Punjab & Haryana HC Strikes Down Section 147A Income Tax Act, Finds Faceless Reassessment Framework Remains Unchanged

The Punjab & Haryana High Court has held that the retrospective insertion of Section 147A could not validate reassessment notices issued by jurisdictional Assessing Officers when the statutory provision governing faceless reassessment under Section 151A remained unchanged.

A Division Bench of Justice Deepak Sibal and Justice Rupinderjit Chahal accordingly struck down Section 147A as unconstitutional, holding that the provision did not cure the legal defect identified in earlier judicial decisions concerning the authority of jurisdictional Assessing Officers to issue reassessment notices.

It further quashed the impugned notices issued under Section 148 by the respective JAOs, holding that such notices were required to be issued through the faceless mechanism prescribed under Section 151A of the Act and the scheme dated March 29, 2022.

Section 147A was inserted into the Income Tax Act with retrospective effect from April 1, 2021, through the Finance Act, 2026.

The provision, notwithstanding anything contained in the Act, provides that for the purposes of Sections 148 and 148A, the expression “Assessing Officer” shall mean and shall always be deemed to have meant an Assessing Officer other than the National Faceless Assessment Centre or any assessment unit referred to in Section 144B(3).

The amendment was introduced against the backdrop of the JAO-FAO controversy that arose after the introduction of the faceless assessment regime.

Several High Courts had held that notices under Section 148 could be issued only through the faceless mechanism and in accordance with Section 151A read with the scheme dated March 29, 2022.

The Revenue had challenged several such rulings before the Supreme Court. During the pendency of those proceedings, Parliament enacted Section 147A retrospectively.

The Supreme Court subsequently set aside the earlier High Court judgments and remitted the matters to the respective High Courts for fresh consideration in light of the new provision, while permitting the assessees to challenge the constitutional validity of Section 147A.

The High Court, while examining the validity of the provision, held that a validating legislation can operate retrospectively only when it removes the basis or foundation of the earlier judicial decision by curing the defect identified by the Court. It cannot merely declare that the earlier judicial interpretation would no longer apply.

"...Abrogation is not to be used as a device by the legislature to bye-pass an unfavourable judicial decision and that if the validating legislation is enacted solely with the intention to defy a judicial pronouncement, such legislation would be an example of legislature overreach and therefore, unconstitutional", the Court said.

The Bench found that Section 147A had not removed the statutory basis on which the earlier High Court decisions were founded. Section 151A and the scheme dated March 29, 2022, which provide for randomised automated allocation and a faceless manner of issuing notices under Section 148, continued to remain in force.

The Court observed that Section 147A neither amended Section 151A nor altered the scheme framed under it. Therefore, the provision could not retrospectively validate the action of jurisdictional Assessing Officers by merely declaring that the expression “Assessing Officer” would exclude the faceless authorities.

"Section 147A is also clearly found to be in direct conflict with Section 151A, read with the scheme framed thereunder, all of which provisions simultaneously exist in the same statute. In the absence of any amendment to Section 151A and/or the scheme framed thereunder, simply because Section 147A begins with a non-obstante clause, would not make its retrospective enactment pass the test of a constitutionally enacted validation law", the Court said.

The Bench held that the legislature could not simply override the interpretation placed by the courts on the existing statutory framework without curing the defect identified in those judgments.

The Court also rejected the argument that the non-obstante clause contained in Section 147A was sufficient to overcome the earlier judgments. It held that the defect identified by the courts continued to exist as the provisions governing faceless reassessment remained unchanged.

The Court further observed that the stated objective of introducing Section 147A was to bring certainty and clarity and avoid litigation. However, instead of achieving that objective, the provision had itself become the subject matter of extensive litigation.

"...Section 151A and/or the scheme framed thereunder continue to exist on the statute book simultaneously with Section 147A. Therefore, introduction of Section 147A of the Act did not bring any clarity or certainty. It only added to the confusion", it said.

The Revenue had relied on notifications issued under Section 120 of the Act to contend that the jurisdictional Assessing Officers possessed concurrent jurisdiction. It also argued that the faceless scheme did not extend to pre-assessment proceedings under Sections 148 and 148A.

The Court rejected these contentions and held that the statutory scheme governing the issuance of notices under Section 148 required compliance with the faceless mechanism.

The High Court accordingly declared Section 147A of the Income-tax Act unconstitutional and directed that the provision be struck down.

It further quashed the impugned notices issued under Section 148 by the jurisdictional Assessing Officers and allowed the connected writ petitions.

For the Petitioners: Dr. Sanjay Bansal, Senior Advocate; Radhika Suri, Senior Advocate; Sandeep Goyal, Senior Advocate; Pankaj Jain, Senior Advocate; Munisha Gandhi, Senior Advocate; Salil Dev Singh Bali, Senior Advocate, along with several other counsel.

For the Income Tax Department: N. Venkataraman, Additional Solicitor General of India, through VC, assisted by Nakul Madhan, Advocate; Urvashi Dhugga, Senior Standing Counsel; Saurabh Kapoor, Senior Standing Counsel; Ranvijay Singh, Senior Standing Counsel; Varun Issar, Senior Standing Counsel; Gauri Neo Rampal, Senior Standing Counsel, along with other counsel.