Tax Reassessment Issue Reaches Supreme Court
After being debated in several high courts, the contentious tax reassessment issue has now reached the Supreme Court.
The contentious issue of reassessment between taxpayers and the revenue department has reached the Supreme Court after traveling through high courts in Allahabad, Delhi, Chhattisgarh, Rajasthan and Calcutta.
The litigation has arisen after Finance Act, 2021 introduced a new procedure for reassessment effective April 2021. Section 148 of the Income Tax Act,1961 grants tax officers power to reopen past tax assessments, if they have reason to believe that certain income had escaped assessment.
The 2021 amendment brought in certain other requirements before such a notice can be issued — a pre-notice inquiry, prior approval from senior officers in the department, and an opportunity to the taxpayer to oppose reassessment.
After this 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 has 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 all high courts 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.
So far, except Chhattisgarh, all high courts have upheld the taxpayers' view that any notice after April 2021 has 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. This week, the Calcutta High Court dismissed the tax department's view.
The revenue department has now taken the matter to the apex court, challenging, in particular, the Allahabad High Court judgment of October 2021.
Tax Department's Appeal
The Allahabad High Court had noted that the Finance Act, 2021 replaced the old reassessment provisions. And that the 2020 Act only extended the deadline to open reassessments but did not save the old procedure to do so. The notices have to be issued as per the new procedure. Further, the bench also concluded that a delegated legislation i.e. the notifications can never override a principal legislation — the Finance Act, 2021.
In its appeal before the apex court, the government has cited huge revenue implications if the high court view is upheld.
It has pointed to Section 3(1) of the 2020 Act to make its case. The provision allows for completion of actions that could not be completed within the statutory deadlines due to the Covid-19 pandemic.
The tax department has stated that the high court’s interpretation is contradictory to what the section means. The section allows for completion of actions that could not be completed within the specified time limit under the law, the department's petition states.
...the actions which get the benefit of the extended time limit will have to follow the same procedure that would have been adopted if the limitation period was not extended.Tax Department's Appeal
And so, the reassessment notices issued after April 1 would have to follow the old procedure as they would have if the notices were issued in the absence of an extension.
Further, the department has argued that the Finance Act, 2021 was not intended to destroy old rights and liabilities which were kept alive by the Relaxation Act for a limited period of time.
Basis these arguments, the tax department has requested the top court to set aside the judgment of the Allahabad High Court and grant an interim stay on the October order.
