ASHOK,DELHI vs. COMMISSION OF INCOME TAX (APPEALS), DELHI

3ITA Nos. 2772/Del/2016 & ors ACIT Vs. Indrani Sathe & ors Where the request is not made in terms of the Indo-Swiss DTAA, it was contrary to the limitation as expressly specified under Article 14 of the Amending Protocol and thus, the period of limitation to frame the assessment could not be extended on the basis of such Reference.

The Ld. Counsel contending that even in the case of the Assessee the Reference has been made under Section 90 of the Act on 14/11/2012, therefore, sought for allowing the Appeals of the Assessee and dismissal of the Appeal of the Revenue by following the ratio laid down by the Hon'ble High Court of Delhi in the case of Pr. Commissioner of Income Tax, Central-1, Vs. Sneh Lata Sawhney (supra).

4ITA Nos. 2772/Del/2016 & ors ACIT Vs. Indrani Sathe & ors Where the request is not made in terms of the Indo-Swiss DTAA, it was contrary to the limitations as expressly specified under Article 14 of the Amending Protocol and thus, the period of limitation to frame the assessment could not be extended on the basis of such Reference.

The relevant Paragraphs of the Judgment are reproduced as under:-

“45. In view of the aforesaid contention, we are required to examine the import of substitution of Article 26 of the Indo-Swiss DTAA by virtue of Article 8 of the Amending Protocol. And, whether the said Article, as it existed prior to 30.08.2010, survived for the purposes of exchange of information relating to the period prior to 01.04.2011.

5ITA Nos. 2772/Del/2016 & ors ACIT Vs. Indrani Sathe & ors

Swiss DTAA is embodied in Article 26 as was substituted by the Amending Protocol.

51.InZileSingh v. State of Haryana &Ors. , the Supreme Court had explained the practice of amendment by substitution and observed as under:

“24. The substitution of one text for the other pre-existing text is one of the known and well-recognised practices employed in legislative drafting. “Substitution” has to be distinguished from “supersession” or a mere repeal of an existing provision.

6ITA Nos. 2772/Del/2016 & ors ACIT Vs. Indrani Sathe & ors

Veerappa Chettiar v. I.S. Michael, 1962 SCC OnLine SC 318 : 1963 Supp (2) SCR 244 : AIR 1963 SC 933] . In West U.P. Sugar Mills Assn. case [West U.P. Sugar Mills Assn. v. State of U.P., (2002) 2 SCC 645] , a three-Judge Bench of this Court held that the State Government by substituting the new rule in place of the old one never intended to keep alive the old rule. Having regard to the totality of the circumstances centring around the issue the Court held that the substitution had the effect of just deleting the old rule and making the new rule operative. In Mangilal Pindwal case [State of Rajasthan v. Mangilal Pindwal, (1996) 5 SCC 60], this Court upheld the legislative practice of an amendment by substitution being incorporated in the text of a statute which had ceased to exist and held that the substitution would have the effect of amending the operation of law during the period in which it was in force. In Koteswar case [Koteswar Vittal Kamath v. K. Rangappa Baliga & Co., (1969) 1 SCC 255] a 5 (2004) 8 SCC three- Judge Bench of this Court emphasised the distinction between “supersession” of a rule and “substitution” of a rule and held that the process of substitution consists of two steps : first, the old rule is made to cease to exist and, next, the new rule is brought into existence in its place.”

“14. Questioning the legality and validity of the decision [State of M.P. v. Pernod Ricard (India) (P) Ltd., 2017 SCC OnLine MP 1572] of the Division Bench of the High Court, the present appeals are filed. Mr Pratap Venugopal, learned Senior Advocate, appearing on behalf of the appellant argued that the effect of substitution is to repeal the existing provision from the statute book in its entirety and to enforce the newly substituted provision. He would further submit that even for incidents which took place when the old Rule was in force, it is the substituted Rule that would be applicable, and therefore, the demand notice dated 22-11-2011 seeking payment of penalties under the old Rule is illegal.

7ITA Nos. 2772/Del/2016 & ors ACIT Vs. Indrani Sathe & ors consists of two steps — first, the old rule is repealed, and next, a new rule is brought into existence in its place….”

