TARUN BALI,MUMBAI vs. INCOME TAX OFFICER WARD 42(3)(4), MUMBAI, MUMBAI

The brief facts of the case are that the assessee is an individual who did not file the return of income for the relevant assessment year. On the basis of information received, the Assessing Officer initiated reassessment proceedings under section 147 of the Income-tax Act, 1961 (“the Act”). According to the information available with the Assessing Officer, the assessee had made credit card payments of ₹45,73,102, purchased mutual funds of ₹1,25,00,000, invested ₹83,98,138 in fixed deposits, deposited cash of ₹50,000 and had also earned interest income of ₹1,93,272 and rental income of ₹1,37,500. Accordingly, the Assessing Officer issued notice under section 148A(b) of the Act asking the assessee to explain the source of the aforesaid transactions. Since the Assessing Officer was not satisfied with the explanation furnished by the assessee, he made an addition of ₹2,54,71,240 under section 69 of the Act as unexplained investments, in the hands of the assessee. Further, the Assessing Officer also added interest income of ₹1,93,272 and rental income of ₹1,37,500 in the hands of the assessee.

In appeal, the CIT(Appeals) rejected the assessee's challenge to the validity of the reassessment proceedings. According to the CIT(Appeals), the notice issued under section 148 pursuant to the judgment of the Hon'ble Supreme Court in Union of India v. Ashish Agarwal [(2022) 444 ITR 1 (SC)] was within the period of limitation. On merits also, the CIT(Appeals) confirmed the additions made by the Assessing Officer. Aggrieved, the assessee is in further appeal before us.

We have heard the rival contentions and perused the material available on record. The issue for consideration is whether the notice issued under section 148 of the Act on 20.07.2022 is within the period prescribed by law or is barred by limitation.

Before examining the facts of the present case, it is necessary to understand the legal position governing reassessment proceedings after the amendments introduced by the Finance Act, 2021 and the subsequent judgments of the Hon'ble Supreme Court. The Finance Act, 2021 substituted the entire reassessment regime with effect from 01.04.2021. Under the substituted provisions, issuance of a notice under section 148 of the Act is no longer the first step in the reassessment process. Before issuing such notice, the Assessing Officer is mandatorily required to conduct the enquiry contemplated under section 148A of the Act, furnish the information relied upon, provide the assessee an opportunity of being heard, consider the reply and thereafter pass an order under section 148A(d) deciding whether it is a fit case for issuance of notice under section issued notice u/s 148 of the Act. These procedural safeguards are to ensure compliance with the principles of natural justice before reopening a completed assessment.

However, despite the new provisions having come into force from 01.04.2021, several reassessment notices were being issued under the old provisions by relying upon the extensions granted under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 ("TOLA"). The validity of such notices was considered by the Hon'ble Supreme Court in Union of India v. Ashish Agarwal [(2022) 444 ITR 1 (SC)]. The Hon'ble Supreme Court held that every notice issued under the old section 148 between 01.04.2021 and 30.06.2021 would be treated as a deemed show-cause notice issued under section 148A(b) of the Act. The Assessing Officer was directed to supply the information relied upon within thirty days and thereafter provide the assessee two weeks' time to furnish a reply, after which an order under section 148A(d) could be passed and, if considered appropriate, a notice under section 148 could be issued under the new provisions.

The judgment in Ashish Agarwal, however, did not create a fresh / new period of limitation in favour of the Revenue. The legal fiction introduced by the Hon'ble Supreme Court merely converted the earlier notices into notices under section 148A(b) of the Act so that reassessment proceedings could continue under the new statutory framework. The judgment did not enlarge or extend the limitation prescribed under the Act. This position has subsequently been clarified by the Hon'ble Supreme Court in Union of India v. Rajeev Bansal [(2024) 469 ITR 46 (SC)], wherein it was held that while the benefit of TOLA was available for computing the period of limitation, the Revenue could proceed only within the limitation that was available after giving effect to the directions issued in Ashish Agarwal.

