Delhi High Court rules that invalid request for exchange of information would not extend the limitation period of assessment

Income Tax Act, 1961 (ITA) contains special provision for assessment in case of search hereinafter referred to as search assessment. As per the provisions of search assessment, tax authority is authorized to assess or reassess income for six tax years immediately preceding the year of search. 

Further ITA provides the period of limitation for such assessment. As per ITA assessment/reassessment in relation to the year of search as well as six years immediately preceding the search has to be completed before the expiry of two years from the end of the tax year in which the last search authorization is executed.

In computing the period of limitation, the period beginning the date on which a request for exchange of information is made by competent authority of India and ending with the period on which the information requested is last received or a period of 12 months, whichever is less, is to be excluded.

Further Article 26 of India-Switzerland Double Taxation Avoidance Agreement (DTAA) contains provisions for facilitating exchange of information between India and Switzerland. Article 26 was amended vide Protocol dated 30 August 2010 to provide that information pertaining to a period on or after 1 April 2011 alone would be allowed to be exchanged under Article 26 of India-Switzerland DTAA. Prior to the amending Protocol, there was no bar on the time period pertaining to which information could be exchanged.

In the facts of the present case ^[1] , search was initiated in respect of an individual taxpayer and search assessment was initiated for tax years 2005-06 to 2010-11. Further since the tax authority had some information relating to undisclosed bank accounts of the taxpayer located in Switzerland, it made a request to relevant authorities in Switzerland to provide information relating to such accounts as per the Exchange of Information article (EOI article) of India-Switzerland DTAA.

Since the request made by Indian competent authorities was for a period prior to 1 April 2011, the request made by the Indian competent authorities was rejected by the relevant authorities of Switzerland.

Nevertheless, as the taxpayer admitted to owning the undisclosed bank accounts, assessment was completed and an order was passed on 4 March 2015. Without the extension for request for EOI from Switzerland, the time limit for completion of assessment was 31 March 2014. 

The limited issue before the Delhi High Court (HC) was whether the request for EOI was valid and consequently whether the time limit of 12 months is to be excluded for computing the period of limitation in respect of the assessment order dated 4 March 2015?

The tax authority argued that although the request for EOI was made to the relevant authorities of Switzerland, no response was received from them within 12 months of the request and, hence, a period of 12 months has to be excluded in computing the limitation period for completion of search assessment.

However, the taxpayer argued that since the request was made for a period prior to 1 April 2011, the request was invalid and consequently the tax authority was not eligible for extension of time period in computing the limitation period. Basis this the taxpayer argued that the assessment was time barred.

The first appellate authority upheld that the assessments are not time barred and upheld assessment orders passed by the tax authority, sustaining the additions made. However, the Income Tax Appellate Tribunal (ITAT) allowed the taxpayer’s appeals and holds that the assessments were barred by limitation as they were completed beyond the time prescribed under ITA and accordingly quashes the assessment orders. The tax authority appealed further in HC and following was noted by the HC to conclude that the assessment was time barred:

• The Protocol amending Article 26 was signed on 30 August 2010. The Protocol thus has the effect of novating Article 26 as was existing in the India-Switzerland DTAA prior to 30 August 2010.
• Hence post 30 August 2010, only such information which pertains to a period post 1 April 2011 was allowed to be exchanged under the EOI article.
• As the request for EOI was made after the amendment viz. 30 August 2010 with respect to a period prior to 1 April 2011, the request was invalid.
• The time limit for search assessment can be extended by 12 months only in case where there is a valid request made for EOI under the DTAA. Since the request of the tax authority in this case was invalid, there cannot be any extension of time limit for search assessment.

^[1] [TS-592-HC-2025(Del)]