Bringing much-needed clarity to the reassessment process during transitional periods and striking a balance between the tax department and taxpayers, the Supreme Court on Thursday said the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA) will continue to apply to the Income Tax (I-T) Act after 1 April 2021. At the same time, it says any reassessment notices issued after 1 April 2021 must be treated as time-barred if they do not comply with the new provisions introduced by the Finance Act 2021. The ruling will have an impact on about 90,000 reassessment notices issued by the I-T department to taxpayers after the enactment of the Finance Act 2021 for incomes that have escaped assessment.
In the order, the bench of chief justice DY Chandrachud, justice JB Pardiwala and justice Manoj Misra, says, "In the instant appeals, the reassessment notices pertain to the assessment years (AYs)13-14, AY14-15, AY15-16, AY16-17, and AY17-18. To assume jurisdiction to issue notices under section 148 with respect to the relevant assessment years, an assessing officer (AO) has to issue the notices within the period prescribed under section 149(1) of the new regime read with TOLA and obtain the previous approval of the authority specified under Section 151. A notice issued without complying with the pre-conditions is invalid as it affects the jurisdiction of the AO."
"Therefore, the reassessment notices issued under section 148 of the new regime, which are in pursuance of the deemed notices, ought to be issued within the time limit surviving under the I-T Act read with TOLA. A reassessment notice issued beyond the surviving time limit will be time-barred," the apex court says.
Further, it says TOLA will extend the time limit for the grant of sanction by the authority specified under Section 151. "The test to determine whether TOLA will apply to section 151 of the new regime is this: if the time limit of three years from the end of an assessment year falls between 20 March 2020 and 31 March 2021, then the specified authority under section 151(i) has extended time till 30 June 2021 to grant approval."
"In the case of section 151 of the old regime, the test is: if the time limit of four years from the end of an assessment year falls between 20 March 2020 and 31 March 2021, then the specified authority under section 151(2) has extended time till 31 March 2021 to grant approval," the bench says.
According to the apex court, TOLA will continue to apply to the I-T Act after 1 April 2021 if any action or proceeding specified under the substituted provisions of the I-T Act falls for completion between 20 March 2020 and 31 March 2021. "Section 3(1) of TOLA overrides section 149 of the I-T Act only to the extent of relaxing the time limit for issuance of a reassessment notice under section 148."
Further, the time during which the show-cause notices were deemed to be stayed is from the date of issuance of the deemed notice between 1 April 2021 and 30 June 2021 till the supply of relevant information and material by the assessing officers (AOs) to the assesses in terms of the directions issued by the SC in Ashish Agarwal (supra), and the period of two weeks allowed to the assesses to respond to the show-cause notices, the bench says.
TOLA was enacted in the backdrop of the COVID-19 pandemic to provide relaxation of time limits specified under the provisions of the I-T Act and certain other legislations as defined under Section 2(1)(b) of TOLA. The Finance Act 2021 amended the provisions dealing with the reassessment procedure under the I-T Act from 1 April 2021. The scheme of reassessment under Sections 147 to 151 was substantially overhauled by the Finance Act 2021.
The effect of TOLA and the notifications issued under the legislation was that if the time prescribed for the passing of any order or issuance of any notice, sanction, or approval fell for completion or compliance from 20 March 2020 to 31 March 2021 and if the completion or compliance of such action could not be made during the stipulated period, then the time limit for completion or compliance of such action was extended to 30 June 2021.
Following directions from the Union government, AOs issued reassessment notices between 1 April 2021 and 30 June 2021 by relying on the provisions under Section 148 of the old regime.
These reassessment notices were challenged by the assessees before various high courts (HCs). Among several objections raised by the assessees, one objection flagged was that the time limit prescribed under Section 149(1)(a) had expired and, given the fact that the income chargeable to tax, which had allegedly escaped assessment, amounted to less than Rs50 lakh, the tax department cannot take recourse to the extended limitation period provided in clause (b) of sub-section (1) of Section 149 of the I-T (1961) Act.
In the Union of India vs Ashish Agarwal case, the Supreme Court held that it was "in complete agreement with the view taken by various HCs in holding" that "the benefit of the new provisions shall be made available even in respect of the proceedings relating to past assessment years, provided Section 148 notice has been issued on or after 1 April 2021."
The SC held that the benefit of the new regime must be provided for the reassessment conducted for the past periods. The increase of the monetary threshold from Rs1 lakh to Rs50 lakh benefits the assessees.
The apex court exercised its discretionary jurisdiction under article 142 to balance the interests of the tax department and the assesses and directed that the reassessment notices issued under the old regime will be deemed to have been issued under Section 148-A(b) of the new regime.
On 11 May 2022, the central board of direct taxes (CBDT) issued an instruction for the implementation of the decision in the Ashish Agarwal case. The instruction 'clarified' that the Ashish Agarwal case will apply "to all cases where extended reassessment notices have been issued […] irrespective of the fact whether such notices have been challenged or not."
It resulted in AOs issuing around 90,000 reassessment notices which taxpayers challenged before HCs. While the Allahabad HC ruled in favour of taxpayers, the Delhi HC ruled in favour of the tax department. This is when the matter reached the apex court.