The concept of the "surviving period" has, therefore, become crucial in determining the validity of reassessment notices issued pursuant to Ashish Agarwal. The expression "surviving period" refers to the balance period of limitation that was available to the Assessing Officer on the date when the original notice under section 148 of the Act was issued under the old law after taking into account the extension granted under TOLA. The legal fiction created by the Hon'ble Supreme Court neither revives an expired limitation nor grants a completely fresh limitation. It merely preserves whatever portion of limitation remained alive on that date. Consequently, once the period excluded by the Hon'ble Supreme Court for completion of the proceedings under section 148A is over, only the balance or surviving period becomes available to the Assessing Officer for issuance of the fresh notice under section issued notice u/s 148 of the Act. of the Act . If that surviving period expires before the fresh notice is issued, the assumption of jurisdiction itself becomes barred by limitation.

The Hon'ble Bombay High Court has recently explained this principle in detail in Ravi Kumar Kailashnath Jaiswal v. Assistant Commissioner of Income Tax (2025:BHC-OS:22261-DB). After considering both Ashish Agarwal and Rajeev Bansal, the Hon'ble High Court held that the Assessing Officer must necessarily issue the fresh notice under section 148 within the surviving period of limitation available after applying the legal fiction created by the Hon'ble Supreme Court. The Court further held that the exclusion of time contemplated by Ashish Agarwal merely postpones the commencement of the surviving period and does not enlarge it. The Hon'ble High Court also rejected the contention of the Revenue that where the assessee had not furnished any reply to the notice under section 148A(b) of the Act, the Assessing Officer could issue notice immediately without waiting for expiry of the statutory period granted to the assessee. It was held that irrespective of whether a reply is filed or not, the assessee is entitled to the entire statutory period granted by the Hon'ble Supreme Court for filing the reply, and the surviving limitation would commence only after expiry of such period.

Keeping the above legal principles in view, we now examine the facts of the present case. The first notice under section 148 of the Act under the Old provisions was issued by the Assessing Officer on 28.06.2021. At that point of time, because of the extension granted under the TOLA, the Assessing Officer had only three days of limitation still remaining under the Act. In other words, except for these three days, the entire statutory period available for issuing a notice had already been exhausted. This balance period of three days is referred to as the "surviving period". Subsequently, the Hon'ble Supreme Court in Union of India v. Ashish Agarwal [(2022) 444 ITR 1 (SC)] held that notices issued under the old law between 01.04.2021 and 30.06.2021 would not be treated as notices under section 148 of the Act but would be deemed to be show-cause notices issued under section 148A(b) of the Act. The effect of this judgment was only to convert the earlier notice into a notice under section 148A(b) so that the Assessing Officer could complete the procedure prescribed under the substituted provisions. The judgment did not grant a fresh period of limitation to the Revenue. It merely protected the balance period of limitation that was still available on the date of the original notice.

In compliance with the directions of the Hon'ble Supreme Court, the Assessing Officer supplied the information relied upon to the assessee on 26.05.2022 and granted the assessee the statutory period of two weeks to file its reply. The period available to the assessee for filing the reply expired on 09.06.2022. As explained by the Hon'ble Supreme Court in Union of India v. Rajeev Bansal [(2024) 469 ITR 46 (SC)] and by the Hon'ble Bombay High Court in Ravi Kumar Kailashnath Jaiswal v. ACIT (2025:BHC-OS:22261- DB), the surviving period of limitation would start running only after the expiry of the time granted to the assessee for filing the reply under section 148A(b) of the Act. Since only three days of limitation had survived, the Assessing Officer was required to issue the fresh notice under section 148 of the Act within those three days after the expiry of the period granted to the assessee. Accordingly, the surviving period expired on 12.06.2022. However, the fresh notice under section 148 was actually issued only on 20.07.2022, that is, more than one month after the surviving period had expired.

Applying the ratio laid down by the Hon'ble Bombay High Court to the facts of the instant case, we observe that notice issued under section 148 of the Act on20.07.2022 was issued after expiry of the surviving limitation period. Once the assumption of jurisdiction by the Assessing Officer is barred by limitation, the consequential order passed under section 147 of the Act is unsustainable in the eyes of law.

Accordingly, we are of the considered view that the notice issued under section148 dated 20.07.2022 is barred by limitation and the appeal of the assessee is allowed.