed by the hon’ble Apex Court in the Ashish Agarwal judgement, retrospectively, from the date of their issuance in the TOLA window (April to June 2021), till the time of supply of information by the AO to the assessee pursuant to the direction of the hon’ble Apex Court in the Ashish Agarwal judgement, and so under third proviso to new section 149, this entire time period of around 1.5 years is to be excluded for the purpose of computing the time barring limitation period as per new section 149 of the Income Tax Act. This time period of exclusion will further get extended by two more weeks for the time given by the AO to the assessee to submit the reply.
The excluded time period window does not end here only. It gets further extended by the 'Surviving Period', i.e., the unelapsed time period between the date of issuance of original notice under old section 148 on or after 1.4.2021 and the TOLA extended relaxed timeline of June 30, 2021.
Defences Still Remaining with Assesses, post Rajeev Bansal Judgement:
In view of our above discussion, practically, the defences of time barring limitation period under the substituted section 149 of the Income Tax Act, as per the Finance Act, 2021, made available by the Ashish Agarwal judgement, have become merely an eyewash and a mirage only, post the Rajeev Bansal judgement.
However, having accepted this harsh reality, with utmost humbleness, certain meritorious defences are still available with the respective assessees to courageously fight their subject reassessment notices, for all the concerned relevant AYs 2013-14 till 2017-18. These are being discussed below:
Surviving Period: There is a silver lining stemming from the 'surviving period'. This limitation time period as explained by way of an example in para no. 112 of the ‘Rajeev Bansal’ judgement, may come handy to assessees, in those cases of reassessment notices, which had been issued at the fag end of TOLA deadline of 30.6.2021, under the old section 148, and which had been again freshly issued at the fag end of September 2022, under the new section 148.
As per paras 111 & 112 of the hon'ble SC judgement of Rajeev Bansal, the AOs were supposed to pass 148A(d) Orders and issue fresh 148 notices under the new regime, within the surviving time period [30th June 2021 minus the date of issuance of original 148 notice under old regime on or after 1.4.2021]. So, for notices issued under old section of 148 on 30.6.2021 (and I believe there would be plenty) this surviving period comes to 0 or 1, if excluding the date of issue of notice. Therefore, it means that for Notices issued on 30.6.2021, the Orders u/s 148A(d) and fresh notice u/s 148 had to be issued either on the same day, on which the reply of the asseessee was received in response to deemed SCN u/s 148A(b) or by one day more, if considering the grace day. But, practically, it would not have been done obviously.
The true purport of para nos. 111 and 112 of the Rajeev Bansal judgement is that the effect of various provisos to new section 149(1)(b) is taken due care by the surviving period. This is duly evident from para no 111 of the judgement, which is being reproduced below, for ready reference.
"The clock started ticking for the Revenue only after it received the response of the assesses to the show causes notices. After the receipt of the reply, the assessing officer had to perform the following responsibilities: (i) consider the reply of the assessee under Section 149A(c); (ii) take a decision under Section 149A(d) based on the available material and the reply of the assessee; and (iii) issue a notice under Section 148 if it was a fit case for reassessment. Once the clock started ticking, the assessing officer was required to complete these procedures within the surviving time limit. The surviving time limit, as prescribed under the Income Tax Act read with TOLA, was available to the assessing officers to issue the reassessment notices under Section 148 of the new regime."
(A) For AYs 2013-14 & 2014-15:
The meritorious defences still available with the respective assessees for AYs 2013-14 & 2014-15 are discussed below:
(a) Fulfilment of Stricter Conditions of Section 149(1)(b), as per Finance Act, 2021:
The lesser threshold reopening time period of three years u/s 149(1)(a) had already got elapsed on the TOLA extended deadline of 30.6.2021, so for all such reassessment notices for AY 2013-14 & 2014-15, the stricter conditions of the higher threshold reopening period of 6 years u/s 149(1)(b) read with first proviso to section 149 will be applicable.
Further, since the said deemed SCNs u/s 148A(b) had been issued on 30.6.2021, and as such the legislative provisions of section 148-151 of the new reassessment regime, as per the Finance Act, 2021 will get applicable and the benefit of extended meaning of the term ‘information’ as per the Finance Act, 2022 will not be available to the AOs.
