ACIT(IT)-1(2)(1), MUMBAI vs. BARCLAYS EXECUTION SERVICES LIMITED, LONDON

A notice under section 148A(b) was issued on 1 June 2022, enclosing the relied-upon material. The assessee responded on 14 June 2022 with detailed explanations; nonetheless, the AO passed an order under section 148A(d) on 22 July 2022 and simultaneously issued a notice under section 148, after obtaining approval from CIT (IT-1), Mumbai. Subsequently, assessment was completed treating the support-service recharges of ₹58.43 crores as FTS taxable under the DTAA.

The CIT(A), after a detailed examination of the statutory framework of section 151 and judicial pronouncements, held that the approval granted by the CIT (IT-1) was not by the “specified authority” prescribed under section 151(ii) as amended w.e.f. 1 April 2021. Since more than three years had elapsed from the end of A.Y. 2017-18 at the time of issuance of notice under section 148, the approval ought to have been obtained from the Principal Chief Commissioner of Income Tax. Accordingly, the CIT(A) quashed the re-assessment order as void ab initio, rendering the grounds on merits academic.

We have carefully considered the rival submissions and the entire record. The chronology of events is not in dispute and is tabulated below for clarity:

The record reveals that the first notice u/s 148 dated 29 June 2021 was issued during the extended period permitted under TOLA (ending 30 June 2021). By virtue of the Supreme Court’s decision in Union of India v. Ashish Agarwal (444 ITR 1), such notices are to be treated as deemed notices under section 148A(b) of the new regime. Consequently, the subsequent order under section 148A(d) and notice under section 148 issued on 22 July 2022 must comply with the new section 151 which mandates prior sanction from the specified authority.

Section 151, as substituted by the Finance Act 2021, draws a clear distinction between cases where a notice is issued within three years and those issued after three years but before ten years from the end of the relevant assessment year. In the former, the approval must emanate from the Principal Commissioner or Commissioner; in the latter, it must be accorded by the Principal Chief Commissioner or Chief Commissioner. Since the impugned notice was issued beyond three years from A.Y. 2017-18, the sanction of the Barclays Execution Services Limited Principal Chief Commissioner was imperative. Admittedly, approval was obtained only from the CIT (IT-1), Mumbai.

The issue is no longer res integra in view of the law laid down by the Hon’ble Supreme Court in Union of India v. Rajeev Bansal (2024 SCC OnLine SC 2693), which has succinctly explained the scheme of Section 151 under the old and new regimes and the role of TOLA in extending time limits during the pandemic. The Apex Court emphasized that the specification of authority is inseparably linked to the elapsed time from the end of the assessment year, and that non-compliance goes to the root of jurisdiction.

Section 151 imposes a check upon the power of the Revenue to reopen assessments. The provision imposes a responsibility on the Revenue to ensure that it obtains the sanction of the specified authority before issuing a notice under section 148. The purpose behind this procedural check is to save the assesses from harassment resulting from the mechanical reopening of assessments Sri krishna (P.) Ltd. v. ITO [1996] 87 Taxman 315/221 ITR 538 (SC)/[1996] 9 SCC 534. A table representing the prescription under the old and new regime is set out below: Regime Time limits Specified authority Section Before expiry of four Joint Commissioner 151(2) of years from the end of the old the relevant regime assessment year Section After expiry of four Principal Chief 151(1) of years from the end of Commissioner or Chief the old the relevant Commissioner or Principal regime assessment year Commissioner or Commissioner Section Three years or less Principal Commissioner or 151(i) of than three years from Principal Director or the new the end of the relevant Commissioner or Director Barclays Execution Services Limited regime assessment year Section More than three years Principal Chief 151(ii) of have elapsed from the Commissioner or Principal the new end of the relevant Director General or Chief regime assessment year Commissioner or Director General 74. The above table indicates that the specified authority is directly co-related to the time when the notice is issued. This plays out as follows under the old regime: (i) If income escaping assessment was less than Rupees one lakh: (a) a reassessment notice could be issued under section 148 within four years after obtaining the approval of the Joint Commissioner; and (b) no notice could be issued after the expiry of four years; and (ii) If income escaping was more than Rupees one lakh: (a) a reassessment notice could be issued within four years after obtaining the approval of the Joint Commissioner; and (b) after four years but within six years after obtaining the approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner.

