It is for the legislature to provide a remedy; it is not for the Supreme Court to supply one by rewriting the Income-tax Act as per its whims and fancies.
THE Supreme Court’s decision on May 4 in Union of India versus Ashish Agarwal validating a series of notices of reassessment issued by the Income Tax Department flies in the face of key foundational principles that govern a constitutional democracy run by rule of law.
The Supreme Court was deciding an appeal filed by the Department against the order of the Allahabad High Court quashing reassessment notices issued by the Department in contravention to the provisions of the Income-tax Act, 1961 as amended by the 2021 Finance Act.
Pertinently, the entire statutory scheme of initiating, inquiring, conducting, and concluding the reassessment proceedings underwent a sea change upon enforcement of the 2021 Finance Act. Under the amended law, from April 1, 2021, no reassessment notice under Section 148 of the Income-tax Act could be issued without following the procedure prescribed under Section 148A of the Act.
The Supreme Court took upon itself to act as the super-legislature, while employing mystical constitutional powers to rewrite law on issuance of reassessment notices, and to apply that rewritten law to over 90,000 reassessment notices already issued under the old law, most of which were not even “pending” for adjudication before the bench.
The only plain and simple question of law that was before the court was whether reassessment proceedings initiated by the Department after April 1, 2021, in violation of the provisions of the amended law, could be termed valid in the eyes of law. Note here that it was not the position of the Department that the reassessment notices were issued before April 1, 2021.
In a well-reasoned decision, a division bench of the Allahabad High Court had come to the conclusion that as per the clear mandate of the law, any reassessment notice issued after April 1, 2021, must go through the rigours and requirements of the amended law. This is what the court said:
“It was for the assessing authority to act according to the law as existed on and after 1.4.2021. If the rule of limitation permitted, it could initiate, reassessment proceedings in accordance with the new law, after making adequate compliance of the same. That not done, the reassessment proceedings initiated against the petitioners are without jurisdiction.”
Pertinently, the Allahabad High Court is not the only court that took this view. Close to 90,000 reassessment notices were issued after April 1, 2021, which became the subject matter of close to 10,000 writ petitions in several high courts across the country. All high courts, except two, to the best of my knowledge, took a consistent view that the reassessment notices have no legal leg to stand on.
It is against this consistent view that a division bench of the Supreme Court took upon itself to act as the super-legislature, while employing mystical constitutional powers to rewrite law on issuance of reassessment notices, and to apply that rewritten law to over 90,000 reassessment notices already issued under the old law, most of which were not even “pending” for adjudication before the court.
It began by observing that “it cannot be disputed that by substitution of sections 147 to 151 of the Income Tax Act by the 2021 Finance Act, radical and reformative changes are made governing the procedure for reassessment proceedings”, and that “amended sections prescribe the procedure governing initiation of reassessment proceedings.”
In paragraph 6.4, it categorically underlines this new procedure as below:
“It provides that before issuing any notice under section 148, the assessing officer shall (i) conduct any enquiry, if required, with the approval of specified authority, with respect to the information which suggests that the income chargeable to tax has escaped assessment; (ii) provide an opportunity of hearing to the taxpayer, with the prior approval of the specified authority; (iii) consider the reply of the taxpayer furnished, if any, in response to the show cause notice; and (iv) decide, on the basis of material available on record including reply of the taxpayer, as to whether or not it is a fit case to issue a notice under section 148 of the Income Tax Act; and (v) the assessing officer is required to pass a specific order within the time stipulated.”
The Supreme Court virtually manufactures an excuse to ultimately decide in favour of the department. Essentially, Ashish Agarwal tells the ordinary taxpayer that when the department falls short of arguments to support its case, courts will go ahead and build a case for it.
In para 7, after having delineated the provisions of the amended law, it said that it is “in complete agreement” with the stand taken by the high courts:
“Thus, the new provisions substituted by the 2021 Finance Act being remedial and benevolent in nature and substituted with a specific aim and object to protect the rights and interests of the taxpayer as well as the same being in public interest, the respective high courts have rightly held that the benefit of the new provisions shall be made available even in respect of the proceedings relating to past assessment years, provided section 148 notice has been issued on or after April 1, 2021. We are in complete agreement with the view taken by the various high courts in holding so.”
However, in the very next paragraph, the court – in a cryptic manner – upheld the validity of the reassessment notices using such specious grounds as “due to a bona fide mistake,” “the Revenue cannot be left remediless” and “Revenue may not suffer as ultimately it is the public exchequer which would suffer”, and that there is a need “to strike a balance between the rights (???) of the Revenue as well as the respective assesses.” It is on the strength of these fancy words alone that the court came to the conclusion that all the reassessment notices issued under the unamended law will be deemed to have been issued under the amended law.