Thus, these reassessment Notices for AYs 2013-14 & 2014-15 will survive only if the assessing officer was in his possession books of accounts or other documents or evidence which revealed that the income chargeable to tax, represented in the form of an asset, which had escaped assessment, amounted to or was likely to amount to fifty lakh rupees or more, for that year.
The word ‘reveal’ being used in section 149(1)(b) of the Income Tax Act, as per the Finance Act, 2021, clearly mandates a definitive escapement of income and that too represented in the form of an asset, in order to reopen the already concluded assessments beyond a period of three years.
Further, Explanation to Section 149 provides the meaning of the term ‘Asset’ as under:
“For the purposes of clause (b) of this sub-section, "asset" shall include immovable property, being land or building or both, shares and securities, loans and advances, deposits in bank account.
Thus, section 149(1)(b) stipulates a much stricter and conservative mandatory condition of possession of books of accounts or other documents or evidence, revealing the definitive escapement of income in excess of Rs 50 lakhs, represented in the form of an asset, and not for merely making some fishing and roving enquiries.
(b) Necessity of 'Information in Possession' with AO, as defined in the Finance Act, 2021
As a result of the deeming fiction of considering the original reassessment notices issued under old section 148, as deemed SCNs under new section 148A(b) of the Income Tax Act, the erstwhile mandatory condition of formation of reason to believe by the AO that any income had escaped assessment had also been substituted with the mandatory requirement of having ‘Information’ in possession by the AO, which suggests that any income had escaped assessment.
For the subject reassessment notices for AYs 2013-14 & 2014-15, in order to assume lawful jurisdiction to validly reopen such assessments, the AO will be required to establish that they were in possession of ‘information’, as defined under Explanation 1 to section 148, as per the Finance Act, 2021, as under:
i) any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time;
ii) any final objection raised by the Comptroller and Auditor General of India to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act.
It is pertinent to mention here that the Query Letter sent by the ‘Income Tax Gazetted Officers Association’ to the CBDT, in the matter of implementation guidelines of the hon’ble Supreme Court judgement, in the case of Union of India vs. Ashish Agarwal, does throw some light on the scope and coverage of this expression of ‘risk management strategy of CBDT’.
In the said query letter, a specific and pinpointed query, concerning the limitations in the scope and coverage of the term’ information in possession flagged as per the risk management strategy of CBDT’ have been highlighted as under:
“During the period from 01-04-2021 to 30-06-2021, notices were issued based on information from 4 sources, viz.: (i) from other AOs, (ii) from other agencies, (iii) from investigation wing and (iv) insight portal. Other than the information received from insight portal no other source qualifies for the criterion of flagged in accordance with the risk management strategy. Will the AO proceed in these cases where information is not flagged in accordance with the risk management strategy?”
Thus, the said query being raised by the revenue officers from CBDT, itself makes it quite clear that out of the four sources of information, (i) from other AOs; (ii) from other agencies; (iii) from investigation wing and (iv) insight portal, only the fourth source of information, i.e. information as per insight portal qualifies for the criterion of flagged information as per the risk management strategy of CBDT.
Further, in order to assess as to whether the assessing officer was having any information in possession, within the meaning of ‘information’ as defined in Explanation 1 to section 148, as substituted by the Finance Act, 2021, suggesting that any income has escaped assessment, the assessees should ask the AO’s to provide the ‘reasons for reopening’ which the AOs must have recorded in the erstwhile reassessment regime, at the time of issuing such original reassessment notices during the period between April 2021 till June 2021. The purusal of the said reasons for reopening will make it duly evident that whether the basis or the reasons of such reopening, qualify as the substituted criteria of ‘information in possession’ with the AO or not.
(B) For AY 2015-16
Interestingly, in cases of reassessment notices issued for AY 2015-16, the lesser threshold reopening time period of three years u/s 149(1)(a) expired on 31.3.2019, and as such it didn’t fall in the TOLA extension window of time period between 20.3.2020 till 31.3.2021. Therefore, the benefit of TOLA extension is not available.