After 1 April 2021, the new regime has specified different authorities for granting sanctions under section 151. The new regime is beneficial to the assessee because it specifies a higher level of authority for the grant of sanctions in comparison to the old regime. Therefore, in terms of Ashish Agarwal (supra), after 1 April 2021, the prior approval must be obtained from the appropriate authorities specified under section 151 of the new regime. The effect of Section 151 of the new regime is thus: (i) If income escaping assessment is less than Rupees fifty lakhs: (a) a reassessment notice could be issued within three years after obtaining the prior approval of the Principal Commissioner, or Principal Director or Commissioner or Director; and (b) no notice could be issued after the expiry of three years; and (ii) If income escaping assessment is more than Rupees fifty lakhs: (a) a reassessment notice could be issued within three years after obtaining the prior approval of the Barclays Execution Services Limited Principal Commissioner, or Principal Director or Commissioner or Director; and (b) after three years after obtaining the prior approval of the Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General.

Grant of sanction by the appropriate authority is a precondition for the assessing officer to assume jurisdiction under section 148 to issue a reassessment notice. Section 151 of the new regime does not prescribe a time limit within which a specified authority has to grant sanction. Rather, it links up the time limits with the jurisdiction of the authority to grant sanction. Section 151(ii) of the new regime prescribes a higher level of authority if more than three years have elapsed from the end of the relevant assessment year. Thus, non-compliance by the assessing officer with the strict time limits prescribed under section 151 affects their jurisdiction to issue a notice under section 148.

Parliament enacted TOLA to ensure that the interests of the Revenue are not defeated because the assessing officer could not comply with the pre conditions due to the difficulties that arose during the COVID-19 pandemic. Section 3(1) of TOLA relaxes the time limit for compliance with actions that fall for completion from 20 March 2020 to 31 March 2021. TOLA will accordingly extend the time limit for the grant of sanction by the authority specified under section 151. The test to determine whether TOLA will apply to Section 151 of the new regime is this: if the time limit of three years from the end of an assessment year falls between 20 March 2020 and 31 March 2021, then the specified authority under section 151(i) has an extended time till 30 June 2021 to grant approval. In the case of Section 151 of the old regime, the test is: if the time limit of four years from the end of an assessment year falls between 20 March 2020 and 31 March 2021, then the specified authority under section 151(2) has time till 31 March 2021 to grant approval. The time limit for Section 151 of the old regime expires on 31 March 2021 because the new regime comes into effect on 1 April 2021.

For example, the three year time limit for assessment year 2017-2018 falls for completion on 31 March 2021. It falls during the time period of 20 March 2020 and 31 March 2021, contemplated under section 3(1) of TOLA. Resultantly, the Barclays Execution Services Limited authority specified under section 151(i) of the new regime can grant sanction till 30 June 2021.

Under Finance Act 2021, the assessing officer was required to obtain prior approval or sanction of the specified authorities at four stages: a. Section 148A(a) - to conduct any enquiry, if required, with respect to the information which suggests that the income chargeable to tax has escaped assessment; b. Section 148A(b) - to provide an opportunity of hearing to the assessee by serving upon them a show cause notice as to why a notice under section 148 should not be issued based on the information that suggests that income chargeable to tax has escaped assessment. It must be noted that this requirement has been deleted by the Finance Act 2022;33 c. Section 148A(d) - to pass an order deciding whether or not it is a fit case for issuing a notice under section 148; and d. Section 148 - to issue a reassessment notice.

