Delhi HC quashes reassessment orders for AY 2016-17, 2017-18 having tax escapement below ₹50 lakh

The Delhi High Court has termed the Central Board of Direct Taxes’ (CBDT) theory of “travel back in time” for reopening assessment cases as bad in law. Accordingly, it quashed reassessment orders related to AY 2016-17 and 2017-18 having income escapement of below ₹50 lakh.

Although the ruling was given by disposing of nearly 50 petitions together, experts feel non-petitioner taxpayers especially from the Delhi Jurisdiction can also benefit.

Temporal dispute

A division bench of Justices Rajiv Shakdher and Girish Kathpalia took note of an instruction dated May 11, 2022 post Supreme Court issued ruling on the validity of reassessment notices issued by the Assessing Officers during the period beginning April 1, 2021 and June 30 2021. These notices were issued based on time extended by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions Act) 2020 (TOLA). In Its instruction, the CBDT had said directions decision of the  Supreme Court read along with TOLA, will allow the “…extended reassessment notices to travel back in time to their original date when such notices were to be issued.”  This theory is applied in various reassessment orders.

The bench observed: ”The law does not support the travel back in time theory propounded by the revenue. Such theory is neither borne out from the decision rendered by the Supreme Court in Ashish Agarwal‘s case nor does it have any roots in the provisions of the 1961 Act as amended by the Finance Act 2021. TOLA also does not support this theory.”

The court took note of Finance Minister Nirmala Sitharaman’s Budget speech of 2021-22 where she announced reducing this time-limit for re-opening of [the] assessment to 3 years from the present 6 years. In serious tax evasion cases, too, only where there is evidence of concealment of income of ₹50 lakh or more in a year, can the assessment be re-opened for up to 10 years.

Legal Implications

“The State, perhaps, did not deem it worthwhile to chase assessees beyond 3 years, where the alleged escaped income was less than ₹50 lakh. These aspects concerning legislative policy come through if one were to read the relevant provisions of the statute referred to above, in the background of the Finance Minister’s speech and the memorandum,” the bench observed and accordingly dismissed all orders and subsequent notices issued under various Sections of the Income Tax Act.

According to Rahul Charkha, Partner, Economic Laws Practice, as a principle, re-assessment proceedings with alleged income escapement of less than ₹50 Lakhs cannot be initiated beyond a period of 3 years from the end of the relevant AY. Given the above, the point of determination and constitution of ‘income escapement amount’ becomes very critical. Previously, there have been instances where at the time of initiating reassessments, double additions and double rejection of deductions have been considered by the tax officers as alleged ‘income escapement amount’ and subsequently, the actual addition made is below ₹50 lakhs.

“Further, the possibility of departmental appeal before the Supreme Court needs to be considered,” he said.

Amit Gupta, partner at Saraf and Partners feels the High Court has unequivocally stated the decision to operate for all assesses since the judgement has been rendered on a pure question of law. Thus, “the benefit of the decision would extend even to other assesses depending on the underlying factual matrix of the each case,” he said.

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