90,000 Reassessment Cases: Supreme Court Rules In Tax Department's Favour
Supreme Court exercises extraordinary power under Article 142 in rare ruling.
The Supreme Court of India has upheld the tax department's stance in 90,000 reassessment notices issued last year. Such notices, issued under the old regime, should be treated as issued as per new requirements, the apex court said.
The top court exercised its extraordinary powers under Article 142 to say that its order will be applicable to all the high court rulings on this issue, as well as pending proceedings. "We observe that the revenue need not file separate individual appeals which may be more than 9,000 in numbers."
Under the current constitutional scheme, this power is not available to the high courts and even the Supreme Court exercises it rarely, Tarun Jain, partner at BMR Legal, said.
Reassessment ordinarily means that the past concluded assessments are disturbed. So, by default, reassessment has severe consequences. This is a big shift in jurisprudence — the full consequences of which will be felt much later.Tarun Jain, Partner, BMR Legal
In the past, the court has invoked Article 142 in some historical and legendary cases having very wide implications, said Rakesh Nangia, chairman at Nangia Andersen India.
The judgment of the Supreme Court is a landmark in the history of income tax jurisprudence. Considering the very large number of cases which might escape assessment of tax due to quashing of over 90,000 notices issued and its potential tax impact on the exchequer, the Supreme Court has taken an exception in the present case and considered it fit to invoke Article 142.Rakesh Nangia, Chariman, Nangia Andersen India
Besides the rare invocation of Article 142, the ruling is significant because of its wide impact.
The Supreme Court's ruling will have an adverse effect on taxpayers contesting the department's view on reassessments, Jain said. The burden on the tax department to meet the stringent rules introduced via Finance Act, 2021 is diluted to the extent of the reassessment proceedings addressed by the Supreme Court decision, he said.
Reassessment Controversy
The contentious issue of reassessment between taxpayers and the revenue department reached the Supreme Court after travelling through high courts in Allahabad, Delhi, Chhattisgarh, Rajasthan and Kolkata.
The litigation arose after Finance Act, 2021 introduced a new procedure for reassessments effective April 2021.
Section 148 of the Income Tax Act, 1961 grants tax officers power to issue notice of reopening past tax assessments, if they have reason to believe that certain income had escaped assessment.
Last year, the government introduced Section 148A which laid down certain other requirements before a reassessment notice can be issued—a pre-notice inquiry if required, prior approval from senior officers in the department, and an opportunity to the taxpayer to oppose reassessment.
After the amendment became effective, the tax department issued reassessment notices between April-June 2021, as per old procedure, which was challenged before various high courts.
The department relied on a notification issued under the Taxation and Other Laws (Relaxation of Certain Provisions) Act, 2020, which relaxed certain procedures in light of Covid-19. The notifications extended the limitation period for issuing reassessment notices to June 30. Simply put, it gave the tax department more time to send notices for reopening past assessment.
The question before the court was whether the department should follow the old procedure since the limitation period was extended, or the new procedure as mandated by Finance Act, 2021.
All high courts barring one upheld the taxpayers' view that any notice after April 2021 had to be as per the new procedure. In December, the Delhi High Court quashed around 1,300 notices that were issued as per the earlier procedure. The Calcutta High Court, too, had dismissed the tax department's view.
The revenue department took the matter to the apex court challenging, in particular, the Allahabad High Court judgment of September 2021.
Supreme Court's View
The bench of Justice MR Shah noted that the amendments to the Finance Act, 2021 were remedial and benevolent in nature. And were introduced to protect the rights and interest of taxpayers.
To that extent, it said, the high courts rightly held that the benefit of the new provisions should be available to reassessment proceedings initiated post April 1.
Even as the Supreme Court acknowledged this, it pointed out that if the high court view is upheld, the tax department will be left remediless. And that the object and purpose of reassessment proceedings cannot be frustrated.
In its reasoning, the apex court noted that the revenue department made a bona fide mistake in believing that the reassessment notices could be issued under the old procedure until June 30.
There appears to be genuine non-application of the amendments as the officers of the Revenue may have been under a bona fide belief that the [Finance Act, 2021] amendments may not yet have been enforced. Therefore, we are of the opinion that some leeway must be shown in that regard which the high courts could have done.Supreme Court
So, instead of quashing the reassessment notices issued between April 1, 2021 and till date, the high courts could've granted leeway to the tax department, the Supreme Court concluded.
In saying so, it gave the following directions:
Notices issued under old procedures to be deemed to have been issued under the new Section 148A and treated as show cause notices.
Assessing officers to provide information and material relied upon within 30 days to the assessee, who have to file replies within two weeks.
As a one-time measure, requirement of conducting a prior enquiry — before a reassessment notice is issued — has been dispensed with. In any case, the bench noted, the inquiry was not mandatory.
All defences available to assesses and all the rights of the tax department introduced through the amendment shall continue to be available.
With these directions, the top court modified the judgments passed by the various high courts and made the notices issued under the old procedure deemed to have been issued as per the Finance Act, 2021 amendments.