In Ashish Agarwal (supra), this Court directed that Section 148 notices which were challenged before various High Courts "shall be deemed to have been issued under section 148-A of the Income-tax Act as substituted by the Finance Act, 2021 and construed or treated to be show-cause notices in terms of Section 148-A(b)." Further, this Court dispensed with the requirement of conducting any enquiry with the prior approval of the specified authority under section 148A(a). Under Section 148A(b), an assessing officer was required to obtain prior approval from the specified authority before issuing a show cause notice. When this Court deemed the Section 148 notices under the old regime as Section 148A(b) notices under the new regime, it impliedly waived the requirement of obtaining prior approval from the specified authorities under section 151 for Section 148A(b). It is well established that this Court while exercising its jurisdiction under Article 142, is not bound by the procedural requirements of law High Court Bar Association v. State of U P [2024] 160 taxmann.com 32/299 Taxman 21 (SC)/[2024] 6 SCC 267.

This Court in Ashish Agarwal (supra) directed the assessing officers to "pass orders in terms of Section 148-A(d) in respect of each of the assesses concerned." Further, it Barclays Execution Services Limited directed the assessing officers to issue a notice under Section 148 of the new regime "after following the procedure as required under section 148-A." Although this Court waived off the requirement of obtaining prior approval under section 148A(a) and Section 148A(b), it did not waive the requirement for Section 148A(d) and Section 148. Therefore, the assessing officer was required to obtain prior approval of the specified authority according to Section 151 of the new regime before passing an order under section 148A(d) or issuing a notice under section 148. These notices ought to have been issued following the time limits specified under section 151 of the new regime read with TOLA, where applicable.

From the aforesaid judgment of the Hon’ble Supreme Court now, it is well settled that if the three-year time limit for A.Y. 2017-18 falls for completion on 31 March 2021 as contemplated under TOLA, resultantly, the authorities specified u/s 151(i) of the new regime could grant sanction till 30 June 2021. In paragraph 79 of the judgment, the Court highlighted that under the Finance Act 2021, the Assessing Officer was required to obtain prior approval or sanction of the specified authorities at four distinct stages, including those under sections 148A(d) and 148, which were never waived. Thus, following the principles laid down by the Hon’ble Supreme Court, we hold that the Assessing Officer was required to obtain prior approval from the Principal Chief Commissioner or Chief Commissioner u/s 151 under the new regime before passing the order u/s 148A(d) or issuing the notice u/s 148.

This principle has been reiterated by the Hon’ble Jurisdictional High Court also in Holiday Developers (P) Ltd. v. ITO [(2024) 159 taxmann.com 178 (Bom)] wherein it has been held that where more than three years had expired from Barclays Execution Services Limited end of assessment year 2018-19, sanctioning authority under section 151(ii) should have been the Principal Chief Commissioner and not the Principal Commissioner, and thus, the order under section 148A(d) and notice under section 148 issued on basis of approval granted by the Principal Commissioner were to be quashed and set aside. “where more than three years had expired from end of assessment year 2018-19, sanctioning authority under section 151(ii) should have been Principal Chief Commissioner and not Principal Commissioner and, thus, order under section 148A(d) and notice under section 148 issued on basis of approval granted by Principal Commissioner were to be quashed and set aside. On similar lines, the assessee has argued that in its case, since more than three years had expired from the end of impugned AY 2017-18 at the time of issue of notice u/s.148 of the Act, sanctioning authority under section 151(ii) should have been Principal Chief Commissioner and not Commissioner of Income Tax, and, thus, order under section 148A(d) and notice under section 148 issued on basis of approval granted by Commissioner of Income Tax were to be quashed and set aside.”

On perusal of the decision of the jurisdictional High Court, it is noted that the facts of the present case are on identical footing. Since more than three years had expired from the end of the impugned assessment year 2017-18 at the time of issuance of notice under section 148, the sanctioning authority under section 151(ii) should necessarily have been the Principal Chief Commissioner and not the Commissioner of Income Tax. Accordingly, we find that the order of the CIT(A) is in consonance with law and requires no interference.