Direct Tax Alert - Supreme Court treats reassessment notices issued between April to June 2021 under old regime as valid

BACKGROUND

Section 148 of the Income Tax Act, 1961 (‘IT Act’) grants the tax officer the power to issue notice for reopening past tax assessment i.e. reassessment if he believes that certain income has escaped the assessment. The Finance Act, 2021 introduced a new procedure for reassessments effective from 1 April 2021. The newly introduced section 148A of the IT Act lays down certain additional requirements before a reassessment notice can be issued, which inter-alia includes a pre-notice inquiry if required prior approval from the higher tax authority and an opportunity for the taxpayer to oppose reassessment. After 1 April 2021, the amended provisions for reassessment became effective, the tax authorities issued about 90,000 reassessment notices between April-June 2021 as per the old procedure. Issuance of such notices was challenged in Writ Petitions before various High Courts across the country on the following grounds: 

• No enquiry was conducted by the tax officer prior to the issuance of notice and reopening is based on the change of opinion of the tax officer.
• Mandatory procedure laid down by this Court in the case of GKN Driveshafts (India) Ltd. vs. Income Tax Officer and Ors. (2003) 1 SCC 72, was not followed.
• No valid “reason to believe”.
• No tangible/reliable material/information in possession of the tax officer leading to formation of belief that income has escaped assessment.

Most of the High Court’s struck down the proceeding. Recently, the Supreme Court¹ had an occasion to examine the validity of these notices. We, at BDO in India, have summarized the ruling of the Supreme Court and provided our comments on the impact of this decision hereunder.

FACTS OF THE CASE

Due to the COVID-19 pandemic, taxpayers and the tax authorities faced difficulties to comply with the statutory time limits. That resulted in Parliament promulgating the Taxation and Other Laws (Relaxation of certain provisions) Ordinance in March 2020 (‘TOLA’). That was succeeded by the Relaxation Act in September 2020, providing some ease by extending timelines for certain compliances. Additionally, Section 3 of the TOLA enabled the Central Government to relax the time limits prescribed in the ‘specified Acts’. Pursuant to these powers, the Central Government has issued the following notifications for further extending timelines:

 

Date of notification	Original limitation (both dates inclusive)	Extended limitation
24 June 20202	20 March 2020 to 29 June 2020	30 June 2020
31 December 20203	20 March 2020 to 30 March 2021	31 March 2021
31 March 20214 *	20 March 2020 to 31 March 2021	30 April 2021
27 April 20215 *	20 March 2020 to 31 March 2021	30 June 2021

*Specific explanation about the issuance of reassessment notice within an extended period was introduced. It suggested that notice for reassessment can be issued within the extended period (where the new regime becomes applicable) by following the procedures of the old reassessment regime.

The tax authorities took a stand that the extension provided by TOLA applies to section 148 of the IT Act. Also, till 30 June 2021, notices can be issued under the old regime and there is no need to follow the new procedure under section 148A of the IT Act. The question before the High Courts was whether the tax authorities should follow the old regime, since the limitation period was extended or the new regime as mandated by the Finance Act, 2021.

All the High Courts (viz. Allahabad⁶, Rajasthan⁷, Delhi⁸, Kolkata⁹, Bombay¹⁰, and Madras¹¹) barring Chhattisgarh¹² High Court upheld the taxpayers' contention that any notice issued after 1 April 2021 had to be as per the new regime. Accordingly, the reassessment notices issued under the old regime of section 148 of the Act were quashed. The tax authorities preferred an appeal before the Hon’ble Supreme Court against the order of the Allahabad High Court.

SUPREME COURT RULING

While treating reassessment notices issued between 1 April 2021 to 30 June 2021 under the old reassessment regime as valid, the Supreme Court made the following observations:

• The new reassessment regime is remedial and substituted with a specific aim and object to protect the rights and interests of the taxpayer. The same being in the public interest, the respective High Courts have rightly held that the benefit of new provisions shall be made available even to the proceedings relating to past assessment years, provided the reassessment notice has been issued on or after 1 April 2021.  
• The impugned notices must be issued under the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021. There appears to be genuine non-application of the amendments as the tax authority may have been under a bonafide belief that the amendments are yet to enforce.
• The judgements of several High Courts would result in no reassessment proceedings at all. The tax authorities cannot be remediless, and the object and purpose of reassessment proceedings cannot be frustrated.
• Tax authorities must be permitted to proceed further with the reassessment proceedings as per the new reassessment regime, subject to compliance with all the procedural requirements and the defences available to taxpayers as per the new reassessment regime.

Accordingly, the Supreme Court issued the following directions:

• The impugned notices issued to respective taxpayers as per the old reassessment regime shall be deemed to have been as per the new reassessment regime and shall be treated to be show-cause notices in terms of section 148A(b)¹³ of the IT Act.
• The respective tax officers, within 30 days from the date of decision (4 May 2022), provide to taxpayers the information and material relied upon by the tax authorities so that the taxpayers can reply to the notices within two weeks thereafter.
• The requirement of conducting an enquiry with the prior approval of the specified authority under the new reassessment regime may be dispensed with as a one-time measure vis-à-vis those notices which have been issued under the old reassessment regime from 1 April 2021 to till date, including those quashed by various High Courts.
• The tax officers shall thereafter pass an order as per the new reassessment regime after following the relevant procedure as required in respect of each of the concerned taxpayer.
• All the defenses which may be available to the taxpayer under the new reassessment regime and whatever rights available to the tax officer under the Finance Act, 2021 are kept open and/or shall continue to be available.
• The present order shall substitute/modify respective judgements passed by the respective High Courts quashing the similar notices issued under old reassessment regime irrespective of whether they have been assailed before this Court or not.

BDO COMMENTS

While the Supreme Court observed and agreed with the view that new reassessment procedures are remedial and benevolent, they should be applicable for past years as well. However, it has treated notices issued under the erstwhile section 148 of the IT Act as valid. The discussion has revolved around the procedure that should have been followed before the issuance of the reassessment notice. The Supreme Court has categorically and clearly stated that this decision shall be applicable pan-India including to matters pending before High Courts. However, one needs to evaluate whether this decision will hold for reassessment proceedings of the Fiscal Year 2016-17 and earlier years that have escaped income below Rs. 50 lacs as those will be beyond the 3 years limit as of 1 April 2021.   

Further, it is pertinent to note that as specifically held by the Hon’ble Supreme Court, all legal arguments against initiation of reassessment proceedings (except the argument that the reassessment notices were issued under the old provisions) such as change of opinion, absence of any new material on record etc. shall be available to the taxpayer to challenge reassessment proceedings. This means that the taxpayer can still challenge the reassessment proceedings on various legal and factual grounds.

Subscribe to receive the latest BDO News and Insights

• Please fill out the following form to access the download.