“8. On that analogy, it was argued that, if we hold that the Prohibition Order of 1950, was invalid, the previous Prohibition Order of 1119, cannot be held to be revived. This argument ignores the distinction between supersession of a rule, and substitution of a rule. In A.T.B. Mehtab Majid & Co. (Firm) [A.T.B. 6 (2024) 8 SCC 742 & Connected Cases Page 36 of 47 Mehtab Majid & Co. (Firm) v. State of Madras, (1963) 14 STC 355 : 1962 SCC OnLine SC 51] , the new Rule 16 was substituted for the old Rule 16. The process of substitution consists of two steps. First, the old rule it made to cease to exist and, next, the new rule is brought into existence in its place. Even if the new rule be invalid, the first step of the old rule ceasing to exist comes into effect, and it was for this reason that the court held that, on declaration of the new rule as invalid, the old rule could not be held to be revived.” (emphasis in original)”

“……It has been urged for the respondent that if the impugned rule be held to be invalid, old rule 16 gets revived and that the tax assessed on the petitioner will be good. We do not agree. Once the old rule has been substituted by the new rule, it ceases to exist and it does not automatically get revived when the new rule is held to be invalid…...”

Amending Protocol contains a non-obstante clause that makes it abundantly clear that Article 26 of the Indo-Swiss DTAA regarding exchange of the information would be applicable only for the information that relates to a fiscal year beginning or after the first day of January of the year following the date of the signing of the Amending Protocol, that is, a fiscal year commencing on or after 01.01.2011, which in the case of this country would be 01.04.2011.

“6.2.4.2 It follows that Art. 26 para. 1 CDI IN-CH9 , as amended by the Protocol of 30 August 2010, applies – pursuant to Art. 14 para. 3 of the Protocol – at most the reports relating to the "fiscal year" ("fiscal year") beginning on first January of the civil year following the signing of the Memorandum of Review. … CDI IN-CH is defined, the "fiscal year" ("fiscal year") corresponds to the previous year ("previous year"), excluding the "financial year immediately preceding the assessment year". By virtue of Indian law, the tenure of which is confirmed by Art. 14 para. 2 of the Protocol of 30 August 2010, the "previous year" beginning on 1st April of each civil year. This therefore means that the new art. 26 CDI CH-IN is applicable at the earliest to reports relating to the "previous year" having commenced on 1st April 2011 (corresponding to the "fiscal year" 2011/2012), which will

9ITA Nos. 2772/Del/2016 & ors ACIT Vs. Indrani Sathe & ors be taxed during the "assessment year" 2012/2013. This provision shall remain without retroactive effect. More specifically, the retroactive effect of the new Art. 26 of INCH CDI is limited to the fiscal year in which followed the date of signature of the Protocol of 30 August 2010, while the amendments entered into force after ratification by both countries on 7 October 2011. Contracting States thus provided for a certain date of entry into force, pending revocation of the report to that intended purpose for the other provisions of the Protocol dated 30 August 2010, which apply – for India – to income realized during tax years commencing on 1st April of the civil year following the entry into force of the Review Protocol or after that date (cf. Art. 14 par. 2 let. a of the Protocol of 30 August 2020), with respect to revenues realized from 1st April 2012, with respect 8 Freely translated through https://www.onlinedoctranslator.com/en/translatefrench -to-english_french to revenues realised from 1st April 2012, accounting for the fact that the instruments of ratification were exchanged on October 7, 2011. That being the case, this retroactivity remains very limited.

6.2.5 The result of the foregoing is that international administrative assistance may at most be entered in a line of account for the fiscal year ("fiscal year") beginning on 1st April 2011 (2011/2012) and the following ("fiscal year" 2012/2013), subject to the examination of other relevant conditions (cf. hereinafter considered. 6.3). It may not in retroactively be granted for tax years ("fiscal year[s]") 02/02, 2002/03, 2003/04, 2004/05, 2005/06, 2006/07, 208/02, 07/2007 2010/11, as required by the requesting authority. These tax years do not fall within the temporal scope of the new Art. 26 CDI IN-CH. The application for administrative assistance must in this regard be dismissed.”

& Connected Cases Page 40 of 47

After the amendment of Finance Act, 2013 [Act 17 of 2013] “Explanation.— In computing the period of limitation under this section— (i) the period during which the assessment proceeding is stayed by an order or injunction of any court; or (ii) the period commencing from the date on which the Assessing Officer directs the assessee to get his accounts audited under sub-section (2- A) of Section 142 and— (a) ending with the last date on which the assessee is required to furnish a report of such audit under that subsection; or (b) where such direction is challenged before a court, ending with the date on which the order setting aside such direction is received by the Principal Commissioner or Commissioner; or”

