ITAT Mumbai on Invalid Reopening: Approval Under Section 151(ii) Must Come From Correct Authority

Background of the Dispute

The Mumbai Bench of the ITAT in Steelex Vs ITO (ITAT, Mumbai Bench) examined whether a reassessment initiated for Assessment Year 2016-17 could legally stand when the approval for issuing notice under Section 148 was obtained from the Principal Commissioner of Income Tax (PCIT) instead of the higher authority mandated under Section 151(ii) of the Income Tax Act 1961.

The assessee, a partnership firm, had filed a return declaring a business loss of ₹40,51,456. This return was originally processed under Section 143(1). No scrutiny assessment under Section 143(3) was framed. Later, under the substituted reassessment framework, the Assessing Officer (AO) initiated proceedings under Section 147 and issued a notice under Section 148 dated 30 July 2022, preceded by an order under Section 148A(d) dated **27 July 2022`.

Both the order under Section 148A(d) and the notice under Section 148 were issued after obtaining prior approval from the PCIT. The crucial jurisdictional challenge raised by the assessee was that, since the notice was issued after more than three years from the end of AY 2016-17, valid approval under Section 151(ii) could only have been granted by the Principal Chief Commissioner of Income Tax (PCCIT) or the Chief Commissioner of Income Tax (CCIT), and not by the PCIT.

The National Faceless Appeal Centre (NFAC) upheld the reassessment, leading to the assessee’s appeal before the ITAT Mumbai.

Core Issue Before the Tribunal

The Tribunal was required to decide:

• Whether a notice under Section 148 issued after expiry of three years from the end of the relevant assessment year can be sustained when the prior approval contemplated by Section 151(ii) was taken from the PCIT instead of the PCCIT/CCIT.
• Whether the relaxation of timelines under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) impacted only limitation periods or also altered who could grant sanction under Section 151.

In essence, the question was whether the defect in sanction went to the root of jurisdiction, thereby invalidating the entire reassessment proceedings.

Assessee’s Contentions

The assessee advanced a purely legal challenge focused on the jurisdictional framework of Section 151. The main planks of the argument were:

1. Time-Linked Hierarchy Under Section 151

• Section 151 lays down a two-tier approval mechanism:
  • Section 151(i): Where the notice under Section 148 is issued within three years from the end of the relevant assessment year – approval may be granted by the authority mentioned therein (such as PCIT).
  • Section 151(ii): Where the notice is issued after three years – approval must compulsorily come from the PCCIT or CCIT.
• Since the notice under Section 148 was dated 30 July 2022, it was clearly beyond three years from the end of AY 2016-17 (i.e. beyond 31 March 2020). Therefore, only the authority covered under Section 151(ii) had jurisdiction to accord sanction.

2. Sanction is a Condition Precedent, Not a Curable Defect

• Proper prior approval from the correct authority is a jurisdictional pre-condition for valid reopening.
• Approval by an officer not empowered under Section 151(ii) cannot be treated as “substantial compliance” or a mere technical irregularity.
• Parliament deliberately vested cases older than three years with a requirement of higher-level scrutiny by PCCIT/CCIT, which cannot be bypassed.

3. Effect of TOLA

• TOLA merely extended the limitation period for issuing notices in light of COVID-19 related disruptions; it did not alter the identity of the sanctioning authority under Section 151.
• The assessee submitted that once the extended period up to 30 June 2021 (as per TOLA) expired, any notice thereafter would fall squarely within the category covered by Section 151(ii) and hence would require approval from PCCIT/CCIT.

4. Reliance on Judicial Precedents

The assessee placed strong reliance on the following authorities: