The Madras High Court has held that the deadline for completing search assessments must first be calculated after accounting for court-ordered stays and other statutory exclusions, before determining whether the COVID-era extension under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA), applies.
The bench of Chief Justice Sushrut Arvind Dharmadhikari and Justice G. Arul Murugan has observed that the disputed income-tax assessments for nine assessment years, from 2011-12 to 2019-20, were barred by limitation.
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The assessee’s premises were searched under Section 132 of the Income-tax Act on July 5, 2018. Notices under Section 153A subsequently followed for assessment years 2011-12 to 2019-20.
The assessee initially challenged those notices in writ proceedings and obtained interim protection for certain assessment years. Those petitions were dismissed on March 17, 2021, with a direction to the Revenue to proceed with the assessments.
The assessment orders were subsequently passed on January 28 and 29, 2022, under Section 144 read with Section 153A. Penalty orders followed in July 2022.
The assessee challenged the assessments, the antecedent notices dated December 22, 2021, and the penalty proceedings, principally contending that the statutory time limit for completing the assessments had already expired.
The Single Judge divided the assessment years into two groups.
For assessment years 2011-12, 2012-13 and 2019-20, no interim stay had been obtained at the initial stage. The Single Judge held that the deadline, after applying TOLA, was September 30, 2021. Since the assessments were completed only in January 2022, they were set aside as time-barred.
For assessment years 2013-14 to 2018-19, however, the Single Judge first extended the original statutory deadline of September 30, 2020, to September 30, 2021, under TOLA. The stay-related exclusion was then applied to that extended date, producing a deadline of April 20, 2023. On that basis, the January 2022 assessments and the connected penalty orders were upheld.
Both sides appealed. The assessee challenged the decision sustaining the assessments for six years, while the Revenue sought restoration of the assessments for the remaining three years.
The assessee, submitted that the Explanation to Section 153B forms an integral part of the provision governing limitation.
According to the assessee, the statutory deadline could not be determined by reading the main provision in isolation. The period during which assessment proceedings remained stayed had to be excluded first. Only the resulting deadline could then be examined to determine whether it fell within TOLA’s qualifying period.
The assessee also argued that the interim stay granted on December 18, 2019, had lapsed on July 23, 2020, because it was not expressly extended beyond that date. On this calculation, the permissible exclusion was 218 days.
The Revenue, represented by Additional Solicitor General AR.L. Sundaresan, argued that the original deadline of September 30, 2020, itself attracted TOLA. It maintained that the court-stay period should be added after extending that deadline to September 30, 2021, making the January 2022 assessments timely.
The Division Bench held that Section 153B provides a single limitation period, determined by reading the main provision together with the Explanation.
The Bench explained that the statutory exclusions operate as part of the initial calculation of limitation. They cannot be treated as a separate benefit to be added after an external extension has already been applied.
The Court also held that TOLA’s reference to a time limit prescribed under the Income-tax Act means the deadline calculated under the relevant provision in its entirety. It does not mean an artificial date derived by disregarding the Explanation.
Accordingly, the correct sequence is to calculate the deadline under Section 153B after applying all relevant exclusions and the applicable proviso, and then test that resulting date against the qualifying window under Section 3(1) of TOLA.
For the assessments before the Court, that window ran from March 20, 2020, to March 31, 2021. The extension to September 30, 2021, was available only where the properly calculated deadline fell within that window.
For the six assessment years involving interim protection, the Court accepted that the stay granted on December 18, 2019, lapsed on July 23, 2020. The resulting exclusion was 218 days.
Applying that exclusion to the original deadline of September 30, 2020, produced a revised deadline of May 7, 2021. Since this date fell outside TOLA’s qualifying window ending March 31, 2021, the pandemic extension was unavailable.
The Bench also considered an alternative calculation allowing for the benefit of the High Court’s suo motu COVID-related orders. Even on that approach, the exclusion could not exceed 287 days, producing a deadline of August 19, 2021.
Both possible deadlines preceded the assessment orders passed in January 2022. The Court therefore held that the assessments for assessment years 2013-14 to 2018-19 were time-barred.
For assessment years 2011-12, 2012-13 and 2019-20, where no initial stay-related exclusion was available, the Bench separately confirmed that the TOLA-extended deadline of September 30, 2021, had expired before the assessments were completed.
The Bench emphasised that TOLA was enacted to relax deadlines affected by the COVID-19 disruption. It rejected an interpretation that would allow the Revenue’s assessment period to expand substantially merely because the statutory provisions were applied in a different arithmetic sequence.
The Court reiterated that tax limitation provisions must be strictly construed. An extension operating to the prejudice of an assessee must be clearly supported by the statutory language.
The Division Bench dismissed the Revenue’s appeals and confirmed the setting aside of the assessments, antecedent notices and connected penalty orders for assessment years 2011-12, 2012-13 and 2019-20.
It allowed the assessee’s appeals concerning assessment years 2013-14 to 2018-19 and reversed the portion of the Single Judge’s order that had upheld those assessments. The Bench consequently quashed the assessment orders, antecedent notices dated December 22, 2021, the specified penalty orders under Sections 271(1)(c) and 271B, and consequential demand notices for those six years.
The Court decided the batch solely on limitation. It left open the assessee’s additional objections concerning natural justice, cross-examination of persons whose statements were relied upon, and the failure to furnish a break-up of additions. It expressed no opinion on the merits of the tax additions.
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