“21. We, therefore, agree with the High Court that the special audit was an integral step towards assessment proceedings. The argument of the appellants that the writ petition of the appellant was ultimately allowed and the Court had quashed the order directing special audit would mean that no special audit was needed and, therefore, it was not open to the respondent to wait for special audit, may not be a valid argument to the issue that is being dealt with. The assessing officer had, after going through the matter, formed an opinion that there was a need for special audit and the report of special audit was necessary for carrying out the assessment. Once such an opinion was formed, naturally, the assessing officer would not proceed with the assessment till the time the special audit report is received, inasmuch as in his opinion, report of the special audit was necessary. Take a situation where the order of special audit is not challenged. The assessing officer would naturally wait for this report before proceeding further. Order of special audit followed by conducting special audit and report thereof, thus, become part of assessment proceedings. If the order directing special audit is challenged and an interim order is granted staying the making of a special report, the assessing officer would not proceed with the assessment in the absence of the audit as he thought, in his wisdom, that special audit report is needed. That would be the normal and natural approach of the assessing officer at that time. It is stated at the cost of repetition that in the estimation of the assessing officer special audit was essential for passing proper assessment order. If the court, while undertaking judicial review of such an order of the assessing officer directing special audit ultimately holds that such an order is wrong (for whatever reason) that event happens at a later date and would not mean that the benefit of exclusion of the period during which there was a stay order is not to be given to the Revenue. Explanation 1 which permits exclusion of such a time is not dependent upon the final outcome of the proceedings in which interim stay was granted.”

“36. The next crucial question is that keeping in view the fact that the time to frame fresh assessment for the relevant assessment year by ignoring the extended period of limitation in terms of Explanation 1(iii) to sub-section (3) of Section 153 of the Act is already over, what appropriate order should be passed. As noted above, the learned Additional Solicitor General had pleaded that if we were not inclined to agree with him, the interpretation of the provision by us may be given prospective effect, otherwise the interest of the Revenue will be greatly prejudiced.

before the appellate authority that the extended period of limitation under Explanation 1(iii) to Section 153(3) of the Act was not available to the assessing officer because of an invalid order under Section 142(2-A) of the Act. However, it will be open to the appellants to question before the appellate authority, if so advised, the correctness of the material gathered on the basis of the audit report submitted under subsection (2-A) of Section 142 of the Act.”

“8. …..Applying the principles laid down by the Apex Court in Sahara India (Firm) Vs. CIT and Another (supra), we hold that where no show cause notice was given to the assessee before making the order proposing conduct of special audit under section 142(2A) of the Act, in the present case and the CIT having approved the said proposal though after giving opportunity of hearing to the assessee is vitiated because of non-compliance with the principles of natural justice. Accordingly, the assessment order passed in the facts of present case is beyond the period of limitation and hence, the same is invalid and bad in law.”

more particularly on a provision such as a present one regulating the period of limitation must receive strict construction. The law of limitation is intended to give certainty and finality to legal proceedings and to avoid exposure to risk of litigation to a litigant for an indefinite period of future unforeseen events”. There is no cavil that the period of limitation as prescribed under Section 153B of the Act is required to be construed strictly. On a plain reading of the language of Explanation (ix) to Section 153B of the Act, the period commencing from the date on which a reference (or first of the reference) for exchange of information is made by an authority competent “under the Agreement referred to in Section 90 or Section 90A” of the Act and ending with the date on which the information is last received, by the Principal Commissioner or Commissioner over a period of one year, whichever is less is required to be excluded.

Section 143(3) of the Act on 27/02/2015 and the date of making reference date being 14/11/2012. The amending protocol of Indo Swiss -DTAA was signed on 30/08/2010, the Article 26 would be effective for exchange of information that relates to the following fiscal year commencing from 01/04/2011. Thus, no request can be made under Article 26(which was earlier numbered as Article 24) of the Indo-Swiss DTAA after 30/08/2010 as the said Article cease to exist after 30/08/2010 as held by the Hon'ble High Court. Therefore, in our considered opinion, the period of limitation could not be extended under Explanation (ix) to Section 153B of the Act to frame the assessment based on such reference.By relying on the ratio laid down by the Hon'ble High Court of Delhi(supra), we hold that all the assessments framed, which are subject matter of the captioned Appeals are barred by limitation, accordingly same are set aside.

Consequently, respective orders of penalty in consequence to such assessment orders are also set aside.

2772/DEL/2016 (A.Y. 2006-07),2773/DEL/2016 (A.Y.2007-08), 4712/DEL/2016(A.Y. 2006-07), 4713/DEL/2016 (A.Y. 2007-08)are allowed. The Appeal of the Revenue in (A.Y.