Old v. New Regime for Re-assessment - Verdict of Delhi High in case of Mon Mohan Kohli v. ACIT & Others

The Hon'ble High Court of Delhi has given its verdict in favour of the noticee taxpayers in the matter of section 148 notices issued after 1st April, 2021, yet under the pre-amendment (Finance Act, 2021) provisions of sections 147, 148 and 149 of the Income Tax Act, 1961. The decision goes by the name of lead case of Mon Mohan Kohli v. ACIT [W.P.(C) 6176/2021] and it covers about 1350 other appellants.

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Moot Question:

Explanations A(a)(ii)/A(b) to the Notifications dated. 31st March, 2021 and 27th April, 2021, which intended to extend application of old provisions, has been assailed. This explanation formed the foundation for the impugned notices issued u/section 148 of the Income Tax Act, 1961.

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Arguments of the Appellants:

·????????????????Even the application of amended se. 149(a) with 3 years' limitation was discussed.

·????????????????Own decision in C.B. Richards Ellis Mauritius Ltd. vs. ADIT, 208 Taxman 322 (Delhi), while interpreting the applicability of an earlier amendment to Section 149 of the Income Tax Act, 1961 vide Finance Act, W.P.(C) 6176/2021 & connected matters Page 56 of 106 2001, (whereby the earlier existing time limit of ten years was reduced to six years), has held that the reduced time limit applied with effect from the Finance Act coming into force.

·????????????????Notifications dated 31st March, 2021 and 27th April, 2021 were ultra vires the Income Tax Act, 1961 as amended by Finance Act, 2021 and in excess of the enabling powers prescribed under Section 3 of Relaxation and Amendment Act, 2020.

·????????????????Concepts of "Occupied field" was resorted to for demarcation of sphere of legislation from that of the Executive.

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Arguments of Revenue:

·????????????????Supreme Court by way of a series of orders in ‘Cognizance of Limitation’ extended limitation and Legislature by promulgating Relaxation Ordinance in March, 2020 and conversion of Relaxation Ordinance into Relaxation and Amendment Act, 2020 had extended dates for compliance and issuance of notices.

·????????????????Section 3(1) of Relaxation and Amendment Act, 2020 is an example of conditional legislation and not delegated legislation. Therefore, it is not ultra vires the parent Relaxation Act.

·????????????????Section 3(1) of Relaxation and Amendment Act, 2020 creates a legal fiction by virtue of which the Revenue was entitled to invoke Section 148 of the Income Tax Act, 1961, as it existed prior to 31st March, 2021 during the extended period between 1st April, 2021 and 30th June, 2021.

·????????????????As a result of the fiction created by Section 3 of Relaxation and Amendment Act, 2020, the Revenue had available to it the “power” in cases where the limitation for issuance of notice was expiring between 20th March, 2020 and 31st March, 2021 [later modified to 30th April, 2021], to take “such action” i.e. the issuance of Notice under Section 148, on or before 30th June, 2021.

·????????????????"Jural corelative" of power of re-Assessment being liability to be assessed, which existed and continued even under the unamended section 148.

·????????????????The Revenue submitted that there is no conflict between Relaxation and Amendment Act, 2020 and Finance Act, 2021 due to their specific text, context, scheme and object: Harmonious construction

·????????????????If there was a conflict between the two statutes, Relaxation and Amendment Act, 2020 would override the Finance Act, 2021, being a special Act.

·????????????????There is a vested right in favour of the Revenue under the old regime of Sections 147 to 151, which could not be taken away by applying retrospectively a shorter period of limitation in a new provision i.e., the substituted Section 149.

·????????????????Section 3(1) of Relaxation and Amendment Act, 2020 is a ‘stop-the-clock’ provision somewhat similar to the U.S. legal doctrine known as ‘Tolling’ which allows for the pausing or delaying of the running of the period of time set forth by a statute containing limitation.

·????????????????By virtue of Section 6(c) of the General Clauses Act, 1897, the mere substitution of the erstwhile Section 148 did not take away the aforesaid incurred right.

·????????????????Concept of “Tolling” was used to stress the nature of extension granted by the Relaxation and Amendment Act.

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?Decision of the Hon’ble High Court:

The High Court has delivered a lengthy, speaking and reasoned order in the matter. The Hon’ble Court has held the following:

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A. LEGISLATURE HAS PERMITTED RE-ASSESSMENT TO BE MADE ONLY IN ACCORDANCE WITH THE SUBSTITUTED PROVISIONS: STRICT INTERPRETATION:

1. Memorandum to the Finance Bill, 2021 clarified that its Sections 2 to 88 which included the substituted Sections 147 to 151 of the Income Tax Act, 1961 will take effect from 1st April, 2021.

2. There is no power with the Executive/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.

3. The law prevailing on the date of issuance of the notice under Section 148 has to be applied.

4. If 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.

5. The Legislature has permitted re-assessment to be made in this manner only, it can be done in this manner, or not at all.

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B. SECTION 3(1) OF RELAXATION AND AMENDMENT ACT EMPOWERS THE EXECUTIVE TO EXTEND ONLY THE TIME LINES - NOT TO MAKE OR CHANGE LAW OF THE LAND NOR TO IMPEDE THE IMPLEMENTATION OF LAW:

1. The Court held that Section 3(1) of Relaxation and Amendment Act, 2020, only extends the time lines.

2. Relaxation and Amendment Act is 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.

3. Section 3(1) of the Relaxation and Amendment Act, 2020 does not empower the Central Government to postpone the applicability of any provision which has been enacted from a particular date. [It could have been argued that se. 3(1) of the RAA only extended timeline of Old Regime.]

