Tax Reassessments: Supreme Court Favours Tax Department, Upholds Extension Under TOLA
During Covid-19, the government enacted the Taxation & Other Laws Act to extend the time limit for issuing reassessment notices for assessment years 2013-14 and 2014-15 till June 30, 2021.
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In a verdict that will have an impact on nearly 90,000 reassessment notices issued by income tax department, the Supreme Court has ruled that the the Taxation & Other Laws Act or TOLA will continue to apply to the Income Tax Act after April 1, 2021.
At the heart of the dispute lay the issue of reassessment notices handed out by the income tax department after the enactment of the 2021 Finance Act for incomes that have escaped assessment.
In 2021, the government had amended the reassessment provisions under the income tax law by introducing Section 148A. The provision meant that effective April 1, 2021, if a tax officer wants to initiate reassessment proceedings, stringent conditions need to be met—a pre-notice inquiry if required, prior approval from senior officers in the department, and an opportunity to the taxpayer to oppose reassessments. Until this amendment, a tax officer could initiate reassessment proceedings if there was a “reason to believe" that income had escaped assessment.
Post the amendment, the tax department could go back 10 years from the end of relevant assessment year if the income which escaped assessment is more than Rs 50 lakh for that year and three years if the income is less than Rs 50 lakh for that year.
Before the amendment, the department was allowed to go back up to six years for incomes above Rs 1 lakh.
Notably, the amendment stated that assessment years that were time barred under the pre-amendment regime could not be a subject of reassessment under the amended regime.
On a plain reading of the provision, this means that no notices could be issued for assessment years 2013-14 and 2014-15 under the new regime as the limitation period of six years stood expired under the old regime.
However, during the Covid-19 pandemic, the government enacted the Taxation & Other Laws Act (TOLA) to extend the time limit to issue notices. TOLA extended the time limit for issuing reassessment notices for assessment years 2013-14 and 2014-15 till June 30, 2021.
But since the 2021 Finance Act took force on April 1, 2021, a situation arose wherein there was an alleged overlap between the old and the new law on tax reassessment. The department issued nearly 90,000 notices in the three months between April 1, 2021 and June 30, 2021 based on the old law, which prompted a challenge from the taxpayers.
The Allahabad High Court ruled in favour of the taxpayers whereas the Delhi High Court ruled against them. The controversy led the matter to land before the top court for a final verdict on the matter.
Delivering its verdict, the court said that all these reassessment notices will follow the directions laid down by the court in its 2022 verdict in the Ashish Agarwal case. In this case, the court had opined that the 90,000 notices issued under the old procedures will be deemed to have been issued as show cause notices in accordance with the revised provisions.
This was done so as to ensure the continuance of the reassessment process initiated by the department between April 1, 2021 and June 30, 2021.
The court was aware of the fact that the assessing officers were effectively inhibited from performing their responsibility under Section 148A until the requirement of supply of relevant material and information to the taxpayers was fulfilled. As a result, the court lifted the inhibition by directing the assessing officers to supply the taxpayers with the relevant material and information relied upon by the department within thirty days from the date of the judgement rendered in May 2022.
Post the supply of material to the taxpayer, the taxpayer had two weeks to respond to the show-cause notice.
This verdict paves the way for the tax department to pursue reassessment proceedings previously thought to be time-barred. Consequently, taxpayers may receive notices related to these reopened cases, potentially causing anxiety and confusion regarding their tax liabilities, said Rishabh Malhotra, counsel at DMD Advocates.
Ankit Jain, partner at Ved Jain & Associates, said that while the court addressed most concerns, it remained silent on one key point: the validity of notices issued without proper approval from the higher sanctioning authorities as required under the new regime. This leaves room for further contention and potential clarification in future rulings, Jain said.