Further, the higher threshold reopening time period of six years u/s 149(1)(b) read with first proviso to section 149 also expired on 31.3.2022, and by then the fresh reassessment notices under new section 148, had not been issued (as these were issued between July 2022 and September 2022), so, all the reassessment notices for AY 2015-16 are getting time barred.
This position has been accepted and conceded to by the learned ASG on behalf of the revenue before the hon’ble Supreme Court in the ‘Rajeev Bansal’ judgement. For ready reference, para 19(f) of the said judgement, corroborating this fact is being reproduced below;
“19. Mr N Venkataraman, learned Additional Solicitor General of India, made the following submissions on behalf of the Revenue:
f. The Revenue concedes that for the assessment year 2015-16, all notices issued on or after 1 April 2021 will have to be dropped as they will not fall for completion during the period prescribed under TOLA;”
So, Friends, the dichotomy of the deeming legal fiction of reading in TOLA extension into the new section 149 is itself making it evident, so much so that the reassessment notices for earlier assessment years of 2013-14 & 2014-15 are surviving whereas the reassessment notices for a later assessment year 2015-16 are getting time barred.
(C) For AYs 2016-17 & 2017-18
In cases of reassessment notices issued for AYs 2016-17 & 2017-18, the lesser threshold reopening time period of three years u/s 149(1)(a) expired on 31.3.2020 and 31.3.2021 respectively but since such time periods fell in the TOLA extension window of time period between 20.3.2020 till 31.3.2021, therefore, the benefit of TOLA extension is available.
Therefore, interestingly, the proposition of the CBDT Instruction No 1 of 2022, of treating the reassessment notices for AYs 2016-17 & 2017-18, of having been issued within the period of three years, on the presumption of time travel theory, has been imparted a stamp of approval by the hon’ble Apex Court, and accordingly all such notices are valid, as far as the time barring limitation period prescribed u/s 149 is concerned. Since the lower threshold reopening time period of three years had been approved by the hon’ble Apex Court, by reading in TOLA extension into the new section 149 timelines, and as such the approvals obtained by the AOs of PCITs u/s 151(i) of the Income tax Act, are also valid.
However, the necessary and mandatory criteria of having the ‘Information in Possession’ with the AO, as defined in the Finance Act 2021, as explained above in the cases of reassessment notices for AYs 2013-14 & 2014-15, remains the mandatory pre-requisite, even for the reassessment notices issued for AYs 2016-17 & 2017-18, so as to render validity to such notices.
Concluding Remarks:
It is evident that every-time there is a Budget amendment intending to reduce the reopening time period for concluded assessments, an exceptionally large number of reopening notices are being issued during the transition phase, completely ignoring the Legislative intent and more importantly the substantive provisions, and eventually this number becomes so big that the perceived revenue considerations, outweigh the strict interpretation of Law, in appellate forums.
We have already crossed the half way mark in FY 2024-25, and are still fighting for the reassessment cases for FY 2012-13. The Finance (No. 2) Act, 2024 has further reduced the reopening time period from ten years to five years w.e.f. 1.9.2024, but still we have already witnessed a flurry of reassessment notices, dating back to as long as AY 2013-14, again ignoring the legislative mandate of first proviso to section 149 of the Income Tax Act. All in all, a vicious circle of continuing litigations sets in, defeating the very purpose and legislative intent of such Budget amendments.
Therefore, it is desirable and essential that the Ministry of Finance and the Budget makers, before making Budget announcements of reducing the time period for reopening of cases, should first consult the CBDT and Income Tax department, that whether such intended relaxation can be implemented at the ground level or not.
Emphasising on the central theme of,
“With defences u/s 149 to TOLA batch of Reassessment Cases, made to become a Mirage,
Dear FM & CJI, Please Listen what the Taxpayers, Embassage.”
I sincerely wish and hope that this writing piece reaches the eyes and ears of the hon’ble CJI, and our beloved FM.
[This Article has also been published in Taxmann with the Citation [2024] 167 taxmann.com 310 (Article)]