4. It is settled law that Executive cannot make or change law of the land without specific Authority from Parliament to do so.

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C. EXPLANATION IS ULTRA VIRES THE PARENT STATUTE - THE RELAXATION AND AMENDMENT ACT

1. The impugned Explanation is not only beyond the power delegated to the Government, but also in conflict with the provisions of the Income Tax Act, 1961 which had specifically made the new reassessment scheme applicable from 1st April, 2021.

2. The delegated authority cannot override the Act either by exceeding the authority or by making provisions inconsistent with the Act.

3. Court was not in agreement with the finding of Hon’ble Chhattisgarh High Court in Palak Khatuja v. UoI. The Hon’ble High Court found agreement with the views of the Allahabad High Court in Ashok Kumar Agarwal v. UoI case and Rajasthan High Court in Bpip Infra Private Limited v. ITO case (The High Court of Rajasthan placed reliance on ratio of Ashok Kumar Agarwal v. UoI).

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D. ONLY CHANGE IN PROCEDURE, NO ALIENATION OF POWER:

1. 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.

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E. PAST PRACTICE:

1. 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.

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F. PROCEDURAL STATUTES ARE RETROSPECTIVE:

1. Statutes dealing with merely matters of procedure are presumed to be retrospective.

2. If the new Act affects matters of procedure only, then, prima facie, “it applies to all actions pending as well as future”.

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G. REMEDIAL LEGISLATIONS ARE APPLICABLE TO PENDING MATTERS:

1. The Legislature introduced reformative changes to the re-assessment Sections governing the procedure for reassessment proceedings by way of the Finance Act, 2021 passed on 28th March, 2021.

2. 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.

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H. CONCEPT OF VESTED RIGHTS NOT APPLICABLE:

1. Time limit to issue notices for re-assessment under the Income Tax Act, 1961 stood expired long time ago. Vested right in favour of the Revenue stood exhausted/expired long ago and no vested right of Revenue has been infringed leave alone violated.

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I. AMENDMENTS ARE PROCEDURAL AND TEHREFORE, RETROSPECTIVE IMPACT:

1. Circular 549 of 1989 issued by the CBDT explaining the provisions of the Direct Tax Laws (Amendment Act), 1989 amending erstwhile Sections 147 to 152 clarified that the said provisions were procedural in nature and would have retrospective effect.

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J. ARBITRARINESS AND CONFLICT:

1. The Scheme of different sections will clash if two regimes are permitted to co-exist during 01.04.2021 to 30.06.2021.

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K. REVENUE CANNOT RELY ON COVID-19 ARGUMENT:

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L. NON-OBSTANTE CLAUSE HAS TO BE CONSTRUED STRICTLY - SECTION 3(1) OF RELAXATION ACT IS EXPRESSLY CONFINED TO AND ONLY SUPERSEDES THE TIME LIMITS

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M. PICK & CHOOSE ARGUMENTS OF REVENUE IS NOT ACCEPTABLE:

1. The Hon’ble High Court viewed that the Revenue has selectively chosen and picked up two terms viz. “such action” & “stand extended” to put forward an interpretation which could not have been contemplated by the Legislature.

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N. SECTION 147 NOT MENTIONED IN THE EXPLANATION:

1. Even if impugned Explanations in the two Notifications are valid, still the impugned notices are bad in law, as the impugned Explanations only seek to effectuate the erstwhile Sections 148, 149 and 151 and they do not cover Section 147.

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O. “LEGAL FICTION” ARGUMENT IS WITHOUT ANY FOUNDATION:

1. There is no assumption that the Act in question is deemed to have been performed within the original time limit, as wrongly contended.

2. Court laid down that clear and unequivocal language was required in the Relaxation Act, 2020 – which is missing.

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P. CONDITION FOR A PROVISION TO BE TERMED AS STOP THE CLOCK PROVISION IS ABSENT:

1. Section 3 of the Relaxation Act, 2020 is not a ‘stop the clock’ provision, as it only relaxes the time limit - time limit is extended, not excluded or stopped.

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Q. SPECIAL ACT OVERRIDES A GENERAL ACT HAS NO APPLICATION:

1. The Hon’ble High Court opined that Relaxation and Amendment Act, 2021 and the Finance Act, 2021 operate in their distinct and separate spheres.?This issue could have been answered in depth.

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R. SECTION 6 OF THE GENERAL CLAUSES ACT SAVES NOTICES ISSUED UNDER SECTION 148 POST 1ST APRIL, 2021 IS UNTENABLE:

1. In this 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

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DECISION:

Upon such reasoning and discussion, the Hon’ble High Court has held 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 reassessment notices relating to any Assessment Year issued under Section 148 after 31st March, 2021 had to comply with the substituted Sections (New regime). Accordingly, the reassessment notices issued under Section 148 of the Income Tax Act, 1961 have been quashed.

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DISCUSSION:

The issue has now 3 High Courts in favour of noticees and 1 in favour of Revenue. Decision of the Hon’ble High Court of Bombay is still awaited. However, the Hon’ble High Court will weigh the verdicts of 3 versus 1. It is hoped that the dispute is seized of and settled by the Apex Court at the earliest so that there will be finality and certainty.?