This is what the court said in paragraph 8:
“The Revenue cannot be made remediless, and the object and purpose of reassessment proceedings cannot be frustrated. It is true that due to a bona fide mistake and in view of subsequent extension of time vide various notifications, the Revenue issued the impugned notices under section 148 after the amendment was enforced. In our view, the same ought not to have been issued under the unamended Act and ought to have been issued under the substituted provisions of the Act. There appears to be a genuine non-application of the amendments as the officers of the Revenue may have been under a bona fide belief that the amendments may not yet have been enforced. Therefore, we are of the opinion that some leeway must be shown in that regard which the high courts could have done so.”
Those who have read the contentions raised by the department and as recorded by the Allahabad High Court and the Supreme Court will make an obvious observation: the department’s supposed averment that it was ignorant of the amended law is nowhere to be found! One can only wonder how hundreds of tax officials made a bona fide mistake on the same provision of law during the same time period. All this while, the department kept on justifying that the reassessment notices, even if against the express mandate of the amended law, were validly issued.
The court’s observation that there was a bona fide mistake on the part of the Department is striking because a strong constitutional court would undertake a serious factual analysis of errors or mistakes of this kind. One could even try to cope with a situation where a constitutional court hears the department on key issues and takes them on face value. But here we have a court that virtually manufactures an excuse to ultimately decide in favour of the department. Essentially, Ashish Agarwal tells the ordinary taxpayer that when the department falls short of arguments to support its case, courts will go ahead and build a case for it.
Be that as it may, paragraph 8 of Ashish Agarwal is mere words, not reasoning supported by law or facts. We must be mindful of the fact that the Supreme Court was hearing a special leave petition challenging the order of the Allahabad High Court. The Allahabad High Court was hearing a writ petition under Article 226 of the Constitution seeking quashing of the reassessment notices issued by the Department without the authority or sanction of law.
There is no such thing as genuine non-application of law or dishonest non-application of law. Non-application of law is plain and simple non-application of law. Nothing more, nothing less. If the Department is left “remediless”, then so be it. If the public exchequer suffers, then so be it. It is for the legislature to provide a remedy; it is not for the Supreme Court to supply a remedy by rewriting the Income-tax Act as per its whims and fancies.
The Supreme Court invoked Article 142, for all practical purposes, to achieve complete justice for the department, and that too, in a case where the department was acting in clear contravention of the express provision of law.
By deeming reassessment notices – issued under repealed provisions – to be valid under law, the Supreme Court has sent a signal that the Parliament does not matter, the procedure established by the Parliament does not matter, and the constitutional right of taxpayers to seek constitutional remedies against State action does not matter. All that matters is the interests of the revenue, which the court will rush to protect at any cost, even if it were to act as super-legislature and rewrite the clear letter of the law. It does not matter to the court if showing ‘leeway’ to the department for misreading the law or misapplying the law – inadvertently or otherwise – would mean striking a thousand blows to the clear mandate of Article 265 of the Constitution.
Another aspect of the case that merits closer scrutiny is the court’s invocation of Article 142 of the Constitution in the facts of the case. Under that article, the Supreme Court may pass such an order as is necessary for achieving complete justice in any cause or matter pending before it.
This is what the court said in para 2.1:
“The Revenue is contemplating to prefer appeals against the similar judgments and orders passed by various high courts. However, as the issue is common and there will be multiplicity of the proceedings and to lessen the burden of this court and for the reasons stated hereinbelow, as we propose to pass an order in exercise of powers under Article 142 of the Constitution of India, the present order shall govern all the other judgments and orders passed by various high courts on the similar issue. Hence, we observe that the Revenue need not file separate individual appeals which may be more than 9,000 in numbers.”
That it was wrong for the Supreme Court to invoke Article 142 in the manner that it did has been sharply discussed here by lawyer Suhrith Parthasarathy, and no purpose would be served if I were to only repeat those points. It must, however, be emphasized that while the Supreme Court has invoked Article 142 in tax matters in the past, the Article was invoked to quash notices or proceedings issued without the authority of law, not to validate them as has happened in Ashish Agarwal. Let this article conclude with the thought that the Supreme Court invoked Article 142, for all practical purposes, to achieve complete justice for the department, and that too, in a case where the department was acting in clear contravention of the express provision of law.