[Opinion] From Clarity to Confusion | Analyzing the Impact of the CBDT Instruction No. 1 of 2023

On 24th April 2023, The Supreme Court (“SC”) delivered a landmark judgement of Pr. CIT, Central v. Abhisar Buildwell (P.) Ltd. [2023] 149 taxmann.com 399/293 Taxman 141/454 ITR 212(“said judgement”) which upheld the view that in cases of unabated assessments (completed assessments), no additions can be made by the Assessing Officer (“AO”) if no incriminating material is found during the search. This case settled a prolonged dispute of reassessments in search cases under Section (“u/s”) 153A of the Income Tax Act, 1961 (“the Act”). But this settled position of law was disrupted by the Central Board of Direct Taxes (“CBDT”) Instruction No. 1 of 2023 issued on 23rd August 2023, wherein it provides direction to the AO to reopen the unabated assessments u/s 147 and 148 of the Act in view of Section 150 of the Act. Nearly a year after the CBDT’s instruction, taxpayers are now receiving Show Cause Notices from AO for assessment years that had already settled and reached finality. The Revenue is now bringing up new unidentified incomes and invoking Section 150(1) of the Act to bypass the time limit on issuing notices prescribed u/s 149 of the Act.

There is sufficient literature available on practical aspects of the implementation of the CBDT instruction and the analysis of the distinction between abated and unabated assessments. However, there is no discussion or debate regarding the legality and authority of the CBDT to issue such instruction. This article begins by examining the said judgement and the CBDT instruction. Further, the authors provide a legal perspective to analyse whether the CBDT Instruction is ultra vires as per the Act and various judicial precedents. Lastly, the author offers certain suggestions to the department to resolve and settle the ongoing dispute while reaffirming the fundamental legal principle of providing finality in litigation to the taxpayer.

Background

The SC in the said judgement reaffirmed the view taken by the Delhi High Court in the case of CIT (Central) v. Kabul Chawla [2015] 61 taxmann.com 412/234 Taxman 300/[2016] 380 ITR 573 and the Gujarat High Court in the case of Pr. CIT v. Saumya Construction (P.) Ltd. [2017] 81 taxmann.com 292/[2016] 387 ITR 529. The Court held that addition cannot be made if during the course of the search no incriminating material is found in respect of unabated assessments. Subsequently, on 25th April 2023, the SC in the case of M/s U.K. Paints (Overseas) Ltd. upheld the High Court judgement by rejecting the assessment order u/s 153C of the Act as incriminating material was not found during the search in the case of the assessee.

The CBDT, exercising its power conferred u/s 119 of the Act issued instructions regarding the implementation of the said judgement. The instruction takes a very structural approach by directing AOs to categorize cases that are similar to the said judgement into two broad categories: abated/pending assessments and unabated/completed assessments. For abated assessments, the AO is required to take necessary actions as per Section 153A(2) read with Section 153(8) of the Act. On the other hand, unabated assessments are further divided into three categories:

1. Lead and tagged matters: In all the lead and tagged matters passed by the SC, the AO shall reopen the assessment u/s 147 and 148 of the Act in accordance with Section 150 of the Act.
2. Cases pending before Appellate Authority and AO: For cases pending before the Appellate Authority, the said judgement should be brought in notice of the Appellate Authority. The AO shall then reopen the assessment u/s 147 and 148 of the Act in view of Section 150 of the Act. For pending cases before the AO, he is directed to initiate reassessment proceedings.
3. Cases disposed of by Appellate Authority: When a judgement has already been passed by the Appellate Authority, the AO shall file a MA and notice of motion for review with the ITAT and the High Court, respectively, to restore the power to reopen the proceedings.

It is evident that the instruction does not exclude any matter outside its purview. This raises serious questions about whether the CBDT intended to clarify the said judgement or if it sought to review the entire issue as per its own sweet will to make its own interpretation of an already settled law.

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